The mining sector in Ethiopia is a hotbed of corruption and hub for graft and fraud. The World Bank (WB) in its 2012 massive report “Diagnosing Corruption in Ethiopia” identified the mining sector as one of the most corrupt sectors of Ethiopia’s economy.
According the WB, there are “seven areas of corruption risk” in the Ethiopian mining sector” including the “three main risk areas” of “license issuing, compliance with license conditions, and mining revenues”. The other critical areas of corruption include fraudulent practices in “compensations and obligations to local inhabitants, contracts with contractors and suppliers to the mining companies, falsification by mining companies of product quality, and theft of mining products and equipment.”
In the area of “license issuing”, the WB report states that “officials may extort or be offered bribes by mining companies in return for issuing licenses, for issuing licenses more quickly, or for specifying less-onerous license conditions.” A related risk is that “officials may secretly have ownership stakes in companies to which licenses are granted; acquire land for which a license application has been made; demand a share in mining companies or in their profits; and manipulate license registration to give themselves or their associates prior registration.” In “license compliance”, “mining companies may deliberately breach mining conditions (for example, environmental, health, and safety regulations, as well as the extent or area of mining)” with impunity.
In the area of revenue, “mining companies may deliberately understate output and profit and overstate costs to reduce royalties and profit taxes.” The regime has no independent means of verifying the revenues of mining companies. According to the WB,
“Collection of royalties and income tax apparently depends almost entirely on the mining companies’ self-certification of output and profit because of the lack of resources at the Ethiopian federal, regional, and city licensing authority levels. It would, therefore, be relatively easy for the mining companies to exaggerate their capital and operating costs and understate their output and profit.” When “license operation and mining revenue breaches are discovered, the mining company may also bribe inspectors to overlook the breaches.”
The catalogue of corrupt practices in the mining sector documented by the WB in its 2012 report cover the entire spectrum ranging from bribes, falsification of records, shakedowns and take downs of mining companies and stealing compensation designated for local inhabitants to criminal use of insider information and fraudulent shell corporations. The egregious examples of corruption documented by the WB are mind boggling and include the following:
A mining company could be required to pay a large premium in return for a mining license. Senior officials and the mining company could keep this premium secret, and the officials could receive payment in offshore bank accounts.
An official may require the mining company to make a large donation to a charity if it wants the license to be issued more quickly. Although the charity may appear to be genuine, it may in fact be a front for a political party or for the official’s personal or family gain.
A mining company may submit a health and safety plan for a mining license in accordance with good practice, but an official may tell the company that unless it pays a bribe, he or she will impose additional and unnecessarily onerous health and safety conditions.
A mining company may submit an environmental management plan for a mining license that will inadequately control the leaching of poisonous chemicals into the water supply. Proper controls would [be costly]. The mining company may pay the official responsible for approving the license a bribe to approve the deficient conditions.
Officials may demand a share in the profits of a mining company. A mining company may agree to give an official’s relative a free share in the profits of the mining project if it receives a license on beneficial terms.
Officials grant licenses to companies secretly owned by them. Officials secretly acquire land that is subject to a license application.
An official who is aware that mining may take place on an area of land may lease the land in advance of the mine licensing. Once the license is granted, the value of the land may materially increase. The official thereby profits from his or her inside knowledge by selling or licensing his or her rights to the land to the mining company.
Companies illegally on-sell licenses granted to them.
Officials manipulate license registration.
An official in the department that issues mining licenses may hear that a mining company wishes to apply for a license. The official may alert a businessperson with whom he or she has connections, and the businessperson may quickly apply for a license over the same area. The official grants the license to the businessperson. The mining company then has to purchase the license from the businessperson, and the businessperson shares the profit with the official.
A prospector may discover minerals, mark the area, and contact the relevant licensing authority to receive a discovery certificate. A corrupt official may not register the discovery in that person’s name but instead notify a business colleague and register the discovery in the colleague’s name. The corrupt official may then falsely inform the discoverer that someone else had previously discovered the minerals.
Officials collude with mining companies to grant subcontracts to relatives. The licensing authority could, as a condition of the license award or social development plan, require the mining company to undertake a large amount of additional infrastructure works at the mining company’s own cost. For example, the mining company may be obliged to build or refurbish a road, a school, or a hospital. A government official could then require the mining company to award one or more of these infrastructure projects to a contractor secretly owned by a member of the official’s family.
Officials or community leaders may steal compensation that should have gone to local inhabitants. Mining companies may bribe officials to set compensation below a proper rate.
Local inhabitants may falsely claim that they occupy land subject to a license application.
Contractors and suppliers may engage in fraudulent transactions in tendering, submitting claims, and concealing or approval of defective works.
Mining companies may commit fraud by making false declarations about the identity and quality of minerals or by bribing certifiers to approve false declarations. A major, ongoing investigation into corruption of this type is under way in Ethiopia.
SMOKE AND MIRRORS IN THE ETHIOPIAN MINING SECTOR?
The regime in power has been playing a magical game of smoke and mirrors with mining revenues. According to a recent report citing official regime sources, “The Ethiopian government earned USD 419 million from the export of minerals supplied by artisanal miners operating in the country in the first 11 months of the current financial year. Export of gold made up the largest proportion of minerals, generating USD 409.1 million in foreign currency, followed by gemstones and tantalum earning USD 9.3 million and USD 1.6 million. This income came from the export of 7878.3 kg of gold, 20,126.3 kg of gemstones and 32.95 tons of tantalum…. MIDROC Gold is the only company that is engaged in large-scale gold mining.” Other reports indicate the “export of minerals has become Ethiopia’s second largest foreign currency earner, contributing over 23 percent of overall export earnings.”
The fact of the matter is that no one, except those who hold the key to the lockbox of the mining revenues, know the actual amount of revenue generated by the mining sector. The regime claims it has no independent way of verifying mining revenues and must rely on information reported by the companies. How convenient! The fact of the matter is that principal beneficiaries of the mining sector revenues are the wealthy oligarchs and the businesses fronting for the oligarchs and other enterprises owned by the “Tigray People’s Liberation Front”.
No one knows the depth and breadth of corruption taking place in the sale of mineral licenses and siphoning of mining revenues. There is credible anecdotal eyewitness testimony alleging that hundreds of pounds of gold are regularly spirited out of the country without inspection by plane from airstrips close to the gold mines. It is this brazen mining scam that the regime audaciously seeks to enshrine and consecrate with Extractive Industries Transparency Initiative (EITI) imprimatur!
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Professor Alemayehu G. Mariam teaches political science at California State University, San Bernardino and is a practicing defense lawyer.
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