Tag Archives: corruption

Cash in Pillows-banking in Afghanistan

cash mattress

One bank with 114 branches in war-torn country; defrauded out of almost all its money; occasional target of terrorists. Ready to bid? That’s what Ashraf Ghani, president of Afghanistan, is hoping. He’s seeking a buyer for Kabul Bank, once the country’s largest. The government took it over in 2010 after its owners were accused of embezzling $825 million using fake loans and spending it on, among other things, 11 villas in Dubai and an airline they used to smuggle cash there. The privatization is a test for Ghani, who wants to show the foreign donors who provide most of his budget that he’s committed to fighting corruption.

New Kabul Bank, as it’s now called, isn’t exactly thriving. The bank has been barred from making loans since the scandal. .. On a recent morning, a branch in Kabul’s Baharistan neighborhood was guarded by five men in military uniforms armed with AK-47 assault rifles. Some of the dust-covered computers weren’t working. A customer trying to make a withdrawal waited for an hour and then was turned away.  “I keep hearing about their system failures,” said the customer, Atiqullah Wali. “It’s better to keep our cash inside our pillows like before.”

When the Taliban was driven out of Kabul in 2001, they left the financial system in disarray, fleeing with all but $30,000 of the central bank’s cash. Into the void stepped Sherkhan Farnood, who was wanted by Russian authorities for allegedly running an illegal money-transfer business. He founded Kabul Bank in 2004 and hired Khalil Ferozi as chief executive officer.
The banking industry boomed as foreign aid poured into Afghanistan, with assets expanding by more than 50 percent a year….Farnood amassed property in Dubai and competed in high-stakes poker tournaments in Europe.

The scheme unraveled in 2010, when the central bank learned of the fraud, ordered Farnood and Ferozi to resign and guaranteed the bank’s deposits to stop a run. An investigation by an independent anti-corruption committee commissioned by the Afghan government found that the executives had stolen an amount equivalent to about one-twelfth of the country’s GDP, mainly by giving loans to themselves and their friends that didn’t have to be repaid. One of the alleged beneficiaries was Mahmood Karzai, brother of then-President Hamid Karzai, who wasn’t charged and said he did nothing wrong……

Excerpt from Looted Lender for Sale as Afghanistan Seeks Buyer for Kabul Bank, Bloomberg BusinessWeek, Mar. 4, 2016

The Art of Selling Weapons: defense industry

image from wikipedia

[When governments buy weapons] it is standard to supplement the main deal with a side contract, usually undisclosed, that outlines additional investments that the winning bidder must make in local projects or else pay a penalty. Welcome to the murky world of “offsets”.

The practice came of age in the 1950s, when Dwight Eisenhower forced West Germany to buy American-made defence gear to compensate for the costs of stationing troops in Europe. Since then it has grown steadily and is now accepted practice in 120 countries. It has its own industry newsletter and feeds a lively conference circuit. The latest jamboree, hosted by the Global Offset and Countertrade Association, was held in Florida…. Yet its very structure serves to mask a build-up in the unrecognised financial liabilities of companies. It also, critics argue, fosters corruption, especially in poorer parts of the world.

Avascent, a consultancy, reckons that defence and aerospace contractors’ accrued offset “obligations”—investments they have promised but not yet made—are about $250 billion today and could be almost $450 billion by 2016. The industry’s own estimates are lower, but all agree the trajectory is upward.

Offsets come in two types. Direct offsets require investment in or partnerships with local defence firms. The idea is to develop self-sufficiency. Turkey, for instance, now meets half its own defence needs thanks to such arrangements. Indirect (non-defence) offsets include everything from backing new technologies or business parks to building hotels, donating to universities and even supporting condom-makers. Here the stated intention is to achieve more general economic or social goals.

Both types of offset are controversial. Economists view offsets as market-distorting. The World Trade Organisation bans their use as a criterion for contract evaluation in all industries except defence. Anti-corruption groups see them as a clever way to channel bribes. Even if many offset deals are clean, they are widely seen as a “dark art”, admits an industry executive. “Offset” has become a dirty word; the industry now prefers the euphemistic “industrial participation”.

The practice is frowned upon in some advanced economies. The European Commission is trying to impose a ban on all offsets in EU-to-EU contracts, and on indirect offsets when the supplier is from outside the union…

America has long been officially against offsets, though it practises something similar at home under the Buy American Act of 1933, which requires foreign arms-makers to source much of the work locally… And as embassy cables published by WikiLeaks make clear, America’s diplomats are sometimes closely involved in its firms’ discussions with foreign governments, including even squeaky-clean Norway’s, over proposed offsets.

In less developed countries, where defence spending is generally rising, offsets are booming. One appeal is that they can be recorded as foreign direct investment, boosting the government’s economic-management credentials. The two biggest arms-buyers in the Gulf, Saudi Arabia and the United Arab Emirates, have long-standing, sophisticated offset programs…Brazil and India are catching up…

This growth is fuelling a thriving offsets industry. At one end are dozens of small brokers who hawk ideas for offset projects to arms-makers and their clients. With the right contacts in government and the armed forces, even small outfits can service the largest defence firms. Take Dolin International Trade & Capital, a one-man operation run by Dov Hyman from his home in suburban New York. Mr Hyman cut his teeth as a textile trader in Nigeria. Today he advises African governments looking to use offsets while helping multinationals craft offset packages.

Further up the chain are a few sophisticated outfits that structure complex deals and arrange financing. The best known is London-based Blenheim Capital. These are assembling ever more creative packages, including, for instance, helping procuring countries to use contractors’ offset obligations as collateral for loans, backed by the “performance bonds” that firms set aside to cover unfulfilled obligations.

These middlemen are offsets’ most vocal defenders. Mr Hyman cites reams of examples of deals that he believes brought great benefits for purchasing countries’ economies. The best of them are “beautiful solutions”: for instance when arms-sellers satisfy offset obligations by guaranteeing credit lines for local manufacturers, thus reducing their financing costs. Using a multinational’s good standing in this way is “an efficient means of making possible transactions that otherwise wouldn’t be viable,” he argues.

However, some projects take contractors disconcertingly far away from their core competence. Take the shrimp farm set up in Saudi Arabia in 2006 with backing from Raytheon, a maker of radar systems and missiles. Praised at first as a model offset, it reportedly struggled to keep its pools properly maintained in searing temperatures and eventually went bust.

Moreover, the academic literature on offsets suggests that the promised benefits are elusive. There are some technology-transfer success stories: for instance, China has boosted its defence-manufacturing capability by requiring offsets when buying kit from Russia. However, research by Paul Dunne of Bristol Business School and Jurgen Brauer of Augusta State University has found that such deals are generally pricier than “off-the-shelf” arms purchases and create little new or sustainable employment. The offsets associated with the giant South African arms purchases of the late 1990s have created 28,000 direct jobs, claims the country’s government. Even if true, it is well below the 65,000 first envisaged. India’s auditor-general recently concluded that some offsets have produced no value for the country.

Judging performance is hard because of a lack of openness. Asked for confirmation of the fate of the shrimp farm, the Saudi offset authority said it kept “minimum information” on projects after their founding and suggested contacting its commercial backers. Raytheon declined to comment and suggested contacting the Saudis. DevCorp, another backer, did not respond. A study published in February by Transparency International, an anti-graft group, found that a third of governments that use offsets neither audit them nor impose due-diligence requirements on contractors.

Worse, accounting rulemakers have failed to impose any requirement to disclose offset liabilities. Companies can thus choose how, or whether, to put them on the balance-sheet. Defence firms have lobbied successfully for offsets to remain classified as “proprietary”, so they do not have to disclose their obligations. In some ways things have got worse: the Commerce Department’s annual report on American contractors’ offsets no longer even breaks out the numbers country-by-country.

This murkiness makes it hard to determine who really pays for offsets. On the face of it, the defence companies do. But Shana Marshall, an offsets-watcher at George Washington University, believes that they build the cost into their bids (pdf). Politicians and officials in procuring countries know that they are paying the bill through padded prices, but they accept this because offsets give them some grand projects to trumpet and sometimes provide palm-greasing opportunities.

A study in Belgium found that the country ended up paying 20-30% more for military gear when offsets were factored in. If the costs are largely borne by taxpayers, the benefits accrue to individuals and institutions chosen by the procuring government. This make offsets a good way to conceal delivery of public subsidies to interest groups, according to Ms Marshall.

A number of deals have been exposed as, or are suspected of being, corrupt. A commission has been set up to look into South African contracts dating back to 1999; the government has already conceded that offset credits changed hands at inflated prices. Since 2006 prosecutors in Portugal have been investigating offsets connected with a €1 billion ($1.3 billion) submarine contract with Germany’s Ferrostaal, HDW and ThyssenKrupp. Three Ferrostaal board members and seven Portuguese businessmen are on trial, charged with fraud and falsifying documents.  EADS, a large European contractor, is facing multiple inquiries over its sale of 15 Eurofighter planes to Austria. Prosecutors in Vienna and Munich are looking into allegations that millions of euros in kickbacks flowed through a web of offshore firms and side-deals, linked to offset agreements worth €3.5 billion, twice the value of the main contract. (In other words, EADS was supposed to generate €2 of business for Austrian firms for every euro it received for the planes—an unusually high ratio even in fiercely bid contracts.) Tom Enders, EADS’s chief executive, told Der Spiegel, a German magazine, that he “knew nothing about the shadowy world of dubious firms allegedly behind this.” The company says it is co-operating fully with prosecutors and that an internal investigation has so far found no evidence of punishable activity.

Prosecutors are also looking into whether AgustaWestland, part of Finmeccanica, an Italian defence firm, paid bribes to secure the sale of 12 helicopters to India in 2010. Finmeccanica’s former chief executive and the former head of AgustaWestland are due to go on trial next month. According to Italian court filings, suspicious payments allegedly flowed through a sham offset contract for software with help from a Swiss-based consultant. The helicopter-maker and the charged individuals deny wrongdoing.

Industry figures point out that all but the Indian case are at least five years old. They argue that corruption is harder to get away with today because of stricter anti-bribery laws and enforcement in America and Europe. Companies’ general counsels pay much more attention to offsets than they did a decade ago, says Grant Rogan, the head of Blenheim Capital.

Even if graft really is on the wane, offsets’ complexities make it hard to measure the true cost of defence deals. Procuring governments may apply generous “multipliers” to give extra credit to projects they deem exceptionally beneficial, especially if they are keen to buy the kit in question. As a result, defence contractors often find their liabilities turn out to be a lot less than their nominal obligations. A $5 billion sale of military kit might come with, say, $4 billion of gross offset requirements, but after multipliers it might only cost $500m to fulfil. A book on the arms trade, “The Shadow World”, by Andrew Feinstein, describes a contract Saab won in South Africa: to receive more than $200m in credits all the planemaker was required to do, the book says, was to spend $3m upgrading pools in Port Elizabeth and marketing the town to Swedish tourists. Saab says the tourism project cost much more, and suggested that it was up to the authorities to decide what value they put on what it achieved.

This sleight-of-hand helps to explain why industry executives are better disposed towards offsets in private than in public, says Ms Marshall. They say they could happily live without them, but they do not lobby to have them banned. Indeed, some big contractors see their ability to craft a package of attractive offsets as a “source of competitive advantage”, as Boeing’s boss, Jim McNerney, puts it.

The largest such firms will employ dozens of offset specialists to give them an edge in bidding. Lockheed, another American contractor, has about 40. As long ago as 2005 the firm was touting its leadership in offsets to win Thai contracts, according to a leaked diplomatic cable.  A downside for the companies is that dealing with national offset agencies can be frustrating. And though the companies’ offset liabilities are smaller in reality than on paper, they can still be daunting: one American contractor, for instance, has $10 billion of nominal obligations in a single Gulf state that will cost $1 billion-2 billion to fulfil, according to a consultant (who will not say which firm or country)….

How long can the offsets boom last?  But in the shorter term, their growth will be fuelled by American and European contractors’ intensifying efforts to sell outside their shrinking home markets, to big developing countries whose defence budgets are growing…. Remarkably, offsets are now said to be the main criterion in contract evaluation in Turkey and some Asian countries—more important than the price or the technical capability of the defence equipment itself.

The defence industry: Guns and sugar, Economist,May 25, 2013, at 63

Afghanistan: 2012 Report of US Department of Defense

afghanistan

From the Executive summary of 2012 Report

During the period of April 1 to September 30, 2012, the Coalition and our Afghan partners blunted the insurgent summer offensive, continued to transition the Afghan National Security Forces (ANSF) into security lead, pushed violence out of most populated areas, and coalition member nations signed several international agreements to support the long-term stability and security of Afghanistan…

Despite these and other positive trends during the reporting period, the campaign continued to face challenges, including a rise in insider attacks. The rise in insider attacks has the potential to adversely affect the Coalition’s political landscape, but mitigation policies and a collective ISAF-ANSF approach are helping to reduce risks to coalition personnel, and to sustain confidence in the campaign. The cause of and eventual solution to this joint ISAF and ANSF problem will require continuous assessment; it remains clear that the insider threat is both an enemy tactic and has a cultural component. The many mitigation policies recently put in place will require additional time to assess their effects, although the number of insider attacks has dropped off sharply from the peak in August.

The insurgency’s safe havens in Pakistan, the limited institutional capacity of the Afghan  government, and endemic corruption remain the greatest risks to long-term stability and sustainable security in Afghanistan. The Taliban-led insurgency and its al-Qaida affiliates still operate from sanctuaries in Pakistan, however, the insurgency and al-Qaida continue to face U.S. counterterrorism pressure within the safe havens. U.S. relations with Pakistan have begun to improve following the re-opening of Pakistani Ground Lines of Communication (GLOCs), and  there has been nascent improvement with respect to cross-border cooperation between Pakistan and Afghanistan.

Although the insurgency’s kinetic capabilities have declined from their peak in 2010, the insurgents remain resilient and determined, and will likely attempt to regain lost ground and  influence through continued assassinations, intimidation, high-profile attacks, and the  emplacement of improvised explosive devices (IEDs). Widespread corruption continues to limit  the effectiveness and legitimacy of the Afghan government. Despite these challenges, the  Coalition continued to make measured progress toward achieving its strategic goals during the  reporting period.

Excerpt from Report on Progress Toward Security and Stability in Afghanistan, (DOD,  Dec. 2012)

Barclays and Qatar: an Unholy Alliance?

U.S. authorities are investigating Barclays  for potentially violating anti-corruption laws during its scramble to raise money from Middle Eastern investors in the early days of the financial crisis.  The probe, being conducted by the Justice Department and the Securities and Exchange Commission, is at an early stage…The U.S. investigation follows a similar probe that British regulators opened earlier this year.

According to people familiar with the probe, it is examining Barclays’ use of middlemen serving as brokers to connect the bank with powerful Middle Eastern interests at a time when the bank was seeking a cash injection from investors in the region.  Barclays disclosed the investigation at the same time it reported a GBP106 million third-quarter loss…The new investigations represent the latest blows to a once-proud British institution. This summer, Barclays paid about $450 million to settle U.S. and British charges that it sought to manipulate benchmark interest rates, sometimes at the behest of top executives. The ensuing political furor led to the abrupt resignations of Barclays’s chairman, chief executive and chief operating officer.

The Justice Department and SEC investigation involves possible violations of the Foreign Corrupt Practices Act, which among other things bars companies with U.S. operations from bribing overseas politicians or corporate executives in order to win business.  In June 2008, as the financial crisis was gaining steam, senior bankers at Barclays persuaded the Qatar Investment Authority and other investors to inject about GBP4.5 billion into the British bank, seeking to erase fears about Barclays’s health. As part of that deal, Barclays hired the Qatar fund to provide “advisory services’ in the Middle East. The bank later disclosed that it was paying about GBP238 million in fees and commissions to Qatar Investment Authority and related entities.

This summer, the U.K.’s Financial Services Authority launched a formal investigation into Barclays’s public disclosures of those arrangements. The probe focused on past and present Barclays executives, including finance chief Chris Lucas, as well as on the manner in which Barclays wooed the Qataris to invest, according to people familiar with the matter.

Excerpts, Barclays Faces U.S. Anti-Corruption Probe, MarketWatch, Oct. 31, 2012

Illegal Logging and Organized Crime

Every two seconds, across the world, an area of forest the size of a football field is clear-cut by illegal loggers.1 In some countries, up to 90 percent of all the logging taking place is illegal.2 Estimates suggest that this criminal activity generates approximatel US$10–15 billion annually worldwide—funds that are unregulated, untaxed, and often remain in the hands of organized criminal gangs. Thus far, domestic and international efforts to curb forest crimes have focused on preventative actions, but they have hadlittle or no significant impact. While prevention is an essential part of enforcement efforts to tackle illegal logging, it has not halted the rapid disappearance of the world’s old-growth trees. New ideas and strategies are needed to preserve what is left of forests.

This paper suggests that current practice be combined with a more targeted, punitive approach, through more effective use of the criminal justice system. It argues that the criminal justice system should form an integral part of any balanced and organized nstrategy for fighting forest crime. This strategy should include initiatives to enhance the efficiency of criminal justice in combating illegal logging—that is, the investigation, prosecution, and conviction of cases, as well as the confiscation of the proceeds of criminal activity. These initiatives should be deployed in parallel with preventive programs, and the two approaches should complement and reinforce each other.

The criminal justice system has been used in the fight against illegal logging, but only in very sporadic instances and in limited and ineffective ways. Moreover, in those few cases, it has tended to target low-level criminals whose involvement in illegal logging is due to poverty. As such, it has created no real deterrent and has encouraged skeptics to further discount the relevance of criminal justice methods. Large-scale illegal operations are carried out by sophisticated criminal networks, and law enforcement actions need to be focused on the “masterminds” behind these networks—and the high level corrupt officials who enable and protect them. Pursuing these important targets through the criminal justice system will require creativity and a clear focus on those criminal justice rules and procedures that prove most effective…..

Because the role of the criminal system in fighting illegal logging has thus far been minimal, there are few documented successes, and little data to explain why the criminal justice system has not been more widely used in this context. To find new ideas as to how the criminal justice system can be used against illegal loggers, this paper therefore draws on experience gained from dealing with other types of crime (money laundering, corruption, and so forth).

The policy and operational recommendations made in this paper are based on legal and operational frameworks that are already in place in almost every country in the world. By making good use of these existing frameworks, we can take an important step towards ensuring the preservation and the sustainable management of the world’s forests.

Policy recommendations:

■ Develop an integrated criminal justice strategy for illegal logging that adopts and implements clear and comprehensive policies. To be effective, the strategy must target high-level corruption and the companies that pay bribes. It must aim for successful investigations, prosecutions, and the confiscation of the proceeds of crime. The strategy should include clear objectives and an assessment process for tracking progress….

■ Improve domestic cooperation. Domestic cooperation between agencies involved at different stages of the fight against illegal logging should be strengthened….

■ Enlist the private sector. When looking into the financial dimension of forest crimes, financial institutions and other entities obligated to report suspicious transactions to financial intelligence units need to be fully mobilized. This can be done through implementing due diligence measures and by monitoring transactions made by politically exposed persons (PEPs) and actors in the forestry sector…  Enhanced due diligence applies to PEPs in recognition that by virtue of their position, there is an increased risk of money laundering.

■ Engage civil society actors. . .

■ Include criminal justice as part of development assistance programs to combat illegal logging. …The implementation of anti-money laundering measures, as well as other steps suggested in this paper, should be included as part of country assistance strategies.

Operational recommendations….

■ Follow the money. Illegal loggers can be convicted of money laundering related to many different predicate crimes. This can result in additional jail time and/or fines above those imposed for the underlying forest crime. Furthermore, asset confiscation deprives criminals of the fruits of their crimes and makes it more costly for them to continue their operation.

■ Enforce anti-money laundering and due diligence requirements. Regulators should strictly enforce know your customer and due diligence requirements— particularly those for enhanced due diligence in the case of transactions of PEPs and suspicious transactions within the forestry sector. Regulators should also enforce compliance with the Financial Action Task Force (FATF)

Excerpts from Executive Summary, “Justice for Forests Improving Criminal Justice Efforts to Combat Illegal Logging” by Marilyne Pereira Goncalves et al., (Wolrd Bank, 2012)

One More Reason to Occupy Nigeria: the severe environmental damage

The Nigerian cell of the Anonymous collective has continued its ongoing campaign against government corruption issuing a statement listing its demands.  Sent to the International Business Times on Tuesday via email the statement has since been re-posted on Pastebin – indicating that it is likely authentic.  In it the collective promised to continue mounting its ongoing series of cyber assaults against the Nigerian government should its demands for “justice” and an end to violence against protesters not be met. Specifically Anonymous Nigeria’s demands were six-fold:

“WE DEMAND THAT YOU CUT THE COST OF GOVERNMENT BY 60%

“WE DEMAND THAT YOU ELIMINATE WASTE IN GOVERNMENT

“WE DEMAND THAT YOU TACKLE CORRUPTION AND POLITICAL PATRONAGE

“WE DEMAND THAT YOU REDUCE THE PUMP PRICE OF FUEL TO N65

“WE DEMAND THAT YOU FIND OUT AND PROSECUTE MEMBERS OF THE FUEL CABAL,” read Anonymous’ statement. Later adding the final demand:

“WE DEMAND AN IMMEDIATE END TO THE KILLING OF INNOCENT PROTESTERS”

The statement follows the collective’s unified and ongoing support of all Occupy movements. Though the root cause of the Occupy movement is difficult to discern, the earliest call-to-arms stemmed from a blog post in Adbusters magazine.  Inspired by the Arab Spring and Spain’s Democracia real YA platform, Adbusters called for all like-minded individuals unhappy with the current global political and economic system to march on Wall Street and mount an ongoing sit-in-protest.

The post quickly captured the imagination of several groups, leading to the #occupywallstreet hash-tag trending on Twitter. The movement gained significant mainstream attention outside of Adbusters’ native U.S. base when the Anonymous collective took notice and publicly voiced its support.  Reiterating Adbusters’ post, Anonymous issued the above video on its AnonOps website citing a series of undisclosed actions perpetrated by “corrupt” governments and corporations as its motivation for the sit-in.  Since Adbusters’ and Anonymous’ call-to-arms the Occupy movement has spread to cities across the world, seeing citizens pitch tents in public squares and mount sit-in-protests against the world’s current political and economic systems. In all the campaigns Anonymous has openly voiced its support for the movement, publicising its live video feeds and reporting any incidents of police violence against protesters.

The Nigerian cell of Anonymous has followed this pattern, publicly voicing its support and reporting any incidents of violence against Occupy protesters. The group has already taken credit for identifying the deaths of in-excess of 10 participants in the Occupy Nigeria protest. Ending its statement Anonymous Nigeria promised it would continue its “peaceful” protest – many Anons list identify themselves as pacifists and are hostile to any and all acts of physical violence

Alastair Stevenson, Occupy Nigeria: Anonymous Demand End to Government Corruption, Jan. 11, 2012

Chevron’s Oil Spills in Amazon, destroying the paper trail

A new document reveals that Chevron officials ordered the destruction of key documents as part of a broad scheme to hide the extent of the company’s pollution in Ecuador’s Amazon, says Amazon Defense Coalition.  A company memorandum from Ecuador dated July 1972 ordered that all reports related to oil spills “are to be removed from the Field and Division offices and destroyed.” From 1964 to 1990, Chevron operated a large concession in Ecuador’s Amazon region that included an extensive network of pipelines, wells and separation stations.

Chevron operated in Ecuador under the Texaco brand. In February, an Ecuador court found Chevron liable for dumping billions of gallons of toxic waste into the Amazon, decimating indigenous groups and causing a spike in cancer rates. Damages in the case, which is under appeal in Ecuador, were set at $18 billion. The extent and environmental impact of the disaster dwarfs the size of the BP spill in the Gulf of Mexico, according to experts.

The memo ordering the destruction of documents was written by R.C. Shields, at the time the director of production in Latin America for Texaco and Chairman of the company’s Ecuador subsidiary. The memo directs Chevron personnel to report only oil spills that are “major events” which are defined as those that “attract the attention of press and/or regulatory authorities.”  The directive also orders that no reports are to be kept on a “routine basis.”  The Shields memo emerged via discovery in U.S. federal court.

Texaco reportedly caused hundreds of oil spills in Ecuador, many of which were “remediated” by setting them on fire, according to the book Amazon Crude, which was published in 1989 and which documented Texaco’s substandard operational practices. The company also has admitted to pouring sludge from the waste pits along dirt roads.

The Shields memo ordering the destruction of documents infuriated members of the legal team representing 30,000 Amazon residents who are suing the oil giant.  This memo is a vivid illustration of the culture of deceit that characterizes Chevron’s destruction of Ecuador’s Amazon over a period of decades,” said Pablo Fajardo, the lead Ecuadorian lawyer. “Deception remains the operating principle for Chevron in Ecuador even today as the company continues to flout its legal obligations to remediate toxic pollution that threatens thousands of innocent lives.”

Karen Hinton, the U.S. spokesperson for the Ecuadorians, said the memo was part of a “pattern of corrupt activities” by the company that include a fraudulent remediation in the 1990s, the fabrication of scientific evidence, attempted entrapment of a trial judge and threats to put judges in jail if they didn’t rule in the company’s favor.  “Chevron acted like the Mafia in Ecuador,” she added. “This repugnant memo is just a small piece of the company’s scheme to defraud Ecuador’s government and its people.”

Chevron’s Ecuador Fraud Highlighted In Memo Ordering Destruction of Documents Related to Contamination, Says Amazon Defense Coalition, PR NewsWire, Dec. 14, 2011

How the United States Funds the Insurgency, Afghanistan

Trucking contractors who pay off the Taliban, warlords and government officials to ensure safe passage for U.S. military goods in Afghanistan do so because they believe they have no choice if they want to avoid attack, a senior military official told a congressional oversight panel Thursday (Sept. 15, 2011).  “Some of that money, for sure, is going to the insurgency,” Brig. Gen. Stephen J. Townsend said. “I can’t quantify how much is going to attacks against us. . . . I don’t think you can completely stop it, but we’ve got to minimize it.”  Townsend and Pentagon officials told a House subcommittee that a new trucking contract, which goes into effect Friday, will decrease the level of corruption through wider competition, increased vetting and improved military oversight, along with a “code of ethics” for the contractors.

The new contract is worth about $1 billion over the next year. Under the contract it replaces, tens of millions of dollars had been diverted to “malign actors,” according to congressional and military investigators.  The officials offered no assurances that the payoffs or wider corruption can be eliminated. But they said Afghan corruption is endemic and the need to supply U.S. troops is critical.  “As bad as it is, it would be worse if we had U.S. personnel guarding convoys,” Deputy Assistant Defense Secretary Gary Motsek said. “The body count would be unacceptable.”

Nearly all of the supply convoys — which transport more than 70 percent of all food, fuel, construction material and weapons to the nearly 100,000 U.S. troops across Afghanistan — are guarded by private Afghan security companies.  Military concern over payoffs first arose more than two years ago, when U.S. army investigators estimated that the going rate for protection was $1,500 to $2,500 per truck. But the military did not launch formal investigations into the issue until congressional committees conducted their own inquiries last year.  Military investigators concluded in May that U.S. funds had flowed to criminals and insurgents through four of the eight companies that were part of the earlier contract and that six of the eight were associated with “fraudulent paperwork and behavior,” including profiteering, money laundering and kickbacks to Afghan government and police officials….

Lawmakers appeared far from satisfied. Rep. John F. Tierney (D-Mass.) said military investigations had identified more than $360 million in overall U.S. contract funds diverted to “warlords, power brokers, insurgents, and criminal patronage networks” in Afghanistan. A separate government commission had estimated this month that as much as $60 billion had been lost to waste, fraud and abuse.

Tierney and others also questioned the military’s zeal in pursuing contract abusers. Last December, the U.S. command in Afghanistan announced that it had suspended Watan Risk Group, the major security subcontractor for trucking convoys, for diverting funds and violating weapons regulations. …Last month, however, the military overturned Watan’s debarment and that of one of Watan’s security subcontractors, Haji Ruhullah. Ruhullah, widely considered a leading warlord in southern Afghanistan, acknowledged making payoffs, but he was excused by the army’s legal department on grounds that Watan had not explained contract rules to him and that his inability to speak English prevented him from reading the rules himself.

The General Accountability Office  has released a report saying that the departments of Defense and State and the U.S. Agency for International Development had failed to comply with laws and agreements requiring them to keep accurate count of the number of contractors employed in Iraq and Afghanistan and of the money distributed to them.  Data compiled last year by all three had “significant limitations,” including an underreporting of “at least $4 billion in contract obligations,” the GAO said.

Excerpts, Karen DeYoung, Corrupt Afghan trucking for U.S. military probed by Congress, Washington Post, September 15, 2011

 

A Continent for Sale through Queensway

According to The Economist,

Angola…is a partner in a syndicate founded by well-connected Cantonese entrepreneurs who, with their African partners, have taken control of one of China’s most important trade channels. Operating out of offices in Hong Kong’s Queensway, the syndicate calls itself China International Fund or China Sonangol. Over the past seven years it has signed contracts worth billions of dollars for oil, minerals and diamonds from Africa.

These deals are shrouded in secrecy. However, they appear to grant the Queensway syndicate remarkably profitable terms. If that is right, then they would be depriving some of the world’s poorest people of desperately needed wealth. Because the syndicate has done deals with the regimes in strife-torn places, such as Zimbabwe and Guinea, it may also have indirectly helped sustain violent conflicts…

The syndicate is built on links forged during the cold war. It is largely the creation of a man known as Sam Pa. Though he uses several names, he was born Xu Jinghua. After attending a Soviet academy in Baku four decades ago, say people who have looked into his career, he traded with Angola during its civil war, which lasted from 1975 to 2002 and over the years was a proxy battleground for several outside powers, including China, America, Cuba, the Soviet Union and South Africa. Mr Pa is a private and rarely photographed person. His name appears in few syndicate documents. He is believed to exert control through Veronica Fung, who may be a member of his family. She controls 70% of a core company, Newbright International. The two frequently travel in Africa, using the syndicate’s fleet of Airbus jets. They are said sometimes to bypass customs.

Mr Pa has several Chinese partners, according to a 2009 American congressional report. The daughter of a Chinese general, Lo Fong Hung, married to Wang Xiangfei, a well-connected banker, controls 30% of Newbright. Mrs Lo is the public face of China International Fund and China Sonangol. She is listed as a director of dozens of interconnected companies. The business’s operations were initially entrusted to the head of a privatised engineering firm from the mainland, Wu Yang. Later, African partners took over.

Although the Queensway syndicate has sometimes been suspected of being an arm of the Chinese government, there is little evidence of that. Indeed, it has often been the butt of criticism from Chinese officials. More likely it was set up to take advantage of a new strategy by the Chinese government, known as the “going out” policy. In 2002, after decades of commercial isolation, China started encouraging entrepreneurs to venture abroad. Short of contacts, Mr Pa teamed up with Hélder Bataglia, a Portuguese trader who had grown up in Angola and had links to Latin America. Together in 2004 they visited Néstor Kirchner, the president of Argentina, and Hugo Chávez, the president of Venezuela. Mr Chávez welcomed them on his weekly television show “Aló Presidente”, where Mr Pa grandiloquently declared: “This is an historic day because we are taking part in your programme.”…..

In late 2004 Mr Pa travelled to Angola. He knew President José Eduardo dos Santos, having first met him as a student in Baku and later traded with his guerrilla army. Mr Pa’s new partner, Mr Bataglia, also knew the guerrillas from having supplied them with food during the civil war. They were joined by a third trader, Pierre Falcone, a French Algerian who has long enjoyed close links with the Angolan elite and particularly the president.

Together the men persuaded the Angolan elite to channel their fast-expanding oil exports to China through a new joint venture, called China Sonangol. Mr Vicente, boss of Angola’s Sonangol, became its chairman. Contracts, signed in 2005, gave the company the right to export Angolan oil and act as middleman between Sonangol and Sinopec, one of China’s oil majors.

China Sonangol threw itself into the business, according to Angolan oil ministry records and applications for bank loans backed by oil shipments. The official statistics are incomplete, but good sources have concluded that almost all of China’s imports of oil from Angola—worth more than $20 billion last year—come from China Sonangol. By contrast, China’s state-owned oil companies have no direct interest in Angolan oilfields, one of their two biggest sources of crude. Their names do not show up on the map of concessions.

By 2009 the syndicate was trading a lot of Angolan oil and decided to expand to other African countries. Mr Vicente, both head of the Angolan state oil company and of China Sonangol, flew to Guinea in 2009 to arrange a deal for the syndicate. One of the people he met was Mahmoud Thiam, Guinea’s minister of mines, whose government had come to power the same year in a coup. Mr Thiam is an American citizen who studied at Cornell University and had previously worked as a Wall Street banker at Merrill Lynch and UBS.

With Mr Thiam’s support, the syndicate won the chance to become a partner in a new national mining company. This would control the state’s share of existing projects and, much more important, gain control of future projects in what is a relatively undeveloped mineral territory. Guinea contains the world’s largest reserves of bauxite and its largest untapped reserves of high-grade iron ore. Under a contract signed by Mr Vicente, the syndicate got an 85% share in a venture called the African Development Corporation. The government received the other 15%. The venture won exclusive rights to new mineral concessions in Guinea, including the right to negotiate oil-production contracts in the Gulf of Guinea. In return, the syndicate promised to invest “up to $7 billion” in housing, transport and public utilities, according to the government of Guinea (GDP $4.5 billion).

Ultimately this deal foundered on a Guinean election, but at the time the Queensway syndicate was so pleased that it reportedly gave Guinea’s military ruler a helicopter as a present. Mr Thiam began to travel with representatives for the syndicate—though in a response to our questions (and as the only person to reply to us) he says he was representing the Guinean government’s shareholding in the joint venture and he denies ever having become one of its employees. Mr Thiam went to Madagascar for the negotiation of a deal modelled on the one he made on Guinea’s behalf. Simultaneously, he carried on as mines minister for another year.

Around the same time, Zimbabwe also caught the syndicate’s eye. Mr Pa met Happyton Bonyongwe, the head of the Central Intelligence Organisation (CIO), the country’s notorious secret police, which helps to keep Robert Mugabe in power. Mr Pa’s plane frequently showed up at the Harare airport and he bought properties in the capital, including the 20-storey Livingstone House. His two original partners, Mrs Fong and Mrs Lo, became directors in a new company, called Sino-Zimbabwe Development Limited, which received rights to extract oil and gas, and to mine gold, platinum and chromium. In return, the company publicly promised to build railways, airports and public housing. These pledges were valued at $8 billion by Mr Mugabe’s government.

By 2009 the Queensway syndicate spanned the globe from Tanzania and Côte d’Ivoire to Russia and North Korea and on to Indonesia, Malaysia and America. It had bought the JPMorgan Chase building at 23 Wall Street in New York.

Nobody should begrudge an entrepreneur commercial success. And China needs the raw materials that the Queensway syndicate can supply. However, there are three worries about the syndicate’s conduct.  The first is personal gain. The terms under which China Sonangol buys oil from Angola have never been made public. However, several informed observers say that the syndicate gets the oil from the Angolan state at a low price that was fixed in 2005 and sells it on to China at today’s market prices. The price at which the contract was fixed is confidential, but Brent crude stood at just under $55 a barrel in 2005; today it is trading above $100.

In return for Angolan oil, the syndicate promised to build infrastructure, including low-cost housing, public water-mains, hydroelectric plants, cross-country roads and railways, according to the government. The country desperately needs such things, to be sure. But their value is unlikely to exceed several billion dollars. That looks like a poor deal for the Angolan people.

In Angola accusations of personal enrichment percolate up towards the top of the state structure. In 2006 the head of the external intelligence service, General Fernando Miala, alleged that $2 billion of Chinese money intended for infrastructure projects had disappeared. He claimed that the funds had been transferred to private accounts in Hong Kong by senior officials, though without naming people mentioned in this article. The general was swiftly sacked, tried and imprisoned (he may, however, now be about to make a comeback to government).

Parts of the Angola-China oil trade appear to be contaminated by conflicts of interest. The Angolan president’s son is said to be a director of China Sonangol, the main trading partner of the state oil company. The Economist’s requests for comment to the companies went unanswered. As well as running both the state oil company and its main customer, Mr Vicente is a director of private shell companies linked to the syndicate. Although these may exist for tax purposes, a report on foreign corruption, prepared last year by the American Senate, reveals that Sonangol was deemed so corrupt in 2003 that Citibank closed all its accounts. The report also says that Mr Vicente personally owns 5% of Sonangol’s house bank which has assets worth $8.2 billion. According to the IMF and the World Bank, billions of dollars have disappeared from Sonangol’s accounts. At one point, Sonangol awarded Mr Vicente a 1% ownership stake in the company he chairs. He was forced to give it back after a public outcry in Angola.

In Guinea criticism is focused on the former mines minister. An unpublished 2009 WikiLeaks cable quotes an American mining executive, whose company stood to lose business in Guinea because of the syndicate, complaining that Mr Thiam has “personally benefited from promoting [the] China International Fund”. Mr Thiam denies this. As a former Wall Street banker, he already had money before he returned to the country of his birth.

The second complaint about the Queensway syndicate is that in Africa it has failed to meet many of the obligations it took on to win mining licences. Zimbabwe is still awaiting even a fraction of its promised infrastructure. Guinea never received the 100 public buses that were meant to arrive within 45 days of the 2009 deal.

The situation in Angola is more complicated, though also disappointing. Chinese contractors have built some housing and railway lines and the projects were at first financed by the syndicate. Signs saying “China International Fund” appeared on construction sites. But in recent years they have been replaced by those of other Chinese companies. According to Western diplomats and Chinese businessmen, the syndicate stopped paying bills for more than eight months in 2007. All work stopped, 2,000 Angolan day labourers were fired on the Benguela railway project and only a Chinese cook remained on duty. Western diplomats suspected the syndicate was banking on being bailed out by the Angolan government, which had staked its legitimacy on infrastructure development. Soon enough, the government issued treasury bonds worth $3.5 billion to finance the projects. Subcontractors are now paid directly by the Angolan state.   Six years after the syndicate arrived more than 90% of the residents of the capital, Luanda, remain without running water. Meanwhile, the syndicate has continued to prosper.

The third complaint against the Queensway syndicate is that its cash props up certain political leaders and thereby fuels violent conflicts. For instance, in Guinea the syndicate came to the rescue of the junta. In September 2009 government men went on the rampage, raping women by the score and massacring more than 150 protesters in a sports stadium, which triggered EU and African Union sanctions. A month later, the syndicate signed its minerals deal, transferring $100m to the cash-strapped junta. Bashir Bah, a member of the opposition, condemned the deal. “First of all it is immoral, and second of all it is illegal,” he said.

The deal caused outrage even inside the government. The prime minister, Kabine Komara, a relatively powerless figure, protested about ministers’ conduct to other officials. A memo from the prime minister’s office, dated November 26th and leaked to Global Witness, declared: “The council of ministers did not discuss or bring up the question of creating a national mining company. What’s more it is not acceptable that a foreign company could become a shareholder in such a company, as it would grant the company, ipso facto, the ownership of all the current and future wealth of the country.” Mr Thiam denies any knowledge of Mr Komara’s complaint.

According to international institutions, the military leaders, who backed Mr Thiam, needed the syndicate’s money if they were to hold on to power. A World Bank official told Western diplomats the junta would “sell the country short on mining revenues and tell the international donors to get lost”. The junta eventually fell and, following elections last year, the minerals deal is now in limbo.

In Zimbabwe the situation is even more egregious. The finance minister, an opposition member of the governing coalition, has blocked extra funding for the CIO, presumably because it backs Mr Mugabe. And yet, it is suddenly flush with cash. In recent months it has reportedly doubled the salaries of agents, acquired hundreds of new off-road vehicles and trained thousands of militiamen who are now in a position to intimidate voters during next year’s elections. Several sources who have looked at the deal concluded that the money came from Mr Pa. They say he struck a side deal with the CIO that gives him access to Zimbabwe’s vast diamond wealth—controlled in part by the CIO. The diamonds were for some years banned from reaching international markets because of global industry prohibitions over violence routinely inflicted on Zimbabwean miners. Yet, Mr Pa is said to buy them and apparently makes payments directly to the CIO, bypassing government coffers.

Little is certain about China Sonangol and China International Fund. Our repeated questions to the companies and their representatives went unanswered. The documents and witnesses we tracked down around the world paint an incomplete picture. But they raise questions of immense public interest.

Oversight of the Queensway syndicate’s businesses is almost non-existent. A decade ago Mr Vicente forbade foreign oil companies in Angola to publish even routine data, on threat of ejection. Since then Sonangol has published some information on its operations. But oil contracts are treated as state secrets. Revenues from deals with the syndicate go to an opaque agency controlled by the president whose accounts are off-limits even to government ministers. Although Sonangol scores reasonably for some criteria, such as revenue, in rankings by Transparency International and Revenue Watch, two lobbies for corporate openness, it still receives bottom rankings for safeguards against corruption.

The syndicate itself is even more opaque. Who ultimately benefits by how much from the lucrative deals is not clear from public records. The syndicate’s corporate structure is fiendishly complex. Individual companies are not vertically integrated—it is not a group in the usual sense. There is no holding company, though the same people keep cropping up as directors in the records of affiliated companies, which are often owned by shell companies registered in lightly regulated tax shelters. Final beneficial ownership is impossible for an outsider to establish.

All this means that the syndicate taints China’s “going out” policy, a cornerstone of the country’s rise in recent years. When the policy works, African resources are swapped for aid, commercial financing and payments in kind such as public infrastructure. But with the syndicate, billions of dollars meant for schools, roads and hospitals have apparently ended up in private accounts. Rather than fixing Africa’s lack of infrastructure, Chinese entrepreneurs and Africa’s governing elites look as if they are conspiring to use the development model as a pretext for plunder.

Excerpts, China International Fund: The Queensway syndicate and the Africa trade, Economist,Aug. 13, 2011, at 21.

 

Afghanistan: the army knot, the rule of law

The global community has failed to create a politically stable and economically viable Afghanistan despite pouring billions of dollars into the South Asian nation during a decade-long war against the Taliban, says the International Crisis Group.  The Brussels-based think tank said the United States and its allies still lacked a coherent policy to strengthen Afghanistan ahead of a planned withdrawal of foreign combat troops from the unpopular war by the end of 2014.

“Despite billions of dollars in aid, state institutions remain fragile and unable to provide good governance, deliver basic services to the majority of the population or guarantee human security,” it said in a report released this week.  Violence is at its worst in Afghanistan since U.S.-backed Afghan forces toppled the Taliban government in late 2001, with high levels of foreign troop deaths, and record civilian casualties during the first six months of 2011.  Afghanistan relies on foreign aid for around 90 percent of its spending, but many international donors are reluctant to channel aid through the country’s ministries because of a lack of capacity and rampant corruption.  Public sector corruption is seen as worse than in any other country except Somalia, and equal to Myanmar, according to Transparency International. President Hamid Karzai has acknowledged graft exists in his government but says foreigners are also to blame.

“The impact of international assistance will remain limited unless donors, particularly the largest, the U.S., stop subordinating programing to counter-insurgency objectives, devise better mechanisms to monitor implementation, adequately address corruption and wastage of aid funds,” said the International Crisis Group (ICG).

About $29 billion of that had been spent on the Afghan police and army, which “have thus far proved unable to enforce the law, counter the insurgency or even secure the seven regions” recently handed over to them, the report found.  “There is no possibility that any amount of international assistance to the Afghan National Security Forces will stabilize the country in the next three years unless there are significant changes in international strategies, priorities and programs,” it said.

By Michelle Nichols, World fails Afghanistan despite spending billions, Reuters, Aug 6 2011