Diamonds and disappearing tax revenues

One of the UK's largest AIM-listed company uses a series of tax havens to avoid paying taxes and contributing to the development of the countries in which it operates.\r\n

Petra Diamonds, the largest diamond mining group listed on the UK’s Alternative Investment Market (AIM), may deal in the glittering rocks bringing lovers together in holy matrimony, but Petra’s behind-the-scenes activities are not about love and togetherness. The Africa-focused company, with a resource base of 261m carats, landed a $40m loan agreement with the World Bank’s International Finance Corporation in September to support the expansion of the company’s Williamson diamond mine in Tanzania.

Will any of this benefit the Tanzanian government or the Tanzanian people? All the revenue from production is to be channelled through Willcroft Company Limited, a 100% owned intermediary company based in Bermuda, a tax haven, before being remitted back to Williamson Diamonds Limited (Tanzania). Bermuda is just one of over 30 tax havens belonging to the UK and ‘managed’ through the City of London.

Why does this matter? Each year, developing countries lose over $385bn to mispricing, while more than 60% of Africa’s capital flight is caused by corporate tax avoidance and evasion. This occurs primarily through the use of jurisdictions structured to provide environments to facilitate such activities.

An estimated 26% of Bermuda’s GDP is generated from a host of ‘secrecy’ services designed to cater to the needs of foreign clients. Besides the near-zero tax holidays, Bermuda provides company redomiciliation, protected cell companies, and a lack of disclosure concerning company ownership, beneficial or ultimate ownership. Petra is only one of over 480 multinationals to maintain subsidiaries in Bermuda.

Secrecy lends itself to corruption. The opacity concerning beneficial owners (those ultimately benefitting from resource revenue) opens the door to potential corruption at the lower or higher state level acting in direct collaboration with the corporation. The Tanzanian government holds 25% and Petra 75% of the Tanzanian entity (Williamson Diamonds Limited).

Tanzania is not the only country to have resources funnelled through a tax haven: Petra’s mines in South Africa transfer revenues through Cullinan Investment Holdings Limited based in the British Virgin Islands. The company’s exploration activities in Sierra Leone are similarly passed through an entity based in the Seychelles called Basama Diamonds Limited (51%).

To get an idea of Petra’s operating boundaries, one could delve back into the company’s involvement in a $1-$2bn, 800 km² diamond concession in the Democratic Republic of Congo (DRC) about a decade ago. In 1996, Zimbabwe’s President Robert Mugabe gave Laurent-Désiré Kabila $5m to fund the war against Mobutu Sese Seko’s dictatorship. In addition, Mugabe facilitated a $53m deal negotiated by the Zimbabwean Defence Industries (ZDI), itself owned by Mugabe’s government, to provide Kabila’s army with arms, bombs, food and transport. The ZDI served as the economic vehicle to access the DRC’s resources via a barter exchange deal. The directors of ZDI, a highly secretive company, were Army General Vitalis Zvinavashe, Mugabe’s close aid Perence Shiri and others close to the regime in Harare. Zvinavashe was also, for instance, a commander in Operation Sovereign Legitimacy (Osleg), which was used as a means of financing the Zimbabwean forces in DRC. One of the deals to finance the Zimbabwean participation was the Sengamines diamond project south of Mbuji Mayi, exploited through a joint venture with Kabila’s Comiex.

Cayman Islands-incorporated Oryx Natural Resources came to acquire the concession. According to Diamond Intelligence, Oryx’s head "Al-Shanfari, an Omani national with close ties to Robert Mugabe and his top officials … use Oryx to enable Mugabe and his senior officials to maintain access to, and derive personal benefit from, various mining ventures in the Democratic Republic of the Congo (DRC)."

Spokesman for Oryx and CEO for the South Africa-based African Mining Management Company (AMMCO), Geoffrey White, disclosed to the Financial Gazette that "there was no payment by Oryx to Osleg or individuals related to Osleg when the new Sengamines was formed and Osleg departed." AMMCO’s Rob Scott said to the same paper that the lack of payment was a political decision between the governments of DRC and Zimbabwe. Oryx was supposed to have owned 49% of Sengamines, Comiex, 35% and MIBA, the DRC’s state-owned diamond company, 16%. The company planned a listing on the London Stock Exchange in June 2000. However, a UN experts’ panel report in 2000 revealed that Osleg owned the 49% of the Sengamines concession, situated in an area said to be controlled by Zimbabwean forces.

This was because Osleg, the beneficial shareholder, nominated Oryx to hold its share. The UN panel stated that this was done in order to "disguise the close association between Sengamines and ZDF [Zimbabwe Defence Forces], and to deceive international investors." Oryx’s response was that the report, "is highly inflammatory and riddled with unsubstantiated and undocumented allegations". 

Plans to list Oryx were foiled when independent regulator Grant Thornton objected just days before the proposed floating. Petra Diamonds had intended to merge with Oryx. Arthur Levy, author of Diamonds and Conflict, wrote that Petra and Cosleg were to split profits equally. By 2003, by presidential decree, Oryx was to own 80% of Sengamines, and MIBA, 20%. According to Petra’s chairman Adonis Pouroulis (concerning the foiled 2000 listing), "I understand the position that they have adopted was put to them by ‘certain regulators’ very late on Friday afternoon." Foiled it may have been, but had the regulator not pulled out after substantial and unambiguous evidence, it is unlikely that Petra, headquartered in the UK tax haven of Jersey, would not have eagerly gone ahead.

This article was originally published by Pambazuka News.