Emerging Conclusions
Mark Taylor
These Emerging Conclusions offer a preliminary analysis of the findings of four reports from the Economies of Conflict policy research series, which examines the links between private sector activity and armed conflict. In addition, the four reports are presented here in electronic form on an enclosed compact disc. The occasion is the symposium “Economic Agendas in Armed Conflict: Defining and Developing the Role of the UN”, co-organized by the International Peace Academy and Programme for International Co-operation and Conflict Resolution, and sponsored by the Government of Norway, on 25 March 2002 in New York.
Emerging Conclusions March 2002
Economies of Conflict: Private Sector Activity in Armed Conflict
These and additional forthcoming reports from the series are available from the PICCR web-site at www.fafo.no/piccr The Economies of Conflict project is supported by the Government of Norway.
Programme for International Co-operation and Conflict Resolution Institute for Applied Social Science P.O.Box 2947 Tøyen N-0608 Oslo http://www.fafo.no/engelsk/
Mark Taylor
Emerging Conclusions – March 2002
Economies of Conflict: Private Sector Activity in Armed Conflict
Programme for International Co-operation and Conflict Resolution Fafo
© Fafo Institute for Applied Social Science 2002 Cover page: Agneta Kolstad Printed in Norway by: Centraltrykkeriet AS
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Contents
Preface ............................................................................................................ 5 1 Introduction ...................................................................................... 7 2 Preliminary Findings ...................................................................... 11 2.1 Anarchic Exploitation ............................................................................ 12 2.2 Criminalized Transactions ...................................................................... 15 2.3 Militarized Production ........................................................................... 17 2.4 Conflict Commodities ............................................................................ 20 2.5 Rogue Companies .................................................................................. 23 2.6 Emerging Conclusions ............................................................................ 25 3 Executive Summaries ..................................................................... 27 Dirty Diamonds ............................................................................................ 28 Fuelling Conflict ........................................................................................... 33 Illicit Finance and Global Conflict ............................................................... 38 The Logs of War ........................................................................................... 47 About the Authors ....................................................................................... 53 Appendix: Contents of the Economies of Conflict CD, Version 1 .............. 54
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Preface
These Emerging Conclusions offer a preliminary analysis of the findings of four reports from the Economies of Conflict policy research series, a project of Fafo’s Programme for International Co-operation and Conflict Resolution (PICCR). These reports are the first to emerge from the series, which examines the links between certain private sector activity and armed conflict. The four reports presented here in electronic form on compact disc are being released for the first time on the occasion of Economic Agendas in Armed Conflict: Defining and Developing the Role of the UN, a symposium co-organized by the International Peace Academy and PICCR, and sponsored by the Government of Norway, on 25 March 2002 in New York. These reports will be released in printed format in the coming months. The Executive Summaries of the reports are reproduced below, as is a table of contents for the compact disc itself. We have gathered from the authors a number of related primary and secondary source documents and included these on the compact disc in order to provide background and context to the studies and to give this version of the compact disc additional utility. Much of what is included on the compact disc is also available on the Fafo web site at www.fafo.no/piccr, which will be updated regularly with additional material. Later in 2002, the Economies of Conflict series will release additional reports on regulatory options, the private security sector, small arms, and brokers. It should be emphasised that Economies of Conflict is an analytical policy-oriented project, aimed at a better understanding of processes and behaviour as the basis for suggesting policy options. The reports issued as part of the Economies of Conflict series do not seek to accuse or shame particular firms or governments. Rather, the studies approach the private economic dynamics involved in armed conflict from within each sector, asking the question, How does certain private sector activity help sustain armed conflict and what can be done about it? In designing the research programme, PICCR opted for an industry perspective. The industries identified below have been selected based on their identification in the literature and through practice (as evidenced by on-going work of nongovernmental organisations, governments, or multilateral institutions). They are by no means exhaustive of the economic dimensions of war, but they represent some of the industries that are, perhaps, most relevant to the challenges to international 5
peace and security posed by contemporary armed conflicts. Although the studies do address illicit activities within licit industries, the project has yet to commission studies related to the specifically criminal activities linked to armed conflict (e.g. narcotics, trafficking in human beings, etc.). As with past PICCR projects, we have chosen an inductive approach, seeking to contribute to these arenas through an analysis of experience and lessons-learned. PICCR commissioned studies from practitioners and researchers engaged in issues related to the industry and war, or the industry and corporate social responsibility, and with a keen sense of what has worked – and what has not worked - in practice. The Economies of Conflict project was launched in the spring of 2001 and since that time we have benefited from the input and support of a growing number of people. Principal among these has been Ambassador Wegger Strømmen at the Norwegian Permanent Mission to the United Nations, who has watched the project grow since its inception. Karen Ballentine, Research Coordinator and Program Associate on the International Peace Academy’s project Economic Agendas in Civil Wars, has been extremely helpful and, along with the excellent staff at IPA, has made the Fafo-IPA cooperation on these issues both easy and effective. Our team of researchers deserve special thanks, both for their openness to our approach to the research task and their willingness to share their knowledge with each other across the seminar table. My thanks also to Leiv Lunde, an advisor on Economies of Conflict and the author of an upcoming report from the project, for his help and perspective over the past year, and to Christian Ruge, a PICCR colleague, who has made an invaluable contribution to the project. I am also grateful to the Government of Norway, which provided financial support for the project, and to those Norwegian officials who have contributed their perspectives on policy issues. Of course, none of the above bears responsibility for any inaccuracies or omissions that might occur in these reports. The views and recommendations expressed in these reports, including this summary of emerging conclusions, are those of the authors alone and do not necessarily reflect the views of Norway, its Government or officials, or Fafo. These emerging conclusions present a work in progress. Your comments would be welcome and should be directed to
[email protected]. Mark Taylor Programme Director, PICCR Series Editor, Economies of Conflict
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1 Introduction
Today’s warlords, governments and non-state actors alike, make use of global financial and commodity markets to transform control over natural resources into war fighting capacity. Under the cover of secrecy and unaccountability provided by war, legally or illegally produced commodities are traded on the legitimate, but highly unregulated, global markets to obtain financial resources, weapons and other materiel needed to sustain the war. The economic dimensions of wars are not new. Yet, the horrors of recent wars seem to have thrown into stark relief the inadequacy of our attempts to end them. Despite the terrible human cost of the wars of the past decade – millions of lives lost or ruined, societies irrevocably scarred, and economies destroyed – it has become increasingly clear that recent wars have far outstripped our ability to bring them to definitive conclusion1 and that the economies of these conflicts may play a crucial part in sustaining them. As a priority for international action, the economic dimensions of conflicts have been catapulted to the top of the international agenda by increasing concerns about the dark sides of globalization. Since 11 September 2001, the U.S.-led international effort to target terrorist financing and logistics has underlined the importance of global financial and criminal networks to national and regional security. Today, a common, global infrastructure of financial services is used to facilitate transactions involving drug money, small arms, diamonds, smuggled timber, the proceeds of corruption, human trafficking and terrorist finance. The apparent ease with which licit and illicit economic goods and services are able to move between ‘black’, ‘grey’2 and ‘white’ markets has forced governments to seek greater financial sector accountability. The failures of financial oversight and corporate accountability apparent in the spectacular bankruptcy of the U.S.-based Corporation Enron have added to a 1
While the number of armed conflicts has dropped since the early 1990s, of those that continue 66 per cent were more than 5 years old in 1999 and 30 per cent were more than twenty years old. In addition, many conflicts which were suspended in the 1990s – not least in Europe, the Middle East, and Central Asia – have not been resolved; see Dan Smith, Trends and Causes of Armed Conflict, Berghof Handbook for Conflict Transformation (April 2001). 2
The term ‘Grey markets’ is used here in its more generally legal sense, referring to markets which bridge legal or ‘white markets’ and the trade in illegal ‘black’ market goods.
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growing sense of uncertainty about the transparency and accountability of firms operating internationally. Concerns about the economic dimensions of international peace and security appear to be converging with an evolving agenda for greater corporate accountability. Intense activity is underway in several arenas to better understand and respond to the economic driving forces of violent conflict and war. Governments and multilateral organisations, non-governmental organisations, multinational corporations and industry associations, have all in recent years launched or participated in initiatives to study or develop policy options for dealing with economies of armed conflict. Campaigning NGOs and industry have moved to address private sector links to conflict through the increasingly significant lens of corporate social responsibility (CSR). Multilateral institutions, including the World Bank, the OECD, and the United Nations, have begun to tackle the issue from their own perspectives (macro-economic analysis, global policy co-ordination, sanctions). With this convergence in mind, PICCR’s Economies of Conflict project has been structured to build on the bodies of work that have emerged from these efforts and to provide input to them.3
Summary: Conflict Commodities and Rogue Companies
With the rise to prominence of ‘conflict diamonds’, and to a lesser extent ‘conflict timber’, there is a growing sense that goods produced in an economy torn by armed conflict are, or should be, morally suspect. The tendency to view such goods as ‘conflict commodities’ is a direct result of an increase in consumer sensitivity resulting from successful campaigns on issues related to corporate social responsibility and human rights, and the increasing concern that such activities run counter to efforts to maintain international peace and security. It is arguable that an international moral and political norm is gradually emerging which views private sector activity that sustains armed conflict as unacceptable. The notion of conflict commodities possesses inherent dangers. Countries dependent upon a limited number of exports could face serious economic hardship should the ‘conflict commodity’ label taint their product. Companies with legitimate investments in such countries face the potential for significant losses and heightened risk to their reputations. These dangers were recognised early on by
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For a summary of UN oriented initiatives see, e.g., “Economic Agendas in Armed Conflict: Defining and Developing the Role of the UN”, Background Paper prepared by The International Peace Academy and The Fafo Institute for Applied Social Science, on the occasion of a symposium sponsored by the Government of Norway, Monday, 25 March 2002, New York. A comprehensive look at the full spectrum of regulatory options relevant for the private sector is being developed for publication as part of the Economies of Conflict series in the Spring 2002; see www.fafo.no/piccr. 8
governments, industry and NGOs concerned about conflict diamonds, and they have guided efforts to define the problem and develop remedies. Despite the risks, there is as yet no agreed definition of what might constitute a conflict commodity. By looking at those commodities already linked to the financing of armed conflict, the Economies of Conflict studies sought to describe the specific activities involved in the production and marketing of such goods, including payments processes and related financial services. What emerges is a picture of conflict commodities as goods exploited to sustain armed conflict and produced or brought to market by anarchic exploitation, criminalized transactions, and militarised production. The policy communities in the international public and private sectors are engaged in trying to identify what mix of private and public policies will be most effective in addressing the role of private sector activity in sustaining armed conflict. Defining complicity and developing policy options now will help member states and companies position themselves in relation to a consensus forming around the issue of conflict commodities. Unfortunately, this is unlikely to be enough. Certain companies, some of a relatively small size but operating internationally, continue to use armed conflict as a cover for more or less anarchic exploitation. These companies profit from the fighting and are often connected with the powers at the head of repressive rebels or governments. The activities of these companies are often crucial to the prosperity or survival of these powers, often in direct contradiction to international attempts to make peace. These are rogue companies, firms that participate in and benefit from the militarization of production, criminalized transactions and anarchic exploitation. Yet, the Economies of Conflict studies identify activities carried out by companies with legitimate business interests that would fit into these categories. As the activities and consequences associated with conflict commodities begin to be better understood, and as the consensus around notions of conflict commodities begins to solidify, a number of companies engaged in otherwise legitimate activities could find themselves on the wrong side of international opinion. The Economies of Conflict studies portray a complex range of licit and illicit activities that result – directly and indirectly - in a number of intended and unintended consequences. Judging from the pace of recent policy development, international companies – and their ‘home’ and ‘host’ states - will need to adopt clear, verifiable positions on core issues about their operations in situations of armed conflict. The elaboration of a clearly defined concept of conflict commodities and rogue companies would have considerable utility with regard to private sector CSR initiatives. It would help all sides – industry, NGOs, and government – by providing some
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transparency to the negotiation of agreed standards. The analysis and definitions suggested below are offered as a departure point in the discussion of these issues.
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2 Preliminary Findings
The first studies produced under Economies of Conflict reinforce the view that decision-making about private sector activity in armed conflict is mired in significant uncertainty. Practitioners in governments, multilateral organisations, firms and NGOs have few definitive or operational understandings of what might constitute harmful private sector activity in armed conflict.4 Company officers need to know the risks involved in certain investment opportunities and, in the context of increasing demands for corporate social responsibility, need a better idea where lie the moral or political trip-wires. Practitioners charged with managing international peace and security require operable definitions upon which policy responses can be based. Governments, those home to multinational corporations or those hoping to attract investment, need to know about the political and economic implications of certain company actions, at home and abroad. The first four reports in the series - covering the oil, diamond, timber and financial sectors – describe a complex combination of activities spanning production processes, trade, the provision of services, and touching upon public and private institutions. What emerges is a tentative categorisation of specific activities that enable - directly and indirectly – rebels or governments to sustain armed conflict. Three categories of activity are described below, followed by an analysis of potentially useful definitions of conflict commodities and rogue companies. The findings are preliminary. The analysis presented here is subject to change based on further research and the conclusions of additional papers to be published as part of the Economies of Conflict series in the spring and summer of 2002.
4 See, e.g., Private Sector Actors in Zones of Conflict: Research Challenges and Policy Responses, a report of the Fafo’s PICCR and the International Peace Academy project on “Economic Agendas in Civil Wars.” Thursday, April 19, 2001, International Peace Academy, New York. Rapporteur: Jake Sherman.
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2.1 Anarchic Exploitation5 Governments and rebels alike make use of global financial and commodity markets to transform control over natural resources into war fighting capacity. Legally or illegally produced commodities are traded on the legitimate, but highly unregulated, global markets to obtain financial resources, weapons and other materiel needed to sustain the war. In all four of the sectors studied to date – diamonds, timber, oil, and financial services – private sector activity consists of a series of transactions which often combine the perfectly legal and legitimate with the thoroughly illegal or illicit. More often than not, the borders between these categories are ill defined. One of the principle reasons for the uncertainty of private economic decisionmaking in armed conflict is the significant lack of relevant regulatory frameworks. State sovereignty implies that a government is likely to exploit its natural resources if it feels the need to mount a military defence, which is usually expensive. But armed conflict usually results in the destruction or weakening of government institutions, which lends itself to loss of administrative effectiveness and de facto sovereignty,6 as well as a direct reduction in transparency and accountability of governments. Thus, while certain activities may be clearly illegal under domestic law, they may not be enforced; many others are simply unregulated. In other cases, the problem of having to enforce or regulate activities that contribute directly to conflict is solved by having them formally legalized. There is little in the way of international public or commercial law against which the legality of private sector activities in armed conflict might be tested or from which policies might be derived. In fact, all of the studies describe a lack of international regulation or enforcement related to these activities.7 Together, these domestic and international regulatory gaps contribute to the blurring of the definitions of licit and illicit economic activities in armed conflict. For those involved in armed conflict, the exploitation of resources is made possible by this relatively unregulated or anarchic state of affairs. In some cases, certain industries seek out such situations: 5
The term ‘exploitation’ is used here in its most general and neutral sense of utilising an object for profitable ends or to obtain potential benefits. 6
States have asserted a permanent right to sovereignty over their natural resources and wealth. The establishment of this right was a particularly important part of statehood for developing countries emerging from colonial rule. In addition, most governments justify military action as a form of selfdefence, a right enshrined in international law. 7
An analysis of the debate around regulatory options is forthcoming as part of the Economies of Conflict series later in 2002. 12
“The tropical timber industry traditionally engages leaders of countries with large forest resources and weak institutions. Abiding by ‘local business practices’, it negotiates deals to extract raw materials as cheaply as possible. This mode of doing business suits the warlord economy extremely well…The state of disorder created by conflict suits the perpetuation of these business practices.” (The Logs of War, 2002). Thus, armed conflict in countries can result in a destructive downward spiral of shady business practices and poor governance. But armed conflict can also result from these dynamics. Governments - of developing and industrialised countries alike - are not always inclined to govern with transparency and accountability. In fact, “[h]alf the world’s [diamond] production or more is mined in countries with unstable or secretive governments, an almost foolproof recipe for expanded and deepened criminality” (Dirty Diamonds, 2002). This relative anarchy in domestic jurisdictions is mirrored by a largely unregulated international financial system. The illicit financial networks imbedded in the international financial system facilitate the illicit aspects of the trade in conflict commodities. The absence of an international regulatory framework, or of agreement on universalized domestic regulation, means that at present legitimate banks would have a hard time trying to avoid handling the proceeds of government corruption or illicit proceeds gained through the exploitation of armed conflict. The Illicit Finance study finds that money laundering and international financial arbitrage are crucial in undermining the accountability of domestic governments or private companies: “[f ]inancial transparency is a core structural requirement by which governments, regulators, law enforcement, judiciaries, civil litigants, and journalists can exercise oversight and insist on the accountability of both important private sector and public sector actors. Its absence facilitates impunity, which in turn often leads to conflict.” (Illicit Finance, 2002). In the case of the oil industry, most companies find the extremes of anarchic exploitation to be counterproductive. Quite apart from the legal requirements of relating to government, oil production requires the security and legal/administrative guarantees that only governments can provide. Thus, in situations of armed conflict, oil companies are usually allied with governments. Yet, oil companies can contribute to corruption and other governance problems directly related to the growth of oil revenues. A key problem lies in the lack of transparency of oil company payments to governments, which can “[O]bscure the direction and volume of oil revenue flows. A large influx of easy oil revenue into a non-transparent system invites corruption, in turn creating incentives to further limit transparency and accountability. Under such 13
conditions, much oil wealth allegedly has disappeared into off-budgetary accounts.” (Fuelling Conflict, 2002). By seeking out weak jurisdictions, or by contributing to the weakening of domestic governance, businesses can help to perpetuate or accelerate the deterioration in accountability. The downward spiral through corruption towards state failure is caused in part by - and results in - the loss of domestic control over the resource: “In a developing country with few resources other than vast tracts of forest, control of this natural capital is control of power…Allocation of timber concessions becomes a mechanism for rewarding supporters and mobilizing wealth to prop up the existing regime. The result has often been massive corruption and loss of revenue to the state. It has also contributed to the erosion of democratic principles as elected politicians and state officials put the rights of companies before those of the population they are supposed to represent. Protected by powerful allies, timber companies become the de facto resource owners and state forestry institutions become the clients of the logging extractors rather than vice versa.” (The Logs of War, 2002). For governments, the loss of territory through armed conflict, or loss of control to favoured individuals or private companies, results in the loss of effective control over the resource. What a government may claim by right and what it can actually exploit may be very different: de jure state ownership can be rendered meaningless in practice by de facto control over the resource by individuals, private companies and/ or their political-military allies. If taking or retaining political power in a particular country requires control and exploitation of the resource, then investment and production become the keys to political power and an extension of state sovereignty. Companies can come to play a central role in the political-economy of a conflict and may help determine the effective exercise of state sovereignty. As made clear in the studies, how companies play these roles depends upon a number of factors, not least the nature of the investment and industrial activity. Common to all four studies are descriptions of a lack of transparency of transactions, a weakening or loss of government control, and the impunity of firms and governments, in the proliferation of conflict commodities and the sustainability of economies of armed conflict in general. Anarchic exploitation is made possible by a lack of governance mechanisms at the domestic and international levels, described above as a series of regulatory gaps. Poor governance may lead to political instability and conflict, but institutional weakness may also result from armed conflict, making war a good time to for certain companies to take advantage of poor monitoring and enforcement. These dynamics, in the context of regulatory gaps, can significantly blur the lines dividing 14
licit and illicit activity. If the private sector can be assumed to prefer low levels of government interference, a state of war could be said to represent an ideal regulatory environment for some industries. But exploitation during armed conflict can promote corruption, impunity, and the incapacitation of government regulation or control over a countries own natural wealth.
2.2 Criminalized Transactions Up and down the supply and demand chains - from legal trading in illegally produced commodities, to illegal transfers of perfectly legal revenues – more or less illicit transactions involved in financing armed conflict help to criminalize procurement, marketing and payments. It is estimated that in 1999 approximately 50 per cent of European Union tropical timber imports consisted of illegally logged timber, a figure that is probably representative of worldwide imports. An estimated 20 per cent of the global diamond trade is illicit. In both cases, logs or rough diamonds that are stolen are then legally imported to consumer countries. “Surprisingly, there is no law that prevents a European country from importing the products of illegal and ‘conflict’ timber operations. Indeed, in the industrialised countries of the West, there is no legislation that can prevent this from happening… Timber is, of course, a legally tradable commodity.” (The Logs of War, 2002). So, too, are rough diamonds. “At a meeting of the inter-governmental Kimberley Process in Moscow in July 2001, the Guinean Delegation unveiled its new certificate of origin, and asked other countries present not to allow, henceforth, the importation of Guinean diamonds without the certificate. The EC representative replied that EU countries could import whatever they want, from wherever they want, and were not bound by any Guinean document. While this suggested an almost willing acceptance of criminality, the EC representative was in fact correct: documents such as Guinea’s certificate of origin have no standing in international law and no backing under current trade agreements and regulations.” (Dirty Diamonds, 2002). Central to the problem of the legal importing of illegal commodities are questions of export and import controls. Both the The Logs of War and Dirty Diamonds reports address in some detail the regulatory options for producer and consumer countries, inter-governmental co-operation as well as industry. However, the diamond and timber trades both suffer from the misrepresentation of shipments. In fact, the re-labelling of timber shipments, or the ‘blending’ of legal and illegal diamonds 15
during transhipment, are crucial for ensuring the access of illegal diamonds or timber to consumer markets. Organized crime has been implicated in the activities of all four of the sectors covered here. Fuelling Conflict reports allegations of covert illicit arms deals and logistical support provided by an oil company to rebels in coups d’etat in Africa (Fuelling Conflict, 2002). For the most part, however, most arms deals involving the oil industry, while heavily criticized and somewhat murky, appear to have been legal. The same cannot be said for the diamond and timber trades. The illegal production and marketing practices of diamonds and timber have proven attractive to criminal organisations and networks. “The timber trade is characterized by endemic corruption, links to organized crime and, in numerous instances, to various warring factions”(The Logs of War, 2002). Much the same is true for significant parts of the diamond industry: “Conflict diamonds are essentially illicit diamonds that have gone septic. They have simply been used for a new purpose - to pay for weapons in rebel wars” (Dirty Diamonds, 2002). Indeed, the regulation gap described below represents an opportunity for dodgy middlemen willing to assume the higher risks of a environment in which contracts are unenforceable.8 The transactions involved in financing armed conflict are similarly criminalized: “Illicit finance is also a key facilitator of civil war…The laundering of the proceeds of crime is a necessary means to carry out the trade in diamonds that has fuelled armed conflict in Liberia, Angola and Sierra Leone, together with their accompanying arms deals and payoffs.” (Illicit Finance, 2002). Central to the effectiveness of illicit financial services, are the licit financial networks across which they operate. In the global financial system, the transformation of money from ‘black’ to ‘white’ via ‘shades of grey’ is only marginally more difficult than ‘blending’ diamonds, or mislabelling timber: “In recent years, with every substantial national, regional, or global failure of governance, a financial scandal has been found in close attendance. Accompanying each financial scandal has been the systemic use of banking and financial secrecy to hide criminal activity. Over the past decade, this pattern has played out repeatedly in jurisdictions all over the world. Repeatedly, political conflict and major political destabilizing activity, including grand corruption, narcotics trafficking, arms smuggling, and civil war have been facilitated and sustained by illicit finance networks embedded in the world’s licit financial services infrastructure.” (Illicit Finance, 2002).
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More information in this regard will be available in a forthcoming publication on these ‘brokers’ to be released as part of the Economies of Conflict series later in 2002. 16
As with the trade in illegal or conflict diamonds or timber, there is no international regulatory framework that governs the international financial system as a whole. Regulatory jurisdictions are domestic, and regulators are dependent upon company transparency and inter-governmental cooperation to obtain oversight over funds moved out of their jurisdiction. Offshore banking has made possible the practice of arbitrage, the practice of structuring international transactions for maximum profitability and minimum regulatory oversight or risk. While not illegal, arbitrage makes illicit finance possible, as financial institutions can move “their riskiest and least attractive transactions to jurisdictions that require the least transparency” (Illicit Finance, 2002). Rarely are the marketing chains or revenue streams of a conflict commodity or its producer entirely illegal from start to finish. Nor are the supply lines of combatants necessarily run as criminal networks, or filled with illegal goods. But experience indicates that to operate effectively, the procurement, marketing and payments processes related to armed conflict consist of a series of transactions that combine the perfectly legal and legitimate with the thoroughly illegal or illicit. The term ‘criminalized transactions’ is suggested here as a potentially useful analytical category within which to group some of the illegal, illicit and generally questionable transactions that help to fuel armed conflict. Transactions involved in the economies of armed conflict could be said to be criminalized by their facilitation of or profiting from the trade in illegally produced (stolen) commodities; improper or unregulated import-export practices (smuggling); the misrepresentation, blending or miss-labelling of conflict commodities (fraud); the diversion of legally obtained revenues (theft); illicit financial dealings (some arbitrage, all money laundering); or the involvement of criminal organizations.
2.3 Militarized Production The three reports covering extraction industries – diamonds, oil and timber – all describe varying degrees of military activity associated with the production of primary commodities. The spectrum of activity ranges from protection of oil installations by security companies, to de facto invasion by state or rebel armies in the pursuit of natural resources. Although similar patterns emerge across the three sectors, each affected company or community faces conditions specific to its situation. In all three sectors, however, the evidence suggests that a key relationship between production and armed conflict is established once production is militarized. Militarization of production occurs when a commodity becomes of strategic significance for a military faction. Rebels in Angola, Sierra Leone and the Democratic 17
Republic of Congo (DRC) have made the control of alluvial diamond mining a strategic military objective. Similarly, rebels movements and government armies in Burma, Cambodia, Liberia, and from Zimbabwe have deployed to secure logging areas and have facilitated the logging of tropical timber, or carried out the logging themselves. Opportunity is the determining factor in the transformation of rough diamonds into a strategic commodity. Diamonds, particularly alluvial diamonds, are a “lowvolume, high value commodity…[t]hey are highly portable and…readily accessible” (Dirty Diamonds, 2002). Timber is only marginally less so: “Compared to most forms of resource extraction, logging is a relatively easy activity, requiring low investment for quick return. A few soldiers with chainsaws and trucks can generate hundreds of thousand of dollars in a relatively short time; a well-resourced company can generate hundreds of millions…. In more extreme cases military intervention in another country is based around the attempt to control that country’s resources. For a warring faction in control of forest land, logging is one of the quickest routes to obtain significant funding with which to continue the conflict.” (The Logs of War, 2002). In the case of conflict diamonds, opportunity exists primarily through access to alluvial diamonds: since rough diamonds are “low-volume, high-value” they are more easily marketed. Similarly, in their study of conflict timber, The Logs of War finds that access equals opportunity with respect to tropical timber. However, compared to rough diamonds, the physical size of the logs makes their marketing more dependent upon military control of transportation routes out of the conflict zones, a sufficient level of corruption at transit points, and the willingness of otherwise legitimate timber companies to launder these logs of war onto the global market. The military activity associated with oil production does not follow the same pattern as that of diamond and timber production. The relatively high costs involved in producing and marketing oil mean that, for rebels and governments alike, access does not equal opportunity. For an oil field to represent a revenue opportunity it requires investment, usually by an oil company. Unlike the diamond and timber sectors, in which production could be profitable to anyone who controls access to the resource, oil companies – national, multinational or both - are a necessary condition for production to take place at all. In a situation of armed conflict, this places the oil production companies in a potentially pivotal position. Formally, oil companies typically adopt a position of political neutrality. Yet, their production is a source of revenue for governments and ruling elites that depend upon these revenues to finance their war-fighting capacity. In addition, in a number of cases, oil companies have arranged more or less covert arms transfers to host governments, often justified by the companies involved 18
on the grounds of improving the capacity of the host government to provide security for oil installations. Oil production in situations of armed conflict usually places investment in harms way and the company remains at the mercy of the shifting balance of military forces during the conflict.9 Oil production requires the investment and the guarantees (contracts, security, etc.) that only an alliance between oil companies and governments can provide. Most companies, dependent upon the host government for concessions and protection, find governments to be their natural allies: “Common accusations are that companies have allowed militaries to use airstrips, helicopters, roads and other oil company infrastructure for offensive military purposes. In some cases host governments even appear to be using oil company security as a cover for waging military campaigns against political or ethnic enemies. Some of the most serious accusations levelled against international oil companies have involved direct or indirect assistance in procuring weapons for host country governments, and in some cases even for rebel groups.” (Fuelling Conflict, 2002). Thus, the militarization of oil production in armed conflict is indirect. Companies may provide logistical or other support - usually to governments - but rebels or government troops are unlikely to be involved in the production of oil, or even the management or oversight of production facilities. However, military activity assures access to the resource through the control of territory, provides security to the production processes and investments, and enables local or regional marketing activities. In the diamond and timber industries, the nature of the production process means that, access to the resource and control of marketing routes are enough to make them a viable economic activity for rebels and government forces. The extraction of rough diamonds in armed conflict zones is often an informal affair, run almost entirely by the military power in control of the region. In the timber industry, logging companies play a crucial role, but where they operate they tend to “side with whoever controls forest territory…in many instances insurgent groups…political, military and criminal groups” (The Logs of War, 2002). Where it occurs, the militarization of diamond and timber production is direct, in the sense that state or rebel militaries are more often than not integral to the production process. For all three commodities, exploitation is in large part determined by the extent to which the commodity can be said to have become of strategic value to the force in question. Usually, the opportunity for profitable exploitation – defined as access 9
The usual exception being off-shore oil installations which can become targets during intra-state wars. 19
to a high value resource and to their markets – is the deciding factor, but investment may also be necessary to make access and marketing viable. Still, the centrality of military activity to the production of all three of these commodities is hard to avoid. In some cases, where there is ready access to the resource, the military is the company and its troops are the labour pool. In others, they operate as sector-wide protection rackets, determining the production cycles, ‘managing’ or victimising labourers and protecting or attacking investments. Over time, and to the extent that a force exercises continuous control of a territory and roads, they can influence production cycles and determine the viability of investments. This is, in a phrase, militarized production. Production may be considered to have been militarized once military personnel or military activity become a direct or indirect part of the production process.
2.4 Conflict Commodities With the rise to prominence of ‘conflict diamonds’, and to a lesser extent ‘conflict timber’, there is a growing sense that goods produced in an economy torn by armed conflict are, or should be, morally suspect. Indeed, the activities of companies dealing in such commodities are increasingly viewed as illegal or a challenge to international security. The Security Council, through its panels of experts and/or monitoring mechanisms, has described the sanctions busting activities of a number of companies. As described in the reports summarised here, the law courts in a number of countries have heard cases involving allegations of dubious and illegal behaviour by much larger multinational corporations. The news media in many more countries have reported similar activities by otherwise legitimate companies operating internationally, sometimes forcing government action in response. It is arguable that this activity represents the gradual emergence of an international moral and political norm under which private sector activity that sustains armed conflict is unacceptable. The growing tendency to view certain products as ‘conflict commodities’ is a direct result of an increase in consumer sensitivity resulting from successful campaigns on issues related to corporate social responsibility and human rights. Yet, there is no agreed definition of what constitutes a conflict commodity. The definitions that have emerged to date have originated as a result of attempts to grapple with the role of specific commodities in fuelling armed conflict, most notably diamonds. The term ‘conflict diamonds’ was an invention of the media, an attempt to summarize a phenomenon confronting the UN, the industry and NGOs. Like all media shorthand, it has its drawbacks, but its usefulness as a category has 20
been confirmed by the fact that definitions have been suggested both by the UN General Assembly and by the inter-governmental series of meetings, known as ‘the Kimberley Process’. The UN GA defined conflict diamonds as ‘rough diamonds which are used by rebel movements to finance their military activities, including attempts to undermine or overthrow legitimate governments.’ The Kimberly Process settled on the following: Conflict Diamonds means rough diamonds used by rebel movements or their allies to finance conflict aimed at undermining legitimate governments, as described in relevant United Nations Security Council (UNSC) resolutions insofar as they remain in effect, or in other similar UNSC resolutions which may be adopted in the future, and as understood and recognised in United Nations General Assembly (UNGA) Resolution 55/56, or in other similar UNGA resolutions which may be adopted in future. Two common aspects of these definitions are immediately apparent. First, both are concerned with the use of diamonds as a source of finance. This is accurate, as the financial exploitation is arguably the single most important role that diamonds play in sustaining armed conflict. However, the definition ignores the impacts of diamond wars (battles for control of diamond territory) or the toll which military control of a diamondiferous region may have on the population and how that may contribute to perpetuating the conflict. Second, both definitions have a clear pro-state bias. This is to be expected as both definitions have emerged from fora in which states play a dominant role. As already noted, there is nothing in international law that might prevent states from exploiting natural resources to finance their war fighting capacity. In fact, principles of state sovereignty entail a responsibility on the part of governments to provide security and to retain a monopoly on the means violence. Similarly, state sovereignty entails the right of a government to exploit its natural wealth to this end. But are all states or government forces in armed conflict necessarily practicing legitimate production or exploitation of a resource? Would this hold true for a commodity-financed repressive regime, one that put its profits towards maintaining the machinery of repression and war? The definition for ‘conflict timber’ offered by The Logs of War takes a more balanced approach. It is based less on the principles of international relations and better reflects the economic and logistical processes as work: “For the purposes of this study, conflict timber refers to timber that has been traded at some point in the chain of custody by armed groups, be they rebel factions or regular soldiers, or by a civilian administration involved in armed 21
conflict or its representatives, either to perpetuate conflict or take advantage of conflict situations for personal gain.” (The Logs of War, 2002). This definition specifically strikes a balance between states and rebels. It seeks to define conflict timber by virtue of logs having been traded or controlled at some point by an armed group or parties to a conflict. However, while true to the reality of conflict timber, this approach to conflict commodities also runs up against state sovereignty, albeit from a different angle from that of conflict diamonds: in a situation of armed conflict, military force will almost certainly be required to ensure the marketing and possibly also the production of timber. Given the acknowledged right of a state to exploit its natural resources, it must be assumed that a state’s military could at some point be involved in timber transactions in, for example, managing or securing production or marketing of timber (see militarised production above). Governments are unlikely to accept a definition of a conflict commodity that may prevent it from exercising its right to exploit. To get around this, The Logs of War qualifies its definition by seeking to ascribe intent. Rebels or government soldiers could be considered to be handling conflict timber if the trade was intended “to perpetuate conflict or take advantage of conflict situations for personal gain”. This, too, is more balanced than the conflict diamonds definitions, which describes the “overthrow” or “undermining” of governments as the sole problematic objective. It is useful, too, because it specifically identifies the criminal dimension of “personal gain”, which would almost certainly capture most repressive elites (assuming “personal gain” includes the use of profits for patronage to accrue political power, not just enrichment). But this definition would also fall prey to the principles of states rights, which include the right to selfdefence if attacked and assumes the right to exploit its natural wealth to this end. “Perpetuating” and “taking advantage” of armed conflict may be morally suspect, but, in a situation of armed conflict, it would difficult to impute this intent to a government that asserted its right of self-defence. What emerges from the Economies of Conflict studies completed to date is that a definition of conflict commodities should probably be based on activities involved in the production and marketing of such goods, rather than on the actors involved. The categories outlined above suggest that a definition of a conflict commodity would include reference to commodities made possible by anarchic exploitation, criminalized transactions and militarised production. These categories are only preliminary and require further development. They appear at first to be far too broad and therefore unlikely to be politically viable. Certainly, further research into industry activities is needed to provide greater clarity as to definitions, as well as to identify the approximate volume of trade in conflict commodities. However, when applied to a particular commodity in the specific 22
context of the armed conflict (e.g. Sierra Leone diamonds, Liberian timber, Sudanese oil, etc.), these criteria might offer a more specific understanding of the nature of the role of the private sector in sustaining conflict. By identifying activities and transactions that help sustain armed conflict, such definitions help clarify the nature of culpability rather than trying to generalize about the character of parties to a conflict or their private sector allies. A focus on activities also makes it easier for concerned citizens, shareholders, industry associations and others to hold governments and companies accountable for their actions. This would enable all concerned – NGOs, multilateral organisations, companies and governments - to develop definitions of complicity in armed conflict that would be relatively transparent and comprehensible across the different sectors. In using the categories suggested here, the objective should not be to cast the analytical net as widely as possible, but to enhance the predictability of demands for regulation or socially responsible corporate behaviour. These categories suggest an ability to refine the analysis to enable characterizations to be made about investments and transactions.
2.5 Rogue Companies Armed conflicts have created a niche market for companies willing to avoid regulation and assume greater levels of risk. These companies - some relatively small in size but operating internationally – use conflict as a cover for their operations, or profit from supplying the combatants, or both. The companies operate illegally in many cases, but many other times they are not technically in violation of any law. The work of the UN sanctions committees’ independent panels of experts and/or monitoring mechanisms has shown that they are often closely connected with the repressive powers at the head of rebel movements or governments, often in direct contradiction to UN sanctions, or other efforts to promote security or peace. They are, in a sense, rogue companies. Rogue companies are involved in all three categories of activity that define conflict commodities: anarchic exploitation, criminalized transactions and militarised production. Yet, the Economies of Conflict studies identify activities carried out by companies with legitimate business interests that would fit into these same categories. As the activities and consequences associated with conflict commodities begin to be better understood, and as the consensus around notions of conflict commodities begins to solidify, a number of companies engaged in otherwise legitimate activities could find themselves on the wrong side of international opinion. 23
The Economies of Conflict studies portray a complex range of licit and illicit activities resulting – directly and indirectly - in a number of intended and unintended consequences. The elaboration of a clearly defined concept of ‘rogue companies’ would have considerable utility with regard to private sector CSR initiatives. It would help all sides – industry, NGOs, and government – by providing some transparency to the negotiation of CSR and armed conflict standards. Judging from the pace of recent policy developments, it is possible that, sooner rather than later, those international firms which have taken on CSR initiatives related to human rights or the environment will have to add the armed conflict lens to their collection of due diligence perspectives. Eventually, companies will need to adopt clear, verifiable positions on core issues about their operations in situations of armed conflict or risk being tarred with the same brush as rogue companies. As policy and law develop, it is not inconceivable that rogue companies will one day find themselves named by the Security Council as threats to international peace and security and treated accordingly. Ultimately, rogue companies could face a range of targeted sanctions that would affect their management and operations internationally with a view to influencing their behaviour in relation to one or more armed conflicts. The utility of such measures for the Council might increase if corporate sanctions proved effective in targeting specific economic and political interests, could be shown to have relatively minor consequences for civilian populations. What companies might qualify as rogue companies? To the extent that companies have participated in the conflict sustaining activities outlined above, the as yet simplistic definition of rogue companies offered here would encompass large parts of the tropical timber industry, a number of international banks, certain companies dealing in rough diamonds, and certain multinational oil companies. Thus, to the extent that they have handled finances related to armed conflict, certain banks operating in problematic jurisdictions identified by the OECD’s Financial Action Task Force (FATF) may qualify as rogue companies. However, a company that looms large in the trade in rough diamonds may not qualify as a rogue company if it has participated in attempts to address those aspects of the trade that lend themselves to the creation of conflict commodities. Similarly, oil companies that have attempted to deal with aspects of the militarization of oil production – for example, through implementation of the Voluntary Principles on Security and Human Rights – may also be excluded. As indicated above, the definition of conflict commodities - and its corollary, rogue companies – may be too broad. For example, the categorisation presented above does not distinguish between activities that are directly or indirectly linked to sustaining conflict. In addition, it remains unclear as to where responsibility lies for making a determination as to the status of a commodity or a company.
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The result is that, in the presently fluid policy context, and in the absence of sharper definitions of the activities that create conflict commodities, simple participation in the economy of a country in armed conflict could implicate companies involved in certain industries in the production of conflict commodities as they are defined above. Clearly, the risk to reputations of companies could present a significant disincentive for investment by some companies. In fact, the risks will continue to rise for all concerned so long as the actions of the worst of the rogue companies are not checked and some clarity is not brought to the debate. For developing countries, where the bulk of some primary commodities are to be found, the danger of a foreign investment freeze - driven by fears over damaged company reputations or brand profiles - may become an increasingly frightening possibility. Similarly, industrialised countries – whether primary commodity producers or not - will need to pay greater attention to the involvement of their companies abroad, or risk feeling the political fall-out from actions over which they have hitherto had little control. Before the agenda can move much further, however, additional research and dialogue is necessary in order to identify precisely what activities would cause a good to be classified as a conflict commodity and a company to be considered a rogue.
2.6 Emerging Conclusions • The kinds of activities described in the Economies of Conflict studies completed to date represent significant challenges to the effective exercise of state sovereignty, corporate social responsibility and international peace and security. • Private sector activity in armed conflict is marked by the convergence of anarchic exploitation, criminalized transactions, and militarized production. • Goods exploited to sustain armed conflict and produced or brought to market by anarchic exploitation, criminalized transactions, and militarized production could be described as conflict commodities. • Companies involved in the production, marketing or payments related to conflict commodities could be described as rogue companies. Company involvement in the activities related to conflict commodities may be direct or indirect. • The distinction between licit and illicit goods or transactions is misleading. In the production or marketing of goods from armed conflict situations, there are perfectly legal actors involved in dubious transactions, and known criminals involved in legal activity. 25
• While understandable, the moral-political distinction between rebels and states that appears in most inter-governmental action in this regard is probably unhelpful for effective policy formulation. The evidence indicates that both state and non-state actors alike have been engaged conflict sustaining private sector activity. • The complexity of the subject implies that, in the development of analytical tools, priority should be placed on the need for transparency of analysis, rather than on achieving consensus on definitions. • Transparency of analysis is probably best achieved through a focus on the activities involved in sustaining conflict, rather than on the actors involved. • Definitions of conflict sustaining activity should be deployed as analytical tools and regulation pursued through the appropriate frameworks. • The complexity of the activities and interests involved indicates that there is no simple or single regulatory option. The political hurdles, too, suggest government and business would oppose a simplistic solution. Therefore, an array of remedies, voluntary as well as coercive, may be required. • Where regulatory gaps exist, new options will need to be formulated to address the problematic activities. These should be developed through multi-party dialogue.
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3 Executive Summaries
This section contains the executive summaries of the four reports from the Economies of Conflict series that are included on the compact disk enclosed. These reports will be published separately in printed format during the spring of 2002.
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Dirty Diamonds Ian Smillie
This study examines the origins of conflict diamonds, suggesting definitions and surveying ways that the diamond trade is linked to armed conflict. The paper looks at how aspects of the trade in rough diamonds help sustain armed conflict and describes attempts to come to grips with the problem by the diamond industry, NGOs, and governments. The effort to develop an international certification system for rough diamonds, known as the ‘Kimberley Process’, is dealt with in detail. By way of conclusion, the paper reflects on analytical considerations related to understanding the links between conflict diamonds and armed conflict, asks if conflict diamonds are ‘easier’ to deal with than other commodities, and offers some recommendations for future action.
Conflict Diamonds
The term ‘conflict diamonds’ is shorthand to describe a phenomenon researched and brought to international attention by two NGOs, Global Witness and Partnership Africa Canada, and a UN Security Council Expert Panel dealing with Angola in 1999 and 2000. The UN General Assembly has subsequently defined conflict diamonds as “rough diamonds which are used by rebel movements to finance their military activities, including attempts to undermine or overthrow legitimate governments.” An inter-governmental series of meetings, known as ‘the Kimberley Process’, settled on something more legalistic and less comprehensive: Conflict Diamonds means rough diamonds used by rebel movements or their allies to finance conflict aimed at undermining legitimate governments, as described in relevant United Nations Security Council (UNSC) resolutions insofar as they remain in effect, or in other similar UNSC resolutions which may be adopted in the future, and as understood and recognised in United Nations General Assembly (UNGA) Resolution 55/56, or in other similar UNGA resolutions which may be adopted in future. Diamonds have an obvious attraction for combatants and the suppliers of their weapons. Diamonds are a low-volume, high-value commodity. They are highly portable, they keep their value, and all too often, they are readily accessible. Customs departments in most countries have no capacity to examine diamonds to determine origins. There is very little government oversight on the international trade, and there is a paucity of consistent, reliable trade and production data that 28
might be used for tracking purposes. Even the legitimate diamond industry has been shrouded in secrecy for generations. Half the world’s production or more is mined in countries with unstable or secretive governments, an almost foolproof recipe for expanded and deepened criminality. The value of rough diamond production was approximately US$7.5 billion in 2000. This was converted into $57.6 billion in diamond jewellery sales, of which the diamond content was approximately $13.7 billion. At least 20 per cent of the rough diamonds that are sold each year are, in one way or another, ‘illicit’, providing a ready-made cover for the ‘conflict diamonds’ that are the subject of current international interest.
Efforts to Curb the Problem
The effort to halt conflict diamonds began in 1998, with a UN Security Council resolution on Angola. UN Security Council embargoes have been proven an effective means of alerting importing countries to the problem of conflict diamonds: the current ban on Liberian diamonds has effectively stopped the laundering conflict and illicit diamonds via Liberia. It has not, however, stopped the flow of conflict diamonds from Sierra Leone. Sanctions on Angola have also not stopped the flow of diamonds. The diamond industry, NGOs, politicians, individual governments and the United Nations have become engaged in a large and concerted effort to deal with the issue. For diamond producing countries, many of them developing countries, the resource is crucial for economic development. For the diamond industry the challenge has been twofold. First, it has a moral obligation to make sure that its product is not tainted. Second, there has been a public relations problem, fanned by a growing number of churches and NGOs, which have threatened the reputation of the industry and its product. Diamond bourses around the world began developing codes of conduct in 2000. However, while several companies have been named in UN Security Council Reports, little has been done, in part because the absence of laws in importing countries outlawing illicit or conflict diamonds means that any industry measures against diamentaires could be actionable in a court of law. The Kimberly Process, which has sought to reach agreement on how to deal with conflict diamonds, has faced two unspoken obstacles. One is the potential cost and complexity of putting an effective system in place. The second has to do with statistics and international inspection. For some countries diamonds are a ‘strategic mineral’ and as such could not be subject to international inspection. For NGO participants, however, self-regulation is a non-starter. By the end of 2001, after ten meetings, the Kimberly Process had yet to reach an agreement on the precise na29
ture of an international certification system. However, the months of negotiation had resulted in the some consensus on the ‘essential elements’ of a global certification system: • Provisions for a certificate of origin; • Provisions for internal controls in producing, trading and processing countries; • The creation of a common statistical data base on the trade in rough diamonds; • A statement on verification of national compliance. In addition, the World Diamond Council had spelled out its understanding of what an industry-managed “chain of warranties’ could look like, and had agreed to external verification of such a system. Key outstanding issues at the time of writing included credible and effective monitoring and co-ordination, and the creation of a consistent and reliable data base on rough diamond production and trade. In addition, there were uncertainties about how and whether the system would conform to WTO regulations.
Conclusions, Lessons and Recommendations
The study focuses on the connection between one primary export commodity and conflict. Diamonds did not cause the wars in Angola, Sierra Leone or the DRC. Diamonds entered the story, in all three cases, after the conflicts had begun. Grievance, however well or badly justified, was the motivator, and power was the goal. But diamonds became important as a source of financing which helped sustain the wars, and as a contributing factor to the intensity and scope of the fighting. There are no internationally agreed mechanisms to monitor the movement of this highly portable, accessible and valuable commodity. That is what the Kimberley Process has sought to develop. The Kimberley Process was initiated on the premise that only a comprehensive international certification system could be expected to have any serious impact on the phenomenon. Such a system would include better control in diamond mining countries, clarity in procedures for shipping diamonds, and controls in trading and processing countries. These controls would have to be backed by an independent international monitoring system and an international database on trade and production. An effective international certification system would also help to end the other illicit uses to which diamonds are put, including money laundering. To be effective, attempts to sever the link between rough diamonds and armed conflict will require the following:
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• The Kimberley Process should result in a strong mechanism for monitoring national compliance with minimum standards. Consumer confidence cannot be based on trust or on haphazard, minimal-review mechanisms. Credible monitoring for compliance should be viewed as compulsory and desirable by any country wanting to demonstrate that its industry is conflict free. • The Kimberley Process should come to grips with the issue of, and the need for, global production and trade statistics on rough diamonds. • The issue of WTO compatibility should be settled, and it should be settled soon. Neither the WTO, nor the GATT, condone or permit theft, war, human rights violations and the other abuses that stem from conflict diamonds. • The certification system should have more authority than can be derived from a voluntary arrangement or from a UN General Assembly resolution. The relevance of conflict diamonds for international peace and security are now well understood. Once a system has been finalized and debated by the General Assembly, it should be forwarded to the UN Security Council for endorsement and global application. The experience of attempting to regulate conflict diamonds via the Kimberly Process suggests a number of key lessons for those working to regulate commodities which fuel armed conflict. On the supply side, the key element is the accessibility of diamonds – a function of security failures, corruption, and state collapse. UN embargoes, new national legislation and industry efforts to stop conflict diamonds have had little impact, except to change the routing and covers under which conflict and illicit diamonds travel. On the demand side, industry secrecy, an absence of reliable trade and commercial data, and lack of governmental oversight are important factors in generating and nourishing the opportunity that has sustained armed conflict. The fact that 20 per cent of the diamond industry is essentially crooked means that channels for the disposal of conflict diamonds had been established by illicit diamonds prior to the conflicts. Armed conflict and criminality converged, creating a more ready opportunity for the emergence of conflict diamonds than might be the case in other commodities. Effective regulation must address the supply and demand sides of the problem in tandem, addressing both the accessibility of rough diamonds and lack of transparency and accountability that enable them to be marketed. The strength of the Kimberley Process was that it was inclusive. NGOs and senior industry executives attended all meetings, and were encouraged to participate as fully as government representatives. There was no North-South divide: there were as many governments from developing countries as there were from the North. And there was a champion for the issue: the Government of South Africa. Shortcomings in 31
the Kimberley Process may become more obvious with time and distance. Certainly, as this paper was being completed in January 2002, the outcome of the process remained unclear. Multilateral processes to discuss the regulation of conflict goods should be as inclusive as possible, integrating the interests of industry, producing and consuming states and NGOs.
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Fuelling Conflict Phillip Swanson
This report examines how oil and gas industry activities in developing countries may contribute to or help perpetuate such conflicts. It emphasises the dynamics that can occur even when oil companies may be attempting to be good “corporate citizens”.
Oil, States and Armed Conflict
Some 70% of world oil production currently takes place outside OECD countries, and over 40% outside either the OECD or the Middle East. Investments by major oil companies can contribute significantly to the GDP and government revenues of oil-rich developing countries. However, large investments in natural resource exploitation and export also tend to give rise to a number of negative dynamics in the economy, government and society of the host country. Even if unintended, these dynamics can be very powerful, with consequences for social stability. Governments typically receive oil wealth via several different routes, including bonuses, royalty payments and income tax. In many cases, a combination of these payment methods is used. Together they can be used to obscure the direction and volume of oil revenue flows. Taxes and other payments related to resource extraction and export by international oil companies often account for well over half of government revenues in oil-rich developing countries. Access to large and relatively easy petroleum revenues can give host governments a false sense of economic security that undermines the need for responsible economic and fiscal management. A large influx of easy oil revenue into a non-transparent system invites corruption, in turn creating incentives to further limit transparency and accountability. Under such conditions, much oil wealth apparently has disappeared into off-budget accounts. Such “looting” of a country’s natural resources by its governing elites can provide the incentive and means to remain in power. Given a regime’s dependence upon oil revenues for its power, any threat to such revenues is likely to be met with significant resistance. In the short term, host governments will be concerned about any cut in the flow of oil, which effectively represents a cut in government revenue. In the longer term, oil-dependent governments are concerned about the willingness of international oil companies to remain in the country. In some cases, the desire to maintain security for oil extraction may lead to the brutal treatment of those opposed to such operations. Whether or not the dynamics suggested are fully or even partly responsible for government violence towards its population in a particular case, large oil revenues at 33
least provide the means for a government disposed toward violence to carry out such activities with relative impunity. A government’s willingness to resort to the use of force to protect its continued access to oil revenues is likely to be reinforced by an increasing estrangement between the government and its citizens. In fact, oil wealth tends to reduce a government’s dependence upon its citizens – corporate or individual – for tax revenues. When a government depends less on its own citizens for its revenue, it may become less accountable and may depend less upon them for its legitimacy. Oil company operations can create or exacerbate tensions between the central government and oil-producing regions, especially if a disproportionate share of benefits is seen to accrue to the former and a disproportionate share of costs to the latter. Tensions can also arise if the region feels that the central government’s share of oil revenue is “unfairly” large.
Armed Conflict and the Company
Most international oil companies have taken a “neutral” stance on the nature of hostcountry regimes, noting that companies should not get involved in politics. A number of NGOs have pointed out that large economic investments provide economic and political comfort to host countries, including de facto “recognition” of rogue regimes. Violence associated with oil company operations most often results from the use of force by government security forces against local protesters who opposed oil industry operations. A number of NGOs, as well as missions by the UN and various oil company “home” country governments have reported numerous allegations of violent human rights abuses committed by government forces in and around oil producing regions in a number of countries. However, the secrecy surrounding security arrangements that many international oil companies have concluded with host governments makes it difficult to assess company complicity in such activity. There are also documented cases of human rights abuses by oil company security forces or by the private forces hired by the oil companies. However, such cases usually are more clear-cut regarding oil company blame. Hopefully, they will also be the easiest abuses to avoid in future, since the oil companies presumably have more control over their own forces. A number of oil companies have been accused of providing logistical assistance to government military campaigns against political or ethnic oppositions. Common accusations are that companies have allowed militaries to use airstrips, helicopters, roads and other oil company infrastructure for offensive military purposes. In some cases host governments even appear to be using oil company security as a cover for waging military campaigns against political or ethnic enemies. Some of the most 34
serious accusations levelled against international oil companies have involved direct or indirect assistance in procuring weapons for host country governments, and in some cases even for rebel groups. For the oil companies, the direct effects of armed conflict are similar to those on other industries, e.g., threats to personnel, installations and supply lines, with the related costs of protecting each of these aspects of the business. However, once conflict erupts in a particular region, it usually will be significantly more expensive for oil companies to abandon their activities than it will be for most other investors. This is due to the large and long-term nature of oil company investments, as well as the location-specific nature of natural resources. Oil companies may assume that their operations will be relatively shielded from civil conflict, in some cases by all parties to the conflict. Due to the large potential revenues that their oil extraction represents, it is not in the parties’ interest to permit armed conflict to devastate oil company investments. For a company already heavily invested, a cost-benefit analysis may indicate that the profit from oil extraction could out-weigh the economic costs of doing business in a conflict zone. For some companies, armed conflict may be almost a cost of doing business. One of the most important negative effects of conflict on an oil company now takes place in the product and capital markets of the developed world. The threat to company reputation can have negative impacts on profits, share prices and the ability to raise capital. Oil companies with easily identifiable brand names at the service station pump are ultimately vulnerable to the sort of boycott campaigns that already have threatened companies in some other industries. Companies also may be increasingly susceptible to shareholder activism, especially by large institutional investors such as pension funds, many of which have adopted codes of conduct.
Policy Options and Instruments
Because oil companies often provide a large portion of host country budgets, they are among the few entities with potential leverage over such governments. This is why some observers see oil companies as potential agents for positive change. However, oil companies face a possible loss of competitive advantage in the event that a host government decides to punish a company for taking a stand on human rights issues by rewarding one of its industry competitors. It is conceivable that a coalition of companies could form a “united front” for policy reform. However, in such a case these companies still could face non-cooperation from the growing number of technically proficient oil companies from developing countries that currently are not under the same Corporate Social Responsibility (CSR) pressures from NGOs, customers and shareholders.
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Transparency
One of the main enabling factors for corruption and diversion of funds to off-budget military expenditures in host countries is lack of financial transparency. A key finding of this study is that a major area for policy focus should be on increasing the transparency of payments by oil companies to host governments. This would make it easier for host country citizenry to achieve a better understanding of the amount of money actually received from the development of their natural resources and to hold their governments accountable on this basis. Oil companies should be required to make a full public accounting of their payments to individual host countries. In many cases of alleged violence by government security troops, the foreign oil companies involved have either denied knowledge of abuses or insisted that the actions were not approved by the company. However, it is often impossible to assess company complicity, or to say whether governments have acted outside security agreements, since such agreements usually are secret. Companies should commit themselves to making public their security agreements with host countries. Given the impact of local violence on the security of oil company staff and operations, it would seem to be in companies’ best interests to pay more attention to such issues. It seems highly unlikely that companies are not already performing various risk assessments and assessments of the political or security situation. Companies should publicly commit themselves to performing systematic risk assessments based on those suggested in the Voluntary Principles on Security and Human Rights.
Policy Instruments
Companies would seem to have a significant market incentive to respond to or avoid NGO criticism, because negative publicity can damage their image with consumers and shareholders. A major drawback with NGO pressure, however, is that it does not seem to be applied evenly to all companies. NGOs have targeted those companies they perceive to be most likely to respond to their criticism. The absences or ineffectiveness of pressure by NGOs is especially evident when it comes to the large, technically proficient non-OECD oil companies that are offering increasingly credible competition to the majors in developing countries. Many of these currently face comparatively little pressure from their customers and shareholders to address CSR issues, thus giving NGOs little leverage to affect them commercially. Voluntary codes of conduct have become an important tool for companies to demonstrate support for particular social principles. However, experience from other industries indicates that codes developed by companies or industry associations in isolation often lack legitimacy vis-à-vis outside observers. Governments could play a role in bringing together industry actors and NGOs to work out codes that various
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parties find acceptable (e.g. the negotiations to establish the “Voluntary Principles on Security and Human Rights”). Collective action by oil companies may also benefit from the “sponsorship” of a respected international body, such as the UN or the World Bank. Governments and the oil industry should recognise the value of multilateral institutions such as the United Nations or the World Bank in helping to manage collective action problems and reputational risk. Government and private sector partnerships with multilateral institutions must reflect the international norms and law that these institutions embody. One approach to stimulate companies to provide more information or to implement other desired policies would be to make these provisions or policies a requirement for receiving certain services provided by or regulated by government. There has been discussion in some countries about expanding criteria for environmental conditionality, already in place in some OECD countries, to include stricter requirements regarding transparency and accountability of payments. There has already been some work to co-ordinate action in this area among OECD governments. As an issue for multilateral negotiation, the transparency of payments by international oil companies to foreign governments may lend itself to the existing negotiating framework, along the lines of the OECD anti-bribery convention. Similarly, stock market listings are in many cases regulated by states, giving governments scope for imposing conditions in this area. A major criticism of conditions on stock market listings is that they could inadvertently punish the financial centres that impose them. However, this collective action problem could be solved by co-ordinated action to introduce harmonised legislation in the world’s major financial centres. Governments should consider the development of mechanisms of positive conditionality in support of stricter requirements regarding transparency and accountability of payments.
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Illicit Finance and Global Conflict Jonathan Winer
In recent years, with every substantial national, regional, or global failure of governance, a financial scandal has been found in close attendance. Accompanying each financial scandal has been the systemic use of banking and financial secrecy to hide criminal activity. Over the past decade, this pattern has played out repeatedly in jurisdictions all over the world. Repeatedly, political conflict and major political destabilizing activity, including grand corruption, narcotics trafficking, arms smuggling, and civil war have been facilitated and sustained by illicit finance networks embedded in the world’s licit financial services infrastructure.
Structural Consequences of the Globalization of Money
In Latin America, Mexico lost a quarter century of economic growth when the peso collapsed in 1994, amid evidence of drug money laundering and massive high-level corruption. Similar financial catastrophes in which billions went missing attended the collapse of governments in Ecuador, Peru, and most recently, in late 2001 and early 2002, Argentina10. Fraudulent pyramid schemes decapitalized nations in transition in Albania, Bulgaria, and Latvia. Kleptocrats stole and then sequestered the national wealth of the Congo/Zaire, Indonesia, Nigeria, and Russia using the same infrastructure of globalized financial services to hide their money. The use of the offshore sector to mask large financial losses facilitated the industrial-corporategovernmental corruption that has burdened the economies of Japan, South Korea and Taiwan. The same global financial infrastructure and major global banks handled political slush funds laundered for former German Chancellor Helmut Kohl and similar monies for illicit arms trafficking by the son of the late French President Francois Mitterand11. Major international banks in Europe, the Americas and the Middle East processed the funds moved from the Persian Gulf by Al Qaeda and 10
See e.g. The Guardian, "In Argentina Today, the police raid foreign banks, January 18, 2002. "Police in Buenos Aires made dawn raids on foreign banks yesterday as part of an investigation into allegations that billions of dollars was smuggled out of Argentina in the days before its financial collapse last month. The investigation into reports that the regime of the former president, Fernando de la Rua, allowed $10bn to disappear offshore came as the slide into economic chaos continued with the resignation of the central bank governor, a sharp drop in the stock market and a further decline in the value of the peso." 11
See e.g. Newsweek, July, 2000, online international edition, "The Kohl Case: Oh, What a Tangled Web: The tale of how Germany's CDU nurtured a system of corrupt finance." 38
Osama bin Laden to terrorist cells around the world, transmitting them by electronic transfers until they became cash delivered by automatic teller machines. Even nations with strong anti-money laundering, financial transparency and disclosure laws continue to find themselves victimized by regulatory failures, as the recent case involving Enron - the seventh largest company in the U.S. prior to its bankruptcy has vividly demonstrated. In each case, the common infrastructure of global banking and financial services has been abused by criminals to accomplish serious crimes. Repeatedly, governments, regulators, law enforcement agencies, and the most important and prestigious international organizations have found themselves unable to trace illicit transactions after something has gone radically wrong.
Structural Consequences of the Globalisation of Money
Affluent countries like the members of the G-7 or the European Union may be able to tolerate and ultimately to shrug off abuse of their financial institutions by criminals, fraudsters, corrupt officials, and terrorists who launder hundreds of billions of dollars per year in illicit funds. For countries in transition and for less developed economies, the theft of natural resources or development assistance, capital losses from public funds gone missing, or the perversion of government institutions through bribery, create burdens that are not so easily managed. Recently, this problem has begun to be recognized within a macroeconomic context. In January 1999, International Monetary Fund (IMF) staff issued a report concluding that offshore banking centers had played a sometimes “catalytic” role in recent Asian and Latin American financial crises. The IMF found that global offshore assets and liabilities – whose ownership has often been impossible to trace - had grown by over 6 percent annually during the mid-1990s to about $4.8 trillion. The IMF staff working paper found that services provided by such centers, and the banks, lawyers, accountants, and company formation agents working with them, had contributed to global financial crises by hiding risk and loss in ways that professional home country supervisors and auditors were unable to penetrate. • In Argentina, some $3 billion to $4 billion were lost or hidden offshore by April 1995; • In Venezuela, billions in problem loans were moved offshore in 1994; • In South Korea, insider dealings off-shore circumvented regulatory limits on bank lending from 1993 through 1996;
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• In Thailand, poor lending decisions were “rolled over” offshore from 1993 through 1996; • In Malaysia, some $10 billions in losses were hidden offshore in 1997. In each case, the IMF found that the offshore sector had created a problem of inadequate transparency and fragmented regulation, which “increases the potential for dubious activities and contributes to weakening good governance in banks and corporations.” 12
Impact of Globalization on Political Stability and on Areas of Conflict
There is increasing recognition that globalization has facilitated the growth of local financial problems into international ones. Indeed, Robert Litan, an economist at the Brookings Institution in Washington, describes regional and international financial contagions as a direct consequence of a “process of globalization [that] has also facilitated the transmission of financial crises across national borders.” 13 At least as significant is the role that globalization has played as a process that has facilitated the transmission of crises of governance across national borders. There is also a growing body of academic work analyzing the impact of globalization on different forms of conflict within jurisdictions, including economic conflict, social conflict, and political conflict, as well as military conflict. For example, a 1999 study undertaken by Norwegian sociologists Ranveig Gissinger and Nils Petter Gleditsch on globalization and conflict used econometric modeling to research the relationship between high levels of trade and political stability world-wide between 1965 and 1993. The Norwegian researchers found that exports of manufactured goods create high levels of welfare and equality, while exports of agricultural products promote poverty and inequality, which in turn become among the factors that lead to political instability.14 Separately, an econometric study undertaken for the World Bank by Paul Collier and Anke Hoeffler found that an important predictive factor for civil war between 1960 and 1999 is the availability of finance, with primary commodity exports 12 Lucia Errico and Alberto Musalem, Offshore Banking: An Analysis of Macro-and Micro Prudential Issues, IMF Working Paper (WP/99/5), January 1999.
13 “Economics: Global Finance,” Robert E. Litan, in Managing Global Issues, Carnegie Endowment for International Peace, 2001.
14
“Globalization and Fonclit: Welfare, Distribution and Political Unrest,” Ranveig Gissinger and Nils Petter Gleditsch, Journal of World-Systems Research, Vol 5, 2, 1999, 327-365.
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substantially increasing the risk of conflict due to making rebellion economically viable.15 Economist Dani Rodrik, a professor at the Kennedy School of Government at Harvard University, has also reviewed the relationship between globalization and conflict. His study found that where governance was weak, the economic changes brought by globalization increased internal conflicts. Professor Rodrik found that “the world market is a source of disruption and upheaval as much as it is an opportunity for profit and economic growth. Without the complementary institutions at home - in the areas of governance, judiciary, civil and political liberties, social insurance, and of course education – the result is too much of the former and too little of the latter.” 16 Financial transparency is a core structural requirement by which governments, regulators, law enforcement, judiciaries, civil litigants, and journalists can exercise oversight and insist on the accountability of both important private sector and public sector actors. Its absence facilitates impunity, which in turn often leads to conflict. Jurisdictions that do not have financial transparency, and which do have natural resources that can be readily exported with minimal accountability, are often those where direct foreign investment and agricultural exports have led to impoverishment and conflict, rather than development and democracy, as found in the Gissinger/ Gleditsch study. Lack of financial transparency plays a substantial facilitating role when members of a country’s ruling class steal national wealth, or “grand corruption”. The corruption of the Suharto family and crony capitalists in Indonesia, of the Nigerian military under Sani Abacha, and of the oligarchs in Russia were all made possible by international bankers. Funds stolen at home were transmitted to offshore havens in the Channel Islands, the South Pacific and the Caribbean, before coming to rest for investment in places like London, Zurich, and New York. Less recognized, perhaps, has been the role that transnational movements of dirty money have played in harming the global environment. For example illegal trading in ozone-depleting chloroflorocarbons (CFCs) requires the smuggling of not only the CFCs but also the money generated by smuggled CFCs. Similarly, when illegal logging takes place in Cambodia, or toxic wastes are dumped in Guyana, the funds generated from those criminal activities are not limited to cash payments in the local economy. Smuggling large quantities of illegal timber or toxic wastes across 15
“Greed and Grievance in Civil War,” Paul Collier and Anke Hoeffler, October 21, 2001, Development Research Group, World Bank. 16 Rodrik, Dani (1997b), Has Globalization Gone Too Far?, Institute for International Economics, Washington, DC., see also Professor Rodrik’s speech, Globalization, Social Conflict and Economic Growth, presented to UNCTAD in Geneva on October 24, 1997.
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international borders requires both falsified shipping documents and payments for the goods offshore. These payments are in turn moved through the global financial system so that criminals can enjoy or reinvest the fruits of their crime. Human rights, too, have been undermined by the ease with which international criminal organizations have been able to launder their funds across borders. Criminal organizations smuggling people across borders need to move funds across borders as well, to bribe officials, to pay off other elements of their infrastructure, and to send remittances back home for further recruitment of their human cargo. The same phenomenon is present as an element in the trafficking of women. The women’s economic value is sharply greater at a distance from their original home. Funds they generate as sexual slaves have been reinvested in the transborder infrastructure that enslaved them, laundered across many national borders. Illicit finance is also a key facilitator of civil war and civic instability. The laundering of the proceeds of crime is a necessary means to carry out the trade in diamonds that has fuelled armed conflict in Liberia, Angola and Sierra Leone, together with their accompanying arms deals and payoffs. The narcotics trade has long been understood as a massive generator of illicit money to be laundered, as well as a generator of corruption and weakened governance. Drug trafficking is also closely associated with conflict, and one of the enduring factors in such conflict is the fact that drug funds sustain combatants in civil wars. It is no accident that each of the three countries which produce most of the world’s opium and coca crops — Afghanistan, Burma, and Colombia – have ongoing insurrections fuelled by drug money. In short, illicit finance has played and continues to play a role in undermining many of the goals of the United Nations and international security policy. Dirty money laundered through the world’s major financial institutions simultaneously threatens democracy, human rights, free markets, the environment, sustainable development, governance, political stability, and civil society. Contrary to the position of many banks and bankers, moving money from country to country, disguising its origin, and enabling its use for criminal purposes, is not a morally neutral activity.
Existing Initiatives
As Brookings Institution economist Robert Litan has recently stated, successful international efforts to regulate cross-border finance generally only emerge in response to crises.17 The sheer scope of the present anti-money laundering initiatives
17
Litan, id, p. 197.
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provide some indication that a lack of global financial transparency has created just such a crisis, requiring a comprehensive global response. In the late 1990’s, money laundering became recognized as a global problem requiring a global response. This response now includes new international instruments, such as the 2000 United Nations Convention to Combat Transnational Organized Crime and the Second Money Laundering Directive, issued by the European Union in late 2001. It is also includes the rapid development of “name and shame” sanctions programs. The most important has been that initiated by the member states of the Financial Action Task Force (FATF) against “non-cooperative countries and territories.” In the first two years that the FATF threatened to limit market access to jurisdictions not meeting international standards, most of the nearly twenty targeted jurisdictions enacted new anti-money laundering laws. The Organization for Economic Cooperation and Development (OECD)’s similar exercise against “unfair tax competition” is having a similar impact on ring-fencing, the strategy by which jurisdictions offer unregulated financial services to non-residents that they deny to their own citizens. Most recently, the new consensus was demonstrated after September 11 2001. After the United Nations Security Council passed UN Resolution 1373, most nations took actions to freeze the assets of a wide range of terrorists and terrorist organizations, while taking other steps to make themselves less vulnerable to terrorist finance. Principle self-regulatory organizations, such as the Basel Committee for Banking Supervision (BGBS), the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS) have focused on extending standards for international regulation to cover transparency issues.18 The new standards have been designed to respond to the major failures of existing financial regulation to provide protection against illegal activities. These failures have included: • Fragmented supervision, within countries by sector, and among countries by national jurisdiction.
18
See e.g. Statement of the G-7, June 18, 1999; “Strengthening the International Financial Architecture,” Report of the G7 Finance Ministers,” June 18–20, 1999; “Financial Havens, Banking Secrecy and Money-Laundering, UN ODCCP, New York, May, 1998; and numerous recent analytic documents of the Basel Committee available on the website of the Bureau of International Settlements (“BIS”).
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• Exploitation of differences among national laws to use regulatory arbitrage19 to circumvent more stringent national laws and international standards. • Secrecy laws that impede the sharing of information among countries and between regulators and law enforcement. • Inadequate attention to electronic payments in existing anti-money laundering supervision and enforcement, including “know your customer” rules, which focus on currency, even as the world’s financial services businesses rapidly continue their move into E-money. • The lack of international standards governing key mechanisms used in transnational financial transactions, such as international business companies (IBC), offshore trusts, off-shore insurance and reinsurance companies, and off-shore fund vehicles, including but not limited to hedge funds. • Minimal due diligence by company formation agents, attorneys, and financial institutions in the process of incorporating and licensing of new financial institutions and shell companies and trusts owned by their affiliates. Over time, the existing international initiatives to respond to these problems are creating a new global code articulating new international standards for transparency. Each of these initiatives is based on the promise that national financial service regulators have the capacity to determine whether their own “local” institutions meet the standards or not. Under the principle of consolidated supervision, the home country regulator of any international financial institution is solely responsible for exercising oversight over the global operations of that institution. Although far from infallible, over the past ten years the principle of consolidated supervision has proven helpful by requiring multi-jurisdictional financial institutions to take their home regulators seriously. In turn, these home regulators are increasingly subject to a common set of standards, such as those established by the Basel Group of Bank Supervisors (“Basel Group”). Over time, these standards have come to promote global financial stability by promoting good practices for banks in their lending and investment practices. However, the same system has to date demonstrably failed to do much to protect the world from money laundering.
19
Regulatory and enforcement arbitrage are mechanisms by which private sector entities structure transactions to avoid the laws of a jurisdiction with stricter standards in favour of a jurisdiction that is more lax. In the borderless world of global finance, the ability to engage in regulatory arbitrage has grown exponentially. As a result, there has been a corresponding reduction in the ability of domestic regulators and law enforcement agencies effectively to enforce local laws on businesses based in that jurisdiction. 44
There is mounting evidence to justify questioning whether global banks, operating transnationally to move money instantaneously across national borders, can be readily regulated or supervised by any one country. While these financial institutions may have their headquarters nominally based in a single country — typically one of the G-7 countries, the EU, or Switzerland – they generate profits and carry out activities on a global basis involving dozens of UN member states. As a result, they are for many purposes beyond the capacity of any single state to police. The current “name and shame” exercises have had the salutary effect of forcing some of the world’s least-adequately regulated jurisdictions to abandon traditional notions of bank secrecy, and to begin insisting that their financial institutions carry out due diligence and know their customers. But these exercises have not and cannot create capacity at a national level to assess the meaning and integrity of cross-border financial transactions. It is not reasonable to expect a small jurisdiction that houses a subsidiary of a major international financial institution to fully understand the cross-border transactions engaged in by the subsidiary, let alone by its affiliates or far-away parent. In practice, even the most sophisticated and best regulated financial centers, including those of the G-7, European Union, and Switzerland, are similarly incapable of exercising adequate oversight over the global enterprises they license.
Developing and Implementing Global Standards: A “White-list” for Global Finance
In recent years, the proposed solution has been a mixture of public sector regulation and private sector self-regulation. Self-regulation has been advocated as a means by which private institutions subject to market forces will, as a matter of good business, avoid transactions that could lead to transactional, institutional, or reputational risk. However, it is not clear that this approach has been effective. Indeed, the combination of both government regulation and self-regulation has not to date effectively discouraged abuse of financial institutions operating globally by drug traffickers, terrorists, major financial criminals, corrupt officials, arms smugglers, or sanctioned regimes, let alone those engaged in local armed conflict, timber theft, or other criminal activity. Today, there is no list that evaluates whether international financial institutions have complied with basic rules of transparency or integrity. On the “name and shame” side, there is no compilation ranking major international institutions for the greatest or least laundering of proceeds of drug trafficking, corruption, terrorist finance, illegal logging, toxic waste, human trafficking, or corporate fraud, although such a ranking might be compiled from court documents, public investigations and press reports. Nor has there been a list involving a “seal” or “certificate” system by
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which an institution can be endorsed as having put into place a series of best practices to promote transparency. Every year, many billions of dollars flow from international organizations and international financial institutions through the world’s major international banks. These public funds are deposited and held in these private-sector institutions without consideration as to whether these institutions have put into place excellent transparency policies and procedures, or minimal ones. Indeed, such funds are deposited and held in private sector institutions that have had no due diligence or know your customer principles, if they happen to be located in jurisdictions where such principles are either not required, or are minimally enforced. The value of such deposits to the private sector financial institutions is substantial, generating not only substantial fees but the ability to engage in further lending activities of their own, due to the multiplier effect of bank deposits. To date, the only limitations placed on those holding or benefiting from such international funds has been the obligation of the institutions to adequately account for the uses of those funds. Broader obligations, such as requiring a particular bank to have in place strong measures for financial transparency or protection against money laundering, have not been expected of private sector banks by the international organizations and international financial institutions that deposit their funds in such institutions. Rewarding private sector institutions who agree to meet high standards of transparency for the funds they process on a global basis could create a significant incentive for banks, providing a further weight to existing national efforts.
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The Logs of War Global Witness
Timber is an easily exploitable, valuable and readily marketable commodity, and has been the resource of choice in several recent civil and international armed conflicts. For the purposes of this study, conflict timber refers to timber that has been traded at some point in the chain of custody by armed groups, be they rebel factions or regular soldiers, or by a civilian administration involved in armed conflict or its representatives, either to perpetuate conflict or take advantage of conflict situations for personal gain. Illegal logging is the felling of trees or the export of timber in contravention of domestic regulations or laws. Conflict timber is closely linked to the increasingly important issue of illegal logging. Conflict timber is not necessarily illegal, as the legality (or otherwise) of timber is a product of national laws. However, in practice, conflict timber is usually illegal timber. The nature and the practices of the trades are the same, as are many of their stakeholders.
The Political-Economy of the Timber Trade
In a developing country with few resources other than vast tracts of forest, control of this natural capital is control of power. Political circumstances – including the innate instability of non-democratic political regimes – favour the rapid transformation of this natural capital into more tangible assets. Allocation of timber concessions becomes a mechanism for rewarding supporters and mobilising wealth to prop up the existing regime. The result has often been massive corruption and loss of revenue to the state. It has also contributed to the erosion of democratic principles as elected politicians and state officials put the rights of companies before those of the population they are supposed to represent. Protected by powerful allies, timber companies become the de facto resource owners and state forestry institutions become the clients of the logging extractors rather than vice versa. The tropical timber industry traditionally engages leaders of countries with large forest resources and weak institutions. Abiding by “local business practices”, it negotiates deals to extract raw materials as cheaply as possible. This mode of doing business suits the warlord economy extremely well. As timber revenues are separated from state control, and the resource is exploited in an unsustainable manner, poverty is exacerbated. The seeds of dissent, and of conflict, are sown and overall
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stability is affected. The state of disorder created by conflict suits the perpetuation of these business practices. Compared to most forms of resource extraction, logging is a relatively easy activity, requiring low investment for quick return. A few soldiers with chainsaws and trucks can generate hundreds of thousand of dollars in a relatively short time; a wellresourced company can generate hundreds of millions. As a result, senior commanders and politicians begin to bypass such national laws as may be in place to control forest exploitation. In more extreme cases military intervention in another country is based around the attempt to control that country’s resources. For a warring faction in control of forest land, logging is one of the quickest routes to obtain significant funding with which to continue the conflict. Illegal timber operations need to protect themselves, even in peacetime. This involves the hiring of armed militias and the acquisition of arms. In turn, this military capability can lead to skirmishes between the company and the local community, or between the militias of different companies. Logging companies side with whoever controls forest territory; in many instances this means insurgent groups. High-risk areas, where there is a significant risk of loss of investment, also tend to attract the proponents of organised crime who, it seems, are prepared to accept higher levels of risk. Revenues generated by natural resources exploited and made possible by armed conflict fuel the power bases of these political, military and criminal groups, and are a disincentive to bringing about an end to conflict.
Policy Recommendations
The timber trade is characterised by endemic corruption, links to organised crime and, in numerous instances, to various warring factions. Despite this, consuming countries and multilateral agencies, such as the World Bank, display an amazing tolerance for the illegal activities of logging companies. Timber is, of course, a legally tradable commodity. However, it has been estimated by Friends of the Earth UK that, based on 1999 figures, approximately 50% of tropical timber imports into the European Union are illegal. There is no reason to suppose that worldwide imports are much better. Surprisingly, there is no law that prevents a European country from importing the products of illegal, and “conflict” timber operations. Indeed, in the industrialised countries in the West, there is no legislation that can prevent this from happening. There are three major impediments to producer and exporter countries addressing the issues of conflict timber. First, a sovereign government is likely to exploit its natural resources if it needs to defend itself. Second, in the case of corrupt governments, the allocation of resultant revenues will almost certainly be opaque, with a large percentage diverted off-budget for non-state purposes. Third, logging opera48
tions, by their very nature, take place in peripheral, frontier regions where established infrastructure is minimal to non-existent. In peacetime, forest management bureaucracies often do not act. In times of war, such action is all the more difficult.
Transparency
Transparency is essential to the prevention of illegal logging and the supply of conflict timber, and should be applied to every stage of a logging operation. Allocation of concessions should be by competitive and technical tender, with the results widely publicised. Concession boundaries, the allocation of cutting licenses and forest revenues accrued to the state should all be publicly available. If local people had a share of the profits deriving from a logging operation, they would be inclined to protect their forest from outsiders, insist that it be managed sustainably and, in short, would be the best monitors of the operation. Local communities should be included in the decision-making process related to the use of forests.
Enhanced Enforcement
In some examples the logging industry acts as a law unto itself. Forest management authorities may need external capacity building to fulfil their mandates. External monitoring, for example in Cambodia and Cameroon, can enable national enforcement units to tackle situations which would ordinarily be too sensitive for that country’s nationals. Donor countries need to work with governments to improve and support capacities for detecting and suppressing forest crime.
Legislative Reform
Legislation governing forestry practices is often inadequate, at times an outdated relict from colonial times unsuited for controlling modern industrial timber extraction. Legislation is only effective in the context of a skilled and independent judiciary that can impose meaningful (i.e. expensive) penalties on illegal loggers. Experience dictates that the producer country must have ownership of the development of the legislation or it is unlikely to take action based on the new law. However, without external pressure experience has shown that producer governments are unlikely to bother to change existing legislation, which more often than not it does not adhere to. Donor countries need to work with governments to improve and domestic legislation and to ensure judicial capacities for the prosecution of forest crime.
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Certificates of Legality
The current lack of international legislation suitable to tackling illegal logging means that as soon as illegally obtained timber leaves the borders of the producer country, it is de facto immediately laundered into the legal timber trade. A certificate of legality could be awarded by the appropriate authority in the producer country, and be subject to independent verification. In turn, the certificate would be recognised in the legislation of signatory consumer countries. All timber imports would need to be accompanied by this certificate, with other imports being impounded. Like all systems this would be vulnerable to forgeries etc, but monitoring and enforcement should minimise this problem. Producer and consumer countries should begin to develop a certificate of legality for timber shipments, in order to distinguish between legal and illegal timber.
Chain of Custody
Tagging of timber, bar-coding and transponder technologies need to be used to establish chains of custody and prevent the admixing of legal and illegal material. Accurate systems of accounting and inventory control are imperative and will result in enhanced revenue collection. Simple computer packages should be developed to permit governments and enforcement agencies to track products from the forest to the marketplace, and overseas.
Consumer and Importer Countries
There is an overarching need for international legislation governing illegal and conflict timber. Given that an international agreement of this nature could take many years, an interim alternative solution is essential. A crucial first step would be bilateral cooperation between producer and consumer countries to enforce domestic legislation in both countries. If not already in existence, legislation should be passed in producing countries to outlaw illegal logging. Consumer countries should recognise this legislation and a bilateral agreement between the two countries should ban the trade in illegal timber. These bilateral agreements would form a body of international law that could form the basis of a future multilateral international agreement.
Customs Collaboration – how co-operative enforcement could work
If customs officials were directed to look for illegal logs or timber, or required importers to declare the legality of its source, the question would arise as to upon whom would fall the onus to vouch for the legality of the timber. Importers may be unaware 50
of the preceding processes and authorisations required to export the timber. Shipping companies may unknowingly be transporting illegal timber or products. The exporting country would also be involved in the process since an export certificate may legitimise the shipment. Consumer country customs controls might follow a “red – amber – green” approach to investigating illegal timber shipments. For example, exports from countries with known illegal logging problems could be flagged for further inspection; information on the shipment could then be exchanged with national authorities in the producer country. For the purpose of ensuring an efficient customs management process, a standard certificate would be desirable. Also, producer countries should be able to request information concerning the volume of imported material being declared to a consumer country’s authorities for taxation purposes. Systems can be developed to promote reciprocal recognition of trade restrictions, ensuring consuming countries aid compliance with producer country measures. More effective networks of cooperation should be developed between producer and consumer countries.
Regulating Domestic Markets
A legal requirement could be established in consumer countries that all timber, forest products and derivatives that are sold must be produced legally. This would impose a burden on sellers and manufacturers. In addition, there would be internal market implications in relation to the European Union since such regulations could place UK retailers at a competitive disadvantage to retailers in other countries not required to prove that their timber had been produced legally. Governments should take measures to ensure that they do not procure any illegal/conflict timber, in the same way that some governments have moved to “green” procurement systems.
International Action
Currently, the international community has no legislative power, other than UN sanctions, to place an embargo on a producer’s timber exports. The UN Security Council has taken this action only once. In 1992 it was recognised that the Khmer Rouge guerrillas in Cambodia were obtaining funding essential to their war effort by trading timber with Thailand. The UN passed resolution 792 which banned exports of round logs from Cambodia, effective from 1st January 1993. As described below, the ban was effective in undermining the financial basis of the Khmer Rouge, but had several unintended consequences that need to be considered in future bans. The G8 has taken a strong stance on illegal logging, particularly the five-point Okinawa statement. The G8 could provide direction to international action. Given the pace at which the forests are being destroyed, and the fact that armed conflict 51
and criminality are both driving this destruction and resulting from it, member states of the G8 and United Nations should consider more immediate and direct measures. The architects of illegal logging and the conflict timber trade are comprised of relatively few very large logging companies. These same companies – the Malaysian Samling and Rimbunan Hijau companies to name but two – crop up again and again in different countries. Their record of illegal logging, dealing with combatants, engaging in corrupt practices and human rights abuses is damning. Yet these same companies are engaged by the World Bank at the highest level and are selected as the company to practice the establishment of “model” concession programmes, with World Bank funding. It is high time that these companies are regarded and treated as international pariahs. The presence of companies engaged in illegal logging anywhere in there areas of operations should not be tolerated in countries undergoing internationally funded forestry reform programmes. There is no specific treaty that could take on the issue of illegal logging or conflict in any concrete way. The various fora for discussing forestry issues, such as the UN Forum on Forests (UNFF) do not appear to have any specific mandate to take comprehensive action to combat illegal logging. The UNFF is supposed to consider the prospects for a legal framework on all types of forests within five years. This would provide an obvious forum for global discussion of the issues raised by illegal logging and conflict timber. However, the participants at the UNFF remain divided over whether a forestry convention is needed, let alone any forestry sector specific measures. Any discussion of a forestry convention should include on its agenda the issues of illegal logging and conflict timber. Other instruments discussed in this report include: • Convention on International Trade in Endangered Species • The OECD Anti-Bribery Convention • The World Trade Organisation • The International Tropical Timber Organisation • The World Bank and Positive Aid Conditionality
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About the Authors Ian Smillie is a development consultant and Research Coordinator for Partnership Africa Canada, an organization that has worked on the issue of conflict diamonds since 1999. He served as a member of the UN Security Council Expert Panel on Sierra Leone in 2000. He is the author of several books, including Patronage orPartnership: Local Capacity Building in Humanitarian Crises (Kumarian 2001). He is an Associate of the Humanitarianism and War Project at Tufts University and an Adjunct Professor at Tulane University in New Orleans. Philip Swanson is a senior economist in the Paris office of ECON Centre for Economic Analysis, Norway. A specialist on energy sector policy and regulatory matters, his current focus is on corporate social responsibility issues in the oil sector. Philip joined ECON in 1999 from the International Energy Agency, and prior to that worked in the energy practice of Price Waterhouse in London. Philip has a Master’s degree in economics from the Johns Hopkins School of Advanced International Studies. Mark B. Taylor is the Programme Director of PICCR at the Fafo Institute. Since 1997, he has worked primarily on issues related to international responses to conflict and the reform of UN peace operations. He was Executive Officer - Research and Special Projects for the UN Special Co-ordinator in the West Bank and Gaza Strip (1994 - 95) and has carried out human rights and security analysis in the Middle East for the UN and non-governmental organisations. Jonathan M. Winer was U.S. Deputy Assistant Secretary of State for International Law Enforcement from 1994 through 1999. He currently practices international financial regulatory law at the firm of Alston & Bird LLP in Washington, D.C. Global Witness is a London-based non-governmental organisation that focuses on the links between environmental and human rights abuses, especially the impacts of natural resource exploitation upon countries and their people. Using pioneering investigative techniques, Global Witness compiles information and evidence to be used in lobbying and to raise awareness. Global Witness’ information is used to brief governments, inter-governmental organisations, NGOs and the media. Global Witness has no political affiliation.
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Appendix: Contents of the Economies of Conflict CD, Version 1 The compact disc enclosed with these Emerging Conclusions contains the electronic versions of four Fafo reports commissioned as part of the Economies of Conflict policy research into private sector activity and armed conflict.
Full Reports from the Economies of Conflict project
Dirty Diamonds: Armed Conflict and the Trade in Rough Diamonds Ian Smillie Fuelling Conflict: The Oil Industry and Armed Conflict Philip Swanson Illicit Finance and Global Conflict Jonathan M. Winer The Logs of War: The Timber Trade and Armed Conflict Global Witness About the authors About Fafo Programme for International Cooperation and Conflict Resolution Web Links to project partners and more on the political economy of armed conflict.
Appendix. Documents relevant for the topics covered in Economies of Conflict.
Private Sector Actors in Zones of Conflict: Research Challenges and Policy Responses, Fafo and IPA 2001 Economic Driving Forces of Violent Conflict and War, Econ Centre for Economic Analysis 2001, commissioned by Norwegian Ministry of Foreign Affairs
Reports from UN Independent Panels of Experts
Report of the Panel of Experts appointed pursuant to Security Council resolution 1306(2000), in relation to Sierra Leone 54
Interim report of the United Nations Expert Panel on the Illegal Exploitation of Natural Resources and Other Forms of Wealth of the Democratic Republic of the Congo Report of the Panel of Experts on the Illegal Exploitation of Natural Resources and Other Forms of Wealth of the Democratic Republic of the Congo Report of the Panel of Experts on Violations of Security Council Sanctions against UNITA, March 10, 2000 Final Report of the Monitoring Mechanism on Angola Sanctions, December 21, 2000
Reports from Global Witness
Can Controls Work? A Review of the Angolan Diamond Control System, Dec 2001 Conflict Diamonds: Possibilities for the identification, certification and control of Diamonds, May 2000 A Rough Trade; the role of Companies and Governments in the Angolan Conflict, December 1998 Chainsaws speaks louder than words, May 2000 The Credibility Gap – and the Need to Bridge it; Increasing the pace of the forestry reform, May 2001 A Crude Awakening – The role of Oil and Banking Industry in Angola’s Civil War, December 1999 Branching Out Zimbabwe’s Resource Colonialism in Democratic Republic of Congo Photos from Global Witness
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Emerging Conclusions
Mark Taylor
These Emerging Conclusions offer a preliminary analysis of the findings of four reports from the Economies of Conflict policy research series, which examines the links between private sector activity and armed conflict. In addition, the four reports are presented here in electronic form on an enclosed compact disc. The occasion is the symposium “Economic Agendas in Armed Conflict: Defining and Developing the Role of the UN”, co-organized by the International Peace Academy and Programme for International Co-operation and Conflict Resolution, and sponsored by the Government of Norway, on 25 March 2002 in New York.
Emerging Conclusions March 2002
Economies of Conflict: Private Sector Activity in Armed Conflict
These and additional forthcoming reports from the series are available from the PICCR web-site at www.fafo.no/piccr The Economies of Conflict project is supported by the Government of Norway.
Programme for International Co-operation and Conflict Resolution Institute for Applied Social Science P.O.Box 2947 Tøyen N-0608 Oslo http://www.fafo.no/engelsk/
