Disclose the sales policy (guideline, directive etc.) and provide a description of the process for selecting the buying companies, e.g. a tender for a specific cargo, or the selection of term contract recipients;
Disclose the buyer selection criteria (technical, financial etc.) – in advance of a competitive tender or the beginning of a direct negotiation process;
Consider providing and explaining any special exemption and/or other deviation from the applicable legal and regulatory framework;
Disclose the list of pre-qualified buyers (where relevant) including beneficial ownership information;
Disclose the commodity sales contract or its key terms – price, volume, grade/quality, contract type (spot, term etc.) and duration. Where standardised contracts or general terms and conditions are used, SOEs should disclose the full text of the standard contract along with the text of any agreements that allow deviations from that standard;
Disclose the identity of the buyer; and
Disclose information in respect of the buyers’ beneficial ownership.
How to Select Buyers of Oil, Gas and Minerals
3. Carrying out the buyer selection process
3.1. Proactive transparency measures
Box 3.1. What SOEs can do to increase transparency and accountability in their commodity sales transactions
Source: Adapted from (EITI, 2017[4]).
Introducing transparency into the buyer selection process can be an important tool through which SOEs can reduce opportunities for corruption and public rent diversion and promote better public accountability of their operations.
SOEs may refer to requirement 4.2.b of the 2019 EITI Standard which provides that:
Implementing countries including state-owned enterprises are encouraged to disclose a description of the process for selecting the buying companies, the technical and financial criteria used to make the selection, the list of selected buying companies, any material deviations from the applicable legal and regulatory framework governing the selection of buying companies, and the related sales agreements (EITI, 2019[3]).
SOEs can take steps to proactively disclose information before, during, and after a specific buyer selection process, whilst taking care to protect information of a commercially sensitive nature. SOEs should be transparent about what information will be disclosed and when those disclosures will take place in order for potential buyers to plan accordingly.
A decision to disclose information may be made by the SOE or may be set out in legislation. SOEs should be transparent with potential buyers from the beginning of the process about the scope of future disclosures. For example, SOEs may include provisions in their general terms and conditions to facilitate disclosures and to avoid legal issues being raised by buyers at the time of disclosure. SOEs may wish to consult with buyers prior to disclosure where appropriate, however, a buyer should not have a veto right over the disclosure of any information related to the sale of publicly-owned commodities should it be in the public interest to disclose that information.
3.1.1. Transparency of the SOE’s sales policy
Providing greater transparency around the sales policy is one way that SOEs can reduce the opacity of their commodity trading transactions and the accompanying corruption risks. The majority of the SOEs surveyed by the OECD Development Centre in 2018 reported the existence of a specific policy (directive, guideline etc.) for sales of oil, gas and minerals, although that policy was not always disclosed (OECD Development Centre, 2018[9]).
Two examples of SOEs that do make their sales policies publicly available were identified in Mexico and Mozambique. In Mexico, PMI makes its “Políticas comerciales de petróleo crudo” available on its website. In Mozambique, the publicly available “Gas Master Plan” contains the sales policy for the tranches of natural gas that are the responsibility of ENH.
SOEs can take steps to clarify expectations from potential buyers by clearly setting out transparency provisions in their sales policies that enable the disclosure of key information in respect of the buyer selection process and future commodity sales transactions.
Box 3.2. Sales policy for the sale of crude oil by PMI
PMI will seek, through the commercialization of crude oil, to maximize the value of PEMEX and of exports Mexican oil companies.
PMI will seek to sell the crude oil that it exports to those final consumers that due to their particular characteristics (geographic location, configuration of their process equipment and others) derive greater value when processing crude oil Mexican and trying to establish a lasting business relationship.
Mexican crude oil will be sold at a price composed of formulas that use the similar raw materials in the region or market where the Mexican crude oil is going to be processed, either United States of America (USA), countries of the rest of America, Europe (Northwest or Mediterranean) or Far East.
Following the price guidelines established in this policy, PMI will offer the crude oil that it exports using the same price formula for all customers that are located in a predetermined geographic region. PMI may place shipments in conditions other than those referred to in these Commercial Policies in cases of force majeure, situations particular logistics or inventories of Pemex Exploration and Production, test shipments, raw with qualities different from the typical exports or when the Board of Directors of the Company approves it.
PMI will seek the establishment of stable and lasting business relationships only with final consumers (including strategic reserves of countries with which Mexico has diplomatic relations). Notwithstanding the foregoing, PMI will be able to sell crude oil to the company PMI Trading, Ltd, for warehouse purposes and mixed to capture market opportunities that result in an economic benefit for the PEMEX group, but the subsequent sale of the crude must be done to final consumers.
PMI will endeavour to ensure that any sale of Mexican crude oil is carried out with a ban on resale, unless it has express authorization. It will not be considered resale, when a customer for operational or logistical reasons related to the used or the situation of your refinery request to exchange one or more shipments of crude oil with another client, situation that must be previously approved by PMI.
Trying to mitigate the credit risk, when any of the clients of crude oil does not have the financial solidity for PMI to authorize open credit and cannot grant the bank guarantees established in the Credit Manual of PMI, the Company may accept that the payment of crude oil sold to the customer is made by a third party with the understanding that the crude oil sold will be refined in the facilities of the original customer with whom the commercial relationship will be maintained. The third party that makes payments to PMI must be approved in accordance with the provisions of the Credit Manual. The sales under this scheme, they will not be considered as being carried out through an intermediary in accordance with the provisions of Article 5.1.5 of these Commercial Policies.
3.1.2. Disclosure of the buyer selection criteria
SOEs can introduce greater transparency into the buyer selection process by publicly disclosing their buyer selection criteria in advance of a competitive tender or the beginning of a direct negotiation process. This practice is encouraged by the Requirement 4.2.b of the 2019 EITI Standard, which provides that “implementing countries including state-owned enterprises are encouraged to disclose a description of the process for selecting the buying companies, the technical and financial criteria used to make the selection” (EITI, 2019[3]).
This advance disclosure of buyer selection criteria can assist buyers in submitting higher quality bids that aim to meet the requirements that the SOE has previously set out. This can act to improve the overall efficiency of the buyer selection process as the buyer selection team should have a complete bid/application to assess and this should also minimise the interaction between the buyer selection team and the prospective buyers during the selection process – which itself can create avenues for corruption.
Several SOEs routinely disclose their buyer selection criteria. In Mexico, PMI sets out and discloses criteria for prospective buyers to determine whether they are able to enter into sales contracts with PMI. This criteria includes whether buyers are based in countries with which the Mexican government allows commercial relations, whether they are final consumers of crude oil, their financial situation and ability to pay, and their obligation not to on-sell the crude to other buyers. Other examples of the proactive disclosure of buyer selection criteria can be seen in Mozambique (ENH) and Myanmar (Myanmar Gems Enterprise). In Ghana, GNPC does not disclose its buyer selection criteria publicly but will provide a copy of its criteria to potential bidders on request.
In terms of the scope of the disclosure of the buyer selection criteria, SOEs should at a minimum, disclose: a description of the process for selecting the buying companies, e.g. a tender for a specific cargo, or the selection of term contract recipients; the selection criteria itself (technical, financial, local content requirements etc.); information on any special exemption and/or other deviation from the applicable legal and regulatory framework (EITI, 2017[4]).
3.1.3. Disclosure of the commodity sales contract or its key terms
There is an increasing international trend towards extractive contract transparency where SOEs can take proactive steps to reduce the opacity that often surrounds commodity trading transactions. The EITI has documented how enhanced transparency in commodity trading supports greater competition and can result in reputational gains for the actors in commodity sales transactions (EITI, 2019[29]).
Requirement 4.2.b of the 2019 EITI Standard provides that “implementing countries including state-owned enterprises are encouraged to disclose … the list of selected buying companies … and the related sales agreements” (EITI, 2019[3]).
The EITI recommends that SOEs should consider the disclosure of the commodity sales contract (EITI, 2019[3]). Where disclosure of the contract in its entirety is not feasible, SOEs should disclose the key terms of the sales contract, including (but not limited to): price, volume, grade/quality, contract type (spot, term etc.) and duration.
Several SOEs have begun disclosing limited details of the terms of their sales contracts. In Mozambique, ENH discloses the quantity of gas allocated to each project/buyer but does not disclose the price and other commercial terms. In Zimbabwe, MMCZ provides certain information in respect to the quantity, quality and term length of the sales contracts. This information is not released immediately but is available after the end of a financial year and only after it has been audited (OECD Development Centre, 2018[9]).
3.1.4. Disclosure of the identity of buyers
It is important for the identity of the buyer to be fully transparent to ensure that the SOE is entering into an arrangement with an entity that is known, and that has the requisite financial and technical capacity to meet its obligations under the contract. Consequently, SOEs should publicly disclose the identity of the buyer for each commodity sales transaction.
In order to provide meaningful information in respect of the identity of the buyer, SOEs should provide the full name and country of registration of the buying company, company registration number, and the name of the parent company (if applicable).
Several of the SOEs surveyed by the OECD Development Centre in 2018 disclose the identity of the buyer. These include: Albpetrol, ENH, MMCZ, Nilepet and NNPC (who publish a crude oil off-takers list on their website). Albpetrol and ENH go one-step further and also publish the identity of unsuccessful bidders in order to provide greater transparency to their operations (OECD Development Centre, 2018[9]).
3.1.5. Disclosure of the buyers’ beneficial ownership information
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.
In the extractives sector, there is evidence that hidden ownership information is a 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[23]).
There had been increasing global awareness of the importance of beneficial ownership information disclosure. The existing global norm on ensuring availability of beneficial ownership information for corporate vehicles is contained in the FATF Recommendations 2012 – Recommendations 24 and 25 and Immediate Outcome 5. This definition of beneficial ownership was 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.
Both the EITI and the European Union have set deadlines for beneficial ownership transparency. EITI implementing countries were required to introduce public beneficial ownership for companies bidding for licences or holding a licence to explore or exploit oil, gas or minerals by 1 January 2020. These EITI requirements have sparked reform in 20 countries now working on establishing public registers. The EU Fifth Anti-Money Laundering Directive, which entered into force in July 2018, required EU member states to incorporate beneficial ownership transparency into domestic legislation by January 2020.
SOEs should ensure that they have access to buyers’ beneficial ownership information. For example, SOEs could collect this information from the buyer as part of a competitive tender process or when entering into direct negotiations. This information should then be stored for future use. For example, the EITI recommends that SOEs maintain an up-to-date list of approved buying companies and include beneficial ownership information for each approved buyer (EITI, 2017[4]).
In terms of the information to be collected, the EITI recommends that information about the identity of the beneficial owner should include the name of the beneficial owner, the nationality, and the country of residence, as well as identifying any politically exposed persons (EITI, 2019[3]).
SOEs should disclose the buyers’ beneficial ownership information to increase transparency in the buyer selection process, and to assure citizens of the bona fide nature of the buyers of publicly-owned commodities. The EITI further recommends that SOEs should consider disclosing the list of approved buying companies and their beneficial ownership information (EITI, 2017[4]).
3.2. Undertaking due diligence on buyers
Box 3.3. What SOEs can do to undertake effective due diligence on buyers
Determine what information should be requested from potential buyers in advance of a competitive tender or the beginning of a direct negotiation process;
At a minimum, include information on the beneficial ownership of the buyer, the involvement of any politically-exposed-persons, and the existence of any conflicts of interest;
Verify that information and consider whether additional due diligence actions may be required in each commodity sale transaction; and
Identify any red flags, such as excessive complexity in a corporate vehicle structure or the involvement of a PEP.
SOEs should undertake robust screening of potential buyers prior to (see pre-qualification criteria Section 2.4.1) and during the buyer selection process, in order to gain a complete understanding of the buyer and its value proposition, and to identify any red flags.
SOEs should consider, in advance of a competitive tender or at the beginning of a direct negotiation process, what information should be requested from potential buyers, in order for the SOE to carry out effective due diligence. The information that SOEs may wish to request is broad but as a minimum should include information on, the beneficial ownership of the buyer, any involvement of politically exposed persons, and the existence of any conflicts of interest.
For example, in Nigeria, NNPCs invitation to tender for the purchase of crude oil specifies that all bidders must provide a written statement providing the full names, contact addresses of current directors and beneficial owners. In Mexico, PMI requires all prospective buyers to provide details of the main shareholders, their names and percentage interests, as well as the name and position of senior executives.
Box 3.4. Information required from buyers prior to entering into negotiations to purchase crude oil from Petrotrin
Prior to entering into any commercial arrangement, the following information must be submitted for review by Petrotrin:
Full name and registered address of the Supplier, including the following: a) Certification of the entity Registration. b) Declaration of the particulars of its Shareholders – name, occupation and address. c) Declaration of the Directors and key management personnel -name, occupation and address.
Description of type of business the company is engaged in and its experience in crude supply and trading (Company Profile).
Bank and business references with whom the company currently conducts business.
List of key management personnel.
Recent audited financial statements (3 years).
A list of references including financial institutions and commercial companies with whom the company currently conducts business.
Any rating that your company may have from institutions such as S&P and Moody's etc.
A Dunn and Bradstreet (D&B) report of the prospective buyer.
Source: (OECD Development Centre, 2018[9]).
Once the requested information has been provided, SOEs should undertake an analysis of that information to check its accuracy and reliability, and consider whether steps need to be taken to verify that information and whether any additional due diligence is required.
At a minimum SOEs should identify and verify the beneficial owners of all relevant persons or entities, identify whether any beneficial owners are PEPs, conduct a background check to ascertain any materially relevant criminal, civil, or regulatory violations, and conduct a conflict-of-interest check on relevant natural persons (Votava, Hauch and Clementucci, 2018[30]).
For example, in Chile, Codelco performs market intelligence, media screening, reviews annual reports, and visits plants and offices of the prospective buyer. In Mexico, PMI undertake due diligence on prospective buyer’s refineries, including verification of the ownership, configuration and capacity.
SOEs need to ensure that they are properly resourced to carry out checks and verification of potential buyers. This may include the provision of training for relevant SOE employees, having access to international databases, and establishing channels of communication with officials in other countries.
3.2.1. Beneficial ownership and involvement of politically exposed persons
Box 3.5. FATF 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, 2013[31]).
It is important for SOEs to fully understand the identity of the buyer’s beneficial owners to reduce opportunities for corruption and public rent diversion, and to create greater accountability and public trust by ensuring that value is not lost in the transactions.
Corporate vehicles can be used to introduce opacity into the ownership structure of an entity to facilitate corruption schemes. They can provide “legal distance” between the beneficial owner and his/her assets by introducing complexity and obscure true ownership. SOEs should note that excessive complexity in a corporate vehicle structure can be regarded as a “red flag” indicator of risk, and may be intended to hide the identity of the beneficial owner.
In some cases the beneficial owner may be a politically exposed person (PEP) who may use corporate vehicles to obscure their identity in order to distance themselves from specific transactions. The risk of a PEPs 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.
It is important to note that the PEP status itself does not necessarily mean an individual is corrupt or that they have been involved in any corrupt practice – but it does raise a red flag and SOEs should then apply further scrutiny.
SOEs should require potential buyers to submit anticorruption certifications, as well as beneficial ownership and PEP information as part of their bid or at the beginning of a direct negotiation procedure. This information should accurately describe how the beneficial owner holds his/her interest, and include a diagram or corporate organogram that visually shows the relationship, as well as the full corporate structure of the company (Westenberg and Sayne, 2018[32]).
In order to verify the beneficial ownership and PEP declarations provided by prospective buyers, SOEs should screen for obvious deficiencies in a bid that raise clear corruption risks, and should cross-reference the beneficial ownership information received from the buyer with information contained in centralised national or international beneficial ownership registers (Westenberg and Sayne, 2018[32]).
SOEs should also undertake their own open source verification of potential buyers by searching: copies of share registries, periodic regulatory filing reports (tax filings, public financial reports and required filings with securities regulator or other regulators), certificate of incorporation and other corporate formation documents, and documents that provide persons with authority to act on behalf of the corporation and define the scope of that authority (Votava, Hauch and Clementucci, 2018[30]).
SOEs may then undertake additional anti-corruption due diligence on potential buyers, prior to, or during, the buyer selection process. For example, in Chile, Codelco performs market intelligence, media screening, the review of annual reports, and visits to plants and offices of the prospective buyer. In Mexico, PMI undertake due diligence on prospective buyer’s refineries, including verification of the ownership (OECD Development Centre, 2018[9]).
Box 3.6. Red flags that may indicate corruption risks associated with BOs and involvement of PEPs
The company’s beneficial ownership or PEP disclosures are uncertified or never submitted;
The company claims it has no beneficial owner, or that its beneficial owner cannot be identified;
The company identifies another company as its beneficial owner;
Cross-checks of the company’s certifications and disclosures against the supporting documents provided reveal that one or more claims in the application is contradicted by the company’s supporting documentation or other reliable information readily available to the SOE;
The disclosures in the application, or the SOEs verification efforts, shows that the company has a PEP as a beneficial owner that violates provisions in domestic anti-corruption law that prohibit public officials acquiring personal benefit from commodity sales; and
The disclosure strongly suggests the company has engaged in collusive or anti-competitive behaviour—e.g., multiple companies with the same beneficial owner bid for the same contract.
Source: Adapted from (Westenberg and Sayne, 2018[32]).
3.2.2. Conflicts of interest
Box 3.7. 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 their official duties and responsibilities.
Source: (OECD, 2003[10]).
SOEs should be cognisant of conflicts of interest that may exist between their employees and agents, and representatives of buyers. When conflict of interest situations are not properly identified, disclosed and managed, they can endanger the integrity of the SOE and can result in corruption and public rent diversion in a commodity sale transaction.
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. This may include whether any employees of the buyer are former employees of the SOE (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 SOE (or government) that are unrelated to the commodity sale transaction.
SOEs should be particularly cognisant of the movement of personnel between SOEs and buyers (often termed ‘revolving doors’).
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 (which includes SOE employees), if inadequately managed, can result in corruption. Conflicts of interest cannot simply be avoided or prohibited, and must be identified, disclosed, and managed.
An example of a requirement for a buyer to declare certain conflicts of interest can be found in Nigeria, where, a company submitting a bid in a competitive tender for the purchase of crude oil from 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 your company” (NNPC, 2018[16]).
3.2.3. Additional due diligence requirements
SOEs may need to undertake additional due diligence checks where necessary. This requirement may be triggered by the nature of the commodity that is being sold or by the identity of the buyer.
For example, in Zimbabwe, the Zimbabwe Consolidated Diamond Company (ZCDC) may subject buyers to an Interpol check and may require buyer to provide further information. In Colombia, if a buyer is classified as comprising high reputational risk, Ecopetrol may require:
Visits or interviews to the counterparty;
High levels of authority to approve the registration of the counterparty;
Requirement of declarations and disclaimers for the specifics conditions (Ex, reported by restrictive lists);
Monitoring the commercial activity with Ecopetrol S.A;
Filling out the anti-corruption certificate that is part of the internal guidelines of Ecopetrol S.A. (OECD Development Centre, 2018[9]).
3.3. Countering public rent diversion at point of revenue collection
Box 3.8. What SOEs and governments can do to counter public rent diversion
Favour clarity, simplicity and centralisation of the revenue collection process in agencies with appropriate revenue collection expertise and mandate to raise revenue;
Put in place an internal control system for revenue administration based on robust risk management and adequate human, financial and technical resources;
Consider designating an alternative entity to the SOE to receive the payment;
Provide credible avenues for whistleblowing against corrupt practices for officials, either within or outside the SOE.
Source: Adapted from (OECD, 2016[5]).
SOEs and governments should be cognisant of the corruption risks associated with revenue collection where funds may be misappropriated or diverted for private gain.
These corruption risks can include the misreporting practices, mainly consisting of distortions in accounting and reporting of revenues. For example, the underreporting of production volumes and the misreporting of applicable charges, fees or credits. Diverted revenues are then usually transferred to bank accounts located in offshore jurisdictions with low tax liabilities and insufficient legislation on information disclosure on beneficial ownership.
SOEs and governments should consider implementing a payment model where the entity that receives the payment is different from the SOE that arranges the commodity sale. In this model, payment for the commodities would be made to a government account – for example the ministry of finance, treasury or central bank. Standard rules of public financial management would then apply.
For example, in Ghana, the Petroleum Revenue Management Act 2011 sets out a process where payments for crude oil sold by GNPC are paid by buyers directly into a specified account at the Bank of Ghana (central bank).
In Iraq, in the aftermath of the Oil-for-Food Programme scandal and the 2003 Iraq War, in an attempt to prevent oil sales from corruption risks or rent diversion, Iraqi authorities required that the payment of commodity sales proceeds must be directed to a different account from the one of the SOE SOMO (OECD Development Centre, 2018[17]).