It's an undisputed fact that one of the most sensitive issues the current Armenian Government faces is how to overcome deeply rooted corruption in different sectors. Hence, assessing the new Government’s work will depend on what kind of steps it will take to overcome this social ill. It’s understandable that corruption is one of the few things that our post-revolution society cannot tolerate, no matter what plate you serve it on. Hence, a government claiming to be revolutionary cannot permit itself to tolerate a corrupt system. This would be the shortest and most direct road to its decline. Indeed, ruling circles are well aware of this and are trying to present their systemic fight against corruption as their most valuable achievement. However, how much of this is true?
By taking a look at the fundamental issues regarding mining, steps taken by the new Government toward anti-corruption can seem suspicious at least in this sector. Yes, the same mining sector that was inherited by the former regime. However, not one serious step has been taken to eradicate corruption schemes, or at least curb them. Moreover, today it has become evidently clear that the new Government is continuing to support the illegal permits and extremely flawed, clearly groundless expert conclusions given by the former regime. By not legally assessing exposed violations of the law adequately, the new Government is, in fact, taking on the legal and political responsibility of all future consequences. A testament to this is the efforts to restart the hazardous Teghut Mine without conducting any serious investigation and not taking appropriate legal action against the Kajaran Mine for exposed violations from official inspections, etc.
This article will not cover all corruption risks regarding the mining sector. However, it will touch upon its manifestations in the sector.
The main tool to limit the corrupt behavior of officials responsible for regulating the mining sector is transparency. To ensure transparency there are clear standards that need to be met: exposing the real owners of mining companies, the composition of raw materials and transfer pricing, movement of shares and other assets between companies, accuracy of newly discovered mineral resources resulting from periodic reevaluation of already existing mining materials, which in turn changes the value of mining companies’ shares, and other similar issues. However, there aren’t any effective tools to oversee the manifestations of corruption. For example, environmental and tax inspections can expose some information about mining companies. However, there is no way to find information on who the real owners or other affiliated entities are that might have connections to the current administration and influence their decisions.
Within the context of assessing the above-mentioned corruption risks, this article will discuss the official inspection carried out last year by the Environmental and Mining Inspection Body of Armenia in the mines of Amulsar and Kajaran and how adequately its findings were documented later. It’s imperative to clarify the public’s position on this issue taking into account the apparent conflict between the mining companies of Amulsar and Kajaran, who publicly accuse each other of slander and interference into their internal activities. This would prevent different groups in society from being used by the companies to engage in a meaningless fight against each other.
In terms of transparency in mining, this article will discuss an influential international process in this sector: the Extractive Industries Transparency Initiative (EITI). The article will touch upon the importance and role of EITI, of which Armenia became a member three years ago. What has been done during this process? What are the priorities stemming from public demand?
EITI is an international initiative that calls for transparency and accountability during the extraction of natural resources. In short, member states of this initiative are obligated to ensure several requirements of the EITI Standards, including transparency of financial flows within the mining industry, exposing owners of the mining companies, etc. This format ensures the active inclusion of the public in making decisions on certain issues. This is because decisions are made by three parties - the government, the companies, and multilateral groups formed by civil society - through consensus.
Natural resources are considered a public good, the extraction of which has to serve the well-being of all society, and not one group of people. In order to ensure that well-being, companies working in this sector and state bodies have to work transparently; the movement of natural resources belonging to the public and information on its revenues have to be completely accessible for the public. This is the main mission of EITI - ensuring transparency to ease tensions in the mining sector.
This article will also discuss if the EITI process has succeeded at this stage and what problems it should focus on next in order not to fail.
Factual Data on Armenia’s Mining Industry
Below are several economic indicators of the mining industry.
Despite the fact that the mining industry does not play a big role in Armenia’s economy, this sector is always a subject for heated discussions. Unfortunately, these discussions are limited to environmentalist circles. Thus, the issue is not viewed in a more broader sense, that is through the aspect of socio-economic effects. It’s very important to fully understand the economic effects mining has in order to expose the current corruption schemes in this field and, in general, to grasp the logic behind how to regulate it.
Different circles within the Government are trying to artificially increase the role mining plays. However, economic indicators show a different story. It is unclear why different groups within the Government are trying to inflate the role of this low-producing and ecologically dangerous field in the country’s social and economic life. This clearly shows that there are signs of corruption in the mining sector.
According to an analysis published by the World Bank in 2016, during the previous 14 years, on average the mining industry comprised only 2.2 percent of the country’s GDP. Between 2013-2015, this number slightly increased to an average of 3.3 percent. Those who favor the development of mining generally argue that by implementing new mining projects new jobs will be created. Meanwhile, data has shown that the development of this sector has not guaranteed a significant amount of jobs today. Based on the same analysis, in 2014, 7057 people were employed in the mining sector, which comprises 9.2 percent of employed workers in the country’s production industry. It’s true that the sector guarantees significant flows of foreign currency because the raw materials are exported almost completely. However, this in and of itself is a negative phenomenon because the exported materials are not used within the country to create added value, and a certain percentage of metals are exported from the country in the form of powder concentrate.
The Real Owners and Offshore Circuses
It’s interesting to note that all mining companies are more or less linked to free economic zones, also known as offshores. It may seem not a problem because tax control in Armenia extends to companies in all spheres of the economy. However, in reality, tools are employed through offshore networks keeping the identity of those with connections to Armenia’s Government (real owners or other shadow beneficiaries) secret and at the same time also supervising the whole mining system in the shadows. Moreover, state bodies do not have the effective tools to bring these shadow players out into the open and hold them legally responsible.
A year ago, the State Commission for the Protection of Economic Competition of Armenia (SCPEC) announced that shares of 19 mining companies in Armenia were sold during different times to one company registered in the Cayman Islands. The name of the company was never published. Moreover, shares of 17 of the 19 companies were sold to one foreign company. According to officially published data, it was not possible to find any real information on this offshore company. The only thing known is its postal address as well as the names of the owners, all of them Armenian. During the study, it became clear that it was possible that ownership rights to another 13 companies would be given to this same company. The representative of SCPEC stated that, according to Armenia’s legislation, large acquisition of companies has to be registered officially. However, the above mentioned offshore company bought the shares piece by piece through many intermediary companies in order to sidestep its obligation to register its acquisitions.
A criminal case was launched in regards to this issue by the Investigative Committee of Armenia. However, till now, there has been no development in this case and law enforcement agencies have not reported any additional information. Based on the case report, preliminary data shows that the ownership and regulation of companies and assets that are registered in Armenia are operated from the same center. Hence, many mining companies working in Armenia are controlled by one organization. This means that throughout the years a highly centralized regulation system has been created in the mining sector. Despite the fact that a criminal case has been opened, for over a year there has been no development in solving this problem or at least no information has been made publicly available. This means that the state system is unable to solve this problem, or it doesn’t want to. In any case, this fact alone shows that the mining sector today is under illegal/highly centralized supervision and state bodies are not taking any effective steps to stop it.
The Real Owners and Affiliated Parties
Who the real owners of mining companies are is a topic that is often discussed. During a Government session on February 21, 2019, Prime Minister Pashinyan clearly stated that new legislative changes will allow exposing all real mine owners to the very last man. However, this statement is not possible to realize. The process of exposing the real owners does not assume that a company will register every single person involved “to the very last man.”
The process of exposing real owners of mining companies was developed within the framework of EITI. As of November 30, 2019, certain companies will be obligated to register only those owners that have at least a10 percent share in the company or have an equity interest in the company’s capital. However, if owners split their shares into 9.9 percent before the above-mentioned date, they are not obligated to register them as owners (no limits have been set for politically exposed persons). Moreover, there are no tools for oversight, for example, how Cypriot citizen Populous Papastapopulous or Aunty Nazik became a shareholder (regarding the issue of the legality of the acquisition of funds). It’s difficult to assess if the process of exposing real owners will become more reliable in the future. However, the legal framework in place currently is not effective for the two reasons already stated: those with less than ten percent share in the company are not obligated to be registered and the absence of oversight mechanisms on the reliability of registered data.
Amulsar and Kajaran - Who Are the Real Owners?
Today, in Armenia there are heated discussions about mining in general, as well as, two mines that for unclear reasons are pitted against each other: Amulsar and Kajaran. It reached a point where at the National Assembly a member of the ruling faction urged environmentalists to raise issues concerning not only Amulsar but Kajaran as well. However, the Government is in place to regulate issues under its control. If it finds violations, it has to take adequate action based on what the law dictates. For example, the Inspectorate for Nature Protection and Natural Resources of Armenia carried out inspections for four and a half months and found serious violations.* A criminal case should have opened, however, for unknown reasons, this has still not happened. Why has the Government not taken adequate steps? This can indicate systemic corruption within the Government. However, today this Government that considers itself to be revolutionary, is expecting environmentalists to take action against the Kajaran Mine, while at the same time, having in its hands all the factual data on the current situation in Kajaran and not taking any adequate action themselves. As the ruling party in the country, it has the direct responsibility to do so.
When discussing the real owners of the Zangezur Copper Molybdenum Combine, the company that runs the Kajaran Mine, there is only one fact that needs to be taken into consideration: in 2004, the Zangezur Combine which was up and running was sold for 132 million USD. However, a year prior, the company’s revenue from the mine was 190 million USD. A question arises: why does Armenia have to sell the country’s biggest enterprise for such an inequitable price? The next question: Who are the real owners of the company? Armenia’s Government should have looked into these questions right from the beginning. Unfortunately, political decisions are not being made to help expose why the former regime privatized the country’s mines, as well as the people affiliated with this process. Legal action is also not being taken based on state inspections that have been carried out recently.
With regards to Amulsar - a very current issue and one of the most debated in Armenia - the main question raised by public protest against the mine is the same question this article raises: Who are the people standing behind the company that has so much influence over Armenia’s Government? Who are the people who have serious influence over Armenia’s former and current regime in spite of the communities, environmentalists and civil society protesting against the mine? This question is not only about those that have financial gain in the company, but also other influential people that formally are not real owners, but are affiliated with the company.
In terms of affiliation with the company (Lydian Armenia) operating the Amulsar Mine, the most well-known person is former Ambassador of Armenia to the United Kingdom and current President of Armenia Armen Sarkissian. In 2013, he was a member of the Board of Directors of Lydian International and had announced that he is ready to contribute to the development of the company’s principal project, the Amulsar Gold Mine. President Sarkissian’s affiliation with Amulsar has been discussed extensively, however other influential people connected to the company have never been brought up.
It’s no secret that the U.S. and UK ambassadors to Armenia have actively supported the Amulsar project. In October 2013, one of the biggest nature protection groups, the Save Teghut Civic Initiative, wrote an open letter to then Great Britain's Permanent Under Secretary to the Foreign and Commonwealth Office Simon Fraser, and then U.S. Secretary of State John Kerry regarding the meddling of their ambassadors. The letter asked for an immediate investigation to find out the legality of the ambassadors’ actions and if diplomatic norms and code of ethics were disrespected. The letter also asked to see if the ambassadors had any personal interests in the Amulsar project. Mr. Fraser responded to the letter by ensuring that their ambassadors' actions were within the law and they don’t have any personal interests in the mine. The U.S. State Department did not respond to the letter.
In terms of Amulsar, the inadequately favorable, and sometimes even scared approach by the former and present regimes toward mining companies can only be explained by corrupt connections. This can be manifested through offshore links that officials from the former and current regime have indicating that they are possibly real owners or have other connections to the company. In any case, the absence of data transparency on people involved in this company makes it impossible to eradicate corruption in this sector. The current administration understands this very well. There are people today in high positions that were also part of the former regime and have connections to the mining sector. This makes it evident that the real owners will not be exposed, at least during this term of this Government.
EITI, By and Large, Has Failed its Mission
It was already mentioned that EITI is an important tool for ensuring transparency in the mining sector. The main mission of this initiative is to reconcile the three main players in the field of natural resource extraction: the Government, the mining companies and civil society. It was for this aim that the EITI Standards were developed: a toolkit to ensure mining companies were financially accountable. Despite the fact that Armenia has had success rates in guaranteeing what the Standards demand, however, it has failed in the most important issue to which the initiative has paid little attention, that is the characteristics specific to Armenia’s mining sector. Taking into account the irresponsible way all metal mining companies have been carrying out their operations, Armenian society is more inclined to justifiably worry about its environment and ensuring its health. This issue is not regulated by EITI Standards. However, every country is free to regulate this issue based on their priorities. During Armenia’s EITI process, this issue was ignored, despite the fact that civil society representatives considered it a main priority. As a result, EITI failed its main mission, which was to reconcile and bring to the negotiation table all main interested parties in the sector.
Society has been widely opposing every single step taken toward mining development due to the irresponsible mining policies adopted by the former and current regimes. For the former regime, the reason was clear: corruption. But now…?
Today, ELARD, a Lebanese consultancy firm, carried out a so-called international expert opinion on the Amulsar Mine. This investigation is not international and, by and large, is not an investigation. Almost 400,000 USD was allocated from Armenia’s state budget to ELARD for a review of an existing document (Environmental Impact Assessment) on the Amulsar project, and not toward an independent, separate investigation. This cannot be considered an investigation at least within the context for which funding was allocated. This investigation has only deepened disagreements and has not provided any solutions. The so-called selection process for the organization that would carry out this investigation is in and of itself direct proof of systemic corruption within state bodies regulating the field.
The answers to the following questions will reveal where corruption is hiding:
1 - Which state body developed the technical tasks for the investigation on the Amulsar Mine? (The Prime Minister’s Office, Ministry of Nature Protection, the Investigative Committee of Armenia or another body?)
2 - Which organizations applied to carry out the investigation on the Amulsar Mine? (All applicant organizations from the preliminary stage to those that were shortlisted).
3 - Which state body chose the organization and based on what criteria was ELARD chosen?
4 - Were local experts included in the above-mentioned organization’s work? Who were the experts and did they take part in the development of the design document for the mine?
5 - What kind of document will be prepared as a result of this investigation and what legal status will this document have? (An expert conclusion to be used in a criminal case, or something else? Will the document have the legal power to ascertain whether or not the mine can be permitted as a foundation for the Government’s decision?)
Since these questions are yet to be answered, it’s irrelevant to review the investigation carried out by this organization.
*Artur Grigoryan served as the Head of the Republic of Armenia’s Inspectorate for Nature Protection and Natural Resources from June 2018 to January 2019.