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Mining Journal Risk Anti-corruption and Compliance Guide 2014

Market Insight
5 December 2014

This Article first appeared in Mining Journal’s Anti-Corruption and Compliance Guide 2014 and is reproduced with permission.

Anti-bribery and anti-corruption is an increasingly important issue in the mining and extractive industries. This HFW article focuses on the key recent developments in international anti-corruption laws and assesses their implications for mining companies. We then look at corporate governance and compliance strategies to help manage the risks, and at the types of insurance coverage available. And we examine what exposures remain.

Key developments in international anti-corruption laws

Over recent years there has been a significant increase in the severity of anti-corruption laws and enforcement. The UK Bribery Act 2010 (the Bribery Act) exemplifies this increasing pressure and has been part of a growing trend extending the stringency and scope of anti-corruption enforcement globally.

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Facilitation payments

The treatment of facilitation payments also varies between jurisdictions. Such payments involve a government official being given money or goods to perform (or to expedite the performance of) an existing duty.

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The extra-territorial reach of anti-corruption laws is also a growing concern for companies. Each jurisdiction applies its anti-corruption laws to its own citizens, residents and domestic companies, including conduct within and outside its territory. The Bribery Act covers offences committed by a person with a ‘close connection to the UK’. This extends to include a British overseas citizens and individuals ordinarily resident in the UK.

The US anti-corruption regime is equally far reaching, with the provisions of the FCPA being enforced in cases with little obvious domestic proximity. Indeed, the FCPA only applies to the corruption of foreign public officials and many prosecutions under the FCPA have been brought against non-US companies. It has been argued to be a de facto protectionist measure for the US Government.


Sanctions for the breach of anti-corruption provisions vary depending on jurisdiction. Most commonly they are dealt with through criminal liability and fines which are imposed on companies, directors and individuals. Sanctions can also include asset confiscation, licence revocations or even the prohibition of a company from bidding for future concessions.

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While the Bribery Act is strict, it does provide for some important defences. A significant defence exists in relation to the failure to prevent bribery by an associated person if a company can show that it had in place ‘adequate procedures’ designed to ensure that associated persons did not engage in bribery.

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Anti-corruption in mining states

Mining companies must be aware of the anti-corruption regimes of the states in which they operate. Many key mining jurisdictions have anti-corruption laws which prohibit the bribery of domestic officials and will hold companies liable for the corrupt conduct. The following case studies illustrate the dangers of these anti-corruption enforcement regimes and the web of litigation that can result.

BSG Resources

In 2010, BSG Resources (BSGR) was awarded a 25-year mining concession in Guinea after its confiscation from Rio Tinto. BSGR then sold the majority stake to Vale for US$2.5 billion. In April 2014, the Guinean government cancelled the licence after an inquiry found BSGR guilty of corruption, alleging that it had offered millions of dollars and shares to Mamadie Touré, the wife of a former Guinean president, to help it to acquire the concession. It was also claimed that the former Guinean mining minister was paid US$200 million for facilitating the grant of the licence.

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In one of the largest US anti-corruption settlements of its kind, the US based Alcoa Inc (Alcoa) agreed to pay a US$384 million penalty to resolve charges of bribing officials of state controlled Aluminium Bahrain BSC (Alba).

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Developments in Extractive Industries Transparency Initiative (EITI)

The EITI runs alongside the EU’s Transparency and Accounting Directive (the Directives) and has recently been subject to review. The philosophy behind the EITI is that companies should disclose what they pay to Governments to ensure transparency and accountability in extractive industries, and to ensure that mining states’ resources are not squandered.

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EU mandatory disclosure requirements

In June 2013, proposals to make amendments to the EU Directives on transparency requirements were approved.

Under the new rules, listed and large unlisted EU-incorporated companies will have to disclose payments made to governments of €100,000 or more.

Compliance will likely require the investment of significant commercial and administrative resources. Member States must adopt the provisions by July 2015.

Implications for mining companies

In view of these regulatory developments, there are a number of key steps that companies should take.

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Hallmarks of good corporate governance

Greater awareness of the problems faced by companies, if a good corporate governance structure is not in place, has forced companies to confront the deficiencies in their own compliance strategies to avoid negative and unfair publicity. This is of particular relevance to the mining industry, where reports of unrest at mine sites and environmental degradation has provoked public outcry at the actions of mining companies.

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Due diligence and compliance

It is crucially important for a mining company to undertake a detailed due diligence investigation into the operations of a target entity, as inadequate duediligence investigations could trigger a multitude of issues for the acquiring company. In particular, adequate due diligence will establish the risks that a company may face on resource development and potential liabilities and licence retention issues. The due diligence process is supported by the indemnities and warranties in the acquisition agreement, which also helps to balance the risk that the buyer and seller respectively undertake.

Assessment of risk

The OECD has published a useful report on due diligence guidance for responsible supply chains of minerals from conflict affected and high risk areas. It is important for companies to establish whether a mine is located in a high risk area. Risk can be assessed through an analysis of the circumstances of the proposed acquisition, in addition to an evaluation of the international and domestic law, the recommendations of international organisations for a company’s business conduct, government backed tools and a company’s internal policies and systems. Failure to assess risk adequately can lead to reputational damage, legal liability and the potential to harm people.

Technical and commercial due diligence

Primarily, it goes without saying that companies should undertake due diligence to ensure that the mine has sufficient coal or mineral reserves and that the quality of the coal or mineral is satisfactory. Companies need to obtain geological surveys in addition to a qualified person report to confirm this. A full examination of the mine will determine what equipment, machinery and infrastructure are already in place.

The important driver in technical and commercial due diligence is the location of the mine. This will determine to what extent companies can get power and water supplied to it. Companies will need to check, particularly when they are buying out a group, whether the supply contracts automatically continue or whether a re-negotiation is required. Assuming you have got sufficient water and power to run the mine, there is then the question of transporting the mined commodity to the exporting port. This can be particularly problematic where a mine has been in operation for many years, and may have changed hands several times in group reorganisations. If the mined commodity is to be transported by railway to the exporting port, companies may have the right to use the railway, which is typically provided by a third party, but not necessarily so. Companies will also need to establish that they can export their mined commodity, and do not have to wait behind more favoured mine users at the port. The agreements for the operation of the railway and for the operation of the port need to be carefully examined to make sure that the new buyer continues to enjoy the same rights of use as the seller. If the company needs to negotiate new access arrangements or power supply contracts, the company must always be aware of the issue of bribery and facilitation payments in certain countries.


Companies will need to investigate the financials of the seller relating to the mine. This will involve obtaining copies of the seller’s accounts, including management accounts. The buyer will need to assess the key financial parameters of the mine operation. A general cost analysis should be undertaken to evaluate the mine’s annual production capacity, mining requirements, sales, FOB average selling price, production cost of sales, stripping ratio, net debt, operating profit, operating margin and EBITDA and so on. The buyer also should analyse the capital expenditure, debts, creditors and financial projections of the seller in addition to looking at its work obligations.

Companies should also obtain all financial documentation and derivatives, financial assurance and bonds (in respect of rehabilitation, environmental and rail/port take or pay), guarantees and security documents. The buyer must raise any discrepancies in the accounts or documents with the seller at pre-contract stage.


It is just as important that companies undertake a legal and commercial due diligence. This involves obtaining copies of all mining tenements, concessions, licences and permits, in addition to corporate matters including: due incorporation, constitution, share rights and board minutes. Companies will need to check whether consents are required for the transaction, whether there are pre-emption rights and where the root of title is. Rights of pre-emption and options that might affect the purchase will be crucially important to the buyer.

It is also important that companies analyse the seller’s material contracts, insurance policies and lease agreements to ensure that there is no ongoing litigation, disputes or liabilities outstanding under the contracts. In particular, the buyer must ensure that the seller has all the requisite environmental licences – for example, waste water disposal – as failure to obtain adequate environment licenses can lead to delays and fines. It can also lead to adverse publicity for the mining company, as environmental issues are a global concern.

Local legal and social engagement

The importance of the local community, and due diligence on the local community, has become increasingly important to mining companies. As corporations have grown and the extractive industry has expanded, civil society groups have become more aware of mining companies’ business.

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Compliance advice to companies

UK companies must be aware of the implications of the Bribery Act in terms of investment in extractive industry projects around the world, but also more widely the question of compliance with EU, US and Australian financial sanctions. Understanding the risks and challenges involved, implementing a comprehensive compliance strategy, keeping abreast of changes in regulation, and obtaining adequate insurance and reinsurance cover, will help to protect a company from the increasing risks mining companies face.

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Pre-claims/investigations insurance considerations

The complexities caused by cross-border business operations to global insurance programmes can require sophisticated solutions to ensure that the different regulatory jurisdictions and laws are taken into account. A failure to have the correct local insurances in place can lead to draconian consequences on companies and their directors and officers.

Creating an effective risk management programme requires a host of internal guidelines and policies to ensure that a company and its directors stay on the right side of the law. From an insurance perspective, procedures are needed across all the business units to ensure that if investigations or claims (or circumstances) arise, they can be notified to insurers within the terms and conditions of the relevant insurance policies. In formulating such procedures the following should be considered:

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  1. What and when matters are required to be notified. This will depend upon the different triggers in the insurance policies, for example whether circumstances are required to be notified or just claims. Also, in what time frame – immediately, as soon as practicable, or within a set time limit?
  2. Quick flow of information is required as well as an ability to capture evidence quickly, not only for notification purposes but also to support the insurance claim and, where necessary, to ensure preventative action can be taken to limit liability.
  3. Claims protocols should be agreed with insurance brokers to ensure that there is clarity on the reporting lines in the event of a claim or investigation. How conflicts are managed will need to be considered. Investigations and claims could involve the company and multiple directors.
  4. In relation to directors and officers insurance, those that are covered by the insurance should be informed of the scope of cover and who they report to in ord
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John Court
Global Director of Information Technology