Review article
Developments in Beneficial Ownership Disclosure in the Extractive Industries in Nigeria

https://doi.org/10.1016/j.exis.2020.12.012Get rights and content

Highlights

  • Nigeria has taken significant steps to promote beneficial ownership disclosure in the extractive industry.

  • The complex and multi-layered structure of most extractive companies operating in Nigeria makes it extremely difficult to collect beneficial ownership information from them.

  • Nigeria's Companies and Allied Matters Act 2020 suffers many of the limitations of its predecessor.

  • Covid-19 will have a negative impact on Nigeria's implementation of beneficial ownership disclosure requirements.

Abstract

Nigeria has been an active participant in the promotion of beneficial ownership disclosure in the extractive industries despite the absence of a solid domestic legal framework supporting it. Among other things, it has established a beneficial ownership register and has extended beneficial ownership disclosure reporting to commodity traders to address secrecy in the ownership of intermediary companies in the oil and gas sector. In mid-2020, a new company law was enacted with beneficial ownership disclosure provisions covering private companies. Though a significant step, the new law, like its predecessor, focuses mainly on legal ownership/control and fails to fully address the issue of ultimate ownership/control critical to beneficial ownership secrecy. This will pose a significant challenge to the effective implementation of beneficial ownership disclosure in Nigeria. Other challenges include the difficulties of collecting beneficial ownership information, the costs of maintaining a secure beneficial ownership register, and the political will to enforce compliance with beneficial ownership requirements. Of note also are the impacts of COVID-19 especially on the government's ability to raise revenue to implement beneficial ownership disclosure. Addressing these challenges requires a whole-of-government approach in the implementation of policies and laws as well as continued public engagement, for beneficial ownership disclosure represents a significant cultural shift in extractive industries business in Nigeria.

Introduction

Anonymity in corporate ownership is deeply implicated in Africa's development tragedy (Transparency International, 2017). This is confirmed by several reports, perhaps most notably, the Panama Papers (International Consortium of Investigative Journalism, 2016), the Luxembourg Leaks (International Consortium of Investigative Journalism, 2017), The Trillion-Dollar Scandal (The ONE Campaign, 2014), and the more recent Luanda Leaks which implicated Africa's wealthiest woman ( (International Consortium of Investigative Journalists, 2020). These reports detail in striking terms how the ownership structure of a corporate entity could be utilized to undermine good governance by manipulating the legal system to avoid taxes in many countries. The Trillion-Dollar Scandal especially noted that developing countries lose at least $1 trillion yearly through a complex web of corrupt activity that mostly involves the use of “anonymous shell companies” to execute dubious extractive industries contracts and other deals. In some cases, a company applying for contracts hunts for politically exposed persons (PEPs), whom it offers a beneficial ownership stake in the deal in exchange for the PEPs to use their influence to enable the company to obtain a licence (Sayne et al., 2017). A 2015 report of the High-Level Panel on Illicit Financial Flows from Africa, commissioned jointly by the African Union and the Economic Commission for Africa, bemoaned that Africa loses more than $50 billion annually to illicit financial flows, most of which occur in the extractive industries through the use of corporate structures that mask the identity of the real owners of the corporations (African Union/Economic Commission for Africa, 2015). Such outflowing money could have been utilized to accelerate economic development in Africa (Radon and Achuthan, 2017).

However, governments are beginning to recognize the need to up their regulatory game not only to protect the integrity of the global financial system but also to enhance their revenue generation especially from the exploitation of natural resources. This recognition has been expressed through the adoption of beneficial ownership disclosure standards for companies bidding for government contracts to help ascertain the real owners of such companies.1 A beneficial owner is generally understood as a natural person who directly or indirectly owns or controls a legal person. While there could be harmless reasons why a company would decide to hide its real owners, on balance, the hiding of the real owners of a company “constitutes a real and present danger” especially to developing countries where regulatory and accountability mechanisms are weak (Nigerian Extractive Industries Transparency Initiative [ (NEITI, 2016a)I], 2016a:1).

Beneficial ownership disclosure would enable licensing authorities to better assess whether an applicant for a licence is a fit and proper person to be awarded a licence. It contributes to leveling the playing field for competing investors and builds confidence in the business environment (Civil Society Legislative Advocacy Centre, 2018). It prevents or reduces prebendalism, clientelism and cronyism and enhances the country's ability to generate revenue by making it easier for tax authorities not only to “follow the money” to assess correctly the tax liabilities of companies operating within their jurisdiction, but also to discover potential conflicts of interest especially for PEPs (see (NEITI 2016a; Radon and Achuthan, 2017)). By stripping company ownership of its mysterious darkness, beneficial ownership disclosure can at least make corrupt activity easier to detect, which in turn could have a deterring effect on corruption. Sunshine is, after all, the best disinfectant.

Due perhaps to the novelty of the beneficial ownership disclosure movement, however, the development of beneficial ownership disclosure roadmaps across the world is quite nascent. While many countries, especially members of the Extractive Industries Transparency Initiative (EITI), have indicated intention to establish beneficial ownership disclosure requirements in the extractive industries, exactly what steps they have taken since EITI's introduction of beneficial ownership disclosure in 2013 have not been the subject of much academic interest (see (Etter-Phoya et al., 2020)). What progress have the countries made? What types of challenges to the establishment or implementation of beneficial ownership disclosure standards have they faced and how are they addressing them? This article addresses these questions with a focus on Nigeria, one of the pioneer members of EITI and the first, globally, to adopt binding legislation to operationalize EITI principles domestically (Abutudu and Garuba, 2011; Nwapi, 2014).

Beneficial ownership secrecy has been recognized as a serious problem in the extractive industries (particularly oil and gas) in Nigeria where senior government officials and other PEPs have been noted to have used secret surrogates to bid for contracts ( (Nwapi, 2015; Katsouris and Sayne, 2013; Global Witness, 2012)). Many of the names contained in the register of companies have been reported to have failed to match the real owners of those companies. One of the best known cases is the Malabu oil scandal involving the award of one of the country's biggest oil blocs to a company in which the Petroleum Minister was said to have had an interest “at a grossly undervalued fee” without the ultimate owners of the company being disclosed (Civil Society Legislative Advocacy Centre, 2018:2). Corporate governance studies in Nigeria have also shown that most of the companies quoted on the Nigerian Stock Exchange are controlled by a set of “director-shareholders” who, numerically speaking, represent the minority but whose controlling power stems from the fact that they have proxies holding majority shares in those companies (Nwidobie, 2016:220).2 This article's focus on Nigeria is logical also because Nigeria was one of the countries that participated in a beneficial ownership disclosure pilot project that EITI initiated in 2013 (NEITI, 2015a).

Much has been written on the EITI in Nigeria and Africa as a whole (see, e.g., (Alstine, 2014; Nwapi, 2014)). Some of the more recent literature has considered the “dark side” or limits of transparency in promoting good governance in the extractive industries (see, e.g., (Ejiogu et al., 2018; Sovacool, 2020)) while others have considered how a focus on transparency has diverted both resources and attention away from other critically important aspects of extractive resource development, such as the impact of resource development on local communities and the core issues of injustice associated with that (see, e.g., (Adunbi, 2020)). Another strand of literature has examined the EITI implementation process and experience in many countries (see, e.g., (Alstine, 2017; Lujala, 2018)). Yet other scholars have highlighted the role of civil society organizations (CSOs) in the transparency movement, observing specifically with regard to Nigeria that only very few CSOs have been involved in the activities of NEITI, as a result of which disclosures from NEITI published audits have not significantly incentivized broad public demands for accountability (Osuoka, 2020). In the literature, however, beneficial ownership disclosure in Nigeria has received very little attention. This article contributes to filling this gap. It is not concerned with the broader aspects of transparency, as other scholars, including many cited here, have carried out extensive work on these issues. A narrow focus on beneficial ownership disclosure allows for a closer engagement with the issue.

Following this introduction, Section 2 will review the global emergence of the beneficial ownership disclosure movement to better contextualise the discussion. This will be followed in Section 3 by a critical review of existing international beneficial ownership disclosure standards, focusing principally on the EITI standards because of their direct link with the extractive industries. Section 4 will analyze the policy and legal developments on beneficial ownership disclosure in Nigeria since the introduction of the subject by the EITI in 2013. Section 5 will discuss the challenges to the implementation of beneficial ownership disclosure requirements in Nigeria (together with recommendations on how the challenges may be addressed) while Section 6 reflects critically on the importance of a whole-of-government approach to the implementation of beneficial ownership disclosures in the extractive industries. Section 7 will conclude the discussion.

Section snippets

The global extractive industries beneficial ownership disclosure movement

As hinted at above, increasing pressure on governments and companies to improve financial revenue transparency and accountability has led to a remarkable shift towards global demands for beneficial ownership disclosure, with multiple international organizations evincing an interest in promoting beneficial ownership disclosure. Among the leading organizations is the European Commission. Its Fourth Anti-Money Laundering Directive, adopted in 2015, emphasized that “accurate and up-to-date”

A review of international beneficial ownership disclosure standards

Three key international standards have emerged from the global movement on beneficial ownership disclosure described above: the FATF Guidance/Recommendations, the EITI Standards, and the EU Directive. Among these, however, it is only the EITI Standards that focus specifically on the extractive industries. The other standards were developed primarily to combat money laundering and terrorist financing. Since money laundering cuts across a broad range of sectors, the FATF Guidance and the EU

Developments in beneficial ownership disclosure in Nigeria

Nigeria's commitment to beneficial ownership disclosure has been expressed mainly through its membership of the EITI and the OGP. As one of the pioneer members of the EITI, it spearheaded in 2007 the passage of domestic legislation to operationalize the EITI principles, a move described by then Chair of EITI Board Peter Eigen as “the great moment of triumph” in the early life of the EITI (see (Shaxson, 2009):viii). At the time, beneficial ownership disclosure was not part of the EITI standards,

Legal challenges

Despite the enactment of CAMA 2020, legal challenges still remain in the implementation of beneficial ownership disclosure in the extractive industries in Nigeria. There is still no law mandating extractive companies to disclose their beneficial owners when applying for oil and gas or mining licences (Radon and Achuthan, 2017). The beneficial ownership disclosure provisions of CAMA 2020 remain cursory and are weak in two key respects, namely: (a) the required disclosure is to be made to the

A whole-of-government approach to beneficial ownership transparency in Nigeria

The foregoing analysis shows both the promise of beneficial ownership disclosure and its challenges. It is clear from the analysis that responsibility for implementing beneficial ownership disclosure in extractive industries does not fall neatly under one specific governmental institution but on multiple institutions and other stakeholders. While the degree of interaction among the institutions and actors may vary from case to case, a significant level of collaboration among them is required if

Conclusion

Beneficial ownership secrecy is well recognized as a significant problem in Nigeria's extractive industries. Since the introduction of beneficial ownership disclosure requirements by the EITI in 2013, however, Nigeria has been an active participant within both the EITI and the OGP in the promotion of beneficial ownership disclosure despite the absence of a solid beneficial ownership legal framework. It participated in the pilot project organized by the EITI in 2013 and in 2016 developed a

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    • The Extractive Industries Transparency Initiative (EITI) and the Technical Reforms model: Insights from the Global Performance Assessments literature

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      For instance, EITI (2019) highlights, while some 40% of members already had legal frameworks in place to meet the initiatives new provision on beneficial ownership disclosure, 33% were actively planning or in the process of passing new legislation to ensure they continued to score highly in the initiatives policy assessments. Nwapi et al. (2021) further provide a detailed account of Nigeria's adoption of beneficial ownership regulation (one of the EITI's pioneering members part of the EITI's pilot of beneficial ownership disclosure in 2013). This point also highlights how the provisions measured by the EITI standards and validation assessment can directly help to elicit changes in policy priorities amongst countries motivated to meet or exceed its requirements, using its technical knowledge of the issues, without extensive public demand from a local population.

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