Corruption risks arise at different steps of a commodity trading transaction. From the initial process of selecting a buyer, to the negotiation of the terms of the sales contract, the shipment or transfer of the commodities, through to the process by which the payment is made (Figure 1.1).
Typology of Corruption Risks in Commodity Trading Transactions
OECD Development Policy Tools
1. Corruption risks across commodity trading transactions: An overview
Figure 1.1. Commodity trading transactions: 4 segments where corruption risks may arise
The next four sections of this paper analyse the risks at each of these four steps in detail. Prior to that, this section analyses more corruption risks arising across these four steps (Box 1.1). They primarily refer to the opacity of ownership and governance structures of key actors involved in commodity trading (including the use of corporate vehicles, the concealment of beneficial owners, and the involvement of PEPs), as well as a lack of or insufficient corporate due-diligence on behalf of commodity trading companies.
Box 1.1. Red flags of corruption risks of cross-cutting relevance across commodity trading transactions
• Opacity of ownership and governance structures of key actors involved in commodity trading;
• Use of fragmented corporate vehicles in commodity trading transactions;
• Use of front companies to purchase commodities;
• Use of joint venture structures in commodity trading transactions;
• Concealment of beneficial owners of buyers;
• Involvement of politically exposed persons in commodity trading transactions;
• Use of intermediaries in commodity trading transactions; and
• A lack of or insufficient corporate due diligence.
Opacity of ownership and governance structures of key actors involved in commodity trading
Recent research by the OECD into IFFs in oil and gas commodity trading demonstrated that buying companies are heavy users of offshore financial centres, and consist of groups of subsidiaries numbering in the hundreds, and in few cases, in the thousands, operating across multiple jurisdictions (Nesvetailova et al., 2021[8]).
These structures may be observed for example in the case of state-owned enterprises (SOEs) that create subsidiaries for commodity trading activities in purchaser and consumer countries; or in the case of buying companies using multiple entities with holdings and subsidiaries registered in different jurisdictions, and front companies to conceal ultimate beneficial ownership (OECD, 2016[1]).
In terms of SOEs selling publicly-owned commodities, it is quite common in the business of oil trading to see national oil companies (NOCs) create separate subsidiaries for their trading activities. In some cases, these NOCs may form joint ventures arrangements with commodity trading companies to market their commodities. The complex and often opaque ownership structure of these entities and the lack of information on shareholding and beneficial ownership may facilitate corrupt practices (OECD, 2016[1]).
Furthermore, there is often a lack of transparency of general information about the activities of SOEs. Research from the NRGI into the reporting practices of 45 SOEs showed that 18 of those SOEs are under no legal obligation to report information about their operations. Furthermore, 25 of those SOEs did not publish audited reports or, if so, published them more than two years late. Only six of these SOEs are listed on a stock exchange and are therefore legally obliged to report their finances (Longchamp and Perrot, 2017[7]). Recent research by the OECD into the corporate structures of six SOEs further demonstrated the opacity of publicly available information. Consolidated accounts were only available for one SOE and audited accounts could not be located for any of the SOEs in the sample. Some complex corporate structures could be identified – for example one SOE has 108 separate subsidiaries, 14 of which are controlled through a company registered in an offshore financial centre (Nesvetailova et al., 2021[8]).
In terms of the companies purchasing publicly-owned commodities from SOEs, these can be refineries or other end-users, international oil companies, banks, large independent commodity trading companies, and small trading companies with little logistical and financial capacity.
These buying companies may be both public and private, and form part of a wider corporate structure with multiple entities with holdings and subsidiaries registered in different jurisdictions, and where the accounting, ownership and equity structures may be fragmented. This can render transactions more opaque and money flows more difficult to track (Nesvetailova et al., 2021[8]). Offshore companies may be used by purchasing companies to hide their involvement in opaque or corrupt trading activities, and to conceal the beneficial owners including any possible involvement of a PEP (OECD, 2016[1]).
Use of corporate vehicles in commodity trading transactions
Buying companies use corporate vehicles to undertake their operations and to structure their ownership. The use of various corporate vehicles may result in the introduction of complexity and opacity in respect of the ownership and governance structures of buying companies, and reduce transparency and oversight surrounding commodity trading transactions.
Corporate vehicles refer to entities that conduct a wide variety of commercial and entrepreneurial activities. These include companies, trusts, foundations, partnerships, joint ventures, and other types of legal persons and arrangements. In many cases, these vehicles have an essential and legitimate role to play in the global economy. However, they can be misused for illicit purposes, including money laundering, bribery and corruption, insider dealings, tax fraud, terrorist financing, and other illegal activities (FATF, 2014[9]).
Excessive complexity in a corporate vehicle structure, the use of opaque accounting practices and a high prevalence of the use of offshore financial centres may constitute red flags of corruption risks. Many of the “independent” commodity trading companies are heavy users of offshore financial centres (OFCs) for their holding companies, regional holdings and special purpose vehicles (Anderson and Porter, forthcoming[10]).
The frequent use of OFC for the registration or domiciliation of subsidiaries by buying companies can also impact the degree of transparency around the accounting practices of those companies. For example, recent research by the OECD notes the prevalence of buying companies centralising and pooling value among different entities within the corporate group, mixing trading, treasury operations, as well as the presence of internal shadow bank functions. In addition, a pattern of a “fixed operating margin” (FOM) was identified where nearly all revenues are matched by a commensurate rise or decline in expenses on a yearly basis, as well as the existence of a significant number of dormant corporate vehicles – which appear to have no operational functions but may be used to accumulate profits on capital acquired in other jurisdictions (Nesvetailova et al., 2021[8]).
For example, in May 2017, the Office of the Attorney General of Switzerland initiated legal proceedings into a large buying company concerning pre-payments made by that company to a SOE in a resource-rich country to secure shipments of crude oil. The scheme involving several employees of the buying company as well as its financial services department paid large commissions to intermediaries (including a PEP) to secure the contract (Public Eye, 2018[11]). The buying company’s shadow bank functions played a key role in this corruption scheme where operations and transfers among different legal persons, both internal and external, produce a fragmentation of compliance and oversight that creates opportunities for corruption (Anderson and Porter, forthcoming[10]).
In a tiered corporate vehicle structure, layers of legal entities and/or arrangements can be inserted between the individual beneficial owner and the assets of the primary corporate vehicle. For example, the New York District Attorney’s Office charged a major buying company, registered in a major trade hub, for its involvement in a scheme to pay kickbacks to government representatives in connection with the purchase of oil. The buying company used an associated entity to send the kickbacks to accounts controlled by the government representatives (TRACE International, Inc., 2020[12]).
In another example, a major buying company, registered in a trading hub entered into a deferred prosecution agreement in December 2020 with the United States Justice Department to resolve investigations into violations of the Foreign Corrupt Practices Act (FCPA). This included setting up schemes to pay bribes to numerous public officials in three resource-rich countries. The schemes were concealed through the use of intermediaries and a fictitious company that facilitated the payments to offshore accounts and, ultimately, to the corrupted officials. Furthermore, the buying company entered into sham consulting agreements, set up shell companies, created fake invoices for purported consulting services and used alias email accounts to transfer funds to offshore companies involved in the conspiracy. Under the terms of the deferred prosecution agreement, the buying company was required to pay a total criminal penalty of USD 135 million (United States Department of Justice, 2020[13]).
Use of front companies to purchase commodities
Buying companies may rely on the use of front companies as a specific corporate vehicle to structure their operations. Front companies refer to entities that are used to obscure the identification of an owner, share-holder or beneficiary of another company.
The OECD Development Centre’s Corruption Typology analysed 130 cases of corruption in the natural resources sector. Of the 130 cases in that study, 21 consisted of complex operations involving different front companies (OECD, 2016[1]).
Buying companies may use front companies to act on their behalf or as a sort of quasi-subsidiary – acting in the interest of the commodity trading company as an extension of its business interests. This mechanism may be used to conceal questionable operations or to hinder legal proceedings. Front companies may be part of a larger, sprawling and complex web that makes identification of individuals almost impossible as the front companies will be identified as the formal buyer of the commodity, prior to reselling it to a more established trading company. Front companies are generally located in jurisdictions whose anti-money laundering provisions are less developed (Longchamp and Perrot, 2017[7]).
For example, a large buying company, headquartered in a major trading hub, entered into an opaque alliance with a PEP, which resulted in the establishment of a subsidiary that entered into swap agreement in resource-rich developing country to export crude oil in exchange for providing refined petroleum products for the domestic market. The subsidiary was registered in another major trading hub and one of its directors is also the founder of the buying company. Over several years, the subsidiary was able to engage in commercial activities in the resource-rich country, with one of its refining contracts being estimated at USD 3.3 billion in 2011 (Berne Declaration, 2013[14]).
In another example, a large buying company, headquartered in a major trading hub, utilised front companies to purchase crude oil from Iraq under the United Nations Oil-for-Food Programme. The buying company financed a previously dormant company in Malaysia in order for that revived company to purchase 33 million barrels of crude oil on its behalf. The Malaysia company paid surcharges (illegal payments) to Iraqi authorities, financed in part by commissions received from the buying company (Volcker, Goldstone and Pieth, 2005[15]).
In a further example of the use of front companies, several companies were granted rights to lift billions of dollars of commodities in a resource-rich developing country. These companies were all controlled by the same individual who was a cousin of the relevant minister of commodities. It was alleged that these companies did not have the requisite capability and experience to be awarded these lifting rights on a competitive basis as they were acting as front companies for the relevant minister. Notably, once judicial proceedings against the minister had commenced, these companies disappeared from the market.
Use of joint venture structures in commodity trading transactions
Joint ventures are a flexible form of corporate identity that two or more parties can use in order to execute a business undertaking (Box 1.2). Joint ventures can be used for a wide variety of legitimate purposes and are a common corporate vehicle utilised by different actors in the extractive sector. However, they can be misused to facilitate corruption schemes in several different ways.
Box 1.2. OECD definition of a joint venture
A joint venture is a contractual agreement between two or more parties for the purpose of executing a business undertaking in which the parties agree to share in the profits and losses of the enterprise as well as the capital formation and contribution of operating inputs or costs. It is similar to a partnership […], but typically differs in that there is generally no intention of a continuing relationship beyond the original purpose. A joint venture may not involve the creation of a new legal entity. Whether a quasi‑corporation is identified for the joint venture depends on the arrangements of the parties and legal requirements. The joint venture is a quasi-corporation if it meets the requirements for an institutional unit, particularly by having its own records. Otherwise, if each of the operations is effectively undertaken by the partners individually, then the joint venture is not an institutional unit and the operations would be seen as being undertaken by the individual partners to the joint venture. Because of the ambiguous status of joint ventures, there is a risk that they could be omitted or double-counted, so particular attention needs to be paid to them.
Source: (OECD, 2009[16]).
Buying companies may form joint ventures with other entities to reduce commercial risk, to comply with local content requirements of a particular jurisdiction, or to increase its chances of being awarded a sales contract. In some cases, commodity trading companies may establish joint ventures with PEPs in resource-rich countries, which may be used in order to access local commodity markets.
Where buyers gain market access by entering into joint ventures with PEPs, the buyer may be awarded preferential contractual terms for the purchase of commodities due to its association with the PEP. This may include the undervaluation of commodities for export, which itself may be symptomatic of a corruption scheme where a commodity is undervalued to allow the initial buyer to purchase the commodity at a low price before quickly off-selling the commodity at a market price on the international market (OECD, 2016[1]), Joint venture structures can then be used to distribute dividends to participants on the basis of their share in the joint venture, allowing both the buying companies and PEP to benefit from the sales transaction. Joint venture structures can act to obscure the identities of the beneficial owners and the involvement of the PEPs.
For example, a large buying company, headquartered in a major trading hub, entered into an arrangement to purchase commodities from a SOE in a resource-rich country. This arrangement involved setting up a joint venture between the buying company and a PEP who was a relative of the president and also had a significant management position in a large SOE. The joint venture structure was complex and involved numerous subsidiaries registered across many different jurisdictions. Over several years, the joint venture paid over USD 1 billion in dividends to its shareholders, one of which is a PEP (Public Eye, 2018[17]).
Buying companies may use joint ventures structures to insert distance between them and an entity that is engaged in paying bribes. For example, four European and North American companies formed a joint venture to bid for contracts in a gas project in a resource-rich developing country. One of the joint venture participants deliberately avoided direct ownership in the joint venture, choosing instead to retain an indirect ownership interest in the joint venture through a partially-owned company registered in another jurisdiction. Senior executives of the joint venture decided to bribe officials in order to win contracts and appointed consultants in order to facilitate the bribery (OECD, 2009[16]).
In other scenarios, buyers may enter into joint ventures with SOEs or their subsidiaries. These joint ventures can create conflicting incentives for the SOE which finds itself on both sides of the transactions, and these blurring of roles may open the door to corruption and public rent diversion.
For example, an SOE from a major resource-rich developing country set up a joint venture entity in a Caribbean jurisdiction with a large buying company, from a major trading hub. Once this corporate structure was in place, the SOE sold crude oil to the joint venture entity below market value. In this case there was no evidence that corrupt practices took place, but this example does highlight the potential risks that can be created through the use of a joint venture structure (Gillies, Guéniat and Kummer, 2014[18]).
Concealment of beneficial owners of buyers
Both buyers and sellers can use corporate vehicles in commodity trading transactions to conceal a beneficial owner who stands to benefit unjustly from a particular transaction or from an on-going corruption scheme. In the absence of transparency of beneficial ownership, commodity trading transactions can be conducted by anonymous shell companies, which are conducive to corruption, conflicts of interest and tax evasion (UNCTAD, 2020[4]).
The beneficial owner(s) of the buyer refers to the natural person(s) who directly or indirectly ultimately own or control the buyer. This is distinct from the “legal owners” who are the persons or companies listed as direct owners in a company’s corporate registration, tax returns, licences or contracts. Beneficial owners can exercise significant control or influence over the legal owners and can ultimately be the beneficiary of any profits received by the legal owners. The Financial Action Task Force’s (FATF) definition of beneficial ownership (Box 1.3) has been adopted by the OECD-hosted Global Forum on Transparency and Exchange of Information for Tax Purposes in 2016, and represents the most widely established international standard for ensuring the availability of beneficial ownership information (OECD and IADB, 2019[19]).
Box 1.3. Financial Action Task Force: Definition of beneficial ownership
Beneficial owner refers to the natural person(s) who ultimately* owns or controls a customer** and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.
* Reference to “ultimately owns or controls” and “ultimate effective control” refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control.
** This definition should also apply to beneficial owner or a beneficiary under a life or other investment linked insurance policy.
Source: (FATF, 2012[20]).
Beneficial ownership is often disguised using a complex web of corporate vehicles to isolate the beneficial owner from the legal (declared) owner. Adding numerous layers of ownership between an asset and the beneficial owner in different jurisdictions, and using different types of legal structures, can frustrate investigations and make detection of the beneficial owner more difficult (FATF – Egmont Group, 2018[21]). Beneficial ownership information can be obscured through the use of:
shell companies1 (which can be established with various forms of ownership structure) especially in cases where there is foreign ownership which is spread across jurisdictions;
complex ownership and control structures involving many layers of shares registered in the name of other legal persons;
bearer shares and bearer share warrants;
unrestricted use of legal persons as directors;
formal nominee shareholders and directors where the identity of the nominator, or even the existence of a nominee contract, is undisclosed;
informal nominee shareholders and directors, such as close associates and family;
trusts and other legal arrangements which enable a separation of legal ownership and beneficial ownership of assets; and
use of intermediaries in forming legal persons, including professional intermediaries (FATF, 2014[9]).
In the extractives sector, there is evidence that hidden ownership information is a major risk factor for corruption. The NRGI reviewed 100 oil, gas and mining corruption cases from 49 countries, and found that over half of these cases involved companies with hidden beneficial owners (Sayne, Gillies and Watkins, 2017[22]). The ONE Campaign has undertaken analysis on the complex and opaque ownership structure that often sits behind extractive companies and estimates that developing countries lose USD 1 trillion each year as a result of corrupt or illegal cross-border deals, many of which involve companies with unclear ownership (Hector, H., 2014[23]).
More recent research by the OECD into IFFs in oil and gas commodity trading demonstrated that buying companies are heavy users of offshore financial centres to structure their operations and to refigure their subsidiaries (Figure 1.2). An analysis of the equity structure of the top 100 global industrial firms by revenue in 2018 showed that the average proportion of group subsidiaries owned via an OFC-based intermediated holding company was 18%. In comparison, an analysis of the equity structure of the “independent” commodity trading companies reveals a figure of 96.7% (Nesvetailova et al., 2021[8]).
Figure 1.2. Percentage of subsidiaries controlled by holding companies registered in offshore financial centres
Source: (Nesvetailova et al., 2021[8]).
The prevalence of the use of offshore financial centres and secrecy jurisdictions by commodity trading companies to incorporate subsidiaries and carry out operational activities increases the risks of corruption in commodity trading transactions. Beneficial ownership information is more difficult to obtain from entities registered in these jurisdictions, and this can frustrate investigations and attempts to monitor the sector by regulators, including the Extractive Industries Transparency Initiative (EITI) (Nesvetailova et al., 2021[8]).
Involvement of politically exposed persons in commodity trading transactions
PEPs may use complex corporate and legal structures, including intermediaries, briefcase or shell companies, or joint ventures with buying companies, in order to participate in commodity sale transactions. The risk of PEP involvement may be heightened in situations where contracts are awarded to local companies – either awarded outright or in a partnership between a local and an international buyer.
The FATF definition of a PEP refers to a natural person who has been entrusted with prominent public functions (Box 1.4). This may include senior members of the government or other such senior officials in the administration, judiciary, police, military or employees of SOEs.
It is important to note that the PEP status itself does not necessarily mean an individual is corrupt or that he/she has been involved in any corrupt practice – but it does raise a red flag that should require further scrutiny.
Box 1.4. Financial Action Task Force: Definition of politically exposed persons
Foreign PEPs are individuals who are or have been entrusted with prominent public functions by a foreign country, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.
Domestic PEPs are individuals who are or have been entrusted domestically with prominent public functions, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.
Persons who are or have been entrusted with a prominent function by an international organisation refers to members of senior management, i.e. directors, deputy directors and members of the board or equivalent functions.
The definition of PEPs is not intended to cover middle ranking or more junior individuals in the foregoing categories.
Source: (FATF, 2012[20]).
Due to their power and influence, PEPs are often in positions that can be abused for the purpose of corruption, public rent diversion or other illicit activities. PEPs often use corporate vehicles to obscure their identity, in order to distance themselves from transactions, and to access the financial system undetected (FATF, 2013[24]).
Several cases have been documented where buying companies have formed partnerships with PEPs who are then able to obtain lucrative contracts, either directly with representatives of the government authorities or with individuals close to them (Public Eye, 2018[11]).
For example, a buying company based in a major trading hub obtained shipments of USD 2.2 billion of oil from a NOC in a resource-rich developing country. The deal was negotiated by intermediaries, one who was a close advisor of the president, and who was considered a PEP under the law of the trading hub where the commodity trading company was based.
In another example, a buying company based in a major trading hub entered into a partnership with a senior military official in a resource-rich developing country to secure access to oil sales. A joint venture was set up between the buying company and the senior military official, who was also a close advisor of the president, to present the official as a co-investor. Using this partnership with the PEP, the buying company was able to secure oil shipments in excess of USD 3 billion (Public Eye, 2018[11]).
Use of intermediaries in commodity trading transactions
The use of intermediaries by buying companies to facilitate the sale and purchase of commodities trading transactions has been recognised by various investigative agencies, international organisations and civil society organisations.
Buyers may engage the services of an intermediary to help facilitate a commodity sales transaction. Box 1.5 sets out the OECD’s definition of an intermediary, who can be a legal or a natural person. An intermediary may help facilitate the transaction between the buyer (trader) and the seller (government) or may him/herself act as the buyer in the transaction before quickly off-selling the commodity to the trader.
Box 1.5. OECD definition of intermediaries
A person who is put in contact with or in between two or more trading parties. In the business context, an intermediary usually is understood to be a conduit for goods or services offered by a supplier to a consumer. Hence, the intermediary can act as a conduit for legitimate economic activities, illegitimate bribery payments, or a combination of both.
Source: (OECD, 2009[16]).
The participation of intermediaries in corrupt transactions worldwide has been largely documented. At least 71% of all 427 bribery cases reported by the signatory countries of the OECD Anti-Bribery Convention in the period from 1999 to 2014 involved the use of an intermediary (OECD, 2014[25]). Analysis undertaken by Stanford Law School of 240 United States Foreign Corrupt Practices Act (FCPA) cases from 1977 to 2017 found that more than 90% of these cases also involved an intermediary (Moretti, 2018[26]).
In commodity trading transactions, a common example concerns a corruption scheme where the buyer pays the intermediary a fee for his/her services, and then the intermediary subsequently pays bribes to the public official who is responsible for selecting the buyer of a specific sale of commodities. In this example, the intermediary acts as a “shield” between the buyer and the corrupt payment (bribe) to the public official.
However, the use of an intermediary in this context may not necessarily protect the buyer from criminal liability. The OECD Anti-Bribery Convention expressly covers the situation where foreign bribery is committed “directly or through intermediaries” and consequently any buyer relying on the use of intermediaries to make corrupt payments would be committing a criminal offence in jurisdictions that are signatories to the OECD Anti-Bribery Convention (OECD, 1997[27]).
The use of an intermediary company without any operational activities or history, or where the identity of the company’s ultimate beneficiaries is obscured constitute red flags, alerting the buyer to the possibility that the commodities were obtained under questionable conditions (Longchamp and Perrot, 2017[7]).
By way of example, a NOC in a major resource-rich developing country regularly sold shipments of the state’s oil to three intermediary companies, who then on-sold the shipments to large international buying companies. Investigations by civil society organisations found that a senior NOC official owned large concealed stakes in all three intermediary companies, and that some of the companies made exorbitantly high-interest loans to the NOC in exchange for discounted oil. Furthermore, one of the intermediary companies reportedly paid companies owned by a family member of the president for unknown consulting services (Sayne and Gillies, 2016[5]).
In another example, a buying company with little experience in trading and headquartered in a major global trading hub entered into an exclusive arrangement to export refined products from a state-owned refinery in a resource-rich country. The buying company acted as an intermediary between the state-owned refinery and the international market, reselling its cargoes to third parties without adding any further value. The buying company was owned by a single shareholder who was a friend of a relative of the president of the resource-rich country (Longchamp and Perrot, 2017[7]).
In other situations, intermediaries may be natural persons who help facilitate transactions between buyers (buying companies) and sellers (SOEs). In one example, an intermediary acting as an agent for a large buying company headquartered in a major global trading hub was involved in multiple bribery schemes in collaboration with insiders at a SOE. The agent was paid for his services by the commodity trading company through an offshore company. The agent was subsequently charged with corruption and money-laundering by the home jurisdiction of the SOE (Global Witness, 2018[28]).
In another example, the Office of the Attorney General of Switzerland held a buying company criminally liable for failing to take measures that were reasonable and necessary to prevent its agents from bribing public officials in order to gain access to the petroleum markets in two resource-rich developing countries. The investigation revealed that the buying company had no formal selection process for any of the agents that it used and it did not carry out any checks on their activities, despite the fact that Swiss and international anti-corruption standards specifically highlight the increased risk of corruption associated with agents’ activities. The buying company was ordered to pay the sum of CHF 94 million (Office of the Attorney General of Switzerland, 2019[29]).
In another example, a subsidiary of a different buying company also headquartered in a major global trading hub, paid approximately USD 2 million to a father-and-son team of local brokers. This pair of brokers were subsequently accused of arranging bribes with an SOE, and references to these bribery payments were included in a financial report prepared for a director of the SOE (Global Witness, 2018[28]).
Lack of or insufficient corporate due diligence
The lack of due diligence and compliance procedures by financial institutions, banks, trading companies and their business partners involved in commodity trading renders the effective prevention and detection of corruption risks more difficult (OECD, 2016[1]).
This can give rise to illicit transactions involving PEPs or other intermediaries, and these risks can be exacerbated where there is not a clear supply chain policy for identifying and managing risks.
For example, a large multinational enterprise plead guilty in a court in the United States for illegally bribing officials of a government in relation to the purchase of alumina by using a consultant to facilitate corrupt payments. The Securities Exchange Commission determined that the multinational enterprise did not conduct due diligence or otherwise seek to determine whether there was a legitimate business purpose for the use of a middleman (TRACE International, Inc., 2020[12]).
Buying companies can minimise this risk by undertaking robust due diligence and compliance procedures in accordance with relevant international, national, and industry standards. This may include internal and external compliance audits, adopting a know-your-customer and know-your-business policy, asking for information about the corporate structure and the full ownership or board members of trading counterpart, but also of any intermediary in the supply chain (e.g. shipping company, the inspecting company, the refineries, etc.) with a zero ownership threshold (OECD Development Centre, 2018[30]).
Trading hubs and home jurisdictions of buying companies can contribute to mitigating the risk of a lack of due diligence and compliance procedures by passing legislation to require buying companies to carry out rigorous due diligence on their business partners, to prevent illicit transactions with politically exposed persons or other intermediaries, and on their supply chain to verify the origin of the commodities, and the conditions under which they are acquired, in particular when sourcing from high-risk areas (OECD, 2016[1]).
Note
← 1. Shell companies are considered to be companies that are incorporated and that have no significant operations or related assets.