The link between lootable resources, corruption, and illicit activities

Post 9/11 there has been an ongoing debate regarding to which extent natural resources are used to finance organised crime and terrorism. In the four West African countries examined in this U4 Issue: Liberia, Mali, Nigeria and Sierra Leone – natural resources have the potential of being both an engine for development, as well as an obstacle. All these countries have in recent history struggled with conflict, organised crime and terrorism. However, it is not clear what role lootable resources – diamonds, gold, oil and timber – play in financing such activity. In this paper, the authors ask whether natural resources play any role in sponsoring activities such as transnational crime, terrorism and conflict and – if so – how is this facilitated by corruption?

Main findings for donors to be aware of

Through a comprehensive literature review of academic sources, policy documents, news articles and reports from non-governmental organisations and international organisations, the authors identify the following main findings regarding the link between lootable resources, corruption, and illicit activities:

1. Illicit trade in natural resources may take place entirely outside of legal value chains, but often intersects with those legal value chains. Illegal resources often make their way into the legal value chain at a later stage.
2. In all four country-cases, corruption facilitates natural resource theft and opaque market structures, which in turn leave room for a variety of illicit private gains.
3. Interventions often require regional and international cooperation in order to have effect.
4. Multinational companies are potentially potent agents of change and need to be held to account.
5. Interventions need to be built on robust contextual analyses of the structures that benefit from exploitation, as well as the shadow value chains that enable natural resources to reach markets.
6. The fact that large shares of the commodities are traded partly outside of formal market structures makes them vulnerable to exploitation by criminal networks and armed actors. These may be militants, pirate syndicates and terrorists.

Informal networks and rent-seeking complicate reform efforts

All four countries show signs of progress in terms of responsible trade in natural resources to some extent. The governments in question have – in collaboration with donors – established laws and institutions tasked with regulating the natural resource trade. These countries are also members of the Extractive Industry Transparency Initiative – hence a platform for discussion between civil society, companies and government exists. While significant progress has been made – such as the establishment of an online repository for mineral licenses in Sierra Leone – informal networks have significant influence over the trade in natural resources. Rent-seeking behaviour among government institutions further complicates reform initiatives. Patronage governance structures where rents extracted from the natural resource trade are used to consolidate power and ensure loyalty also provide an important perspective on how resources fail to benefit general development in the countries examined.

Interventions require in-depth understanding of value chains and action on several levels

The authors find that resources are commonly subject to illicit extraction only to be integrated in legal value chains at various stages through eg forged certificates or by being mixed with legal resources. At the community-level, several attempts have been made to manage upstream risks in the value chain and to formalise the trade. The results have, however, been mixed and some initiatives – such as the Diamond Area Community Development Fund – have been criticised for actually contributing to increase inequalities.

The authors find that the lack of transparency in the commodity trade in combination with low domestic regulatory capacity, and use of secrecy jurisdictions make shadow value chains a concern that require regional and international solutions. Commodity trading hubs such as Switzerland and the UK can take further steps to improve transparency in the commodity-trading sector and try to establish partnerships with natural resource-producing countries to more effectively monitor the trade. Read the paper for in-depth considerations and clues to potential interventions at all levels.