Recent developments illustrating corruption risks in the mining industry

Introduction

Mining executives do not need to be reminded that their industry presents some of the gravest risks of corruption. They operate in regions that are extremely high risk for bribery and corrupt behavior, and in a sector that is one of the most heavily regulated around the world. The fact that licenses and approvals are necessary for the exploration, development, construction and operation of a mine, coupled with the circumstance that governments often own relevant land or infrastructure, means that mining companies are constantly dealing with governments and government agencies to get their products to market. The combination of high risk jurisdictions and pervasive governmental regulation presents a uniquely high risk of corrupt activity.

At the same time, enforcement of anti-bribery and anti-corruption laws – primarily by the United States and United Kingdom authorities – has led to more investigations and prosecutions, higher monetary sanctions, and the imposition of monitors and other agents to oversee businesses.

This note provides examples of recent cases and investigations, and highlights some ways to mitigate key risks.

Recent enforcement cases

United States

In the United States, bribery of foreign officials is covered by the Foreign Corrupt Practices Act of 1977 (the FCPA) and is investigated and prosecuted by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). The DOJ can bring criminal charges against companies and individuals who are US persons or who engage in corrupt behavior in the US. Those criminal charges can result in substantial jail time for individuals, hefty fines, and remedial obligations such as monitors or changes to corporate procedures.

The SEC can bring civil charges against companies who have securities listed on a US exchange, and their associated persons. The SEC can seek injunctive relief, disgorgement of revenues gained from bribery, civil penalties, as well as orders barring individuals from acting as an officer or director of a listed company. The SEC can bring charges for actual bribery, or for violations of various laws that require companies to maintain books and records that accurately record transactions and internal controls that are adequate to prevent bribery.

The following recent enforcement actions and investigations in the mining sector demonstrate the reach of the US authorities.

Criminal cases:

• Alcoa Inc: Alcoa settled parallel DOJ and SEC proceedings in January 2014, paying a total of $384m in penalties (penalties were paid by the parent, Alcoa Inc., and a majority-owned subsidiary, Alcoa World Alumina LLC). This currently represents the sixth largest FCPA settlement by a corporation. The conduct at issue in Alcoa's case did not involve extraction operations; rather the authorities alleged that Alcoa was involved in a scheme involving the payment of more than $100m to Bahraini officials with influence over contract negotiations relating to Alcoa's supply of alumina (refined from bauxite extracted in the company's global mining operations) to Aluminium Bahrain ("Alba"), a state-owned aluminum producer. The scheme dated back to 1989 and purportedly involved a London-based "consultant" with close relationships to the Bahraini royal family acting as a middleman to facilitate the bribes. The bribes were paid in the guise of the consultant's "commission" payments and by markups on the price of the alumina. Funds were routed offshore, through accounts in Guernsey, Liechtenstein, Luxembourg and Switzerland. The middleman was not named in the DOJ and SEC settlements; however UK authorities charged Victor Dahdaleh, a British-Canadian businessman, with corruption offences related to the payment of bribes to Alba personnel. Further details of this prosecution appear in the UK section below.

• Indian titanium mining case: the DOJ announced in April 2014 that it had charged six foreign nationals with participating in an alleged conspiracy involving the bribery of officials in in India to allow for the mining of titanium minerals. The defendants reportedly conspired to pay $18.5 million in bribes to secure licenses to mine in the state of Andhra Pradesh. At the time of the announcement, one of the defendants (a Ukrainian national) was the subject of extradition proceedings in Austria and the others were still at large. Austria has since refused to extradite the Ukrainian national to the US, while press reports indicate that the remaining defendants are still at large. The case is ongoing.

Investigations:

• Kinross Gold Corp: Kinross announced in October 2015 that it is under investigation by the SEC and DOJ in relation to possible internal control deficiencies and improper payments to government officials. Press reports indicate that the investigation concerns operations in Mauritania and Ghana.  Kinross's statement indicates that it received information regarding the allegations in 2013 and has been carrying out an internal investigation.
• Gold Fields Limited: the SEC carried out an investigation into South African mining company Gold Fields Limited in relation to the granting of a financial stake in one of its mines to a group of black investors, including the parliamentary speaker, as part of a Black Economic Empowerment (BEE) transaction (the BEE program was launched to redress inequality caused by the apartheid regime in South Africa). Gold Fields announced in June 2015 that it had received a letter from the SEC stating that it would not recommend enforcement action.

United Kingdom

The UK's Bribery Act 2010 came into force in 2011 and criminalizes both public and private sector bribery.  The UK Serious Fraud Office (the SFO) is the body responsible for investigating and prosecuting crimes under the Bribery Act.

The Bribery Act applies to conduct within the UK and to the conduct of UK nationals or residents and UK-incorporated companies anywhere in the world. It creates criminal offenses, punishable by imprisonment for individuals and fines for the giving or receiving of bribes.

The Bribery Act also created a new 'corporate' offence whereby a company or a partnership can be held liable for failing to prevent bribery if (i) a person associated^[1] with it bribes another person, (ii) intending to obtain or retain a business advantage for the commercial organization. This corporate offense can be committed by a UK-incorporated company or an overseas company which carries on business or part of a business in the UK (i.e. with a demonstrable business presence in the UK). The only defense for companies within the scope of the corporate offense is to show that the company had in place 'adequate procedures' designed to prevent associated persons from carrying out acts of bribery.

We set out below some examples of recent and ongoing bribery investigations by the UK authorities. To the extent that these cases involved conduct which took place prior to July 2011, the pre-Bribery Act legal framework applies, rather than the Bribery Act itself.

• ENRC plc: the SFO announced in April 2013 that it had launched a criminal investigation into the activities of ENRC and its subsidiaries in Africa and Kazakhstan. ENRC had originally appointed external counsel to carry out an internal investigation into whistleblower reports. Press reports on the ENRC case indicate that the conduct under investigation includes payments made to a series of offshore accounts in connection with the company's Kazakh operations, payments made to officials in connection with ENRC's purchase of a copper smelter in Zambia, and apparent irregularities relating to the acquisition of a copper mine in the Democratic Republic of Congo. The SFO's most recent annual report (for the year ended 31 March 2015) notes that the ENRC case continues to make progress.
• Victor Dahdaleh and Bruce Hall: the SFO charged Mr Dahdaleh with corruption offences in October 2011, alleging that he had been involved in the making of payments to Bahraini officials in connection with alumina supply contracts entered into with Alcoa (see above). The Dahdaleh trial collapsed in December 2013 after Bruce Hall (the former CEO of Alba and a key prosecution witness) changed his evidence and Alba's US lawyers (who had provided information to the SFO during their investigation) refused to attend court to be cross-examined. Mr Dahdaleh was acquitted of all charges. Mr Hall was extradited to the UK from Australia and was also charged with corruption offences. He pleaded guilty to conspiracy to corrupt in related proceedings, admitting to having accepted bribes in relation to Alba contracts and was sentenced to 16 months in prison in July 2014. He was also subject to a confiscation order for over £3 million and paid compensation of £500,000 to Alba.

 Other jurisdictions

Following the lead of the US and the UK, other countries are also developing anti-corruption legislation and pursuing anti-corruption investigations. We expect that this trend will continue, and will impact the mining sector. The following is an illustration of cases brought by other jurisdictions in the mining sector.

• BSG Resources: BSG Resources is reportedly the subject of a number of international corruption investigations relating to mining operations in Guinea. A Guinean inquiry concluded in 2014 that there was "precise and consistent evidence establishing with sufficient certainty the existence of corrupt practices" in the way BSG won its mining rights. BSG's rights were removed following the conclusion of this inquiry.  Following this decision, Frederic Cilins, a French intermediary for BSG in Guinea, pleaded guilty to US charges of obstruction of justice, admitting that he offered the wife of Guinea's former dictator up to $6m to destroy contracts with BSG in an attempt to keep those contracts from a grand jury investigation into possible corruption. An investigation into BSG's conduct is also reportedly underway in Switzerland and the SFO has been assisting the government of Guinea's ongoing investigation.

• MagIndustries: in June 2015, Canadian company MagIndustries announced the interim results of an internal investigation into whistleblower allegations of bribery connected to its operations in the Republic of Congo. This interim report included findings that gifts such as furniture and 4x4 vehicles had been provided to Congolese officials, multiple trips for officials to China and South Africa had been organized or supported by the company, and that a number of payments were made to officials. These included both 'per diem' payments in excess of permitted amounts and 'black money' payments made to reduce taxes and penalties owing in the Republic of Congo. The company reported that investigations are ongoing but that it has already taken some steps to address the issues, including management changes and the introduction of new procedures. Press reports indicate that the Royal Canadian Mounted Police is investigating the allegations although no charges have been brought at this time.

Key risk areas for mining companies

The mining industry presents a 'perfect storm' of bribery and corruption risk. The combination of high-risk jurisdictions and pervasive governmental involvement is a volatile mix. The following outlines some of the key risks and suggests some ways to mitigate those risks.

• Operating in high risk countries. Many of the countries in which mining companies tend to operate are also identified as posing a higher corruption risk by sources such as Transparency International's Corruption Perceptions Index (http://www.transparency.org/cpi2014/results).
  • Companies should ensure that they understand any jurisdictional risks posed by the countries in which they operate and should ensure that heightened compliance procedures are followed in these jurisdictions.

• Interactions with government officials. There is some level of risk inherent in these interactions with government officials, particularly in high risk countries, since this presents an opportunity for officials to request or demand bribes or facilitation payments. While some jurisdictions' anti-bribery laws contain a carve-out permitting the making of facilitation payments, this is not the case worldwide (for example facilitation payments are prohibited by the UK Bribery Act).

  • Companies should offer training to employees or third parties likely to encounter such requests so that they refuse such payments and report such requests to management and compliance personnel.

  • Companies should also consider building additional time into projects to allow for delays if particular events (such as the receipt of permits) are held up due to a refusal to pay a bribe.

• Use of agents. Mining companies may often rely on local agents to investigate opportunities, liaise with government authorities, secure permits and permissions on their behalf, or to assist in the onward sale of mined products. Although this is often the most efficient way to do business, agents and intermediaries can be used to make improper payments, or may do so on their own initiative in an attempt to secure business if not subject to the proper controls.

  • Companies should carry out pre-appointment due diligence on agents and put in place procedures to monitor any activities they carry out on the company's behalf.  Red flags include requests for additional payments where the reasoning for these is unclear, payments to third countries or accounts not in the agent's name, and requests from government authorities to only work with a particular agent (in this scenario, the agent may have a family or other connection to the government official and be used as a vehicle for kickbacks or other improper payments).

  • Appropriate anti-bribery and corruption clauses should also be included in agency agreements. These could include a requirement for the agent to comply with relevant anti-bribery laws and to abide with company policies and procedures and, where possible, allow the company to terminate the relationship in the event that these provisions are breached.

  • Companies should also consider offering training to high-risk third parties such as agents to ensure that they understand the anti-corruption procedures with which they must comply.

• Excessive gifts/entertainment/travel/per diems. Many mining companies operate corporate hospitality programs offering gifts and entertainment to government officials and other third parties with whom they have business relationships.  Companies may also wish to pay for officials to travel to visit particular projects, whether this involves payment of travel expenses or also includes per diem payments.  Although these are all permissible payments when made for legitimate business purposes, there is a risk that expenditure of this type can be misused for corrupt purposes, or perceived as such.

  • Companies should ensure that they have robust policies and procedures governing this area and that they are familiar with any local law restrictions on what recipients, particularly government officials, are permitted to accept.  As a general rule, corporate hospitality of this type should have a genuine business purpose and should not be overly lavish.

  • Companies should also maintain accurate records of this expenditure, including the recipient, the amount and the purpose for all gifts or entertainment.

• Corporate social responsibility initiatives. It is becoming increasingly common for government agencies granting mining rights to request corporate social responsibility commitments from mining companies. For example governments may suggest that a company establish funds or programs for local communities or even make donations to specific charities or causes, which may seem to be a condition of the award of the rights. In some cases, these programs can be used as a means to funnel kickbacks to officials or otherwise create a perception of potentially improper dealings between the mining company and the government.

  • Companies should seek to ensure that any corporate social responsibility initiatives in which they engage are transparent and have appropriate governance arrangements in place. For example, if funds are to be donated for use by local communities it will be important to ensure that there are appropriate controls around the use of those funds and that they are not simply appropriated by, or passed on to, local officials. 

  • Similarly, companies should carry out due diligence on any charities that will receive donations to ensure that they are legitimate, properly established under local laws, and not connected to decision-makers on the project in question.

• Compliance in multiple jurisdictions. The international anti-bribery and corruption landscape is increasingly complex. Laws such as the FCPA and UK Bribery Act are broad in their jurisdictional scope and capture a wide range of overseas conduct.  Moreover, regulators tend to adopt extremely aggressive views of the jurisdictional scope of these laws. An ever-increasing number of other jurisdictions are also introducing their own anti-corruption laws, meaning that companies may well need to be aware of and comply with numerous laws. In circumstances where companies are required to carry out an internal investigation into potential corruption, in addition to potentially investigating conduct across multiple jurisdictions, multiple regulators may be involved.

  • Companies should ensure that their anti-corruption policies and procedures meet the requirements of all applicable laws. Where an investigation is required, they should seek expert advice to ensure that issues such as self-reporting and disclosure of documents to multiple regulators are appropriately managed.

Conclusion

In light of the corruption risks in the mining sector and the eagerness of various governments to conduct wide-ranging anti-corruption investigations and enforcement actions, companies operating in the sector are well-advised to carefully monitor and manage their businesses.  The trend of increased enforcement will only continue, which will necessitate a greater level of care to ensure compliance with applicable anti-corruption laws.

^{[1] The definition of 'associated persons' is very broad and reaches those performing a service for or on behalf of the company, such as employees, agents, or third party contractors etc.}