BHP corruption probe's bad timing

BHP Billiton's shock revelation that it has uncovered evidence of possibly corrupt behaviour by its employees in dealing with government officials highlights the difficulties of operating massive mining projects in developing countries.

BHP, which is the world's largest mining company, first heard of the corrupt payments was when it was contacted by the US Securities and Exchange Commission (SEC) last August.

The mining giant is cooperating with the SEC including launching its own internal investigation.

Because some BHP securities are traded on the New York Stock Exchange, the miner falls under the SEC's jurisdiction, even though the allegedly corrupt activity is understood not to have taken place in the United States.

In a carefully worded statement yesterday, BHP revealed that it had disclosed to the relevant authorities "evidence that it has uncovered regarding possible violations of applicable anti-corruption laws involving interactions with government officials”. BHP said it was not possible to predict how long its investigation would take, or its likely outcome.

It is understood that the "relatively small” payments were made in connection with a number of minerals exploration projects, the last of which was terminated on commercial grounds just over year ago. In an email yesterday, the company said the SEC's request for information was not connected to "any activity in China, BHP Billiton's marketing activities or the sale of any of the company's products”.

Analysts said any payments could have been made in order to obtain the exploration permits, or they could have been made after the exploration project had finished, when the company would have been required to make reparations for any environmental impact.

The company conducts hundreds of mineral explorations each year, seeking out prospective new projects. In the nine months to 30 March 2010, the company spent $US346 million on minerals exploration.

The mining industry is seen as especially vulnerable to corruption, particularly in developing countries. There is huge pressure on mining giants to develop their multi-billion projects quickly, and to minimise delays.

This makes them easy targets for corrupt government officials who can often extort payments by threatening delays. For instance, they can threaten to hold up multi-billion dollar projects by prolonging negotiations over royalties, the compensation payments required for taking the land of local communities and the level of environmental restoration at the end of the project.

The boom in commodity prices has led to an explosion in the number of mining companies looking to secure the right to develop new mines in developing countries. As a result, corrupt local officials have been able to benefit from fierce competition between companies as they vie to secure exploration rights over potentially exciting new mineral deposits.

Various international bodies are pushing for new standards that would require global mining and oil companies to declare their financial payments on a country-by-country basis. This would make it easier to track the 'corruption gap' by measuring how much the difference between the payments made to the government, and how much the government actually spends. But to date these initiatives have had only limited success.

The revelations come at a bad time for BHP, which is hoping the European Union will give the green light to its proposed giant $116 billion Pilbara iron ore joint venture with Rio Tinto.

Last month, China jailed four executives from Rio, including Stern Hu, for bribery and infringing commercial secrets.

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