Wednesday, February 09, 2011

(STICKY) Mopani pilot audit reveals tax payment irregularities

COMMENT - Massive tax evasion going on at Mopani. I quote: " The audit revealed that Glencore AG, the purchaser, determines prices and that some copper from Mopani is sold under an “old” contract with copper in one instance being sold at 25 per cent of official prices at LME. " In other words, they are not paying taxes over 75% of the copper 'sold' to Glencore under that contract. (UPDATED Feb 13th 2011) The full Mopani audit report is here. Also see the summary to the Pilot Audit of Mopani Mine in the comments below from Friends Of The Earth. (Update Thursday 10 Feb) Also see: Govt accused of secret dealings with mine owners Thursday, February 10, 2011, 8:48

On Glencore International - it is operated by old Bill Clinton friend Marc Rich, who has also been convicted for tax evasion in the US, as well as for trading with Iran. He was pardoned by President Bill Clinton. Rich's legal representation was Lewis 'Scooter' Libby, who himself barely escaped prison after a conviction for his role in outing CIA agent Valerie Plame Wilson. (More on Marc Rich on Youtube.) At one point rich was on the FBI's Most Wanted list, for "trading with embargoed states, tax evasion, racketeering and arms trafficking" (quoting Keith Harmon Snow's article Merchants Of Death). I would say the mines are better off in the hands of the state, with a proper legal framework in place.

Mopani pilot audit reveals tax payment irregularities
By Chiwoyu Sinyangwe
Wed 09 Feb. 2011, 04:01 CAT

A PILOT audit has revealed glaring irregularities and inconsistency in production and revenue figures that Mopani Copper Mines submit to ZRA for tax administration, most of which hinge on its links to Glencore AG.

And revelations of the audit sanctioned by the government with the aid of some cooperating partners have stated that Zambia lacks enough capacity to verify records submitted by mining firms to Zambia Revenue Authority (ZRA) for tax administration.

It stated that the taxes being paid by mining firms in the country were not consistent with production volumes and the revenues from copper sales.


According to an audit conducted by lead auditors - Grant Thornton Zambia - and Econ Pöyry, a Nordic based global consulting and engineering company, there was clear indications from the comparative analyses that there were major problems with both revenues and costs of Mopani Copper mines.

The focal point of the review was to audit a significant and representative part of the mining industry and to cover significant problems during initial phase of changing the Zambian fiscal system in 2008 and 2009 periods.

The audit revealed that most of irregularities were embedded in transfer pricing in revenues owing to Mopani's links with Glencore AG, which owns 73 per cent of the mining units based in Kitwe and Mufulira.

Most of the overall production is sold to Glencore based on the “Copper Marketing and Off-take Agreement” signed in the year 2000 which entitles Glencore UK a commission of two per cent calculated at the gross value FOB port landing.

“...we believe that the related party sales and pricing mechanisms are not in accordance with the agreement disclosed, or arms length principle,” the audit report stated. “This should have impact on the tax assessment for the period under review.”

The audit revealed that Glencore AG, the purchaser, determines prices and that some copper from Mopani is sold under an “old” contract with copper in one instance being sold at 25 per cent of official prices at LME.

“The agreement is entered into with Glencore UK Limited, but the actual sale transactions disclosed are, as far as we have been able to verify with Glencore International AG,” the audit revealed.

“The agreement mentioned is in fact an agent agreement, stating that Glencore is to operate as sole sales and marketing agent for Mopani. The sales are to be made at official LME London Metal Exchange copper grade settlement quotation averaged over the relevant quotation period plus premium or less a discount realisation charge for freight.”

The audit revealed that despite Mopani selling copper grade +1 in consistency with LME prices, Glencore has consistently bought copper at prices below the market value.

The audit team accused Mopani of being hostile towards the audit which was postponed from initial February 2009 to October 2009 and most audit queries went unanswered despite the exercise being undertaken in accordance with the ZRA Act.

“The audit team has not enough information to dissect the full production cycle of copper from Mopani with the current data,” the audit report stated. “Mopani has used every opportunity available to hamper the progress of the audit and the audit team are at the moment not able to fully conclude whether the copper production from Mopani is trustyworthy or not.”

The audit report which doubted ZRA's capacity to verify records for taxation submitted by Mopani stated that there was general indication of inflated operations costs at the mine.

During the period of the audit, the labour cost for Mopani was estimated at US $50 million against the “unexplainable figure US $90 million".

"One explanation could be that costs that should have been capitalised have been taken as expense,” the audit stated.

“Glencore is charging freight charges (realisation charges) based on fixed fees for deliveries CIF Rotherdam, even though the actual shipments were made to other ports, often closer to Copperbelt."

The scope of the audit report which was submitted to finance minister Dr Situmbeko Musokotwane about September 2010, involved taking a full review of operational costs, revenues, transfer pricing, employees' expenses and overheads on Mopani operations in Kitwe and Mufulira.

And the audit revealed that there was no collaboration between ZRA and the Ministry of Mines to monitor the production and revenue figures submitted by the mines as evidenced by the pilot audit on Mopani which revealed inconsistency in production figures submitted to government and those in the company's books of accounts.

“The pilot audit has shown that there is great need for determined effort at collecting the taxes that are assessed under the laws implemented by Zambian parliament,” stated the audit.

“ZRA needs the Ministry of Mines to follow up production volumes from ore treated via produced volumes to sold metals on a more consistent and comprehensive basis in order for the calculation of the royalty to be reliable."

I'm trying to be as precise as I can, but the trail again seems to lead to Marc Rich to one of the Rothschild clan, Nathaniel Rothschild, son Baron Jacob Rothschild.

According to Investigate.co.uk, Xstrata financial adviser is none other than financier Nathaniel Rothschild, son of Lord Jacob Rothschild, and Marc Rich compatriot in Switzerland. (See also this Reuters article.)

Here Nathaniel Rothschild waxes lyrically on the prosects and the business culture of Marc Rich's Glencore.

NM Rothschild (previously headed by Evelyn de Rothschild, now David de Rothchild) also financed the BSAC of Cecil John Rhodes in the 1880s, and the privatisation of the Zambian mining industry through the privatisation of state monopoly ZCCM, in the 1990s.

So much for 'free markets' and privatisation. All privatisation represents, is a return to colonialism under another name. The money still disappears from the country. - MrK


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4 Comments:

At 6:10 PM , Anonymous LesCrozes said...

I hope that GVZ, ZRA and minority shareholders (First Quantum 16.9% and ZCCM-IH 10%) will take Mopani Copper Mines and GLENCORE to court. Mopani has been stealing the Zambnian people for years!!!

 
At 10:34 PM , Blogger MrK said...

Hi Philippe,

Thanks a lot for these files.

From Les Amis de la Terre (Friends Of The Earth)

Pilot audit report – Mopani Copper Mine
Summary
February 2011


INTRODUCTION

In 2008, the Zambian Revenue Authority (ZRA) engaged an international tax audit team, consisting
from Grant Thornton and Econ Poyry, to assist in a pilot audit of selected mining companies operating in Zambia. The audit covered the activities of the mines from 2006 to 2008, and examined the trial balances since 2003.

One of the company audited was Mopani Copper Mine (MCM). MCM was selected because of the
size of its operations and its high level of declared costs. MCM’s main shareholder is the Swiss
commodity trader Glencore, through Carlisa Investment, an investment company based in the Virgin
Islands.

In 2005, the European Investment Bank (EIB) granted a EUR 48 millions loan from its Investment
Facility (IF) to MCM, to rebuild and modernize the company’s smelter in Mufulira. Both the EIB and the

IF have as their objectives poverty reduction and sustainable development in the ACP countries.
However, on the basis of the findings of the pilot audit it is highly questionable whether MCM had any

positive impact on the Zambian economy and tax revenues. Several inconsistencies uncovered in
MCM’s accounts through the audit suggest that Mopani may be using tax avoidance practices to
reduce the tax it pays in Zambia.

Among other things, the audit found that :

- the increase of certain operating costs were inexplicable ;

- Mopani has been carrying losses forward for 10 years and therefore wasn’t subject to
corporate tax, whereas these costs should have been « materially lower » ;

- There were serious inconsistencies in the production volumes declared by Mopani ;

- Mopani was selling copper and cobalt for a consequently lower price than the London Metal
Exchange (LME) rate, to its related company Glencore, registered in Zug, Switzerland, that
has one of the most attractive tax regime in the world ;

- The pattern of price hedging used by MCM was « not normal » and appears « more equal to
moving taxable revenue out the country than true hedging »..

It should be noted that the auditors complain about the company seeming to have « resisted the pilot audit at every stage ».

This audit has been kept secret. We decided to make it public :

- Because it is very rare to get such precise information on how multilateral corporations
allegedly manipulate their accounting to avoid paying taxes in poor countries ;

- To call on governments to recognize that the problems of tax havens and bank secrecy are
not issues that have been resolved and that more rigorous reporting obligations should be
imposed on multilateral corporations in order to prevent transfer pricing and other abuses;

- To point out the fact that Mopani has received a EUR 48 millions loan from the EIB, and from
European development money, and that, in light of the abuses alleged in the audit, the use of
EU development funds and their management by institutions such as the EIB should be
seriously questioned.

 
At 12:11 AM , Blogger MrK said...

New Counter Balance Report: The Mopani copper mine, Zambia – How European development has fed a mining scandal

9 December 2010

The Mopani copper mine’s contributions to Zambia’s economy and budget are inexistent, the mining company’s social policy is marked by a race to the bottom and it leaves a devastating impact on the environment. This is the conclusion of the report “The Mopani copper mine, Zambia – How European development has fed a mining scandal”, five years after the European Investment Bank (EIB) granted the mining company a €48 million development loan to do exactly the opposite. “This obviously comes nowhere near development”, says Anne-Sophie Simpere, the author of the report. [1]

zambia_children_web_310

“This report is built upon a case study but the Mopani copper mine is far from a standalone case. Different mines scattered all over Zambia are tarred with the same brush”, Simpere explains. Therefore this report – in line with previous analyses - seriously questions the link between development and mining in general.

The EIB however keeps on lending to the mining sector under the veil of development. Between 2000 and 2010 ten out of fourteen projects involved the mining sector in Zambia, taking a share of 81% of the total amount of EIB loans in the country.

“It is clear to us that these EIB loans benefit western companies and Europe’s quest for raw materials rather than the people of Zambia”, the author states. The Mopani mine is owned by the Mopany Copper Mine (MCM) consortium, which main shareholder is Glencore. The notorious legal, environmental and human rights reputation of this Swiss company got rewarded with the 2008 “worst corporation of the year” Public Eye Award. The report examines the large flows of cheap Zambian copper into Switzerland from where large amounts of copper are sold at a much higher price, suggesting that Glencore uses transfer pricing as a way to avoid paying taxes. “Considering this, it’s surprising that the EIB agreed to finance this consortium with public funds for development. All the more because, considering its turnover, Glencore should have no difficulties raising funds on private markets”, Simpere says.

 
At 12:11 AM , Blogger MrK said...

(Continued...) While it has never supplied evaluations of these projects on the basis of precise development criteria and independent analyses on the ground, in recent years the EIB has developed an active communication strategy to boast the merits of the mining sector in Africa. Most of the articles published on the subject are content to affirm that the sector can alleviate poverty, without supporting these claims with empirical evidence. This reaction from a Zambian professor probably reflects better the sentiment of the Zambian people towards Western mining companies: “They don’t pay taxes, they have expelled the farmers and closed off the land, they’re building the infrastructures that interest them, they’re not going to employ many people because everything’s highly mechanized, but they’re going to discharge huge quantities of polluting waste, including radioactive. So from an economic point of view, with a simple cost/benefit analysis, it is clear that the Lumwana project is of no advantage to Zambia”. [2]

The report concludes by calling up on the European member states and institutions, which decide on the EIB’s functioning, to ensure that EIB funding is consistent with European commitments on development and environmental affairs. Among other things the report recommends “a moratorium on the financing of mining projects, extended until the bank adopts all the recommendations of the Extractive Industries Review and guarantees that the appropriate mechanisms have been set up to ensure their application.” [3]

An interview with Savior Mwambwa, Executive Director of the Centre for Trade Policy and Development in Zambia is available here

Notes for editors:

1. The EIB’s legal development responsibilities were confirmed both in the Lisbon Treaty and by the European Court of Justice.

2. Another Zambian mine which the EIB granted 3 loans totaling €85 million.

3. The “Extractive Industries Review” (EIR) is an in-depth study of the extractive industry sector, commissioned by the World Bank. It has produced key recommendations to ensure that extraction projects have positive impacts. As an international reference (based on multi-sectoral consultations in several regions of the world), the EIR served as the basis for the final report “Striking a Better Balance”, published in December 2003, which analyses the situation, highlights the main problems, and makes recommendations.

Download the report here.

 

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