Switzerland's Le Temps: "Who Wants to See the Billions that Commodity Traders Pay to Governments?"
Note: This article, written by Adrià Budry Carbó, originally appeared in Swiss newspaper Le Temps under the headline "Qui veut voir les milliards des traders?". It is translated and reproduced here with permission.
Nongovernmental organizations (NGOs) show how difficult it is to track the money that flows between commodity traders and countries that produce raw materials. Switzerland wants to better regulate the practices surrounding the mineral sector, but does not want to tackle commodity trading.
For theorists of "resource dependence", the equation is simple. If countries that own raw materials are poor, it is because the added value derived from oil, gas or mineral resources flows unidirectionally away from those countries to rich countries, traders and their shareholders.
In practice, it's more complicated. Multinationals that deal in raw materials actually pay billions of dollars to the source countries. But a lack of transparency around these payments makes it impossible to ensure that this this money benefits local communities.
Development practitioners, NGOs and other transparency advocates believe they have found the solution. Since 2002 and the launch of the "Publish What You Pay" initiative, these actors have campaigned for corporate payments to foreign governments to be published in a transparent manner. Methods like this help make states more accountable to their citizens and can decrease corruption.
Switzerland and the rules of the game
And in this field, Switzerland—a hub for commodity trading—could be a case in point. That, in any case, is the opinion of the Natural Resource Governance Institute (NRGI). This American research NGO sees Switzerland’s current revision to its law on limited companies as a "unique opportunity to change the rules of the game," in the words of its president, Daniel Kaufmann.
The preliminary draft of the law includes a component aimed at "increasing the transparency of financial flows" toward "countries where the rule of law structures are insufficient". It will be debated on February 22 by the National Council’s Legal Committee and is for Green MP Lisa Mazzone a "first step to stem the curse of raw materials".
The Swiss Trading and Shipping Association (STSA) is in favor of the measure proposed by the Federal Council, which it sees asmaintaining "equivalence with the European directives" on the extraction of raw materials and a way “to prevent companies from using Switzerland to escape international rules” according to Stéphane Graber, STSA’s secretary general.
Identify accounting "inconsistencies"
In addition to the European measures, some 50 natural resource-producing countries that are signatories to the Extractive Industries Transparency Initiative (EITI) have already committed to making corporate payments to government entities public, while asking companies to do the same. It is by comparing these two payment databases (those of governments and companies) that inconsistencies can be identified, the NGOs hope.
Among the potential "inconsistencies" is the hole in Chad's national accounts that was discovered at the turn of the millennium. Oil flowed out of this poor sub-Saharan African country, but despite the billions paid to the Chadian Petroleum Corporation, the country’s ranking dropped in the Human Development Index and its external debt grew. The Canadian group Griffiths (since renamed Caracal Energy) has been convicted of paying bribes for Chadian oil concessions.
Since then, Glencore has taken over the Chad contract. The Zug-based company—which has granted a $2 billion loan to Chad—also deals with "90 percent of the state's oil export duties," according to the company. Because of its listing on the London Stock Exchange, Glencore is required to publish the amounts it pays for oil extraction. But nothing forces it to do the same for its trading activities.
Exemption from transparency for trading
There is no provision for making payments transparent when buying or selling commodities. This is true internationally and in Switzerland, where the Federal Council’s draft law overlooks regulating trading and focuses only on extractive activities, which are the first link in the value chain. In other words, the copper mine would be subject to the law but not the sale of the metal.
Passing the law without including trading would amount to legislating for four companies (whose capital ranges between 100,000 and 1 million francs), according to estimates by the NGO PublicEye (which relies on a database of 544 Swiss companies active in the sector). 85% of those companies are pure traders (exempting them from legal scrutiny in the draft law) or are exempted from publishing their payments because they already do so in other jurisdictions (such as Glencore, based in Zug but listed in London), or they do not exceed the minimum amount of 100,000 francs (a size criterion for their capital which would make them exempt).
This reform is insufficient, according to the Public Eye. "To exclude trading from the law is to refuse to supervise the Swiss raw materials sector and thus to ignore its sometimes harmful effect on the producing countries," says Marc Guéniat, a specialist in commodity trading. This is especially true since the trading revenues exceed those of extraction for most producing countries. According to Public Eye's calculations for 2012, oil sales account for 64% of Nigeria's national budget.
For NRGI, this is another argument for extending the EITI principles to traders. "The sale of raw materials is the most opaque sector of all state enterprises," according to Daniel Kaufmann. Furthermore, NRGI would like all these companies to publish their transactions for all countries, and not just as an aggregate amount which Trafigura does voluntarily [it does, however, publish trading payments separately for EITI countries].
Business secrecy and the Swiss exception
"Unimaginable!" In the natural resource sector, this is a common reaction amongst traders to the proposed transparency moves. If some traders say they are willing to make more information available about these payments, they decline to consider releasing a high level of detail about their transactions, according to a representative of a trading house. "We operate in a competitive market. What are we talking about here? Unveiling our competitive advantage.”
In addition, unlike mining concessions that last over the course of ten or twenty years, the purchase and sale of raw materials is regulated by daily contracts. The implementation of these transparency provisions on trading is still up in the air.
The sector does not just point to their "business secrecy" that is being threatened. Behind the scenes, there is irritation about the proliferation of "attacks" on trading, like the initiative "for responsible companies"; it is argued that traders will not hesitate to operate elsewhere if Switzerland took the risk of legislating "in a vacuum".
The debate is not over
For Stéphane Graber, “it is illusory to believe that measures imposed in Switzerland will bend the United States of Trump or the European Union. It is not desirable to create a Swiss exception, whether for extraction or for trading.”
Whatever the parliament’s decision, the debate will not be ending anytime soon. To justify the exemption from trading, the Federal Council said it expected a "coordinated international approach" to avoid the possibility "that Swiss companies are disadvantaged compared to their competitors." The United Kingdom will itself be looking into this issue next Wednesday.
"Rights to dig" for 292 billion
It is now possible to know how much the oil majors pay for their wells. But NGOs point out that little-to-nothing is known about traders, who spend more money to access resources than oil majors do.
Much more information is available about the business of commodity extractors. Legal obligations in Europe and Canada have provided much new information on payments to governments that is separate from the information provided voluntarily via initiatives like the EITI.
502 companies involved in extraction totaled $292 billion in payments to 138 government companies to access natural resources in 2016, according to NRGI, which compiled this data on its site.
Transparency exemption
The sum of similar transfers could be much more significant in trading. This is certainly the opinion of PublicEye, which points to the fact that a country like Nigeria generates 81% of its income from the sale of its oil and, therefore, only generates 19% of its income from extraction.
"Between 2011 and 2013, 10 countries in sub-Saharan Africa generated $255 billion from the sale of natural resources," says Marc Guéniat, sector specialist for the NGO.
NRGI reached the same conclusion by looking at the case of Trafigura. The Geneva-based merchant is the only one to voluntarily publish the amounts of its payments to government enterprises. In 2016, it paid $21.2 billion to obtain gas and oil (including payments in barrels, in kind), up 60% from 2015. This is more than any oil majors for their extractive activities. Over the same period, BP paid 12.9 billion, Shell 15.1 billion and Total 9 billion.
Nongovernmental organizations (NGOs) show how difficult it is to track the money that flows between commodity traders and countries that produce raw materials. Switzerland wants to better regulate the practices surrounding the mineral sector, but does not want to tackle commodity trading.
For theorists of "resource dependence", the equation is simple. If countries that own raw materials are poor, it is because the added value derived from oil, gas or mineral resources flows unidirectionally away from those countries to rich countries, traders and their shareholders.
In practice, it's more complicated. Multinationals that deal in raw materials actually pay billions of dollars to the source countries. But a lack of transparency around these payments makes it impossible to ensure that this this money benefits local communities.
Development practitioners, NGOs and other transparency advocates believe they have found the solution. Since 2002 and the launch of the "Publish What You Pay" initiative, these actors have campaigned for corporate payments to foreign governments to be published in a transparent manner. Methods like this help make states more accountable to their citizens and can decrease corruption.
Switzerland and the rules of the game
And in this field, Switzerland—a hub for commodity trading—could be a case in point. That, in any case, is the opinion of the Natural Resource Governance Institute (NRGI). This American research NGO sees Switzerland’s current revision to its law on limited companies as a "unique opportunity to change the rules of the game," in the words of its president, Daniel Kaufmann.
The preliminary draft of the law includes a component aimed at "increasing the transparency of financial flows" toward "countries where the rule of law structures are insufficient". It will be debated on February 22 by the National Council’s Legal Committee and is for Green MP Lisa Mazzone a "first step to stem the curse of raw materials".
The Swiss Trading and Shipping Association (STSA) is in favor of the measure proposed by the Federal Council, which it sees asmaintaining "equivalence with the European directives" on the extraction of raw materials and a way “to prevent companies from using Switzerland to escape international rules” according to Stéphane Graber, STSA’s secretary general.
Identify accounting "inconsistencies"
In addition to the European measures, some 50 natural resource-producing countries that are signatories to the Extractive Industries Transparency Initiative (EITI) have already committed to making corporate payments to government entities public, while asking companies to do the same. It is by comparing these two payment databases (those of governments and companies) that inconsistencies can be identified, the NGOs hope.
Among the potential "inconsistencies" is the hole in Chad's national accounts that was discovered at the turn of the millennium. Oil flowed out of this poor sub-Saharan African country, but despite the billions paid to the Chadian Petroleum Corporation, the country’s ranking dropped in the Human Development Index and its external debt grew. The Canadian group Griffiths (since renamed Caracal Energy) has been convicted of paying bribes for Chadian oil concessions.
Since then, Glencore has taken over the Chad contract. The Zug-based company—which has granted a $2 billion loan to Chad—also deals with "90 percent of the state's oil export duties," according to the company. Because of its listing on the London Stock Exchange, Glencore is required to publish the amounts it pays for oil extraction. But nothing forces it to do the same for its trading activities.
Exemption from transparency for trading
There is no provision for making payments transparent when buying or selling commodities. This is true internationally and in Switzerland, where the Federal Council’s draft law overlooks regulating trading and focuses only on extractive activities, which are the first link in the value chain. In other words, the copper mine would be subject to the law but not the sale of the metal.
Passing the law without including trading would amount to legislating for four companies (whose capital ranges between 100,000 and 1 million francs), according to estimates by the NGO PublicEye (which relies on a database of 544 Swiss companies active in the sector). 85% of those companies are pure traders (exempting them from legal scrutiny in the draft law) or are exempted from publishing their payments because they already do so in other jurisdictions (such as Glencore, based in Zug but listed in London), or they do not exceed the minimum amount of 100,000 francs (a size criterion for their capital which would make them exempt).
This reform is insufficient, according to the Public Eye. "To exclude trading from the law is to refuse to supervise the Swiss raw materials sector and thus to ignore its sometimes harmful effect on the producing countries," says Marc Guéniat, a specialist in commodity trading. This is especially true since the trading revenues exceed those of extraction for most producing countries. According to Public Eye's calculations for 2012, oil sales account for 64% of Nigeria's national budget.
For NRGI, this is another argument for extending the EITI principles to traders. "The sale of raw materials is the most opaque sector of all state enterprises," according to Daniel Kaufmann. Furthermore, NRGI would like all these companies to publish their transactions for all countries, and not just as an aggregate amount which Trafigura does voluntarily [it does, however, publish trading payments separately for EITI countries].
Business secrecy and the Swiss exception
"Unimaginable!" In the natural resource sector, this is a common reaction amongst traders to the proposed transparency moves. If some traders say they are willing to make more information available about these payments, they decline to consider releasing a high level of detail about their transactions, according to a representative of a trading house. "We operate in a competitive market. What are we talking about here? Unveiling our competitive advantage.”
In addition, unlike mining concessions that last over the course of ten or twenty years, the purchase and sale of raw materials is regulated by daily contracts. The implementation of these transparency provisions on trading is still up in the air.
The sector does not just point to their "business secrecy" that is being threatened. Behind the scenes, there is irritation about the proliferation of "attacks" on trading, like the initiative "for responsible companies"; it is argued that traders will not hesitate to operate elsewhere if Switzerland took the risk of legislating "in a vacuum".
The debate is not over
For Stéphane Graber, “it is illusory to believe that measures imposed in Switzerland will bend the United States of Trump or the European Union. It is not desirable to create a Swiss exception, whether for extraction or for trading.”
Whatever the parliament’s decision, the debate will not be ending anytime soon. To justify the exemption from trading, the Federal Council said it expected a "coordinated international approach" to avoid the possibility "that Swiss companies are disadvantaged compared to their competitors." The United Kingdom will itself be looking into this issue next Wednesday.
"Rights to dig" for 292 billion
It is now possible to know how much the oil majors pay for their wells. But NGOs point out that little-to-nothing is known about traders, who spend more money to access resources than oil majors do.
Much more information is available about the business of commodity extractors. Legal obligations in Europe and Canada have provided much new information on payments to governments that is separate from the information provided voluntarily via initiatives like the EITI.
502 companies involved in extraction totaled $292 billion in payments to 138 government companies to access natural resources in 2016, according to NRGI, which compiled this data on its site.
Transparency exemption
The sum of similar transfers could be much more significant in trading. This is certainly the opinion of PublicEye, which points to the fact that a country like Nigeria generates 81% of its income from the sale of its oil and, therefore, only generates 19% of its income from extraction.
"Between 2011 and 2013, 10 countries in sub-Saharan Africa generated $255 billion from the sale of natural resources," says Marc Guéniat, sector specialist for the NGO.
NRGI reached the same conclusion by looking at the case of Trafigura. The Geneva-based merchant is the only one to voluntarily publish the amounts of its payments to government enterprises. In 2016, it paid $21.2 billion to obtain gas and oil (including payments in barrels, in kind), up 60% from 2015. This is more than any oil majors for their extractive activities. Over the same period, BP paid 12.9 billion, Shell 15.1 billion and Total 9 billion.