Opacity in the transfer of commodities can provide opportunities for corruption, for example, in the misinvoicing of commodities, the misreporting of grade and valuation or the misreporting of volume. Figure 4.1 sets out a number of red flags that may indicate the presence of corruption in the transfer of commodities.
Typology of Corruption Risks in Commodity Trading Transactions
Commodities (oil, gas and minerals) occur naturally in different forms and can exhibit a wide variety of different technical characteristics once mined or produced. The price of a particular commodity can differ greatly depending on its grade, and therefore, governments need to be cognisant of the risk of undervaluation of commodities for export which may be symptomatic of a corruption scheme where a commodity is undervalued to allow an “unqualified” buyer (often an intermediary) to purchase the commodity at a low price before quickly off-selling the commodity at a market price on the international market, and where the share of the windfall can serve to pay bribes (OECD, 2016[1]).
The manipulation or abuse of the payment date can also represent a corruption risk. These risks include contractual provisions with unusual long-term repayment periods, and payments in open credit with no financial guarantee leading to unbalanced terms where the seller would assume substantial risks of default. If these risks are identified, further scrutiny may need to be applied to this particular commodity sale transaction (OECD, 2016[1]).
For example, there are allegations that refer to the falsification of the payment date on cargo’s bill of lading date by trading companies supplying fuel to a SOE from a resource-rich developing country. The fuel was priced using an average of published Platts quotations, and the bill of lading date determined which quotes to use. By shifting the date to a period when quotes were higher, some traders allegedly could overcharge the SOE by hundreds of thousands – or in extreme cases, even millions – of dollars for a cargo (Sayne, Gillies and Katsouris, 2015[40]).
However, there are several legitimate reasons why a buyer may be offered a delayed payment date. It is the practice of some SOEs to offer days in credit – often up to 30 days. In other cases, given that a delayed payment date represents a benefit for the buyer, this benefit may be reflected in the selling price for the commodity sale.
The OECD has noted the opportunities for corruption that may occur in respect of the reporting or classification of minerals in the upstream mineral supply chain. Increased attention should be paid to circumstances of vulnerability, such as where public officials have a history or reputation of requesting bribes to fraudulently provide documentation related to due diligence certification, transport and export, valuation of minerals, misreporting or misclassification of minerals (OECD, 2021[41]).
The risk of undervaluation may be influenced by factors including: whether the commodities have been refined/processed (as unrefined products are less likely to have transparent pricing), whether there are publicly quoted prices for that commodity, spot sales, large variations in grade, and potential tax benefits that may be associated with undervaluation (IISD/OECD, 2018[42]). Table 4.1 sets out the risk of undervaluation for different minerals and metals.
The grade of a commodity can have a significant effect on the price, and therefore increased transparency around the grade and the valuation method used to determine that grade can help identify any red flags and mitigate risks of corruption in the transaction.
It is important to ensure that volumes are not over- or underreported so that any value is not lost in a commodity transaction. There are several international and industry standards for expressing commodity volumes (bbl., MMBtu, tonnes, troy ounces, etc.) that should be routinely used to reduce opacity and opportunities for manipulation and corruption.
In order to mitigate the opportunity for misreporting, volumes should be regularly calibrated. Normally calibrations are either done by a third party or witnessed by the other party’s agent. Appropriate oversight mechanisms should be put in place to ensure that the calibration is accurate and that any opportunities for corruption are prevented or mitigated.