Maendeleo Group Blog

Wednesday, 21 June 2017 18:38

Illicit Financial Flows in the Extractives Sector in Africa - Reflections on the Osoro Report in Tanzania

Written by Selemani Kinyunyu

On 12 June 2017, President John Magufuli of Tanzania received a report from the Osoro Committee which was commissioned to examine the economic and legal implications of the country’s export of gold and mineral concentrates. The establishment of the Osoro Committee follows a visit made in March by President Magufuli to the port of Dar es Salaam where he barred the export of 277 containers of gold and mineral concentrate belonging to Acacia Mining PLC, pending government verification of the amount and value of the minerals.

A probe team was established to carry out the chemical analysis and a report released in early April 2017. The chemical analysis pointed to significant variances in the amount of gold concentrate in the containers, suggesting that Acacia had under declared the export value and amount of mineral concentrate by as much as three times. The probe team also found that at least 10 other minerals were not declared by Acacia including zinc, nickel and lithium.

 

Based on the findings on the chemical analysis, the Osoro Committee estimates that Tanzania lost up to $ 84 billion between 1998 and 2017. Given that Tanzania’s proposed 2017/2018 budget is approximately $ 15 billion, the losses would be sufficient to run the country for at least 5 years. The Commission’s findings suggest that Acacia engaged in a number of dubious practices that contributed to Illicit Financial Flows including;

  1. Base erosion and profit shifting - Acacia would include illegible costs in the computation of its costs of production with the aim of eroding its tax base in Tanzania. Then through a network of subsidiaries, Acacia would export the gold concentrate from Tanzania (which now has a lower book value due) and sell it to third parties through its treasury department in South Africa at a much higher value.
  2. Trade misinvoicing – Acacia would misreport the nature, amount and value of mineral ore being exported.
  3. Transfer pricing – Acacia would collude with companies to sell gold and mineral ore at prices that were not reflective of the actual market value. The manipulation of the sale price was done for the purpose of avoiding or reducing its tax obligation.

Following these findings, the Osoro Committee made 21 recommendations related to legal, policy and institutional reforms. It noted that there were significant internal deficiencies in the countries tax, mining, business registration, judicial and freight management authorities. The Osoro Committee also recommended public disclosure of mining contracts and for appropriate criminal and administrative sanctions be taken against individuals who had occasioned losses or engaged in corruption and mismanagement.

Acacia which operates 3 mines in Tanzania is a subsidiary of Barrick Gold, the largest gold mining company in the world. Acacia strongly disputes findings of the chemical analysis and of the Osoro Committee. It has called for an independent audit of the findings. Following considerable pressure on its cash flows and a share price that nose-dived by 30%[1], executive vice chairman of Barrick Gold John L Thornton met with president Magufuli in Dar es Salaam on 14 June 2017. A statement issued by the presidency after the meeting suggested that Barrick would pay Tanzania any money it owes and that Barrick would help Tanzania build a smelter. Thornton’s brief statement after the meeting was coy, instead insisting that further discussions would be held by a joint team of experts to resolve the impasse.[2]

What way forward for Tanzania?

The Osoro report is not the first time there has been a detailed scrutiny of the country’s mining industry. There have been at least 5 other inquiries into the matter namely the 2002 General Mboma Committee, the 2004 Dr. Jonas Kipokola Committee, the 2005 Enos Bukuku Committee, the 2006 Lau Masha Committee and the 2008 Judge Bomani Committee. The real challenge therefore appears to be implementation deficit.

Commendably, president Magufuli announced that all the recommendations of the Osoro Committee shall be implemented. Three priority areas the author recommends are immediate execution are;

  1. Public dialogue and contract transparency – There is still need for reflection and discussion on the concerns raised by the Osoro report and preceding committees especially with respect to taking measures to enhance community beneficiation from mineral resources. In order for this to happen, mining contracts should be made publicly available. This would be in line with Tanzania’s commitments to contract transparency under Section 16(1) of the Tanzania Extractive Industries (Transparency and Accountability) Act.
  2. Constitutional, legislative and policy review – Tanzania is encouraged to review its mining, oil, gas, tax and company laws through a participatory process. A revamped legal regime would clear up the red tape that facilitates Illicit Financial Flows and encourage mineral beneficiation within the country. The government of Tanzania is also encouraged to assent to the recently adopted East African Community Mining Bill (2017) which seeks to establish a mechanism for reporting mining and mineral related activities in the region.[3] Tanzania should also resuscitate the stalled constitutional review process with a view to enshrining ethical standards for public officers, strengthening oversight bodies, creating space for public participation in resource management and limiting the broad discretionary powers of the executive that may be subject to abuse.
  3. Accountability – Criminal and administrative sanctions need to be taken against individuals and companies that may have facilitated the loss to break with the culture of impunity. Tanzania can use its recently unveiled Corruption and Economic Crimes Division of the High Court to prosecute offenders. Immediate measures should also be taken to freeze the assets of persons of interest while convicts should have their assets forfeited.

 

What lessons for other African countries?

The challenges facing Tanzania are not isolated. In fact, the situation obtains in other resource rich countries on the continent. Tanzania’s southern neighbour Zambia attempted similar strong-arm tactics to get a better deal from investors in its copper sector. The Zambian strategy focused largely on unilateral amendments to mining laws that saw an increase in mining taxes. The results were not very encouraging as mining companies sluggishly accepted the changes and threatened withdrawal from the copper sector.[4] The Zambian government was eventually forced to change its position and lower some taxes. Interestingly, Barrick was one of the companies operating in Zambia!

The Mbeki Panel on Illicit Financial Flows highlighted many of the opportunities available to African countries to redress the above challenges. For countries experiencing Illicit Flows in the extractives sector, the following recommendation may be crucial;

  1. Implement the African Mining Vision (AMV) - The AMV is a roadmap for the holistic development of mineral resources in Africa. It provides guidance for states to enhance community beneficiation, improve contract negotiation in the extractives industry and mainstream mining into industrial and trade policy. The implementation of the AMV is overseen by African Minerals Development Centre which can assist African states to promote the transformative role of mineral resources in the development of the continent through increased economic and social linkages.
  2. Engage the African Union Advisory Board on Corruption (AU-ABC) – Article 22(5)(e) of the African Union Convention on the Preventing of Corruption mandates the Advisory Board on Corruption to collect, analyse and disseminate information on the conduct and behaviour of multi-national corporations (MNCs) operating in Africa. Such reports could prove vital in monitoring new methods of Illicit Flows or reporting the activities of rouge MNCs.
  3. Build and support coalitions – African governments need to build strong coalitions among themselves and with key stakeholders including civil society to monitor and assess trends in tax management, Illicit Flows and money laundering. Platforms such as the African Tax Administration Forum, Tax Justice Network - Africa and the Financial Action Task Force (FATF) Style Regional Bodies in Africa are some key spaces where conversations about Illicit Flows are taking place. These institutions need to be supported and strengthened by African governments.
  4. Enhance contract negotiation and support – The African Legal Support Facility (ALSF) provides legal advice and technical assistance to African countries in negotiation of complex commercial transactions, creditor litigation and other related sovereign transactions. The ALSF also develops and proposes innovative tools for capacity building and knowledge management. It is currently providing services to only 18 of 55 African countries. More countries are encouraged to use the services of ALSF as they negotiate or review contracts in the extractives sector.

A strategic lesson to be drawn from these experiences is that Illicit Flows in the extractives sector in Africa is a systemic problem that requires a broad-based solution. Many useful tools specifically crafted for the African continent exist to fight Illicit Flows. However, only strong political will and the deployment of the right approaches can assist African states to break free from Illicit Flows and the resource curse.

 

*Selemani Kinyunyu is a Tanzanian lawyer and Strategic Advisor at the Maendeleo Group. The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of any organisation he may work for or be affiliated with. Follow him on twitter on @selemani

 


[1] See Acacia Mining shares plunge as Tanzania keeps ban on gold exports https://www.ft.com/content/2c913ce0-4092-11e7-9d56-25f963e998b2

[2] See Further Market Update http://www.acaciamining.com/media/press-releases/2017/2017-06-14a.aspx

[3] See Four Key Bills sail through the first reading http://www.eala.org/media/view/four-key-bills-sail-through-the-first-reading

[4] See The Politics of Reforming Zambia’s Mining Tax Regime available at http://archive.resourcegovernance.org/sites/default/files/Politics_Reforming_Zambia_Mining_Tax_Regime.pdf

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