OIL AND CAPITAL FLIGHT: THE CASE OF ANGOLA JANUARY 2021 By Nicholas Shaxson Tax Justice Network, Berlin PERI WORKING PAPER SERIES: CAPITAL FLIGHT FROM AFRICA / WP#534 Oil and Capital Flight: The Case of Angola Nicholas Shaxson January 2021 A grant from the Open Society Foundation through the Political Economy Research Institute (PERI), University of Massachusetts at Amherst, is gratefully acknowledged. Additional support from Freidrich Ebert Stiftung, Germany is acknowledged. i Preface to the Working Paper Series on African Capital Flight Capital flight constitutes a major constraint to Africa’s efforts to fill the large and growing financing gaps that hold back its progress towards achieving sustainable development goals. The mounting evidence on the unrecorded outflows of capital from Africa has spurred calls for strategies to curb the financial hemorrhage that is afflicting the continent. The existing evidence is still inadequate, however, on four fronts. First, the quantitative evidence is predominantly aggregate and does not furnish adequate country-specific information on the mechanisms of capital flight, its institutional contexts, and the role of domestic and foreign players in facilitating it. Second, the literature has not paid adequate attention to the destinations of wealth accumulated through capital flight and the roles of the banking sector and public institutions in destination jurisdictions. Third, much of the literature conflates the capital flight with the broader concept of illicit financial flows. While all capital flight is illicit owing to its unrecorded transfer – and often, as well, by virtue of the illegal origins of the wealth, and the failure to declare the assets and pay tax on the associated income – not all illicit financial flows are capital flight; for example, payments for smuggled imports are an illicit flow but distinct from capital flight. Fourth, the existing literature has not sufficiently explored the two-way relationship between capital flight and governance in national and international institutions. To help fill these gaps in the literature, the African Development Policy Program at the Political Economy Research Institute has initiated detailed analyses in a project generously supported by the Open Society Foundations and the Friedrich Ebert Foundation. This Working Paper series presents the project’s outputs. Our goal in issuing these reports is to engender informed public participation in decision making on financial regulation. Key findings will be distilled and published in the coming year in an edited volume that is forthcoming from Oxford University Press. Léonce Ndikumana Director, African Development Policy Program University of Massachusetts Amherst ii iii List of Acronyms Acrep ACR Exploracão Petrolífera BAI Banco Africano de Investimentos BdP Banco de Portugal BES Banco Espírito Santo BESA Banco Espírito Santo Angola BFA Banco de Fomento Anngola BIS Bank for International Settlements BNA Banco Nacional de Angola BofA Bank of America BoP Balance of Payment BPC Banco de Poupanca e Credito CAH Cochan Angola Holdings LLC CDIS Coordinated Direct Investment Survey CIF China International Fund CNC Conselho Nacional de Carregadores CPIS Coordinated Portfolio Investment Survey CRS Common Reporting Standard CSIH China Sonangol International Holdings Limited DMCC Dubai Multi-Commodities Center DoTS IMF's Direction of Trade Statistics DRC Democratic Republic of Congo ECB European Central Bank ESFG Espírito Santo Financial Group FCPA U.S. Foreign Corrupt Practices Act FDI Foreign Direct Investment FNLA Frente National de Libertacão de Angola FPSO Floating Production, Storage and Offloading FT Financial Times GAL Golfrate Africa Ltd GEFL Sociedade de Gestão e Participacões Financeiras GHAL Golfrate Holdings Limitada GRN Gabinete de Reconstrucão Nacional HDI Human Development Index ICIJ International Consortium of Investigative Journalists IFF Illicit Financial Flows IMF International Monetary Fund INE Instituto Nacional de Estatística IOCs International Oil Companies iv KPMG Klynveld Peat Marwick Goerdeler LNG Liquefied Natural Gas MOF Russian Ministry of Finance MPLA Movimento para a Libertacai Popular de Angola MSA Mehenou Satou Amouzou OPEC Organization of the Petroleum Exporting Countries PEIL PE Investments LTD. PEP Politically Exposed Person PIT/IRP Petroleum Income Taxes/ Imposto sobre o rendimento do petróleo PSA Production Sharing Agreement PwC Price Waterhouse Coopers QFO Quasi Fiscal Operations RBS Royal bank of Scotland SBS Société de banque suisse SEC U.S. Securities and Exchange Commission SHA Sociedade de Hidrocarbonetos de Angola SIGFE integrated state financial payments system SLN Sociedade Lusa de Negócios SPV Special Purpose Vehicle SSI Sonangol Sinopec International SWF/FSDEA Fundo Soberano de Angola TAIS Trans Africa Investment Services UAE United Arab Emirates UNCTAD United Nations Conference on Trade and Development UNITA União Nacional para a Indenpendência Total de Angola v Table of Contents 1. Introduction ........................................................................................................................................... 1 2. Oil and the Resource Curse ................................................................................................................. 11 3. Independence and Its Aftermath .......................................................................................................... 21 4. Capital Flight Amid War ..................................................................................................................... 26 5. The “Golden Decade” .......................................................................................................................... 50 6. Sonangol and its Foreign Partners ....................................................................................................... 71 7. Beyond Oil ........................................................................................................................................... 89 8. Blowback in Portugal ........................................................................................................................ 108 9. The Bankers ....................................................................................................................................... 120 10. Conclusions: Where Angola’s Money Went ................................................................................... 140 Annex A: Sonangol Joint Ventures ....................................................................................................... 151 Annex B: How Angolan oil contracts work .......................................................................................... 161 Annex C: Note on data .......................................................................................................................... 166 Annex D: BNA monthly foreign exchange operations .......................................................................... 168 Annex E: Participants in the Angola-Russia debt deal .......................................................................... 169 Annex F: Confidential Sources .............................................................................................................. 171 Annex G: Oil discrepancies ................................................................................................................... 172 vi 1. Introduction During its “golden decade,” the roughly 12-year period between the end of its civil war in 2002 and the oil price crash of 2014-2015, Angola exported more than half a trillion dollars’ worth of oil. This could have transformed Angola’s economy for the benefit of its 30 million people. Instead, an old patronage system became more deeply entrenched and ossified, and most Angolans saw few benefits beyond the fact that the bloodshed had ended. Now oil prices are down, and the oil is slowly starting to run out, and there is relatively little to show for it beyond some showy infrastructure and construction projects, mostly located in and around wealthier parts of the country’s capital, Luanda. This raises a big question: where did all the money go? A large chunk of Angola’s mineral wealth ended up overseas, in the hands of a relatively small number of individuals, enabled by an infrastructure of mostly western intermediaries. This paper uses “investigative economics” to uncover how these outflows happened - the who, what, why, where and how of this giant money drain. I conducted fieldwork in Lisbon in June 2018 and Angola in October 2018. The latter visit to Luanda ANGOLA: BASIC STATISTICS (2018) came less than two weeks after the inauguration of the new president, João Lourenço, replacing president Population (2016) 30.8 million dos Santos, who had been in power since 1979. Will GDP per capita $5,725 the new president set about harnessing the remaining (2011 PPP US dollars) oil wealth to transform the country? Early signs are UN Human Development 147 that he would like to do so. But without foreign help Index rank (out of 188 to tackle the international networks that have assisted countries) in the looting of Angola, this will be hard or Income per capita rank -16 impossible. minus HDI rank Source: United Nations Development Programme, Much has been written over the years on the billions Human Development Report 2019. New York: UNDP, 2019. of dollars that have gone missing from Angolan state 1 budgets. This study looks at a different but related