Africa’s growing illegal mining: Financial drain and corruption threaten the continent

Sub-Saharan Africa is losing billions of dollars annually to a growing global network of financiers and middle-men working with corrupt in-country officials to facilitate illegal and ‘grey’ mining operations which are spreading across the continent, and which are already systemically entrenched in several countries.

The International Monetary Fund, in an investigation of the burgeoning issue and which assessed the cost to the fiscus of affected African states, found that many, especially where there was weak central governance, were vulnerable to international illegal mining syndicates, as well as ‘grey’ mining practices by established mining houses.

Africa has consequently become a global illegal mining hub, along with associated illicit money flows – with authorities increasingly concerned over the spread of this dual problem.

The continent has an estimated 30 per cent of the world’s key mining commodity resources, says the International Monetary Fund (IMF).

Included is a large slice of the reserve of rare-earths, as used in industrial magnets and other key high-tech industry components, plus commodities such as the lithium found in cell phone and mobile device batteries, and a rapidly growing number of all-electric and hybrid cars.

The figures involved are significant.

Africa’s mineral deposits account for an average of 70 per cent of total African exports annually, and about 28 per cent of continental gross domestic product, which, according to international statistical data resource Statista, will amount this year to about $3.1 trillion.

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There is a consequential bid by some African states to avert both the illegal mining of such resources, along with the exploitative extractive industry practice of usually exporting raw commodities from African sources and only thereafter adding value – often for resale of final products, such as cell phones, back into Africa.

This cycle ensures that most of the value of Africa’s resources leaves the continent.

Two African states, Zimbabwe and Namibia, are currently wrangling with what is needed to keep Africa’s mineral wealth in African hands, as far as possible, once such resources are extracted – in these two instances, the current focus being on increasingly-sought-after lithium.

Complicating matters, it is not clear that the World Trade Organisation will allow key commodity export bans, as are being considered in some countries.

Putting a ban on certain raw material exports does little, in any case, to stop their extraction or export, illegal commodities and illicit financial flows being the more likely outcomes of such efforts.

And with international crime rings involved not only in illegal mining produce, but also in the financial flows behind them, it is only becoming easier for those unwilling to meet obligations, pay their mining taxes, or who are simply ignoring laws and are operating illegally with increasing ease.

Outlawing illegal mining has not stopped that practice, which continues to increase Africa-wide, and potentially will increase yet more rapidly, as the Russian Wagner Group follows through on its recent assertion that it intends to expand its extractive industry footprint in Africa.

‘Grey’ mining occurs following formal agreements with investors given preferential consideration around the extraction of Africa’s valuable raw materials, but when there is little or none of the reciprocal elements of such agreements taking place.

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Frequently, reciprocal plans for infrastructure development and local community benefits, such as schools and clinics, supposed to be built by mine operators, are never realised.

‘Grey’ mining also describes the off-shoring of taxable profits by dubious accounting means to low-tax regime countries, and out of the hands and fiscus of the countries in which these resources are mined.

While the extractors, and those in African governments facilitating their activities, may benefit, it is almost uniformly the case that little is done for affected local communities – who also often have to deal with the despoiling of rivers and arable lands caused by mining from which they receive little to no benefit, while the state as a whole loses out on taxes which ought to be paid locally.

The avoidance of taxes involved in mining operations in many African countries, on its own, is claiming a growing proportion of affected states’ income, says the IMF.

According to an IMF report on the problem, Sub-Saharan countries are losing from $450 to $730 million a year in corporate income tax revenues shifted to other lower-tax jurisdictions by multinational companies in the continent’s mining sector.

Laws are being considered to halt or reduce this process, but the downside of such steps is that they can put off prospective investors, and so where they exist, they are often ignored or exemptions granted – with a backroom arrangement to sweeten the deal for officials.

While mining corporations are hiding tax dollars through ‘creative bookkeeping’, and likely some bribery, smaller companies, and especially the growing horde of illegal miners across the region, are increasingly operating brazenly – selling illicitly-obtained high-value commodities to middlemen, who finance their operations in cahoots, usually, with officials of the affected country.

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Gold Mafia, a four-part investigative series undertaken by international TV news channel Al Jazeera, and published in April, exposed one such operation, a gold smuggling and money-laundering syndicate operating from within Zimbabwe, involving high-ranking officials. The report triggered a government “investigation”, which is still under way.

Al Jazeera reported that its investigation “shows multiple different gangs using gold as their preferred method for laundering money, with three of them operating mainly from Zimbabwe”.

“The process is as simple as it is cunning: Criminals from around the world with large volumes of unaccounted for cash can give that money to the Zimbabwean government, directly or through smugglers.”

In return, they receive gold, which is then recast, becoming untraceable.

With a nearly collapsed economy, Zimbabwe, like some other African states, is highly vulnerable to predatory tactics such as are used by the criminal syndicates operating there, according to the Al Jazeera investigation, with some senior political figures still under sanctions and the government desperate for any dollars it can generate.

Similar schemes and syndicates are operating across the Sub-Saharan region, but have not been detailed down to individual players, as in the Al Jazeera exposé, wherein senior government officials and other local actors are named.

One of those currently operating in Zimbabwe has a prior exposure in East Africa. Kamlesh Pattni is a businessman who Al Jazeera says was accused in the 1990s of pocketing hundreds of millions of dollars belonging to the Kenyan exchequer through such a gold smuggling scheme.

Pattni was charged but never convicted – but Al Jazeera’s undercover operation shows that he is now involved in a similar scam in Zimbabwe.

His operation works by exporting Zimbabwean gold to Dubai and then laundering the money and the precious metal.

When the gold arrives in Dubai, it is sold to refineries, and the proceeds are banked by the money-launderers.

The resmelting process removes all traces of the gold’s origin, and thereby any funds flowing from illicit sales are ‘scrubbed clean’.

This is also how the money-laundering operation works to cover up any traces of gold illegally extracted, or legally extracted and illegally sold.

Similar schemes are in place for other high-valued resources such as gems, as well as increasingly, rare-earths minerals necessary for high-tech equipment, and also some other precious metals, like platinum.

When the full scope of these related illicit – or in the case of some major mining houses operating in Africa, employing not ‘grey’ mining practices such as tax-dodging tactics – is assessed, the cumulative impacts become significant.

Mining in Africa is growing rapidly in importance, in direct proportion to the need for minerals and resources found predominantly in Africa.

With that growth has come, however, more illegal mining and increased deceptive involvement of major mining houses that use numerous techniques to minimise or even negate any tax liability arising in the specific African country where they are mining.

Some countries are making progress in addressing profit shifting in the mining sector, reports the IMF, but the inroads are modest.

Sierra Leone’s “new fiscal regime” had moved the country away from negotiating fiscal terms mine by mine, while Guinea, Liberia, and Mali have strengthened their transfer pricing protection.

Both South Africa and Nigeria have set limits on interest deductions and nine of the 15 resource-intensive economies identified in the Sub-Saharan region by the IMF have alternative minimum taxes that can ensure at least some corporate taxes are paid each year.

Kenya has introduced an anti-treaty shopping provision into its tax treaty policy, as well.

That these steps are necessary is evident from the related facts, but whether they are working is another question.

The mining sector contributes about 10 per cent to GDP across 15 resource-intensive Sub-Saharan African countries.

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In most of these countries, mining exports represent 50 per cent of total exports, on average, and are the main source of foreign direct investment, says the IMF.

However, for the 15 resource-intensive economies involved, tax revenues from mining account for just 2 per cent of GDP, on average.

Legal efforts by various African governments to keep mining profits at home are simply responded to in most cases by use of labyrinthine reporting practices that obscure real taxable profits, the net effect being to move such profits off the operating entities’ books in the countries where they mining.

A global minimum tax has been proposed and will likely mitigate profit shifting and reduce pressures from tax competition, says the IMF.

While improving tax policy and tackling tax avoidance could work, says that body, such steps require “careful preparation and stronger capacity, which take time, resources, and political commitment”, most elements of which are currently not in place in most of the affected African states.

And there are also unintended negative effects of even such a moderate step designed to regularise mining in Africa.

“Our analysis of payments data, reports from the Extractive Industries Transparency Initiative, an internal IMF resource revenue data set, and financial information from more than 600 multinational companies reveals that an increase in the corporate income tax rate differential between the (higher) producing country and the average (lower) offshore countries by 1 percentage point results in a decrease of reported profits in the mining sector by 3.5 per cent,” says the IMF analysis.

Against this backdrop, there is growing concern that the illegal mining business in Africa is only just starting to get going in earnest, with South Africa acting as the template.

According to the Mining Yearbook 2022, produced by Miningmx, illegal mining is not only a “huge and growing problem across much of Africa”, but is particularly evident in South Africa, where it is getting rapidly larger and more organised in scale.

Expert analysis by various interested NGOs and governmental agencies indicates that this pattern is now beginning to emerge in other affected states on the continent.

This finding ties directly into those of the Al Jazeera investigation wherein illegal mining outflows of commodities, and the laundering of profits, go hand-in-hand.

In turn, such money-laundering attracts yet more illegal activity, strengthening the syndicates involved and ensuring decreasing control for hard-pressed authorities.

According to Errol Smart, the Minerals Council SA’s executive for the promotion of “junior mining”, the name given to artisanal and small-scale miners being brought into the legal mining framework “…illegal mining here is not junior mining, it is mega-scale corruption and crime”.

“What started out involving isolated groups of ‘zama-zamas’ (translated as ‘people who keep on trying’) working on small operations on alluvial diamond diggings and old, shallow gold mines on the Witwatersrand (great Johannesburg area) some 10 years ago, has evolved into large-scale mining operations,” explains the Mining Yearbook 2022 report.

“These involve gangs of illegally operating miners working underground in various deep-level Free State gold mines (in South Africa) for months at a time.

“Just how bad the situation (has become) was underscored when the extent of an illegal mechanised mining operation on Thungela Resources’ Khwezela Colliery Kromdraai site near eMalahleni in Mpumalanga province was exposed.

“It only came to light after a serious toxic water spill from the site, for which Thungela was initially blamed, but the company then revealed it had been caused by a major illegal mining operation on ground which Thungela was rehabilitating after it had been mined,” the report added.

Thungela has been to court multiple times and won interdicts to stop the illegal miners from operating, but the South African Police Service has been unable to enforce these court orders, and the mining has not only continued, but is escalating in scale.

The pattern established for commodity outflows and related money-laundering in South Africa is now being spread across the continent to other African states attempting, largely unsuccessfully, to staunch the losses to their economies.

Last year, Miningmx reported that the extent of the illegal ruby trade, to give another example of illicit precious minerals movements in Africa, was difficult to assess, but it was “huge”, with Gemfields having sold about $620 million worth of rubies since it started operations in northern Mozambique – but with another estimated $600 million worth of the gems having left the country illegally, and finding their way onto the international market, as ostensible legal product.

The rapid deterioration of mining situation across Africa, becoming an increasingly ‘wild west’ scenario of overt illegality unchallenged by weak central authorities, was predicted as far back as 2016 by South Africa’s Minerals Council – but that warning has not seen any change in the dark direction that mining in South Africa or other affected African states is increasingly taking.

According to the Minerals Council, some 20 per cent of the world’s gold production comes from artisanal mining, which has “become integral to the economies of many mining countries in the developing world”.

The council also points out, however, that artisanal mining is “plagued with exploitation of children and women – in Africa it is estimated that about half of artisanal miners are women and 10 per cent are children”.

The independent Institute of Security Studies (ISS) estimates that roughly 30,000 illegal miners produce close to US$1 billion of gold alone each year, all “lost production”, in effect, and that is in South Africa alone.

It is unknown what the financial extent of all the other forms of illegal and ‘grey’ mining are costing Africa as a whole, but the value is estimated to be a significant percentage of the continent’s total output potential – enough to drive developmental programmes in most of the affected countries.

“The United Arab Emirates and Switzerland have been identified as the primary export destinations,” says the ISS in its assessment of the problem, made last August, since when the situation in South Africa, and in a number of other affected African states, has markedly deteriorated.

Said one senior diplomat who studies and reports on these issues: “One could say, without any irony, that mining in Africa is increasingly going underground.”