A lack of transparency of the terms of commodity sales agreements can provide opportunities for corruption. These risks can arise in respect of the key terms of the agreement (for example, volume or price), and additional risks may arise with the use of non-conventional sales agreements. Figure 3.1 sets out a number of red flags that may indicate the presence of corruption in the negotiation of the key terms of the transaction.
Typology of Corruption Risks in Commodity Trading Transactions
OECD Development Policy Tools
3. Corruption risks in the terms of the sales agreement
Figure 3.1. Red flags of corruption risks that can arise in the negotiation of terms of a sales agreement
Source: Adapted from (Sayne and Gillies, 2016[5]).
Lack of transparency of the key terms of the transaction
Not all “bad deals” are direct results of corruption. Other factors that can influence whether a state receives a sub-optimal return for the sale of its natural resources include where governments prioritise short-term returns over long term gains (e.g. by negotiating a resource-backed loan with costly repayment terms in order to generate a quick return on its natural resources), or simply bad management (Chêne, 2016[32]). Greater transparency around the key terms of the transaction, and how they are executed, can improve understanding around the sale of publicly-owned commodities, promote accountability and mitigate corruption risks.
The lack of transparency surrounding the key terms of the transaction represents a significant corruption risk in the commodity trading sector. Corruption may occur where there is insufficient disclosure of disaggregated data on: volumes received by SOEs; commodity sales by SOEs; revenue streams and financial transfers to and from SOEs and to and from governments.
Corruption risks may arise in the jurisdictions where buying companies are registered and where they carry out business. These risks may include a lack of requirements for payments disclosure by commodity traders and their business partners, and the lack of harmonisation across national jurisdictions with regard to disclosure requirements, including information on commodity trading related payments and beneficial ownership (OECD, 2016[1]).
Unbalanced contractual terms can directly reduce the return received by a state for the sale of its natural resources, and these losses can be significant given the high value of the sales involved. For 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. According to the civil society sources, the terms of the transaction gave the parties discretion to choose exchange rates for foreign currency conversions and provided the buying company with an unusually long period in which to pay the SOE for the refined products it received. Furthermore, the terms of the transaction did not require the buying company to post any security for the refined products it received (Sayne and Gillies, 2016[5]).
For example, the OECD Corruption Typology reports the case of suspicious transactions where a small buying company with no credentials in the trading business was offered very generous contractual terms to trade refined products, despite the fact that it would provide no logistical or other reasonable service. Contractual provisions included unusual long-term repayment periods, and payments in open credit with no financial guarantee led to unbalanced terms where the seller assumed substantial risks of default (OECD, 2016[1]).
Additional risks associated with the use of non-conventional sales agreements
Resource-backed finance agreements
Resource-backed finance agreements allow the government to be paid for the sale of its production in advance instead of waiting for the payment on delivery. The political pressure faced in some countries to spend oil revenues quickly may lead to the negotiation of pre-payment arrangements granting favourable conditions to the buyer at the expense of the seller (e.g. discounted prices).
In sub-Saharan Africa, resource-backed finance agreements were first documented in Angola in the mid‑1990s, and since then have become relatively commonplace in resource-rich developing countries in sub‑Saharan Africa, Latin America and beyond. These agreements are ordinarily entered into by governments or by SOEs themselves, whereas the lenders are often state-owned development banks from China and independent commodity trading companies (Mihalyi, Adam and Hwang, 2020[36]). A growing volume and share of sub-Saharan African government debt is now owed to commercial creditors (25%), compared to multilateral (38%), Paris Club bilateral (7%) and non-Paris Club bilateral (30%) lenders (Anderson and Porter, forthcoming[10]).
Recent research from the NRGI demonstrates the magnitude of the money involved in these resource-backed finance arrangements. The NRGI evaluated 52 resource-backed loans across sub-Saharan African and Latin American countries which totalled USD 164 billion. This included 30 loans by countries in sub‑Saharan Africa totalling USD 66 billion, and 22 loans by countries in Latin American totalling USD 98 billion (Mihalyi, Adam and Hwang, 2020[36]).
The corruption risks associated with the use of resource-backed finance agreements are exacerbated by opacity of the lending terms. The agreements are not usually made public, thus preventing proper scrutiny of their key terms, including the costs, repayment terms and the use of the loans. Furthermore, these loans may be made available outside of the government’s regular budgetary process (Mihalyi, Adam and Hwang, 2020[36]) which can add to the risk of misappropriation or diversion of public revenues under a resource-backed finance agreements (Global Witness, 2019[37]).
Development and commercial banks publish global lending aggregates on a regular basis but rarely publicly disclose loan-level information such as interest rates, maturity, and resource-security arrangements. Buying companies generally only make substantial disclosures when repayment problems emerge, and a lack of transparency around resource-backed loans can make renegotiation more difficult (OECD, 2020[38]). For example, one major buying company, headquartered in a key global trading hub, provides a short account of loans outstanding in its yearly report, but offers no information on other key terms (Mihalyi, Adam and Hwang, 2020[36]). In other cases, information about the existence or the terms of resource-backed finance arrangements may become available when a country enters a period of debt distress.
Of the 52 loans evaluated by the NRGI in 2020, the full loan agreement was only publicly available in 1 out of the 52 cases. This agreement was only made public 12 years after it was signed, and five years since the related copper and cobalt mining started. There is no comprehensive information available about the associated infrastructure funding or the repayment plan. Furthermore, two thirds of those loans went to countries with a poor or failing score under the NRGIs Resource Governance Index.
The use of resource-backed finance arrangements may result in public rent diversion. For example, a SOE from a resource-rich developing country entered into several resource-backed finance agreements with major buying companies. Although the terms were not disclosed by the parties, several of the contracts, invoices, and emails were subsequently leaked. It appears that the contracts are in violation of local law as the shipments were purchased without a required public tender and were only possible because of payments made to government officials derived from the oil revenues. Subsequently, one of the buying companies was held criminally liable in its home jurisdiction (a major global trading hub) for failing to prevent its employees and agents from bribing public officials in order to gain access to commodity markets (Mihalyi, Adam and Hwang, 2020[36]). Financial institutions were present in this transaction as lenders to the buying company. Two loans were granted by the buying company to the SOE from its own funds, and a further four loans were originally lent by financial institutions to the buying with the understanding that they would be on-loaned to the SOE. However, these banks did not report any suspicions to regulatory authorities until after the Office of the Attorney General of Switzerland had begun its investigation into these transactions (Public Eye, 2017[39]).
Commodity-for-product-swap-agreements
Commodity-for-product-swap-agreements are often negotiated when demand for their specific commodity is low or when they cannot pay cash for the refined products that they require. These agreements are highly context-specific, and consequently there are few industry standard terms or “best practices” against which to measure them – which makes undervaluation and mispricing difficult to identify.
Commodity-for-product-swap-agreements may offer opportunities for corruption and misappropriation of public rent as suggested by large discrepancies observed between benchmark estimates and actual figures for government revenues in certain oil producing countries. The absence of money transfer and the secrecy surrounding contractual clauses make corrupt behaviours difficult to detect (OECD, 2016[1]).
For example, a SOE from a resource-rich developing country entered into several commodity-for-product-swap-agreements with buying companies. Official justified these need for these agreements to alleviate domestic fuel shortages. The agreements consumed roughly a fifth of the government’s share of oil production, a portion worth an estimated USD 35 billion in 2010 to 2014 (Sayne and Gillies, 2016[5]).
Subsequent analysis of these commodity-for-product-swap-agreements by the NRGI found that some of the agreements were poorly structured and contained unbalanced or inadequately defined terms that allowed the buying companies to profit at the expense of the SOE. It was estimated that losses from a single contract could have reached USD 381 million in one year. While there is no direct evidence of corruption, it was observed that some of the buying companies selected lacked fundamental trading capabilities, including the ability to market their own crude and source fuel directly from refiners. These companies were chosen over more experienced buying companies to manage these large transactions. Furthermore the SOE published almost no information about the deals – making independent scrutiny very difficult (Sayne and Gillies, 2016[5]).