Natural resource extraction and trade: What are the challenges?

The extraction of, and trade in, natural resource commodities (including minerals but also fishery and forest products) is a driver of economic growth and a source of employment and income for millions of people around the world. Commodity supply chains cover a range of steps from source country production, to export, including ‘licensing, exploration, contracting, extraction, and revenue generation and allocation of natural-resource revenues’.4f7ad93bfd27 Governments, private companies, and non-governmental organisations (NGOs) are all involved in these supply chains in varying ways.

Natural resource extraction often occurs in remote locations in countries experiencing severe corruption and other governance challenges. Commodity supply chains are thus linked to significant corruption risks. In the case of natural resource supply chains, corruption is an important contributor to poor development outcomes, where corrupt practices facilitate a range of illegal activities across sectors.b24a644840bc These concerns have contributed to the development of initiatives that promote transparency and accountability, and which mitigate corruption in natural resource commodity supply chains. Early initiatives to reduce corruption in natural resource sectors have tended to focus on making revenues more transparent, whereas corruption risks may arise at any point along supply chains, including resource access, extraction, processing, transportation, and revenue expenditure. Therefore, policymakers, law enforcement, and other stakeholders are encouraged to improve understanding of corruption risks along the supply chain, to better adapt responses to evolving corruption patterns.d5d47bb4b10a Understanding and addressing corruption along the entire natural resource supply chain is fundamental to creating a more sustainable model for natural resource use.f19df0aaf011

This U4 Brief covers five categories of initiatives where dealing with corruption is the primary or secondary focus in natural resource supply chains: (1) public sector reform initiatives; (2) social accountability initiatives; (3) multistakeholder monitoring bodies; (4) voluntary certification standards; and (5) corporate traceability initiatives. Its purpose is to explore anti-corruption lessons from established natural resource supply chain initiatives. Based on a desk review of existing literature on such measures, we describe the selected initiatives’ approaches, highlight their application, and identify their anti-corruption potential where possible. Lastly, we make suggestions to inform practitioners as they continue to implement governance measures in natural resource supply chains.

Understanding corruption in natural resource supply chains

Rapid expansion of the production and trade in natural resource commodities is associated with high levels of corruption.9e10871e74ce Corruption, which is understood as ‘the abuse of entrusted power for private gain’,51b9b053f084 is a major barrier to the potential for sustainable development outcomes from natural resource wealth – a phenomenon sometimes referred to as the ‘resource curse’.62598e1703a8 Recent analysis shows that corruption risks in natural resources are likely to expand as extraction increasingly occurs in remote places.05e6bca422c6 Corrupt practices, such as bribery, embezzlement, misappropriation, the diversion of public funds, and facilitation payments, may arise at any point in natural resource value chains – from the decision and award of extraction rights, to the regulation and management of extraction, revenue collection, management, and expenditure.d1bdc1e9b761

At the same time, policy is evolving to recognise the importance of context-specific anti-corruption approaches, particularly those tackling the supply and demand for corruption in source countries.3257ad34ec60 Typical natural resource value chains – such as forestry, fisheries, and mining – take raw materials through primary and secondary processing facilities and distribution channels to markets and end customers. Value chain governance measures therefore involve inter-organisational decision processes and regulatory practices across multiple stakeholders, such as supply chain companies and state and non-state actors.a734d1cae0ba

Corruption along natural resource supply chains comes in various forms and differs across types of natural resources, governance structures, and the actors involved. Typical forms of corruption include: 1) bribery for information on the movements of monitoring patrols, in the issuing of fishery licences and in the negotiation of fisheries access agreements, logging or hunting permits, 2) falsifying export permits or shipping documents; 3) avoiding inspections or seizures; or 4) dropping charges.ae9decba7ed1 Other corrupt practices involve interactions between public actors in natural-resource-focused institutions and line ministries, including the granting of favours to policymakers to ensure minimal environmental regulations or law enforcement,9d432896e2d0 embezzlement of funds that are intended to improve environmental management and conservation, or collusion between officials with discretionary power in the negotiation of agreements and issuance of licences.231ebad7dafe

Supply chains face particularly significant risks from corruption in emerging economies, where they often operate across distant, heterogeneous, turbulent, and ambiguous business environments, and where strong connections between petty and grand corruption make the associated criminal networks difficult to disrupt.4b7cde797274 This makes corruption risks difficult to identify, understand, and mitigate, especially when supply chain anti-corruption efforts are poorly coordinated.769b955b619f

Examining the development of anti-corruption initiatives and collaborative partnerships

Much progress has been made to improve the governance of natural resources through various transparency and accountability initiatives. While early efforts focused on contract and revenue transparency,68d6e09d041a more recent anti-corruption efforts have addressed traceability and supply chain transparency.d74192173c70 Many anti-corruption policies adopted in countries with abundant natural resources tend to involve whole-of-government approaches.b969e1eb9b75 There is also recognition of the role of civil society organisations (CSOs) in monitoring and/or overseeing anti-corruption measures along supply chains, particularly influential watchdog groups with the political leverage, financial means, and knowledge necessary to scrutinise, pose challenging questions, and demand results.4ef7f76d937c

Many partnerships have also been developed via multistakeholder initiatives that aim to promote greater transparency and accountability in natural resource supply chains. Examples include those in forestry (Forest Stewardship Council (FSC), Programme for the Endorsement of Forest Certification (PEFC)), fisheries (Fisheries Transparency Initiative (FiTI), Marine Stewardship Council (MSC)), and biodiversity (IUCN-ICMM Mining Dialogue). The efforts of the Extractive Industries Transparency Initiative (EITI) require member countries and signatory companies to facilitate information sharing on natural resources. This includes information on financial transfers between governments and corporations to increase public awareness and encourage demand for good governance.dc4cf4bf6831

These initiatives – in the form of information and technology, legal and policy tools, and incentives – aim to rebalance asymmetries in information about the origin and impacts of traded commodities, therefore helping to empower vulnerable communities in source countries. While corruption is not a primary focus of most of these initiatives, these interventions are typically grounded in an understanding that transparency and accountability in natural resource commodity production are, in many cases, closely associated with improved governance.

Traceability, certification, and other supply chain management systems are among the most familiar governance initiatives. More broadly, however, many anti-corruption policies that are not specific to supply chains can still impact them, eg public financial management and whole-of-government approaches.6657df4ff582

Supply chain initiatives have been established to encourage more information sharing as to what is happening upstream and to communicate this information within governments and firms.372dae77e796 Besides public disclosure of information, these initiatives seek to incentivise changes to improve management and accountability, reduce the risk of corruption, and improve regulation and crime prevention.dd4b499e8889 However, evidence of the effectiveness of many existing approaches is remarkably sparse and violations are not necessarily effectively sanctioned, potentially exacerbating corruption.cf7dac1bb867

Governing natural resource supply chains is a political process that requires balancing transparent public disclosure of information and commercial considerations, such as preserving the competitive advantages of firms.a6ca0b833571 As a result, natural resource supply chain initiatives are shifting their focus from single actors to embedding obligatory or voluntary standards and commitments for responsible behaviour across multiple stakeholders.1dacc224cbd1 Many anti-corruption initiatives combine strengthening oversight and control with transparency in contracting and revenue flows.8a89c81ef4b5 This is because, while transparency is needed, it is insufficient to mitigate corruption on its ownf045a27dd420 – especially given the complexity of corruption in supply chains.7dc1d92bc855 Beyond transparency, other aspects that require action include supportive legal frameworks, regulations, and administrative processes for effective stakeholder engagement, as well as strengthening the capacity of communities or local governments to engage in supply chain governance.9fbe9f34db71

The profound changes occurring in natural resource sectors – remote extraction, lengthier and opaque supply chains, complex proliferation of actorsc4c8f239d79d – create numerous opportunities for increasingly sophisticated forms of corruption. Generic anti-corruption policy has not kept pace with these changes, or with the global integration of natural resource supply chains. A major finding of recent anti-corruption effectiveness literature is that a greater focus should be placed on embedding detailed corruption risk assessments in intervention design, so as to ‘connect the corruption dots’ between contexts.3bbf04a4ab29 This includes detailed and rigorous approaches to risk, starting with the decision to extract natural resources and continuing to the many decisions that follow – such as those setting the terms of contracts, and disclosing information regarding operational and financial matters and how revenues are invested.0a68c20f3cde

Exploring the existing anti-corruption initiatives

Investors, corporations, industry groups, not-for-profit organisations, consumers, and some governments have all called for greater transparency in natural resource supply chains.4e0dc6fdfade Initiatives that have arisen in response vary in scope, ambition, and stage of implementation. While most of these do not explicitly target corruption, most aim at increasing sustainable natural resource use, potentially indirectly targeting corruption if legal reforms and enforcement are effective. Government institutions play an essential role in generating incentives, creating effective deterrents and sanctions for adopting sustainable supply chain initiatives, building and maintaining critical infrastructure (eg anti-corruption policies, anti-corruption courts, and law enforcement), and implementing measures and safeguards.d47ba831fe25

Anti-corruption strategies in natural resource supply chains in source countries take many forms and relate to various processes. The next section proposes a typology of initiatives where preventing corruption is the primary or secondary focus. Five broad categories of interventions are identified, with examples provided. These are: (1) public sector reform initiatives aimed at preventing or eradicating corrupt behaviours in public administration and service delivery to increase public sector effectiveness, transparency, and accountability through improved administrative, financial, and control systems; (2) social accountability initiatives that rely on public participation through citizen monitoring for corruption prevention and creating incentives for better performance; (3) multistakeholder initiatives where diverse stakeholders can work in partnership to improve the prevention of corruption, transparent management of public resources and delivery of services; (4) voluntary certification standards where initiatives aim to ensure that products comply with conditions and norms established by law and are promoted as effective alternatives to regulation and tools for promoting business accountability; and (5) corporate traceability systems which are publicly stated goals by a single firm or group of companies to eliminate corruption from their supply chains.

1. Public sector reform initiatives

Corruption can be viewed as a symptom of failed institutions, implying that effective anti-corruption measures must address the causes of institutional failure and misgovernance.e77fd021707f Public sector decisions govern natural resources all along supply chains, so reform initiatives often focus on promoting public sector integrity and high ethical standards in administrative decisions. Initiatives in this category often involve a combination of two or more interventions related to improvements in budget processes, oversight, and management of resources.ca253d589ae2 This category also includes reforms related to simplifying taxation and its collection so as to address concerns that complex taxation presents opportunities for corruption. Many public sector reform initiatives also incorporate strengthening law enforcement capacity, increasing the volume of law enforcement, and improving enforcement agencies’ monitoring abilities. For example, efforts in the forest sector show that training for law enforcement officials on issues related to corruption – including creating a scorecard for forest law enforcement, and compiling information on arrests, prosecutions, convictions, and sentencing – can increase suppression of corruption and associated crimes.8e1d32b846f1 Public sector reform initiatives need not explicitly target natural resource corruption but may aim to improve governance and tackle corruption in government institutions overall, indirectly benefitting natural resource supply chain governance.

2. Social accountability initiatives

Social accountability refers to actions, tools, and mechanisms used by civil society, the media, citizens, and communities to hold elected and appointed officials accountable. Three core elements of social accountability are: (a) a focus on citizen rights and access to information on policy and budget commitments; (b) efforts to strengthen citizens’ voice in and access to governance through monitoring and feedback; and (c) the creation of safe spaces and processes for dialogue and problem-solving.99fc7eedf6c2 The success of social accountability initiatives is affected by the role of different kinds of political institutions, the type and capacity of civil society actors involved, and a wide range of ‘relational’ factors.32b4d9c6cfb9 This assumes that success depends on governments’ downward accountability, especially where formal procedural accountability by government and other powerful actors is weak or non-existent. Social accountability initiatives in the anti-corruption field include: citizen monitoring and oversight of public and/or private sector performance, user-centred public information access/dissemination systems, public complaint, and grievance redress mechanisms, as well as citizen participation in actual resource allocation decision-making, such as participatory budgeting.1040b30914b2 There is growing focus on applying social accountability for transparency and accountability of natural resource revenues, with valuable lessons from the work of civil society on tax justice and tax havens.c6bca94e27ed

3. Multistakeholder initiatives

The participation of business associations, NGOs, governments, and other stakeholders is an essential precondition for the broad recognition and application of codified standards or guidelines. Many multistakeholder initiatives assume that making information about revenue flows more transparent enables citizens, governments, and others to use the information to hold governments to account for revenues and their use.aca7b3fe5d6b The Extractive Industries Transparency Initiative (EITI), the Fisheries Transparency Initiative (FiTI), and the Forest Legality Initiative (FLI) represent the most prominent multistakeholder initiatives formed to address governance risks and promote better management and accounting systems for managing natural resources. Although there are significant variations across contexts and initiatives, the value of multistakeholder initiatives for tackling corruption depends on changing key actors’ incentives and overcoming the design problems and conflicts of interests of key actors. The anti-corruption effects of these initiatives depends on their ability to raise the standards of natural resource governance, secure the protection of vulnerable groups or species, and promote access to information about resource revenues and their use.d2d462d1817d

4. Voluntary certification standards

Voluntary certification standards typically include the protection of biodiversity advanced through a range of mechanisms, from prohibitions on destroying certain ecosystems, to controls on negative externalities that can harm biodiversity.18af01cf89f9 Initiatives such as the Forest Stewardship Council (FSC), which certifies forests and promotes labelled forest products, have led to efforts by environmental groups and industry to export the certification and labelling approach to other resource sectors. An example is the Marine Stewardship Council (MSC) which is the first global multicriteria certification and labelling scheme for marine fisheries.e4a3d25d0a9e Such initiatives may promote transparency and accountability in countries where corruption is sporadic due to their role in documenting natural resources practices and applying third-party monitoring.9ef8e9f64d52

5. Corporate traceability systems

Advances in artificial intelligence, big data analytics, and information technologies are driving new anti-corruption opportunities that have the potential to improve natural resource supply chain governance. These developments have led to private-sector-led and hybrid governance interventions that increase connectivity between producers and consumers through exchanging information in supply chains.6fcf1afd7ad5 A core aspect of such initiatives is traceability. This is the capacity to verify the history, location, and status of an item through documented identification to reliably track all component materials of the product back through all supply chain steps and pathways to their origins, thereby preventing the introduction of any unauthorised material.a6869cd656e1 In practice, while some progress has been made, traceability systems’ promise has yet to be fully realised. Traceability systems, as currently implemented, are prone to vulnerabilities that reduce their effectiveness in preventing commodity and money laundering and combating illegality and corruption.62697acbe670 The effectiveness of traceability systems depends not only on technical and financial capabilities (influenced by political and institutional priorities) but also on implementation, which may be cursory and ineffective against corruption risks. In some instances, implementation has been described as administrative exercises that favour large producers, with concentrated supply chains squeezing out local producers and creating disproportionate burdens on smallholders, driving them deeper into illegality and preventing access to markets.3236917e4ea8

Evaluating the effectiveness of existing initiatives: What lessons can be learned?

This section summarises the available evidence on the effectiveness and impact of different anti-corruption initiatives in natural resource supply chains, and the lessons that can be drawn for improving them when dealing with natural resource corruption in source countries.

The first lesson is that incentivising producers in source countries to participate in supply chain initiatives and broadening the scope of interventions – including involving more companies, regions, commodities, and supply chains – can support anti-corruption efforts and increase accountability in natural resource governance. Specifically, more robust codes of conduct and sectoral standards can impact producer behaviour and effectively promote transparency in target supply chains.ef3f633d68fb When considering the anti-corruption potential of supply chain initiatives, it is important that they and anti-corruption policies complement and reinforce each other, rather than fragment efforts towards improved anti-corruption outcomes.1fe0d983c748 Recent research suggests that holding supply chain actors to higher standards of corporate conduct, and improving the financial and technical capacity of anti-corruption agencies to carry out the functions necessary to manage natural resources, had had some impact on corruption reduction.15012da98e32

The second lesson that can be drawn from transparency and accountability initiatives used to promote the prevention of corruption is that evidence of their effectiveness ‘is very context-specific, and little is understood about the factors which make these impacts happen’.ef8c4831eacd Important contextual factors that can contribute to the effectiveness of anti-corruption initiatives include the nature of the state and its institutions, existing power relations, civil society capacity, the social contract between the state and its citizens, and the institutionalisation of accountability mechanisms.bdec61aa4f31 Increased anti-corruption effectiveness depends on the source country’s commitment and evidence-informed policies and programmes to mitigate corruption risks along natural resource supply chains and promote sustainable development outcomes.dc040e3d264c

A final lesson is that anti-corruption initiatives are most effective when integrated into a broader package of institutional reforms and when supported by other public policies. For instance, while social accountability mechanisms are crucial for creating more citizen awareness and can help transform citizens’ knowledge of public policy and its implementation, such strategies can fail and only positively affect accountability when combined with actual information sharing and citizen deliberation. For instance, evidence from Ghana and Mozambique shows that information was provided exclusively to leaders and officeholders, therefore having little effect on citizens’ knowledge and leading to more capture and embezzlement.bc4b5a563df6

Next steps for practitioners

While natural resource supply chain initiatives have the potential to increase transparency and accountability in natural resource governance, they also have limitations. Many of them focus on only one aspect of supply chains,92fa26ef1c66 are based on untested assumptions or poorly articulated theories of change,44ffa09ba9c2 or lack the means to tackle corruption at the intersection of source country markets and global supply chains. With these limitations in mind, practitioners could help improve such initiatives in several ways.

Incorporate criteria that address corruption risks into supply chain approaches

Support could be provided for traceability initiatives, associated processes of supply chain mapping, and supply chain transparency to help monitor and disclose sourcing information to stakeholders that can, in turn, contribute to better understanding and response to critical risks. This could include traceability initiatives with anti-corruption functions that gather information such as licensing and contract transparency, extraction and operations, transparency of government expenditures, and opportunities to connect with and understand the actors in the upstream supply chain.

Create a clear vision of what the supply chain initiative aims to achieve, and ensure governments, partners, and stakeholders agree with these goals

There is growing recognition for multistakeholder initiatives in natural resource governance that encourage representatives from civil society, government, and the private sector to establish credible learning platforms, standards, enforcement mechanisms, and labels, certifications, and/or ratings that drive progress on sustainable supply chains.2013658e73c2 The anti-corruption relevance of these initiatives could be improved by linking them with existing anti-corruption policies and legislation, such as public procurement policies,7c30640ff1c1 and developing country-specific Theories of Change that include social and environmental dimensions.b06801aeb31d

Prioritise supply chain corruption risk assessments during the development of initiatives

This can help develop appropriate risk profiles and informed mitigation strategies that reduce the adverse effects of corruption. It will also help target initiatives towards supply chain links where effective mitigation strategies can be both feasible and have a potentially high impact, using tools such as political economy assessments to understand corruption risks and the patterns of incentives underlying governance and corruption in a given context. Political economy analysis can be carried out alongside or as part of other analytical work (eg stakeholder, institutional, and risk analysis) to understand the context.

Establish and support anti-corruption initiatives in natural resource supply chains as a component of broader anti-corruption strategies

The effectiveness of supply chain anti-corruption strategies can be improved through stakeholders leveraging existing national anti-corruption initiatives. In addition to targeting context-specific risks of corruption in supply chains, linking to broader anti-corruption measures at the national level offers entry points and opportunities for cooperation with relevant national anti-corruption and governance institutions.