The Paradise Papers – Burkina Faso’s development dreams lost in the offshore world

Sierra Leone Telegraph: 9 November 2017

Documents from the Paradise Papers reveal how Glencore made secret payments, battled cash-strapped countries in court and sought to reduce its tax bill around the world. When one of the world’s biggest miners turns up in a small town in Africa, the local residents and officials had hopes of a better life.

This story, published by the International Consortium for International Journalists (ICIJ) on Burkina Faso, home to a Glencore mine, paints a very different picture. While Appleby helped Glencore reduce its tax bill, it was also charging nearly 950 times more than one engineer working on the mine earned.

One Burkina Faso official told ICIJ reporter Will Fitzgibbon, “We were victims, in a way, of our own naiveté and inexperience faced with these companies that are very experienced.”  This is Fitzgibbon’s story:

KEY FINDINGS

On the night of Sept. 6, 2015, Juliette Kanyala awoke to the crunch of heavy vehicles rolling across the red dirt and coming to a halt outside her home in Perkoa in the landlocked West African nation of Burkina Faso.

For most of Perkoa’s 5,000 inhabitants the sound of a four-wheeler lumbering past the sparse mud brick homes, granaries and millet fields off the central highway, signaled trouble: most often, a visitor from the multimillion-dollar zinc mine that dominates the area.

Kanyala, 37 and two months pregnant, labored to her feet and walked past her four sleeping children to the front door, rousing mongrels and chickens from quiet corners as she went.

It was the police, and they wanted her husband, Bali Xavier Bado. The son of the village chief and head of a local youth association, Bado had been among those leading protests at the mine, owned by Nantou Mining S.A., a subsidiary of the Swiss commodity giant Glencore PLC.

Bado, an assistant engineer at the mine, about 80 miles from the capital of Ouagadougou, had helped lead the men, women and children of Perkoa on a march to the mine to protest poverty, low pay and environmental damages. They had blocked the mine entrance, halting operations.

The protest was peaceful until 4 a.m. on the fourth day, when police charged and villagers scattered. A few days later, police were making unannounced visits.

They arrested one of the protesters at the market. They took another from the school. For others they came in the dark of night.

Bado fled on his motorbike without telling his wife where he was going. It was safer that way, he told her.

The protests failed to produce any change for the disappointed villagers. When the mine had opened it appeared to hold the promise of a better life for the people of Perkoa. But that failed to materialize – as did the tax revenue financially strapped Burkina Faso had hoped for.

Details from leaked Glencore records reveal a story of contrasts. As villagers struggled with hunger, poverty and other hardships, boardroom machinations in faraway Switzerland, Bermuda and other tax havens moved millions of dollars into – and then out of – the small African nation whose name means “Land of Honest Men.”

The details are revealed in files – containing multimillion-dollar sales contracts, board of directors’ decisions, budgets and emails – from the blue-chip Bermuda law firm Appleby. The files document its relationship with the mining company’s parent, Glencore, one of the world’s largest metals, oil and grain traders.

Documents analyzed by the International Consortium of Investigative Journalists, Süddeutsche Zeitung and 94 media partners reveal how Glencore made secret payments, battled cash-strapped countries in court, and sought to reduce its tax bill in nations around the world.

Separately, ICIJ has obtained a confidential assessment by Burkina Faso’s tax office that accuses the Glencore subsidiary of abusing tax loopholes and creating fictitious charges by shell companies to reduce taxable earnings and avoid paying tens of millions of dollars in taxes to one of the world’s poorest countries.

‘Don’t give it back empty’

When the Perkoa zinc deposit was discovered in the 1980s, the village chief told the mine’s early owners: “When you borrow a cooking pot from someone to make dinner, don’t give it back empty,” a Burkina Faso expression meaning, “Don’t forget us.”

Nearly two decades and a succession of mining companies later, relations began to deteriorate amid economic ups and downs in the mining industry. Zinc prices plummeted 70 percent in 2007, the year in which Nantou Mining took control. Nantou’s operations were suspended in 2008 until prices recovered. Today the mine is the country’s main producer of zinc, sending 720,000 tons a year of concentrate, a fine gray dust, to Canada, Spain and elsewhere. Zinc is most commonly used as an anti-corrosion coating.

Management insists that the mine never fully recovered from the downturn, and tensions with workers flared before the clash in 2015. In 2012, a Nantou subcontractor dismissed 338 contract workers after a three-day strike. The subcontractor said the employees’ contracts had ended. The workers said that they were sacked for seeking higher wages and better health and safety conditions.

“It’s like slavery in miniature,” a current employee who wished to remain anonymous told ICIJ. “What hurts is when I read the amount of zinc that Perkoa produces. And then I see how we live and work. It doesn’t make any sense.”

Glencore told ICIJ its investment supported the construction, production and operations of the mine. Workers’ wages and benefits are “among the best across the Burkina Faso mining industry.”

“We totally reject the allegation that Nantou Mining’s workforce was subjected to ‘slavery like conditions.”

Villagers complained of what they called Perkoa’s “growing pauperization” and environmental contamination.

Fruit trees near the mine’s perimeter, villagers said, had been poisoned by chemicals and were dying. Even trees that remained healthy, they said, were off-limits to those who used to pick the fruit. The mine also had obliterated the village’s most fertile food and oilseed fields, they said.

When Nantou built new homes for villagers evicted by the mine’s expansion, it ignored community customs and family size, villagers said. As a result, villagers built other homes with their own scarce resources. The mine’s housing now lies largely empty and abandoned, with broken gates and debris cluttering the entryways.

In addition, villagers accuse Nantou Mining of complicity in the mismanagement of a private foundation created to distribute social development funds. Complaints intensified in May 2015, focusing on the head of the foundation, the wife of Burkina Faso’s former foreign minister. Perkoa residents said the foundation had done little to help one of the impoverished nation’s very poorest regions, where one in every three children is stunted.

Villagers said Nantou’s and the foundation’s support of the community falls far short of what’s needed – and what was promised. The foundation, into which Nantou paid part of its social and community development contributions, rejected the criticism.

Nantou has received awards for community development, Glencore told ICIJ, and its contributions to local communities in the region include building bridges, roads, sanitation facilities and youth and training centers.

Yet Nantou has acknowledged elsewhere that it hasn’t been able to finance the sort of progress that Perkoa residents are seeking. “Given the difficulties we face, the company cannot undertake, in the short time, any new engagements that would have a financial impact,” Nantou’s general director wrote to Perkoa’s village chief in August 2015 after the protest that led to Bado’s leaving town.

“The price of zinc is fairly low, and our revenues are constantly decreasing, contrary to our expenses,” the general director wrote in the letter, obtained by ICIJ and Burkina Faso newspaper Le Reporter. The company “is indebted to its suppliers and service providers for a lack of available cash,” he wrote.

Months earlier, Glencore’s CEO, Ivan Glasenberg, had told shareholders a different story. “There is demand growth” for zinc, Glasenberg said in May 2015. “We think zinc is moving into a deficit,” he said, predicting that demand would drive prices up.

The earlier forecast proved accurate. By the end of 2016, zinc was worth more than it had been in four years.

‘Two kinds of justice’

The police who came for Bado gave up the search a few days later, and Bado returned home. But police arrested other protesters, who, in addition to 10 Nantou employees, included farmers, teachers, schoolmasters and security guards. They were convicted of protesting illegally and sentenced to probation.

Bado eventually returned to work in the mine’s mechanics plant. Within a week, he was fired from his 77-cent-an-hour job for his participation in the protest. “There are two kinds of justice in Burkina Faso,” Bado said. “The justice of the state and the justice of the mine.”

After the protests at Nantou and sites owned by other companies, Burkina Faso’s Parliament convened a committee to investigate the mining sector. Its September 2016 report estimated that seven mining companies, including Nantou, together had avoided paying the country $36.7 million by using an accounting technique that reduced the company’s taxable income.

The committee singled out Nantou as the only mine to report an injury attributable to the lack of protective workwear and noted that the company had paid less than $250,000 of $7 million owed to Burkina Faso’s environmental rehabilitation fund. In response to questions, Glencore told ICIJ that it has set aside the “full provision” for rehabilitation.

“We were victims, in a way, of our own naiveté and inexperience faced with these companies that are very experienced,” Ousseni Tamboura, the head of the parliamentary committee, told ICIJ from his office.

The companies have thrived, he said, but not the citizens of Burkina Faso.

Withholding taxes

When Bado received his severance pay, $70.84 of the $669 he was owed was taken out and paid directly in taxes on his wages.

Paying taxes isn’t as straightforward for his former employer, Nantou.

Incorporated in Burkina Faso, Nantou is owned through a chain of five offshore companies incorporated in Bermuda, the United Arab Emirates, Switzerland and the island of Jersey, according to a diagram marked “private and confidential” that Glencore shared with its offshore lawyers at Appleby.

Until Glencore sold the mine to a Canadian company in March 2017, it owned most of Nantou through Merope Holdings Ltd., a Glencore subsidiary in Bermuda that uses Appleby employees as stand-in directors.

Merope has neither employees nor an office of its own. Despite owning one of West Africa’s largest zinc mines, at least on paper, its 2011 financial statement contained just 1,065 characters – barely longer than seven tweets.

Internal law firm records showed that Glencore spent more in one year on “Govt fees; couriers, etc.” for Merope than Nantou spent on Bado’s pay. Appleby, working for Glencore on the Burkina Faso zinc mine, billed up to $730 an hour, according to internal billing records, or nearly 950 times what Bado earned per hour as an assistant engineer at the Perkoa mine.

A confidential Burkina Faso government audit of Glencore, obtained by ICIJ separately from the Appleby files, reveals the central role of offshore companies in Glencore’s operations in Burkina Faso as well as a series of tax deductions deployed by the mining giant.

“While recognizing freedom of management,” wrote tax inspector Jean Yameogo, Burkina Faso reserved the right to disagree with management policies “capable of damaging the rights of the public treasury.” On Oct. 26, 2016, Yameogo issued Nantou a tax bill of $29 million, including penalties.

Nantou had set up transactions with members of the Glencore corporate family to escape paying Burkina Faso taxes, the tax office found. The tax office also found that Nantou sold a less valuable zinc concentrate to Glencore International in Switzerland instead of producing pure zinc within Burkina Faso. As a result, Burkina Faso could have lost the opportunity to tax the more valuable final product, a common complaint of tax officials across mineral-rich countries in Africa.

Nantou also had borrowed money tax-free from Glencore in Switzerland, creating deductible interest payments to reduce the company’s taxable income, the tax office found. In addition, Burkina Faso’s tax office said Nantou had avoided taxes on payments to suppliers.

Nantou included “fictitious” charges in its accounts, the tax office found, through a British Virgin Islands Glencore company named Pasley Universal Inc. that provided no real service. While Nantou tried to convince tax authorities that Pasley really was an operating company, Yameogo wasn’t satisfied, and he rebuked Nantou for not providing proof that it was a real enterprise.

Glencore told ICIJ that Burkina Faso has reduced the amount due from $29 million to $1.5 million and that Nantou “continues to challenge” the remaining amount.

Glencore denied that Nantou had included “fictitious” charges to Pasley Universal Inc. in exchange for services. Glencore provided “technical, operational and management support” through Pasley to Nantou, Glencore said.

Beyond the Burkina Faso’s tax audit, the leaked Appleby documents raise questions about whether Glencore used offshore transactions to slash its tax bills in the African country. Appleby’s files reveal a string of loans from Glencore to finance the mine between 2010 and 2014.

In one email, Glencore explained, it contributed $30 million to Nantou through two offshore companies in Bermuda. As a result, Glencore wrote, Nantou “is already indebted” to one of the companies “under this loan,” which allowed Nantou to deduct $2.5 million in interest payments. At the same time, Glencore wrote, the $30 million was “not repayable … in any circumstances.”

“It definitely sounds like it’s likely that the structure has been built because of tax avoidance,” said Lauri Finér, a tax law researcher at the University of Helsinki. The multiple loans, the possible interest paid to the company in Bermuda, a tax haven, and the use of multiple secrecy jurisdictions are all indicators of possible tax avoidance, Finér said.

“From the perspective of the whole group, it’s not real money,” Finér said. “It’s paid between the companies. So it’s plus, minus equals zero for Glencore.”

Nantou Mining S.A. did not pay corporate taxes in 2014 or 2015, according to a Burkina Faso government report.

Always wrong

After Bado’s dismissal, Kanyala gave birth to their baby, Idrisse, but then fell sick with vomiting and bouts of vertigo. She spent 28 days in a hospital. The family sold her motorbike, some land and a few pigs to cover the medical costs. Relying on Bado’s employment at the mine, the couple had chosen not to plant their fields earlier in 2015. Without crops in the ground, they would have even less to eat than usual.

Bado now ekes out a living by descending deep vertical shafts to hack at rocks in an informal gold mine and then bouncing by bus across West Africa to sell what gold he can.

In February 2016, Bado met with Nantou’s lawyers to try to thrash out a compensation deal for what he claimed was an unfair dismissal. Bado pressed for $4,298. The meeting ended in a stalemate, leaving Bado empty-handed, with no more money to continue his fight.

“When you are weak, you have to negotiate even if you are in the right,” Bado said. Kanyala agreed: “The poor man is always in the wrong.”

This article has been published by the Sierra Leone Telegraph – courtesy of the ICIJ.