Cracking Down on Corrupt Mining Deals

Regulators probe fraud and seek new disclosure rules | “There is more need now to be very sure of what you’re buying”

Matthew Campbell and Jesse Riseborough

A Bumi coal mine on the Indonesian island of Borneo


For a business that routinely makes multibilliondollar deals with governments and controversial leaders in the developing world, the mining industry has been remarkably free of regulatory scrutiny. No longer. World leaders gathering in Northern Ireland for the Group of Eight summit in mid-June called for tighter oversight by requiring companies to disclose all payments made to foreign governments. The new rules, aimed at exposing corruption, come as U.S. and British regulators probe companies including BHP Billiton and Eurasian Natural Resources. “Mining has been caught in the headlights in the past few months,” says Raj Karia, a partner in London at law firm Norton Rose Fulbright. “The environment has changed. There is more need now to be very sure of what you’re buying and aware of the history of an asset.”

Britain and the European Union are pushing for new laws that require disclosure by petroleum and mining companies of all payments including taxes and licensing fees to governments and officials — and for developing countries to disclose payments they receive in connection with natural resources deals. The U.S. Securities and Exchange Commission adopted similar disclosure rules last year as required by the Dodd-Frank Act. The measures are being challenged in federal court by the American Petroleum Institute and others on the grounds that they put U.S. companies at a disadvantage. Canada, home to the world’s highest number of publicly traded mining companies, will require them to report payments, Prime Minister Stephen Harper said in mid-June.

Until recently, there’d rarely been a major investigation of a mining company under the U.S. Foreign Corrupt Practices Act. That law prohibits “the payment of bribes to foreign officials to assist in obtaining or retaining business” worldwide, according to the SEC, and can be applied to companies that aren’t based in the U.S.

The regulatory changes come in the wake of a series of headline-grabbing scandals in an industry that has seen $524 billion of takeovers since 2008, according to data compiled by Bloomberg. In April the U.K.’s Serious Fraud Office opened a formal investigation into allegations that London-based Eurasian Natural Resources paid bribes to win business in Kazakhstan and Africa. In a statement, the company said it is “assisting and cooperating fully with the SFO” and “is committed to a full and transparent investigation of its procedures and conduct.” The investigations have helped knock $4 billion from Eurasian Natural Resources’ market value. The three billionaires who control the company are seeking to take it private.

London-based Bumi launched an independent investigation of “potential financial and other irregularities” at its PT Bumi Resources unit last year. Bumi Resources said documents used to justify the probe were fake. Bumi is the product of a $3 billion deal in 2011 between a company controlled by banking scion Nathaniel Rothschild and two Indonesian coal exporting companies. Bumi is seeking to unwind part of the deal that created it by splitting into two entities.

BHP Billiton, the world’s largest mining company, is the subject of a joint U.S.-Australian probe examining whether its multimillion-dollar hospitality and sponsorship program at the Beijing 2008 Summer Olympics was in part a way to bribe Chinese officials, Melbourne’s Age newspaper reported in March. Mining projects in Cambodia and the Philippines are also being studied in the inquiries, the Sydney Morning Herald reported. BHP says it has provided evidence to authorities investigating alleged breaches of anticorruption laws, including the SEC. It began an internal inquiry in 2009 following an SEC request for information related to dealings with foreign officials, including Chinese dignitaries. “The group is cooperating with the relevant authorities and reporting the facts found in the investigation,” BHP said in an e-mailed statement.

To avoid controversy, big mining companies may choose to steer clear of countries with questionable dealmaking histories, says Paul Gait, a mining analyst at Sanford C. Bernstein. “The real victims in all of this are those developing countries with a significant resource endowment that are going to find it harder to access capital because of the alleged criminal behavior of certain mining companies,” he says. And there may be fewer deals involving middlemen who obtain mining assets from governments, then sell them to international mining groups, says Tim Bush, the head of governance and analysis at the U.K.’s Pensions Investment Research Consultants, a shareholder group. “In a proper free, fair, transparent market such intermediaries shouldn’t have a role,” he says.

The crackdown is part of the hangover from the 1999-2012 commodities boom, which saw prices for such minerals as iron ore and copper jump on the back of Chinese economic growth, says Robert Talbut, who heads the investment committee of the Association of British Insurers, which represents some of the U.K.’s largest institutional investors. “There was a sense that because the sector was hot you were prepared to severely compromise on due diligence,” Talbut says. “Maybe the experience of the past 18 months or so shows that if you take shortcuts simply because a sector is hot, the chickens can come home to roost.”

The bottom line After $524 billion in deals since 2008 and numerous scandals, the mining industry is under increased regulatory scrutiny.


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