Miner accused of tax fraud

Glencore, the world’s biggest private commodity trader, has been accused by a coalition of international NGOs of cheating the Zambian government of nearly $100-million in taxes by vastly inflating its operational costs at its Kitwe-based Mopani Copper Mining subsidiary.

The accusations were first made by a coalition of non-governmental organisations comprising the Centre for Trade Policy and Development, Counter Balance, Eurodad, Oxfam and Tax Justice Network and were based on a leaked audit report at tax specialists of accounting firm Grant Thornton done at the Mopani Copper Mine in Kitwe. They rejected by the mine’s Swiss-based owners as based on incomplete information.

But the rising wave of negative publicity appears to have delayed a planned public listing in February on the London Stock Exchange by the giant commodity trader, which controls 60% of the world’s zinc and 50% of its copper resources. Most of its operations are based in Africa and Eurasia. Last year Glencore reported a mind-boggling $175-billion in turnover, but very little of that remained in the producer countries.

In the Zambian case Glencore had violated Organisation for Economic Cooperation and Development guidelines by transferring profit out of the country by means of derivative trading, thereby avoiding about $100-million in taxes, the NGOs charged.

The findings of the 2009 audit report, commissioned in late 2008 by the previous Zambian government, have been kept secret (with not a word mentioned about them by current Zambian Mines Minister Maxwell Mwale) until they were publicised by the NGO coalition in mid-February.

Glencore protested that the report was based on incomplete and flawed assumptions that were incorrectly interpreted by the auditors, who, it claimed, failed to take into account that half the blister copper produced at Mopani came from the company’s other mines in the region, most notably nearby Katanga in the Democratic Republic of Congo.

Failing to explain
Even if that were the case, Glencore still has a lot of explaining to do. A copy of the report obtained by the Mail & Guardian showed that Mopani could not explain a $50-million discrepancy in its reported cost of labour for the period under review, but questions were also asked about its costing of fuel and mining costs, even at increased rates of production.

Mopani also failed to maintain arms-length relations in selling copper produced by its Zambia-based operations to its Swiss-based mother company at prices well below spot market prices, a practice known as transfer pricing, the auditors found.

Mopani initially resisted cooperating with the audit—a charge that Glencore denies—and it was only after the auditors moved to Kitwe that they could start laying their hands on paperwork they had requested nearly a year earlier, in December 2008, according to a copy of the report.

Mopani’s accounting system appears to be in a mess. Not only could it not provide legally required documentation, but a general ledger analysis also showed several loopholes and could not be matched with the final balance.

Moreover, the audit raised wider questions about the manner in which Glencore International can make or break international commodity markets. Trading around the clock in every international time zone with a team of 485 dedicated traders, the company’s massive size and hedging practices in the market means it can “squeeze” prices for everything, from oil to sugar and wheat.

Its complex set-up, run through various wholly owned entities registered in secretive tax havens around the world (it owns Mopani with First Quantum through a British Virgin Islands-registered shelf company), adds to the suspicion that it is a market manipulator, a charge its South Africa-born chief executive, Ivan Glasenberg, is keen to dispel.

Glencore is no stranger to controversy. Set up in the early 1990s by oil trader Marc Rich, who fled the United States to Switzerland after being charged with illegally dealing in Iranian oil and avoiding taxes, it has also been accused in the past of being involved in gun-running and involvement in the United Nations Iraqi food-for-oil scam.

Rich was, however, forced out of Glencore after incurring massive losses in an attempt to corner the world’s zinc market. Former US president Bill Clinton controversially pardoned Rich on his last day in office, adding to the Swiss company’s aura of influence over the world’s most powerful offices.

Glencore’s reputation for secrecy and control is legendary. Visitors to its corporate headquarters in Baar in the Swiss canton of Zug relate how every move is covered by closed-circuit television cameras. Favoured customers are treated to handmade Swiss chocolates covered with real gold foil.

Glencore has always rejected every accusation, as with the Mopani audit, but its actions speak louder than words. In 2003 it threatened to close Zambia’s two biggest copper mines after the government refused to accept its (lower than the international market’s) prices for its copper exports.

The Zambian government backed down, but after the leaking of the audit report Lusaka may just get a little revenge. Some London stockbrokers suggest that Glencore’s share value may now have to be discounted by as much as 20% to 50%. Glencore failed to respond to questions from the M&G.

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