On Tuesday 22 November 2022 Corruption Watch (CW) launched not one, but two new reports, both relating to beneficial ownership transparency (BOT) in South Africa’s extractives sector. The organisation also hosted a webinar with guest speakers Michael Barron and Tim Law, experts in the fields of beneficial ownership and implementation of the Extractives Industries Transparency Initiative (EITI) Standard.
Both guests were independent consultants on the reports, which advance a case for greater BOT in the mining sector by implementing a BO regime and by becoming a, EITI member. They are titled Beneficial Ownership Transparency in South Africa’s mining sector and The Extractive Industries Transparency Initiative and South Africa, respectively.
“Corruption Watch has identified mining sector as a sector with various corruption vulnerabilities,” says CW attorney Asiphe Funda. “Since 2017. Corruption Watch has been a part of Transparency International’s global mining programme with over 20 mineral-rich jurisdictions, referred to as the Accountable Mining Programme (AMP).”
AMP focuses on the corruption of vulnerabilities in the application phase of mining and seeks to advocate for good governance, accountability and transparency in the approval stage of the mining value chain. One of the risks CW has identified at the initial stage of the value chain is that of beneficial ownership and financial transparency.
“The mining sector has created a corrupt industry vulnerable to illicit financial flows on a grand scale,” Funda says. “Corruption Watch research and evidence-driven data also indicate that mining companies, government officials and to a certain extent, local and mining community elites, have created relationships and conducted activities which exploit loopholes in order to evade taxes, maximise tax benefits, and adversely affect the government and local communities’ ability to secure development and protect socio-economic rights.”
The BOT report analyses the current status of BOT in South Africa, sets out why transparency around beneficial ownership is important for the country and why BOT is linked to tackling corruption in the mining sector, explains the international context, and makes several recommendations
The EITI report analyses the implications of the EITI for South Africa, lays out the arguments for and against the country joining the initiative, and makes recommendations on ways in which the EITI agenda can be pushed forward in South Africa.
The importance of BOT in South Africa
Beneficial ownership transparency – when the true owner of an organisation or company is known, without complex ownership structures getting in the way – is a vital component in the fight against financial crime.
The reader merely has to think of the years of state capture in South Africa to realise the importance of transparency in company ownership. The state capture commission, over its in its almost 5 500-page report, identified multiple cases where secrecy of interests or influence were
“Although BOT alone would not have prevented this corruption, it would have created a significantly more challenging environment for those attempting to use shell companies, disguise conflicts of interest, and misappropriate money,” the report states. “All of the criminal activity during the state capture period was at least in part facilitated by secrecy.”
An effective BOT framework would look all the way through ownership structures to real people, says Law, the director of Engaged Consulting in the UK. “The value of this is that not only does it allow people to understand who is controlling and owning businesses”
That value can extend to identifying whether there are people who maybe have a position of political influence or who may have some interest in a company, Law adds, or it may also be about understanding conflicts of interest or whether businesses which claim to be a domestic South African business really are owned and controlled in South Africa. “So there are lots of good reasons to want to understand the beneficial ownership of companies.”
While South Africa has made significant progress on BOT, the recent mutual evaluation report submitted to the Financial Action Task Force (FATF) found gaps and weaknesses in the country’s BOT regime. The report’s executive summary states that: “Obtaining of adequate, accurate and current BO information compared to basic, also varies but in the majority of cases it is not easily available and when available, it often takes a long time to obtain. The authorities could not demonstrate that they apply sanctions for failure to comply with information requirements.”
This has led to a legislative scramble to beef up the BOT framework and avoid an unwelcome appearance on the FATF grey list.
The report also finds that while there are currently legislative proposals to create a legal obligation to report beneficial ownership, there are flaws in the proposals on the table.
Furthermore, there is still no confirmation on whether South Africa will opt for a public or non-public register – the former is not required under FATF Recommendation 24, though the organisation is clearly moving in that direction. Concerns revolve around the protection of personal details about natural persons, which could involve risks such as identity theft and threats to personal safety. It is thus important to carefully consider the implications of making BO data public so that all risks are appropriately and effectively mitigated.
“As far as we can see, there’s been a lack of systematic evaluation of the real merits of public versus non-public BO registers in South Africa,” says Law. “Without that systematic evaluation, there is a risk that the decision that’s made is not in the best interests of allowing South Africa to capture all of the benefits of having an effective beneficial ownership regime.”
The report’s recommendations extend to the government, Corruption Watch and its advocacy efforts with other civil society players, the private sector, and other stakeholders in the BOT agenda in the country. Among others, the recommendations include the implementation by government of a beneficial ownership regime that meets international best practice, and a strategic communications campaign to raise awareness of the benefits of BOT, especially for the private sector.
The benefits of joining the EITI
The EITI international secretariat has made regular attempts to draw South Africa into its community. South Africa has always been a compelling target for EITI membership, says the report, because of its status as an influential nation on the continent and its potential to be a catalyst for other African nations to join. If South Africa does become an EITI member, it may play a significant role in raising levels of transparency and governance in the broader extractives sector across the continent.
“Our feeling that for South Africa, the time has come. This is an initiative which South Africa should be part of,” says Barron, director of UK consulting firm Michael Barron Consulting, which specialises in advancing the transparency agenda.
“One of the things the EITI does well is to not just publish information, but publish it in a form as accessible as possible, supported by outreach and infographics and communications to make that information more accessible to a wide range of stakeholders who wanted to use it.”
One of the main benefits of EITI is broad transparency, and a drive to make that transparency relevant and accessible to all stakeholders, and although South Africa claims that its levels of governance are adequate for collecting and holding the necessary data to tax the mining sector and therefore does not need EITI, this claim, says the report, reveals a misunderstanding of EITI’s primary purpose.
“The primary purpose of EITI is not to empower weak government agencies to collect more tax” the report notes, but rather – in EITI’s own words – “to promote understanding of natural resource management, strengthen public and corporate governance, and provide the data to inform greater transparency and accountability in the extractives sector.”
Another argument put forward against South Africa joining EITI is that of the top 10 mining countries around the world, only Peru and Indonesia are members of the initiative – so if the likes of Australia, Canada and Brazil are not members, why then should South Africa join?
The report argues that South Africa’s role and influence on the African continent is fundamentally different from the position held by those other countries in their regions. “Even if South Africa may see itself as part of mining’s global top table, it is the only member of that top 10 on the African continent, and cannot fail to have a role in how Africa addresses corruption.”
Another popular argument which postulates that, by implementing EITI, South Africa might be seen to be leaving this group may be flawed, say the consultants. Or this might perhaps be seen as South Africa admitting that it does not have the same level of governance as those countries.
However, this argument may be flawed.
“Furthermore, there is no evidence developing countries would see South Africa adopting EITI as in any way diminishing its place as a leading extractives country. Indeed, it would probably have the opposite effect and be seen as a logical step on the road away from state capture.”
The BOT report makes six recommendations, including the implementation, by government, of a beneficial ownership regime that meets international best practice. Other recommendations focus on a strategic communications campaign highlighting the benefits of BOT with all relevant stakeholders, and particularly the private sector, CW continuing to monitor the proposed BO legislation and the process of getting it approved and enacted, and the organisation engaging with other CSOs, the private sector, and the Open Government Partnership.
The EITI report, meanwhile, makes 10 recommendations, aimed variously at CW, the South African government, the EITI board and international secretariat, and other CSOs in the country.
They include among others, that the government convene a taskforce to examine the implications of EITI implementation and to recommend candidature or not, that EITI commission a scoping study and engage with stakeholders in the country, and that CW develop a strategy to raise awareness of and build support for EITI membership and that other CSOs support this initiative.