Tax dodging and corruption

© Mark Henley / Panos
In commodity trading, the risk of tax offences, aggressive tax avoidance, corruption and influence peddling is particularly high. This is due to inexistent or lax policies governing such risks, the high values of some of the commodities, the involvement of so-called politically exposed persons as well as the opacity surrounding the actors involved in addition to the transactions themselves. These practices often result in human rights violations by reducing states’ capabilities and means to fulfil the human rights of its populations.

In commodity trading, there is a significant risk of transfer mispricing which Transparency International defines as firms agreeing ”to manipulate the price of their internal transactions in order to declare less profit in higher-tax jurisdictions and therefore reduce their total tax payments”. The risk of tax avoidance is raised as a result of the high export values of some commodities, the tax policies of producing countries and those of home countries (often lower-tax jurisdictions). The existence of no-tax offshore jurisdictions further increases, or even incentivises, tax avoidance.

A noteworthy case of transfer mispricing came to light in 2011 in Argentina involving the world's four largest grain traders: ADM, Bunge, Cargill and LDC. Argentina’s revenue and customs service began an investigation into the four companies when prices for agricultural commodities spiked in 2008 and yet no increase in profit for the four companies had been reported to the office. As a result of the investigation it was alleged that the companies had submitted false declarations of sales and routed profits through tax havens or through their headquarters. In some cases, they were said to have used phantom firms to buy grain and had inflated costs in Argentina in order to reduce the recorded profits earned in the country. According to the country's revenue and customs service, the outstanding taxes amounted to almost USD 1 billion. 

The companies involved have denied the allegations. To date, the Argentinian tax authorities have not replied to Public Eye’s request regarding the current state of the case but in its 2018 annual report, Bunge mentioned provisions which suggest that the case is still ongoing: “[A]s of December 31, 2018, Bunge's Argentine subsidiary had received income tax assessments relating to 2006 through 2009 of approximately 1,276 million Argentine pesos (approximately $34 million), plus applicable interest on the outstanding amount of approximately 4,246 million Argentine pesos (approximately $113 million).

Risk of corruption

The risk of corruption is also widespread in commodity trading, not only for oil and minerals, but also for agricultural commodities. This heightened risk can be explained by several factors:

  • In producing countries, agricultural producers, land or plantation owners or those owning significant processing facilities and logistical assets are often embedded in or closely tied to the political elite. These politically exposed persons (PEP) can exert considerable influence over certain parts of global commodity value chains such as controlling exports as well as related policy areas. This fact alone makes trade in agricultural commodities a risky activity. The risk increases considerably in states where the rule of law is weak, as is sometimes the case in producing countries.
  • While the sums involved in agricultural commodity trading are smaller than in most hard commodities and there are no royalties, revenues from agricultural commodity sales can nevertheless be quite large.
  • The lack of transparency surrounding ownership structures and actual business transactions further aggravates the risk.
  • The absence of specific regulations, as there is for banks, aimed at stopping trading companies from doing business with PEP.
© Tim Boyle / Bloomberg Getty Images

One of the few corruption cases that has come to light recently involves grain giant ADM. In 2013 an ADM subsidiary pleaded guilty and agreed to pay more than USD 17 million in criminal fines to resolve charges that it had paid bribes, via vendors, to Ukrainian government officials to obtain value-added tax refunds. In a parallel action, ADM consented to a judgment that ordered the company to pay some USD 37 million in disgorgement and pre-judgement interest. The total amount of penalties exceeded USD 54 million in this case alone.

Entanglement with government officials can even go a step further. In November 2017, in the wake of the revelations dubbed the Paradise Papers which exposed questionable off-shore schemes, the French TV broadcast «Cash Investigation» revealed problematic business dealings conducted by LDC in Brazil. In 2010, the Geneva-based trader joined forces with a subsidiary of the world’s biggest soy producer Amaggi to form Amaggi & LD Commodities Ltda. Amaggi is owned by Blairo Maggi, former Minister of Agriculture and a large landowner known as the «king of soy» who was Governor of the state of Mato Grosso when the joint venture with LDC was established. Amaggi & LD Commodities Ltda opened a trust based in the Cayman Islands the same year. The beneficial owners of the trust were all members of the Maggi family. Blairo Maggi himself claims never to have received any money from the trust.

However, allegations against Maggi should have raised a red flag as Maggi was under investigation by the Brazilian judiciary for corruption and money laundering committed during his time as Governor of Mato Grosso. The Maggi administration is suspected of having enforced a scheme of monthly bribes paid to state lawmakers in exchange for political support. LDC thus knowingly relied on an individual classified as a politically exposed person for its business activities in Brazil. When it set up the joint venture in 2010, Blairo Maggi had an important role in government, which he had already mixed with his private-sector activities, creating clear conflicts of interest.

© François Meienberg / Public Eye

At times the political involvement of multinational corporations goes beyond circumventing tax regulations and paying bribes. A particularly serious case involves Swiss-based Chiquita who went as far as to directly finance paramilitary groups in Colombia between 1989 and 1999. While the company has admitted making payments to one group it has sought to portray itself as a victim of extortion by the paramilitary group. The proceedings against Chiquita are ongoing even though the company settled a criminal complaint by the US government by paying a USD 25 million fine in 2007. 

In May 2017, human rights organisations called on the International Criminal Court (ICC) to investigate fourteen former and current Chiquita executives and employees for complicity in crimes against humanity. Moreover, in August 2018, Colombia’s Attorney General announced charges against 13 former Chiquita executives and administrators for mass killings by paramilitary groups that took place between 1997 and 2004. Those accused are expected in court to answer to charges of having supported terrorism.  This case illustrates the connection between corruption and human rights violations, and demonstrates that such business dealings can have very real and acute consequences for people’s lives.