Eye on Malawi’s EITI

Anonymous companies and beneficial owners: why it matters for Malawi

By Rachel Etter-Phoya

The compulsory disclosure of beneficial owners of companies was one of the changes to the Extractive Industries Transparency Initiative (EITI) Standard that was passed in Lima, Peru, at the Global Conference in February this year. All EITI countries must comply with this requirement by 2020. In Malawi, the Multi-Stakeholder Group has decided to include the disclosure of beneficial ownership from the start.

Anonymous company ownership has been described as “the worst problem you’ve never heard of” by leading natural resource governance focussed non-governmental organisation Global Witness. Anonymous or “phantom” companies are used to make it very difficult, if not impossible, to link the company back to the person who really owns it. This is ideal for people who want to use and move their money around without being discovered such as tax evaders, terrorists and politicians who have looted the public purse. This corporate vehicle can be used in the extractive industries which means there is often limited information available on the identity of the real owners – the ‘beneficial owners’ – of companies that have secured licences to explore and produce oil, gas and minerals. It is important to know how much money government is receiving from projects, but it is equally critical to know who is benefitting from a company’s profits.

Many mining, oil and gas projects are run by responsible companies but there are some companies that set up a chain of unaccountable entities often registered in multiple countries. These companies may not have the necessary experience or technical and financial capacity. Despite this,

“such companies may be given access to lucrative extractive projects because their owners are politically connected, or because their owners are willing to engage in questionable deals aimed at generating quick profits for a few rather than benefits for wider society”

(EITI 2016). If discovered, this can deter investment in a country and projects, and erodes the trust of citizens in their government.

Anonymous companies can be set up in many countries including the USA and British Virgin Islands. Instead of listing the ‘real’ owners, a lawyer or another person can allow their names to be used as “nominee” shareholders or directors or even other companies can be listed which makes it harder to uncover the chain of ownership. The recent publication of the ‘Panama Papers’ has revealed how elaborate company structures have been used by politicians, celebrities and their families from across the world to obscure and hide their assets and ownership interests in projects and companies as well as to avoid paying taxes. This leak included over 11.5 million files from Panamanian Mossack Fonseca which is one of the largest offshore law firms in the world.

Anonymous companies also make it harder for governments to address money laundering and tax evasion. ONE has estimated that every year developing countries lose USD 1 trillion because of corrupt or illegal deals, many of which involve anonymous companies. This money is vital for countries, like Malawi, to improve access to and quality of public services and infrastructure. Global Financial Integrity estimates that Malawi loses USD 650 million per year through illicit financial flows.

Nigeria’s EITI Secretariat has explained that beneficial ownership data “enable Nigerians to expose corruption and nepotism in the acquisition process”. In Nigeria, the Secretariat is also implementing

“a mechanism that would enable it to capture ownership of divested wells, licence holders, lease holders and companies bidding for extractive industry contracts”.

The Democratic Republic of the Congo has published beneficial ownership data for Congo Dongfang International Mining company (see the image below) and this included the name, nationality, address, date of acquisition and ID number of people who hold shares in each company. This is a start to addressing the challenge of illicit financial flows and the direction Malawi’s EITI Multi-Stakeholder Group will take.

Image courtesy of EITI (2016)

The new EITI Standard of 2016 requires that by 2020 companies that bid for, operation or invest in oil, gas and mining disclose their beneficial owners – name, nationality and country of residence. Further information would also make the data more useful such as date of birth, national identity number and residential address. In particular, any politically exposed persons (a person entrusted with a prominent public function such as a Member of Parliament or civil servant) holding ownership rights will also have to be identified. At a minimum, Malawi will need to include this information in the annual EITI report but a further recommendation is that beneficial ownership information should be made available through a public register. The European Union now requires member states to establish ownership registers, not just for the extractive industries, to address money laundering.

For further information, see EITI’s page on beneficial ownership.

Search the International Consortium of Investigative Journalist’s Offshore Leaks Database (including the “Panama Papers”) for yourself, here’s how.

***

The piece “Anonymous companies and beneficial owners: why it matters for Malawi” featured above was initially published in Malawi’s Mining & Trade Review Issue Number 39  that is circulating this July 2016.

The full edition is available for download here. This monthly publication is edited by Marcel Chimwala.