For an industry that routinely makes multi-billion dollar deals with developing-world governments and an array of sometimes controversial leaders, the mining sector has been remarkably free of political scrutiny.

No longer. World leaders gathering in Northern Ireland for the Group of Eight summit beginning today have mining transactions and companies in their cross hairs. They are proposing tighter oversight by requiring companies to disclose all payments made to foreign governments. The new rules, aimed at exposing corruption, come as U.S. and British regulators probe mining companies including Eurasian Natural Resources Corp. (ENRC) and a firm backed by Israeli billionaire Beny Steinmetz.

The spotlight may change how mining groups, which have participated in $524 billion of takeovers since 2008 according to data compiled by Bloomberg, make deals worldwide, restraining acquisitions of assets tainted with allegations of bribery or corruption. It may also put new assets in play as mining companies under legal pressure look to sell projects or, in extreme cases, have them seized.

“Mining has been caught in the headlights in the past few months,” said Raj Karia, a partner in London at law firm Norton Rose Fulbright. For deals in the sector as a whole, “the environment has changed,” he said. “There is more need now to be very sure of what you’re buying, and aware of the history of an asset.”

Britain and the European Union are pushing for new laws that require mandatory disclosure by petroleum and mining companies of all payments including taxes and licensing fees to governments and officials, and for developing countries to report all resource revenues in a standardized way.

Lift Veil

The goal is to “lift the veil of secrecy that too often lets corrupt corporations and officials in some countries run rings around the law,” British Prime Minister David Cameron wrote last month.

The U.S. Securities and Exchange Commission adopted similar disclosure rules last year as required by the Dodd-Frank Act. The measures are being challenged in court by entities including the American Petroleum Institute on the grounds that they disadvantage U.S. companies against foreign-owned ones.

BHP Evidence

BHP Billiton Ltd. (BHP), the world’s largest mining company, said it has provided evidence to authorities investigating alleged breaches of anti-corruption laws, including the SEC. It began an internal inquiry in 2009 following an SEC request for information related to dealings with foreign officials, including Chinese dignitaries.

“The group is cooperating with the relevant authorities and reporting the facts found in the investigation,” BHP said today in an e-mailed statement. “It is not possible at this time to predict the likely outcomes of the matter.”

The Melbourne-based company declined to say which other authorities it was liaising with, or offer details of specific allegations being investigated.

BHP is the subject of a joint U.S.-Australian bribery probe examining its multimillion-dollar hospitality and sponsorship program at the 2008 Olympics, The Age newspaper reported in March. Projects in Cambodia and the Philippines are also being studied in the inquiries, the Sydney Morning Herald reported.

Canada, home to the world’s largest number of mining-company listings, will also impose mandatory reporting standards, Prime Minister Stephen Harper said last week. While penalties for failing to disclose payments aren’t yet established, the filings will provide greater transparency to fight corruption, he said.

Pursuing Bribes

The efforts represent a change to the governments’ relatively hands-off approach to the mining industry. Until recently, there’d rarely been a major investigation of a mining company under the U.S. Foreign Corrupt Practices Act. That law prohibits “the payment of bribes to foreign officials to assist in obtaining or retaining business” worldwide, according to the SEC, and can be applied to companies that aren’t based in the U.S.

Even in the U.K., home of mining giants including Rio Tinto Group, the Serious Fraud Office has focused its efforts on probing deals in the defense and energy sectors, largely avoiding mining. An SFO spokesman declined to comment. Rio Tinto said in a statement last week that it’s supportive of Cameron’s efforts to increase oversight of the industry.

This year there has been plenty to scrutinize. A British shareholder group has called for an investigation of Bumi Plc (BUMI), the product of a $3 billion 2011 deal between a company controlled by financier Nathaniel Rothschild and a pair of Indonesian coal exporters.

Unwinding Bumi

London-based Bumi on May 31 said a review of its accounts found about $201 million of spending at one unit for which there was “no clear business purpose.” An independent probe at the company’s other investment, coal exporter PT Bumi Resources (BUMI), followed the discovery of “irregularities” in September of last year.

The findings have led Bumi to seek to unwind part of the deal that created it by splitting into two entities. One will be controlled by Indonesia’s billionaire Bakrie family and listed in Jakarta, while Bumi keeps its 85 percent holding in PT Berau Coal Energy (BRAU), remaining listed in London. As part of an effort to recover missing funds, it’s in talks with Indonesian regulators as well as the U.K.’s SFO.

Opt Out

To avoid potential future controversy, big mining companies may simply choose to steer clear of countries with questionable deal-making histories, said Paul Gait, a mining analyst at Sanford C. Bernstein Ltd.

“The real victims in all of this are those developing countries with a significant resource endowment that are going to find it harder to access capital because of the alleged criminal behavior of certain mining companies,” Gait said.

In particular, deals with middlemen who obtain mining assets from governments, and then sell them to international mining groups, may get an especially cool reception, said Tim Bush, the head of governance and analysis at the U.K.’s Pensions Investment Research Consultants shareholder group.

“In a proper free, fair, transparent market such intermediaries shouldn’t have a role,” he said. “They’re there to oil the wheels un-transparently.”

U.S. prosecutors are examining a deal between BSG Resources Ltd., a company linked to Israel’s Steinmetz, and Guinea’s government to obtain part of the Simandou iron-ore concession, which was later re-sold to Vale SA for $2.5 billion.

Glencore Xstrata

BSGR denies wrongdoing, and has argued the Guinean government is trying to strip the company of the concession. If that occurs, it could spur a race among mining companies like Rio and Vale to increase their ownership of the asset, part of the world’s richest undeveloped iron-ore deposit, said Liberum Capital analyst Richard Knights.

Meanwhile ENRC’s legal troubles, which also include an SFO probe of suspected bribery at its operations in Kazakhstan, may similarly put significant new assets into play.

The three billionaires who control the company are seeking to take ENRC private in the wake of investigations that have helped wipe more than $4 billion from its market value. After the deal, they may seek to break up the company, selling off assets to suitors that could include Glencore Xstrata Plc (GLEN), according to people familiar with the situation. Analysts at Nomura Holdings Inc. value the firm’s Kazakh business at more than $11 billion and its African unit at $1.8 billion.

A spokeswoman for ENRC declined to comment.

Still, a broad range of mining assets are for sale for more prosaic reasons as resource firms look to unload less-promising projects amid weakening commodity prices, reducing demand for those with uncertain histories.

Fewer Deals

So far this year global mining takeovers have totaled just $24.3 billion, compared with $93 billion in the same period in 2012.

Rio Tinto is considering a sale of at least part of its coal business in Mozambique, which it acquired for $4.1 billion in 2011, after flagging a $3 billion writedown of the value of the project, a person familiar with the matter said in January. Glencore is also seeking buyers for its Las Bambas copper development in Peru, which could fetch as much as $10 billion.

The broad crackdown on the mining sector is part of the hangover of the last commodities boom, which saw prices for minerals like iron ore and copper jump on the back of Chinese economic growth, said Robert Talbut, who heads the investment committee of the Association of British Insurers. It represents some of the U.K.’s largest institutional investors.

“There was a sense that because the sector was hot you were prepared to severely compromise on due diligence,” Talbut said. “Maybe the experience of the past 18 months or so shows that if you take shortcuts simply because a sector is hot, the chickens can come home to roost.”

Editors: Larry Reibstein, John Viljoen

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Federal police passed the buck on BHP bribery claims

Nick McKenzie and Richard Baker

The Australian Financial Review, http://www.afr.com/p/business/companies/federal_police_passed_the_buck_o...

17 June 2013

The federal police made a “critical decision” not to investigate criminal allegations that Australians working for BHP Billiton had bribed officials in Cambodia, China and Western Australia, and instead handball the case to the corporate regulator, which also ran no probe.

Confidential documents reveal how the AFP and ASIC, with the knowledge of federal government officials, ­mishandled one of the nation’s highest-profile corporate graft cases after it was referred in May 2010 by American officials to their Australian counterparts.

US anti-corruption investigators have been probing BHP Billiton since 2009, part of an ongoing inquiry that is likely to result in the company receiving a massive fine, but had also told federal police that the bribery allegations were “a matter for Australian authorities”.

A source close to the US investigation called the AFP’s initial decision not to take up the inquiry “inexplicable” given the mining giant is headquartered in Melbourne and the firm has allegedly broken Australian criminal laws.

It was only recently that a ­self-initiated internal review led the AFP to re-open the BHP Billiton bribery file and initiate a formal investigation.

The AFP declined to state why it had closed its file on BHP in late 2011, 16 months after the case was referred to it by US officials, without conducting its own investigation. But it said that it had initially assessed the matter “with the knowledge that United States authorities were investigating the matter”.

The AFP said that in February 2013, after further discussions with US investigators, it began its own inquiry into “Australian nationals identified during the US investigation”.

Evidence found by US investigators

Documents released to Fairfax Media under freedom-of-information laws reveal that in May 2010, the Australian authorities were told that US investigators had found evidence that BHP Billiton was allegedly “paying bribes to foreign public officials”.

Such conduct would breach criminal laws passed in Australia in 1999.

It’s understood US officials also identified a public official in Western Australia as having received potentially illegal inducements from BHP Billiton, although this is redacted in the FOI ­documents, and the AFP told Fairfax Media it could not comment on the local ­allegations as they “form part of the ongoing investigation”.

The FOI files reveal that after the 2010 referral, the federal police spent 12 months “evaluating” possible “bribery offences or corporations law offences” without conducting any independent investigations, despite having discussions with US authorities.

In May 2011, the AFP decided to handball the case to ASIC, a move facilitated by an unnamed senior official from the financial crimes division of the Attorney-General’s Department .

“It was recommended by [the AFP] . . . that [ASIC] take the lead role in Australian inquiries in the matter,” an AFP executive briefing note from 2011 states.

“Should any criminal offences be identified by [ASIC] during their inquiries the matter shall be referred [back] to the AFP.”

ASIC has no jurisdiction to probe bribery but can probe related corporate offences. It also conducted no in-depth investigations. According to the FOI files, “on 23 September 2011, the matter was formally rejected [for investigation] by the AFP”.

Matter includes ‘senior government representation’

BHP’s aborted attempt to establish a bauxite mine in Cambodia and its hospitality program for Chinese officials at the 2008 Beijing Olympics is among the conduct being examined by the federal police. According to diplomatic cables previously published by Fairfax Media, the Cambodian deal was personally overseen by Prime Minister and ­strongman Hun Sen.

The handwritten notes of a senior AFP investigator, released in the FOI files, reveal the AFP had identified the role of Australian officials in the deal. “It should be noted that this matter does include senior Australian government representation as a result of BHP Billiton negotiations,” the file note states.

The allegations involving a Western Australian public official are likely to be probed by WA authorities because they involve state offences.

The documents reveal that instead of conducting its own investigations in 2010 and 2011, the AFP relied on teleconference briefings from the US Securities and Exchange Commission and Justice Department. “It was anticipated that this [teleconference briefings] would enable the AFP to obtain sufficient information on which to conduct an evaluation and determine if the matter was in the jurisdiction of the AFP,” an executive brief dated March 2011 states.

An executive brief dated June 2011 reveals that the federal police “received a quantity of documents from BHP and the Attorney-General’s Department in relation to the matter” and which were marked by BHP Billiton as commercially sensitive. This appears to have further stalled the handling of the case by Australian authorities.

“Documents provided directly to the AFP contained a caveat from BHP requesting confidentiality due to commercial sensitivity,” the June 2011 ­executive brief states.

“AFP Legal were not able to provide definitive advice in relation to disclosure. After several failed attempts to obtain appropriate advice in a timely manner, a decision was made to return the documents to the AGD [Attorney-General’s Department] and request disclosure by them directly” to ASIC.

Improved interaction

In a statement, the AFP said it continued to improve the way it interacted with other agencies, including ASIC. The corporate regulator has been criticised for failing to investigate serious corporate offences referred to it by AFP investigators who charged two Reserve Bank firms, Note Printing Australia and Securency, with foreign bribery in 2011.

The move by the AFP to allow the matter to be referred to ASIC for investigation in May 2011 is described in a February 2013 federal police document as a “critical decision” but one “deemed to be consistent” with the investigative approach taken in the US, where the corporate regulator leads the inquiry into BHP Billiton. ASIC refused to answer questions about why it failed to investigate BHP Billiton.

The February 2013 AFP briefing that reveals an investigation had been finally launched states: “It is anticipated this investigation will require two to three members for three to six months to fully evaluate the matter and then, depending on the proposed course of action, require two to six members for a further three to six months.”

Lawyer and foreign bribery expert Mini vandePol said the case showed Australia needed a dedicated bribery and corruption regulator.

“This example still shows the US leading the way in this area.”