Inadequate Due Diligence and the Infrastructure Sector

21st July 2021

By Anna Griffin (Accountable Infrastructure Project Officer) and Amelia Pace (Project and Executive Officer)

Australia’s lax corporate registry system enables companies with a poor business integrity track record to use Australia as a launching pad for corrupt activities in the Pacific.

Our Pacific neighbours operate under the assumption that adequate due diligence is done by Australia when companies register here, but this is simply not the case. This means that companies that are corrupt, that engage in financial crimes, or have owners who are politically exposed, can legally register in Australia and operate in corruption prone jurisdictions, such as the Solomon Islands, where there are fewer regulatory safeguards. This creates the conditions for corrupt and criminal activity to thrive. When these companies operate in the infrastructure sector – one of the most corruption prone sectors globally – the potential for nefarious activity increases. This is due in part to the scale and complexity of projects.

Complex contracts and opaque business structures used by companies can be a breeding ground for bribery and corruption. They can provide a cover for money laundering or tax evasion and can result in projects that are not in the public interest, provide little to no social benefit for communities, and can cause environmental and social damage. As a regional leader and financier of infrastructure projects in the Pacific, Australia should be championing responsible business conduct and strengthening efforts to conduct robust due diligence of Australian registered companies and their directors.

The Issue:

The Pacific region is estimated to need US$3.1 billion in investment per year until 2030 for critical infrastructure projects. Covid-19 has seriously affected poverty reduction in the Asia-Pacific, with the number of people living in poverty in the region likely to have increased in 2020. To improve livelihoods, transport is needed to connect people to jobs, markets and education; information communications technologies are vital to connect people through more reliable internet; and energy projects are required for access to lighting, communications and refrigeration.

When investment needs are great, the risk of inefficiency and misappropriation of funds is high. The very nature of large infrastructure projects – such as roads, railways, water sanitation, and social housing projects – leave them comparatively more exposed to corruption risks than other sectors. The scale is huge, the costs are high and with multiple contractors and agencies involved, undue influence, lobbying by special interest groups, cartel behaviour and bribery is common.

Added to this, Australia’s weak corporate register allows companies and their associated entities – often with opaque business structures – to use Australia as a launching platform for dubious activity overseas. Countries have a legitimate expectation that Australian registered companies have already been properly scrutinised, but the lack of a robust system allows people who have been involved in corruption and other illegal activities to register their businesses in Australia.

A company can be registered without adequate due diligence checks, beneficial ownership disclosure, identification of potential links to politically exposed persons, or a robust assessment of their business activities and legitimacy. While Australia’s ongoing commitment to the Pacific through infrastructure investment is welcome, unless Australia’s corporate laws are strengthened, Australia will continue to be a potential launching pad for companies (both Australian and international) that have not been properly ‘checked out’.

Why it Matters:

When companies operate in a corruption prone sector, in a corruption prone country, the need for robust due diligence cannot be underestimated. In line with its international commitments to prevent financial crimes, including money laundering, Australia must address the role it plays as a launching platform for corrupt or criminal individuals and companies. As is stands, Australia’s corporate registry is unable to meet these responsibilities. This is especially concerning when large infrastructure contracts are awarded to questionable companies in places like the Solomon Islands, where it has been shown that there is often little benefit to communities, royalties are low and sustainability practices are lacking causing environmental and social damage.

“There being no due diligence check, beneficial ownership disclosure and identification of links to politically exposed persons creates a big worry.” Ruth Liloqula, Executive Director Transparency Solomon Islands

While the Australian government is not responsible for contract and licensing decisions in the Solomon Islands or elsewhere, it does have an obligation to ensure it does not exacerbate negative impacts by providing legitimacy to companies with poor track records through lax regulatory practices. It also has a responsibility to ensure that Australian companies demonstrate responsible business conduct and compliance with the OECD Guidelines for Multinational Enterprises. This responsibility sits with the Australian National Contact Point for the OECD Guidelines.

Gold Ridge Mine, A Case Study:

AXF Resources is an Australian registered company that has been subject to liquidation and breaches of directors duties, where $200 million has flowed through the company with reportedly no records to show for it. The court appointed liquidator was not provided with books, records, or company accounts covering a period of five years. The AXF Group has also defaulted in a number of high-profile property deals in Sydney, raising further red flags, given the prevalence of money laundering in the Australian property market.

In 2020, AXF Resources was the part owner of the Gold Ridge mine in Solomon Islands. The company initially bought a 90% stake in the mine and then sold a majority share to Chinese company Wanguo. The Gold Ridge mine, previously Australian owned and operated, has had a troubled history, which includes financial difficulty as well as structural and environmental damage partly caused by extreme weather events. AXF’s liquidation and the swift transfer of its majority stake raises questions about the business practices of the company, its directors, and the intentions behind purchasing the mine. Whether the above is an example of corporate mismanagement, a breach of directors’ duties or an indication of more serious and criminal conduct is unclear, but due diligence checks into the background and integrity of this company, as part of a robust corporate register, may have revealed further information.

In addition, an opaque deal worth US$825 million with China State Railway to operate the mine has since been finalised. TI-Solomon Islands has confirmed the conditions of the contract remain secret, there was no consultation with the customary landowners and other impacted communities, and real beneficiaries are unknown. The speed and scale of the project means communities will be resettled, loose their land and livelihoods, and environmental degradation is likely.

“The current system can and does result in devasting impacts on livelihoods, land and resources and rights of tribes who have customary rights over these lands.” Ruth Liloqula, Executive Director Transparency Solomon Islands

Australia’s strong focus on infrastructure spending through its aid program, the Australian Financing Facility for the Pacific, and its involvement in the Blue Dot Network should increase its obligations to ensure basic due diligence is done on companies registering their businesses in Australia and operating in the Pacific. This would make it more difficult for companies who engage in corrupt or criminal activities to benefit from the legitimacy the Australian corporate registry provides.

Australia must promote Business Integrity best practice in Australia and Internationally:

A stronger corporate registry system that conducts basic verification and due diligence of companies and their directors would raise the standards for corporate registration in Australia. This would go some way to prevent businesses who wish to engage in corrupt or criminal activity from using Australia as a launching pad. Currently, it is too easy for these companies to register their businesses here and then operate in countries with even fewer regulatory checks and balances. As a respected jurisdiction, Australia has an obligation to implement best practice regulatory oversight and champaign responsible business conduct. This is particularly important as Australia funds and promotes large infrastructure spends as part of the aid program to help achieve the development goals of our Pacific neighbours. Otherwise, Australia’s inadequate corporate register will continue to provide a platform for companies with a poor track record to engage in business conduct that can have devastating human rights and environmental impacts, and fuel corruption and money laundering in countries such as the Solomon Islands. Our neighbours, put trust in Australia that a company registered here has gone through some sort of due diligence assessment to check their track record, connections and who will ultimately benefit – but that is simply not the case.

Photo 1: Yancy Min on Unsplash

Photo 2: JESHOOTS.COM on Unsplash

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