Asia (Other)

Cem Ozturk_KrollE: cozturk@kroll.com   W: www.kroll.com

Corporate investigators need only work in corruption and fraud cases in Southeast Asia for a short while before noticing a correlation as clear as it is unsurprising: companies linked to environmental destruction are also overwhelmingly linked to issues of corruption and fraud.

While the reasons for this are unclear (although disregard for one ethical norm suggests disregard for others), the trend becomes apparent during the course of our casework in countries such as Indonesia, Myanmar and Papua New Guinea.

In Kroll’s experience in the region, the trend is strong enough to suggest that if researching Company X, we encounter documented issues of unlicensed deforestation, illegal disposal of industrial waste, serial overfishing and other such environmental concerns, these issues alone are often a reliable predictor for other potentially troubling issues in the company such as corruption and fraud — and even connections to organised crime.

This correlation has been clearest in companies that are involved in land-related industries — especially timber, palm oil and mining — all of which invariably necessitate close interaction with land licence-issuing authorities, local political leaders and regulators.

What we see in our casework is that companies in these industries that routinely flout environmental laws and norms often have undisclosed relationships (commonly in the form of beneficial ownership via a proxy individual) to the very political officials who are charged with regulating them. Indeed, their ability to violate environmental laws with impunity is often due to the fact they are aligned with, protected by and often paying these officials.

Example: forestry and palm oil in Indonesia

In Southeast Asia, the illegal timber trade is still a multibillion dollar business, and the region’s illicit timber still finds its way into global supply chains. In Indonesia in particular, forestry remains one of the most graft-prone industries in a country well-known for corruption. This is partly rooted in the continuing decentralisation of power to local governments since the 1998 end of the Suharto administration, which resulted in a large increase in the sale of public land from local government to private actors. Many of these transactions allegedly involved payment to local government officials, and resulted in dozens of major corruption cases in the Indonesian courts and investigative media since that time. The illegal timber trade continues today, especially in the heavily forested islands of Kalimantan/Sarawak and Sumatra.

In many of these cases, private companies purchase public land from local political authorities via third-party intermediaries, then rapidly log and/or burn the land for conversion to more profitable crops such as palm oil. Each stage of these projects — from the acquisition of the land, to the logging, burning, and palm conversion — involve the potential gratification of officials; and most (but not all) companies involved in these industries are thus continually exposed to corruption risk.

Implications for anticorruption due diligence

Despite these links, environmental issues are not always captured in basic counterparty risk and due diligence assessments, particularly for low-cost and high-volume assessments produced for compliance purposes. The issues of environmental destruction and corruption are seen as separate — but they are often not.

Our experience is that a company’s linkages to illegal environmental destruction are often highly correlated to other significant potential problems with corporate governance, and is often co-incidental with such issues as corruption, tax evasion, opaque ownership and worse.

While relationships with environmentally destructive counterparties may have limited legal implications for multinational companies in and of themselves, the fact that these counterparties are also often potentially linked to corruption is important to consider when calculating counterparty risk. Much more often than not, a poor environmental track record suggests a poor anticorruption track record — and a much higher risk.

By Cem Ozturk, Associate Managing Director

E: cozturk@kroll.com   W: www.kroll.com

Tags: Anticorruption, Counterparty Risk, Environmental, Indonesia, Myanmar, Papua New Guinea
Related Articles by Firm
Foreign Banks Allowed to Operate in Myanmar
After more than 50 years of banning, the Central Bank of Myanmar has issued the first final licenses allowing four foreign banks to operate in Myanmar.
Tanzanian Draft National Energy Policy of 2015
Highlights on the ongoing and upcoming industry developments with focus on the transition of the energy sector since the introduction of the Big Results Now! campaign
Mineral Rights Available in Tanzania
Overview of the mineral rights available in Tanzania, with specific focus on the various categories of mineral rights
The Legal Framework of the Aviation Sector in Tanzania
As attention turns to Tanzania’s trade and energy opportunities, the spotlight has fallen upon the nation’s infrastructure. This update focuses on the capabilities and issues of the Tanzanian aviation sector.
Oil price volatility - Offshore oil storage
Are there any legal concerns with tankers being used for floating storage?
Oil price volatility - risks and opportunities in 2015
While many companies can weather the oil price slide and volatility, some industry players face a real risk of insolvency.
India: Union Budget 2015
A bullet-point overview of changes in Direct Tax, Indirect Tax and Goods and Service Tax in India in light of Finance Minister Arun Jaitley’s first full-year Budget…
Prohibition against transfer of personal data outside Hong Kong
Section 33 of the Personal Data (Privacy) Ordinance (PDPO) prohibits the transfer of personal data to places outside Hong Kong, except in circumstances specified in the PDPO.
Security of payment under FIDIC contracts: more secure, for now
The High Court of Singapore recently handed down an important judgment in relation to the enforceability of Dispute Adjudication Board (DAB) decisions under the FIDIC forms of contract.
Insurance Laws (Amendment) Bill passed as Ordinance in India
The long-awaited Insurance Laws (Amendment) Bill has become a provisional law in India. The Bill amends the Insurance Act (1938), the General Insurance Business (Naturalisation) Act (1972), and the Insurance Regulatory and Development Act (1999).
SICC: now open for business
On Monday 5 January 2015, the Singapore International Commercial Court ("SICC") was officially opened...
Myanmar insurance update
Clyde & Co partner Michael Horn recently visited Myanmar's commercial capital Yangon and reports on the current state of the insurance market...
Launch of the online mining cadastre transactional portal
Plus, a summary of the key mineral rights available in Tanzania; and, a look at the manner in which mineral rights can be transferred.
Restrictions imposed on holders of mineral rights
This briefing looks at some of the restrictions imposed on holders of mineral rights in Tanzania by the Mining Act 2010
Draft local content policy for the oil & gas industry in Tanzania
The first draft of the long-awaited local content policy for the oil & gas industry in Tanzania has now been published by the Ministry of Energy and Minerals ...
Tanzania: Revocation of mining licences
The Tanzanian government recently announced the cancellation of a total of 174 mining licences. This mining update examines the key continuing obligations imposed by the Mining Act upon mining licence holders.
Mining Development Agreements
In this month’s mining briefing we look at Mining Development Agreements (MDAs) and the role that they play in the mining sector in Tanzania.
The Tanzanian railway system: current legal framework
The railway system of mainland Tanzania has a total track length of 3,676 kilometers (km) with two separate networks, run by two separate organisations ...
Related Articles
New Decree on special preferential import/export tariffs under the CPTPP
Plus recent Vietnam updates on insurance, public investment and minimum wages.
SCA issues guidelines for financial institutions on anti-money laundering
The advent of AML and ATF guidance is a welcome step for businesses in the UAE.
Update on Stamp Duty regulating electronic transactions
A new notification requires parties who enter certain electronic transactions to pay stamp duty in cash.
Related Articles by Jurisdiction
Anti-Trust & Competition: Asia’s evolving competition landscape
After a period of rapid adoption of competition laws in Asia, only Bhutan and North Korea are compliance safe spaces ...
Hot Topics
We discuss Brexit with insight from various private practice lawyers; Richard Bell of Clyde & Co writes about his Journey along the Silk Road; JunHe delve into issues regarding provisions to ...
3rd annual Representing Corporate Asia survey, including Firms of the Year, 2009
The issues affecting in-house counsel’s choice of external counsel, and a full list of the winning firms as voted by our in-house counsel community ...
Latest Articles
New Decree on special preferential import/export tariffs under the CPTPP
Plus recent Vietnam updates on insurance, public investment and minimum wages.
SCA issues guidelines for financial institutions on anti-money laundering
The advent of AML and ATF guidance is a welcome step for businesses in the UAE.
Update on Stamp Duty regulating electronic transactions
A new notification requires parties who enter certain electronic transactions to pay stamp duty in cash.