A lack of transparency surrounding the collection of the payment provides opportunities for corruption. These risks may arise in respect of the opacity of the revenue flows, manipulation of the foreign exchange rate, or a lack of transparency of the payment account. Figure 5.1 sets out a number of red flags that may indicate the presence of corruption in the collection of the payment.
Typology of Corruption Risks in Commodity Trading Transactions
OECD Development Policy Tools
5. Corruption risks in the collection of the payment
Figure 5.1. Red flags of corruption risks that can arise in the collection of the payment
Opacity of the revenue flows
The lack of transparency surrounding the revenue flows of a transaction represents a significant corruption risk in the commodity trading sector. Corruption and public rent division may occur in the initial transaction between the SOE and the buyer, and at the subsequent stage where the revenues pass from the SOE to the central government.
Given the vast sums generated by SOEs from their commodity sales, sufficient transparency and rigorous oversight are critically important to ensure that revenue flows are managed correctly.
For example, the OECD Corruption Typology reports a case of substantial oil revenues, intended to be remitted to the national budget, allegedly being misappropriated in the context of the sale of the state’s share of oil by the national oil company, which claimed a subsidy deduction. Other suspicious transactions suggest the diversion of rents by intermediary trading companies turning a blind eye to the misappropriation of rents through legitimate means (cashing dividends on behalf of PEPs) or contributing to the creation of complex and opaque structures of corporate vehicles rendering the identification of beneficial owners more difficult (OECD, 2016[1]).
Research from the NRGI notes the practice of some SOEs of retaining billions of dollars in sales proceeds, including in non-transparent foreign accounts, and then spending much of these revenues “off-budget”. This practice creates additional corruption risks as extra-budgetary spending of commodity sales revenues avoids the standard checks and balances of the budget system (e.g. legislative approval, public financial management procedures, etc.) (Sayne and Gillies, 2016[5]).
For example, in 2014, the central bank governor of a resource-rich developing country alleged that the SOE had failed to remit USD 20 billion in commodity sale revenues to the treasury over a 19-month period (Sayne and Gillies, 2016[5]).
In 2016, an analysis by the NRGI of 33 NOCs showed that just 22% of combined total revenue they generated, including from oil sales, was directed to their countries’ national treasuries (Malden and Williams, 2019[3]).
The U4 Anti-Corruption Resource Centre has noted that the risks of revenue misappropriation arising from commodity trading transactions is increased by the lack of specific regulation and lack of specific regulators in key commodity trading hubs (Longchamp and Perrot, 2017[7]). Trading hubs and home jurisdictions of buying companies have an opportunity to mitigate corruption risks associated with the opacity of revenue flows by requiring companies active in commodity trading to disclose all payments to governments (OECD, 2016[1]).
Manipulation of the foreign exchange rate
The majority of commodity trading transactions are made using United States Dollars (USD), rather than in the local currency to the producer country.
Even a slight adjustment to the foreign exchange rate can have consequential effect on the amount that is paid by the buyer to the seller due to the often significant value of a given commodity sale transaction. Foreign exchange rates could be used as a means to divert public revenue for private gain, especially where the exchange rate mechanism is not clear, or where the date (from which the currency conversion is calculated) is not set out or the wording is vague.
For example, in 2015, an investigation into commodity trading transaction identified a contract between the state-owned oil refinery and a buying company where payments to the oil refinery where made using a “mutually agreed upon exchange rate”, rather than fixing a reference rate in the contract. Consequently, this transaction could have been exposed to risks of corruption and public rent diversion if the foreign exchange rate was manipulated in favour of the buyer (who may use part of its increased profits to pay bribes) and to the detriment of the state (Guéniat et al., 2015[43]).
Corruption risks associated with the application of foreign exchange rates can also arise at the stage where the revenues pass from the SOE to the central government. For example, a SOE allocated crude oil on an intercompany basis to its subsidiary for use in refining, swaps or export sales. It was alleged that the SOE used low exchange rates to convert USD payments into local currency, and therefore artificially reducing the amount of money that was due to be remitted to the central government (Sayne, Gillies and Katsouris, 2015[40]).
Lack of transparency of the payment account
The lack of transparency surrounding the use of bank accounts to receive revenues from the sale of publicly-owned commodities represents a significant risk of corruption and public rent diversion. Payment for the purchase of publicly-owned commodities may be made directly to the SOE or to another government account – for example the ministry of finance or central bank. This will ordinarily depend on the legislative requirements or the terms of the sales contract.
It is important that bank account details are set out in the contract, or other government instrument, to avoid instances of manipulation. For example, a SOE from a resource-rich developing country executed a contract for the sale of commodities that required payment into the SOEs “nominated bank account”, rather than the contract setting out wiring instructions or bank account details (Sayne, Gillies and Katsouris, 2015[40]).
In other cases, payment account details can be clearly set out but may be ignored. For example, in the 1990s, the UN Oil-for-Food Programme in Iraq mandated that the proceeds of oil sales be deposited in a UN bank account in order to purchase humanitarian goods and services. Payments never reached the UN bank account but were instead transferred to Iraqi controlled banks in Jordan and Lebanon or selected Iraqi embassies (OECD, 2016[1]).
Research from the NRGI has highlighted several examples where SOEs or other government agencies have retained billions of dollars in sales proceeds in non-transparent foreign accounts. In one example, a SOE retained a large share of oil revenues and engaged in extensive extra-budgetary spending. This was brought to the attention of the International Monetary Fund (IMF), which identified a USD 31.4 billion shortfall in the state’s fiscal accounts. The majority of financial shortfall was linked to off-budget spending of oil sale revenues by the SOE, where the IMF noted that some funds were diverted to foreign escrow accounts for unclear reasons (Sayne and Gillies, 2016[5]).
In another example, a SOE from a resource-rich country kept the vast majority of its earnings in foreign bank accounts. No information about the accounts’ balances, management or outflows was published. However, investigations later found that these funds fed 75% of government spending (Sayne and Gillies, 2016[5]).