The lack of transparency and oversight in the sale of a government’s share of publicly-owned commodities provides opportunities for corruption. These corruption risks are especially prevalent at the buyer selection stage and are exacerbated by the large amounts of money involved and the interaction of the buying companies with state authorities (Longchamp and Perrot, 2017[7]). These risks include the opacity of the selection of buyers, the use of bribery to secure commodities, and the existence of conflicts of interest between buyer and seller. Figure 2.1 sets out a number of red flags that may indicate the presence of corruption in the buyer selection process.
Typology of Corruption Risks in Commodity Trading Transactions
OECD Development Policy Tools
2. Corruption risks in the buyer selection process
Figure 2.1. Red flags of corruption risks that can arise during the buyer selection process
Opacity of the selection of buyers
Governments or SOEs will undertake an allocation process to select buyers to enter into commodity sale agreements. This process may involve the buyer submitting a bid or tender in a competitive bidding process or the buyer conducting a direct negotiation with the government to purchase commodities.
The lack of an open and competitive public tender for the sale of commodities may lead to suboptimal allocation and overly favourable contractual terms for the buyer. This may occur in particular where a buying company offers little value added and acts as a mere intermediary between the government (often represented by a SOE) and a second-tier purchaser (OECD, 2016[1]).
Additional risks may arise in situations where commodities are sold through a competitive bidding process, where bidders may collude to manipulate the outcome of the bidding process. The OECD Development Centre has developed guidance for SOEs on buyer selection which provides steps that SOEs can take to identify and prevent buyer collusion (OECD, 2020[31]). The use of inappropriate commodity pricing benchmarks may affect the return that a government receives for the sale of its commodities. Corruption risks may be heightened for commodity sales where there is a lack of publicly quoted prices for the commodity, as is the case with some minerals.
The allocation process for selecting buyers of publicly-owned commodities is often opaque. For example, research from the U4 Anti-Corruption Centre found that in states where SOEs are responsible for selling natural resources, public tenders are rarely published on portals or in official journals. Furthermore, the results of those tenders are published even less often (Longchamp and Perrot, 2017[7]).
The disclosure of the allocation method (competitive bidding process or direct negotiation) used for the purchase of the publicly-owned commodities can provide useful context on the sale and how a particular buyer was selected, and may also raise red flags where further investigation may be warranted. For example, a 2015 investigation into commodity trading transactions by Public Eye discovered that a state-owned oil refinery had awarded a contract to export refined petroleum products to a buyer without a public tender process, despite it being illegal under that states’ national law to award public contracts without a tender process (Public Eye, 2018[11]).
The exercise of discretion in the buyer selection process is a major risk factor and can undermine the effective prevention of corruption and can result in significant public rent diversion. Discretionary decision-making can result in the selection of buyer who may purchase commodities for less than their market value. In practice, these “unqualified” buyers are often intermediaries, who purport to act as the buyer in the transaction purchasing the commodity at a low price before quickly off-selling the commodity at a market price on the international market, without providing any logistical or other reasonable service. The buying company thus acts as a mere intermediary between the public entity or its marketing agent and a second-tier purchaser (OECD, 2016[1]). The OECD Development Centre’s guidance for SOEs on buyer selection provides detailed guidance on reducing discretion in the buyer selection process by developing a pre-qualification process, setting out pre-defined criteria, and using a weighting system to assess a prospective buyer against those criteria.
The risk associated with the opacity of the selection of buyers is linked to other risks in the commodity trading value chain – including the opacity over the ownership and governance structures of the key actors involved and the lack of transparency over the key terms of the commodity trading transaction – see Sections 1 and 3.
The opacity and the lack of oversight in the sale of publicly-owned commodities can provide opportunities for corruption. For example, an inexperienced company based in a major trading hub and run by a friend of a PEP from a major oil exporting country was able to secure large shipments of oil, without any public tender, from authorities in that oil exporting country. Those shipments were then re-sold at a higher price (Chêne, 2016[32]). Furthermore, the contract contained numerous clauses that directly harmed the public finances of that oil exporting country (Public Eye, 2018[11]).
In another example, a buying company based in a major commodity trading hub made payments to two shell companies controlled by a trader and a former adviser to a president of a resource-rich country. The trader and adviser reportedly secured meetings between employees of the buying company and senior government officials in another resource-rich country, including the president. Following those meetings, the buying company was selected to purchase several million barrels of crude oil from the NOC (Sayne and Gillies, 2016[5]).
A transparent and robust competitive bidding process can reduce opportunities for corruption and public rent diversion if a sufficient number of credible bidders are able to respond to the invitation to tender, have an incentive to compete for the contract, and the seller’s discretion is limited. SOEs should set pre-determined and objective buyer selection criteria and introduce standardised and automatic procedures, and make information related to all stages of bidding processes publicly available to all stakeholders.
However, in some specific contexts there are legitimate strategic and economic reasons why sales are conducted using a direct negotiation method. For example, government-to-government transactions, resource-backed financing agreements, and arrangements in which international oil companies lift and sell the government share of production, if this is already set out in an existing production sharing agreement (OECD Development Centre, 2019[33]).
Robust governance arrangements for SOEs are particularly important to ensure that SOEs are resourced to undertake a buyer selection process. In many instances, state-owned companies act as both as the administrator and regulator of the sector, and this lack of or insufficient segregation of roles and responsibilities between administrative, regulatory and supervisory functions, may constitute a corruption risk factor.
Use of bribery to secure commodities
Bribery involves intentionally offering, promising or giving any undue pecuniary or other advantage to an official or decision maker, with the intention that the official or decision maker acts or refrains from acting in relation to the performance of their duties. Bribery to secure contracts or obtain access to natural resources on uncompetitive terms is a particular problem in the commodities sector (Chêne, 2016[32]).
Bribery mechanisms include kickbacks, secret commissions, and facilitation payments. For example, prospective buyers may pay direct commissions to a public official in a SOE or government agency in exchange for the purchase of commodities under advantageous conditions. In other cases, buyers may use intermediaries to pay the commission. These may be individuals or opaque corporate vehicles that are controlled by corrupt officials that extract benefits from a commodity trading transaction at the expense of the state.
These corruption schemes are often set up to shield the identity of a PEP who may control, or otherwise have influence over, the allocation process. The detection of these schemes can be challenging when intermediaries and offshore structures are placed between the buying company and the PEP being bribed. For example, illicit payments may flow through a different jurisdiction than the one where the opaque corporate vehicle (front company) is created – see also (Anderson and Porter, forthcoming[10]). These financial flows and the front company may be part of a larger and complex corporate structure that makes the identification of the key individuals involved very difficult (Longchamp and Perrot, 2017[7]).
In another example, a buying company allegedly paid USD 700 000 in bribes to the CEO of the oil and gas regulator in a resource-rich country to secure access to oil and gas. Following an investigation by the local anti-corruption commission, the CEO was arrested, and the oil and gas regulator was forced to suspend all public tenders for oil and natural gas sales (TRACE International, Inc., 2020[12]).
Existence of conflicts of interest between buyer and seller
Conflicts of interest in both the public and private sector have become a major matter of public concern worldwide, and these have been documented by the OECD (Box 2.1). When conflict-of-interest situations are not properly identified, disclosed and managed, they can endanger the integrity of organisations and result in corruption and public rent diversion.
Box 2.1. OECD definition of conflict of interest
A “conflict of interest” involves a conflict between the public duty and private interests of a public official, in which the public official has private-capacity interests which could improperly influence the performance of his/her official duties and responsibilities.
Source: (OECD, 2003[34]).
A framework that provides for the disclosure of conflicts of interest can help to identify and capture any additional red flags associated with the relationship between the buyer and the seller. This may include whether any employees of the buyer are former employees of the seller (or vice versa), whether the buyer has access to any information in respect of the commodity sale that other rival companies did not, or where the buyer is providing goods or services to the seller (or government) that are unrelated to the commodity sale transaction.
For example, in Nigeria, crude oil tender requirements recognise the risks arising from conflicts of interests. Buyers participating in a competitive tender for the purchase of crude oil from the Nigerian National Petroleum Corporation (NNPC) must provide a sworn affidavit to “confirm whether or not any of the members of relevant companies of NNPC or Bureau of Public Procurement (BPP) is former or present Director, Shareholder, or has any pecuniary interest in [the bidding] company” (NNPC, 2018[35]).
While a conflict of interest is not necessarily evidence of corruption itself, there is increasing recognition that conflicts between the private interests and public duties of public officials, if inadequately managed, can result in corruption. It should also be recognised that as all public officials have legitimate interests which arise out of their capacity as private citizens, conflicts of interest cannot simply be avoided or prohibited, and should be identified, disclosed, and managed.
Recommendations for mitigating risks associated with conflicts of interest are set out in the OECD Development Centre’s guidance for SOEs on the selection of buyers of oil, gas and minerals (OECD, 2020[31]). SOEs should require buyers to disclose any conflict of interest but should also undertake their own analysis to identify and capture any additional red flags associated with the relationship between the buyer and the seller. SOEs should be particularly cognisant of the movement of personnel between SOEs and buyers (often termed “revolving doors”).
SOEs should also put in place robust procedures to identify and manage conflicts of interest in their buyer selection teams. This may include: prohibiting specific unacceptable forms of private interest; making employees aware of the circumstances in which conflicts can arise; and ensuring that effective procedures are deployed for the identification, disclosure, management, and promotion of the appropriate resolution of conflict-of-interest situations.