It Takes Two To Tango: Collusion in Tax Evasion and Corruption in Cobalt Mining

“We are the victims, everytime. We got double trouble, everytime.“

Lucky Dube

Union of Fire

For millennia, OxyCo. and LumberCo. co-existed peacefully - each minding its own business. It was as if the physical form of each entity dictated its lifestyle and outlook. In its free-flowing form, OxyCo. preferred to roam the world while LumberCo. was content with growing deeper roots in its habitat. OxyCo. was given to frequent ambitious plans.

One dark windy evening, OxyCo. approached LumberCo. with a proposition. “In our sojourns across the world we have faced a major limitation. Darkness. Darkness confines our activities to daytime.” OxyCo. representatives began. “We believe that creating a source of light for use at night could propel our civilization forward and make our world a better place.” LumberCo. representatives listened on patiently. “After intensive deliberations, we have determined that a partnership between our entities is the solution,” OxyCo. announced with the confidence of a serial inventor.

In this Union of Fire, OxyCo. would provide Oxygen while LumberCo. would provide Fuel (wood). Both parties would contribute towards Ignition (machinery and infrastructure) based on their capabilities. Perhaps surprising to an outsider, instead of pursuing profit sharing based on each party’s investment proportion, it came to be that OxyCo. would receive 75% of the proceeds. Unbeknown to LumberCo., its agents had been promised personal gains that made them amenable to OxyCo.’s disproportionately larger profit share.

Joint Venture

The venture was rocky from the start even though the disquiet was not aired immediately. Airing of grievances happened gradually as LumberCo. noticed that its dead trees were quickly getting depleted as the Fire Venture expanded. In fact, to serve the higher demand for fire, the venture had started felling healthy trees. Needless to point out, oxygen’s seemingly infinite supply was not getting consumed. As such, OxyCo.’s loss seemed disproportionately lower. As healthy trees continued to be felled for wood, the agents of both LumberCo. and OxyCo. remained deaf to the plight of LumberCo.’s trees.

“The Union of Fire is lopsided and we reject it in its entirety,” shouted angry trees. It remained to be seen whether the top brass of LumberCo. would stop the gradual demise of its habitat or if its loyalty to OxyCo. would continue to be funded by the essence of its own domain.

Sounds Familiar?

An eerily similar situation exists in the upstream segment of the cobalt supply chain in the Democratic Republic of the Congo (DRC). The analogs are as follows:

• OxyCo: mining companies based in Europe, North America and China

• LumberCo.: DRC government

• Wood: mineral reserves

• Trees: Congolese people

• Ignition: capital (machinery, infrastructure and wages)

For years, foreign corporations have plundered the natural resources of the DRC with little, if any, benefit to the Congolese. This extractive system is perpetuated with the blessing of the political elite. Tax evasion and corruption are the lubricants of an extractive machine that runs on Congolese sweat, blood and lives. The Congolese are crying and one can only wonder if the government ever listens. Glencore International AG (“Glencore“) is the quintessential case of tax evasion and corruption in different commodity sectors and countries including cobalt and copper in the DRC.

Man Eat Man Society

Glencore is a multinational corporation domiciled in Baar, Switzerland and involved in the mining, refining and trading of commodities. The commodities giant has been marred with numerous controversies spanning its entire existence. Its operations in the extraction of copper and cobalt in the DRC has perhaps been the most significant manifestation of the company’s willingness to flaunt its corporate social responsibility (CSR) in favor of fattening its bottom line. Glencore has operated in the DRC since 2008 through the financial takeover of Katanga Mining Limited (KML). Known to target Global South corporations facing financial turmoils, Glencore acquired shares in KML at their lowest value (during the 2008 financial crisis).

Through its acquisition of KML, Glencore inherited KML’s controversial mining contracts allegedly obtained through the bribery of DRC’s political elite (including former President Kabila). For personal gains of its top officials, the government of Joseph Kabila frequently undermined the Congolese Mining Code of 2002 that sought to ensure fair extraction of DRC’s mineral resources.

However, KML’s ills are not confined to the period before Glencore’s takeover. KML (and Glencore) continues to be linked with inter-webbed bribery and tax evasion schemes. Tax evasion is generally implemented through underreporting mineral grade and production volumes, under-pricing commodities, inflating operating costs, smuggling minerals and exploiting loopholes in government regulations.

Glencore’s robust tax evasion system is made possible by 2 critical elements: the concept of transfer price (in relation to market price) and local subsidiaries in mining countries and tax havens. Transfer prices are typically lower than market prices and are used in internal trade transactions between international subsidiaries of a corporation. Glencore’s tax havens are located in Bermuda, Isle of Mann and Virgin Islands.

Here is an example of the tax evasion scheme in practice: KML sells cobalt to Glencore’s subsidiary in Bermuda at a transfer price. This allows KML to report low profits thereby minimizing taxes paid to the DRC government. Glencore’s subsidiary in Bermuda then sells the cobalt at the market price to the end customer thereby obtaining maximum profits. Glencore is thus able to have their cake and eat it - maximum profits, minimum taxes!

In 2022, Glencore pled guilty to several charges of bribery and market manipulation pressed by the US Department of Justice under the Foreign Corrupt Practices Act (FCPA). In particular, Glencore admitted wrongdoing in bribery schemes involving 5 countries and amounting to $100 million. Glencore’s victims were the DRC, Nigeria, Equatorial Guinea, Ivory Coast, Cameroon, Venezuela and Brazil. The bribery scheme in the DRC alone totaled $22.5 million.

Regarding state corruption, the DRC government was accused of having misappropriated about US$413 million in 2022. This sum was part of the payment made by the state mining company, Gecamines, to the national treasury but could not be traced by auditors.

Conclusion

Glencore is just one of the several foreign corporations, including Chinese companies, plundering the DRC. To underscore the gravity of the tax evasion crisis, the DRC obtained less than 50% of owed tax revenues in 2007! At the continental level, a United Nations Trade and Development (UNCTAD) study in 2020 reported that Africa loses US$ 89 billion dollars per year. In comparison, Africa received US$ 53.5 billion in 2022. The data specific to the DRC is not readily available but given its massive commodity output, one can estimate the magnitude of DRC’s losses to illicit financial flows.

Contrary to prevailing sentiment, the West and China grabs DRC’s wealth with the right hand and gives back a little with the left hand. How can the country pull itself out of the pit if actions in that direction are undermined locally and internationally by the minute?