most global corporations with reputations to defend know the risks of operating
in countries where corruption is rife, and there’s a history of oppression,
conflict and abuse. So they take advice on operating responsibly, spend
fortunes on due diligence and put in place all sorts of human rights,
environmental, and anti-corruption policies. This means they can do business
safe in the knowledge that the companies they work with won’t harm local people
or the environment. Importantly for them, they won’t attract criticism
internationally or locally – right?
Unfortunately, it’s not quite that easy. Often the information that companies need most may actually be kept hidden. As new markets open, a big question that incoming companies face is who they can partner with locally – get this wrong, and the damage to local relations and image can be immense.
The Coca Cola Company has just come face to face with the limitations of private due diligence in Myanmar. After deciding to re-start operations in the country in 2012, the conglomerate did the right things, hiring big name due diligence companies and spending substantial sums on checks and vetting procedures before setting up local business ventures.
Despite these efforts, it wasn’t until Global Witness alerted Coke earlier this year that the company realised that its only local director also had interests in a jade business called Xie Family. Involvement in jade should be a red flag, given that Myanmar’s jade sector is notorious for corruption, military involvement and environmental and human rights abuses, and that Myanmar jade is still subject to US sanctions.
Global Witness research shows that, over the past two decades, Xie Family has been a key jade mining subcontractor of army company Myanmar Economic Holdings Limited (MEHL). Subject to US sanctions, MEHL has been embroiled in controversy over allegations of land-grabbing, environmental abuse and the use of violence against protestors at its Letpadaung mining project. Xie Family and MEHL have told Global Witness that they have not worked together since 2012, but figures from last year’s jade auction show that they jointly marketed jade that sold for over 5 million euros at that time.
That doesn’t meant that the Coca Cola local director or Xie Family have committed any wrongdoings, but these connections are ones that due diligence should be picking up, in order that incoming companies can make an informed decision on their partners.
No reputable company wants to get into bed with a corrupt official, a shady businessman or a human rights abuser. So, what should they be doing to avoid being exposed by hidden skeletons in their partners’ closets?
· More robust due diligence. Coca Cola has stated that it had conducted comprehensive due diligence based on the information available at the time. However, the local director involved was known to have links to the jewellery trade, which should have raised red flags, and further digging into any links to Myanmar’s ruby or jade sector both of which are subject to US sanctions.
· Publicly identify who owns and controls in-country ventures and partnerships, and disclose background information on these individuals. Myanmar has experienced decades of secrecy and severe restrictions of free speech resulting in scarce public information and serious gaps in even the best corporate due diligence. To mitigate risk, international companies should publish the names and identifying information of the individuals who own and control their local ventures (also known as their ‘ultimate beneficial ownership’). Companies should also disclose the information they have on these individuals in terms of other business interests, political or military connections, and any credible allegations of corruption environmental or human rights abuse. Such publication is crucial to allowing local people and independent groups to flag gaps and concerns. Companies should also disclose identified risks as they arise and mitigating steps.
· Join the call to end anonymous companies. Public disclosure of companies’ ultimate beneficial owners worldwide would help companies gain greater access to the information they need to assure themselves, local communities and institutional investors that they are getting into the right bed in the first place.
Since the Xie Family connection has come to light, Coca Cola has made some positive moves, but more action is needed.
Today, Coca Cola has published the names of the directors and shareholders of its local subsidiary, and disclosed information on the Xie Family connection as part of the report it has submitted under the US Reporting Requirements. This is a good start, but much more is needed. The two shareholders listed are both companies, and no details have been provided on the individuals who stand behind them, or what other business interests or connections these figures or the subsidiary directors have. Without this information, local people are not in a position to identify any gaps or flag any concerns.
Coca Cola has used its influence to facilitate a dialogue between Global Witness and the jade company, Xie Family. As a result, this company is now considering early publication of information in line with the global transparency standard, the Extractive Industry Transparency Initiative, including details of the volumes of jade it produces, its payments to the government and any arrangements with state-owned enterprises including army companies.
Companies that choose to go into emerging markets can make substantial gains, but the risks are also high. If companies are serious about responsible business, real transparency is essential to avoid causing harm and reputational damage – and crucially, setting up operations which both they and the countries in which they operate benefit from.