Corruption in Commodity Trading

March 2021

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Corruption in Commodity Trading

March 2021

Corruption in Commodity Trading
I haven’t yet received my pre-ordered copy of The World for Sale by Javier Blass and Jack Farchy, but it has already spurred some headlines about corruption in the world of commodity trading. The story that attracted the most attention concerns a former Glencore mining executive who admitted to the book’s authors that in 2003 he flew around the world with bags of cash to be paid in bribes to government officials.

The authors rightly point out that, although unethical and immoral, it was both legal and even tax-deductible in 2003 for Swiss companies like Glencore to pay ‘commissions’. The Swiss government has thankfully rectified that sad state of affairs, and Glencore has banned using local agents, the intermediaries they used to facilitate corruption.

Glencore started life as Marc Rich & Co, led by a brilliant but flawed trader who specialised in dealing in countries where most people feared to tread. Daniel Ammann has written a (truly) excellent biography of Marc Rich – The King of Oil – in which he tackles the issue of corruption. He writes

“Most commodities come from countries that are not beacons of democracy and human rights. The “resource curse” and “the paradox of plenty” are the terms economists and political scientists use to describe the fact that countries that are rich in oil, gas or metals are usually plagued by poverty, corruption, and misgovernment. If commodity traders want to be successful, they are forced—much like journalists or intelligence agents who will take their information from any source—to sit down with people that they would rather not have as friends, and they apparently have to resort to practices that are either frowned upon or downright illegal in other parts of the world.”

Mr Ammann is right: corruption has more to do with governments than commodity trading. The onus is on governments to cure the disease.

Way back in 1977, the US instituted the Foreign Corrupt Practices Act (FCPA). It made it unlawful for a U.S. person or company to offer, pay, or promise to pay money or anything of value to any foreign official for the purpose of obtaining or retaining business.

More recently, China, previously one of the world’s most corrupt countries, has resorted to drastic action, instituting capital punishment for corrupt officials.  Other countries are taking less drastic measures, but they are moving, albeit too slowly, in the right direction.

Corruption in commodities typically thrives when governments get involved in, for example, awarding mineral rights, production or trade quotas or by setting prices.

It was omnipresent in the agricultural markets when I began my career in commodities. At that time, only the government had the right to import or export certain commodities in many countries. Buying and selling tenders were often rigged – and you were never sure how much money was being siphoned off or added on before it reached the farmers or the consumers.

Over the past 40 years, governments have exited the agricultural commodity trade; the business has been privatised. When business is in private hands, producers or buyers have little interested in receiving bribes; it is the price and the terms of the deal that interest them.

But what should you do if a government official asks for a bribe? In my book, The Sugar Casino, I told the true story of the first time someone asked me for one:

“After spending two years as a futures trader in Minneapolis, my company transferred me back to London with a brief to develop new markets in the Middle East and Africa. The company’s agent in one country (I won’t say which one) contacted me to say that they had surplus sugar that year and the government would like to export a couple of cargoes to earn much needed foreign exchange. The minister who was handling the sale was coming to London the following week. Could I meet him?

 “Despite being only 25 years old, I met the minister and took him to an expensive restaurant. We had an excellent meal, discussed the sugar market and tried to estimate the price for the particular grade of sugar the country was exporting. As we were leaving, he surprised me by suggesting that we dine again the following evening. I agreed even though I was unsure what we had left to talk about.

 “The next evening, the minister slipped me a shopping list of electronic items that he would like to take back with him from London. There were only four items on the list: a television, a radio, a stereo system and (bizarrely) an electric iron. He asked if I could help him obtain these items. I wasn’t quite sure if he asked me to go with him to the shops to choose the items or ask me to buy the items and give them to him for free. And if it was the latter, I was surprised at how little it took to bribe a minister.

 “The next day, I told my boss what had happened. I thought it was a bit of a joke. Still, my boss took it seriously, advising me to go back to the minister to politely explain that company policy meant that we couldn’t help with his request but that we would still like to buy his sugar and be very competitive on the price. I did as instructed and was not surprised to hear a week later that one of our competitors had bought the two cargos of sugar. I calculated they had probably made a profit of $240,000 on the deal. I compared that to the couple of hundred dollars it would have cost to buy the items on the minister’s shopping list.

 “I mentioned this to my boss, who told me angrily that I should never think about paying a bribe to anyone, no matter how much money was at stake. He called it “selling your soul to the devil” and argued that even if a television may not cost much, it was “the thin edge of the wedge. And from a business point of view”, he added, “It makes no sense.

 “First, it will give your client a hold over you. Second, if everyone does the same thing, you will end up competing against each other in the number of bribes that you pay.” He called it “competitive corruption” and said that paying a bribe would be ineffective if your competitor paid more.

In 2016, I interviewed the legendary sugar trader Robert Kuok for The Sugar Casino. He told me:

“One piece of advice: never hug the high and mighty; they electrocute you. Keep them at arm’s length. And always adhere to moral practices, and nothing can stop you. If someone asks you for a bribe, you should say that neither you nor your company could do that. But stay very polite. Don’t stand on your high horse and preach morality at that moment. Just turn them down nicely. If you get a chance later at a meal or something, you can pontificate a little, but not then – they are not in the mood to be listening to moral truth.

Sound advice, indeed.

Source: © Commodity Conversations ® 2021

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