Tue, Oct 10, 2017

Links Between Environmental Destruction and Corruption Risk in Southeast Asia

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.

This article was first published by Asian-mena Counsel, magazine for the In-House Community (www.inhousecommunity.com).

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