Disputes Series: Article 1
Ownership of valuable natural resources has become one of the biggest areas of dispute in recent years, with opaque transactions in countries lacking a strong rule of law causing conflict between companies and local governments. Working on a dispute over corruption and a valuable mining license in East Africa, K2 Intelligence used a range of techniques to uncover the truth and resolve the dispute in its client’s favor.
Demand and money from China and other emerging markets have opened up new frontiers in the search for natural resources over the last two decades. The investment into and the development of oil- and mineral-rich countries, particularly in Africa, has exceeded anyone’s expectations. However, the rule of law in many markets has entirely failed to develop along with this influx of money and hunger for assets.
As a result, disputes over ownership of natural resources and licenses to extract them have become increasingly common. But a lawsuit is just one of a number of ways a company can apply pressure to resolve a dispute on its own terms; what the business really wants is to settle the dispute. K2 Intelligence’s experience in the case below shows the benefit of tackling such disputes from a variety of angles.
Matteo Bigazzi of K2 Intelligence writes:
Problem: This case centered on an East African country and a mining license that had belonged to our client until it was mysteriously passed to an Southeast Asian company for no apparent reason—and with no compensation paid to our client. K2 Intelligence was asked to determine whether the Asians had paid bribes to bring about the transfer, and to gather as much information as possible about their questionable business practices in previous transactions all over the world.
Solution: Finding direct evidence of corruption is really, really hard, although it does happen—as I’ll come back to further on. The first thing we did was gather information that spoke to the subject company’s general reputation: they had developed a reputation for environmental “inattention” at best, and there was press attention about the manner in which transactions had been conducted in various countries.
You may not be able to find direct evidence of corruption, of brown envelopes changing hands, but you can show that a license has been handed over without due process—no tender process, at a price that seems to go against the market realities and with the presence of middlemen between the government of that country and the company in question.
There were a couple of middlemen with pretty murky reputations who popped up in this case. So part of our job was a deep public record exercise in many different countries talking to local people, checking the local press, to find out what was publicly known about the company. What we found showed they were at best lackadaisical, at worst corrupt, and that was the kind of behavior our client wanted to demonstrate to the judges in their court case.
Secondly, we did a more targeted piece of work gathering information on the executives of the company, government officials close to it, and the middlemen involved. Following the corporate connections, we found a company-formation business in Singapore that an executive from the company in the dispute had used, as had the son of the mining minister, to set up new companies. Delving further, we found certain other parallels showing business relationships between them elsewhere. We also discovered that a middleman had bought the wife of someone involved in the mining ministry a very expensive luxury car. So in this case we found something that did look like direct corruption.
The thing about big corruption is that if you do it properly, it’s basically impossible to prove. If you and I wanted to come to a corrupt agreement now, we might be home and dry if we spoke on the phone and I decide to pay you in cash, meet you somewhere nobody is likely to recognize us, and we’re careful about how we get there. Our chances of getting away with it improve if you then do something clever with the money to hide it away (i.e., you don’t go straight out and buy a Porsche with it). Even if people make mistakes, catching them in the act is very, very hard.
The third part of our job was making the information we found known to journalists in that country and internationally. The court case went on for years, and press coverage is a useful form of direct pressure. The lawsuit is just one part of what you can do to resolve a dispute on your terms. Another way is to keep your opponent and their reputation in the public eye—stories that show they are not reputable and that there are cases against them in other areas. As long as they are true, they are very useful. It makes it harder for them to do business elsewhere when they constantly face questions about their reputation.
You also have to think about the audience they want to maintain that reputation in front of, whether that’s readers of the Financial Times or the Racing Post, and target them there.
The shortage of natural resources around the world has created a boom in mining and oil and gas production in Africa’s mineral-rich countries. However, as more companies and countries have invested in extracting valuable commodities, conflict over these resources has also increased. Research published last year by Chatham House shows that between 2001 and 2010, international arbitration cases in oil and gas increased more than tenfold over the previous decade, and in mining, the increase in cases was fourfold.
The rise in the number of disputes “correlates strongly” with higher commodity prices, the report shows, and conflict is also driven by the large amounts of money invested by miners and drillers, the desire of governments to keep a greater share of profits, and the lack of a strong rule of law in certain jurisdictions over licenses and ownership rights.
The complex issues surrounding disputes means more companies need expert help reaching a satisfactory resolution, such as that provided by K2 Intelligence. If you would like to speak to one of our experts about your concerns, please contact us.