U4 ISSUE June 2017 No. 7 Shadow Value Chains Tracing the link between corruption, illicit activity and lootable natural resources from West Africa Åse Gilje Østensen & Mats Stridsman Anti- Corruption Resource Centre www.U4.no U4 is a web-based resource centre for development practitioners who wish to effectively address corruption challenges in their work. U4 is operated by the Chr. Michelsen Institute (CMI) – an independent centre for research on international development and policy – and is funded by the DFAT (Australia), Danida (Denmark), DFID (UK), BMZ (Germany), Norad (Norway), SDC (Switzerland), Sida (Sweden) and the Ministry for Foreign Affairs of Finland. All views expressed in this Issue are those of the author(s), and do not necessarily reflect the opinions of the U4 Partner Agencies or CMI/U4. (Copyright 2017, CMI/U4) Cover photo: flickr user Jaione Dagdrømmer (Creative Commons) Shadow Value Chains Tracing the link between corruption, illicit activity and lootable natural resources from West Africa Åse Gilje Østensen & Mats Stridsman U4 Issue June 2017 No 7 Abstract Illicit natural resource trade continues to benefit corrupt officials, criminal and terrorist networks and to divert resources away from development, security and the common good in West Africa. How are Liberian timber, Sierra Leonean diamonds, Malian gold and Nigerian oil traded outside, and intertwined with, legal value chains before ending up in what is often legal consumer markets? By collating recent knowledge of the ‘shadow value chains’ of these resources, this paper seeks to explore if and how illegally traded natural resources sponsor other types of illicit activity, such as organized crime and terrorism. Furthermore, how are these activities facilitated by corruption in the different cases? The paper gives a number of recommendations. The perhaps most important one is that in order to improve interventions, in-depth understanding of local power relations and incentive structures in these individual shadow value chains is crucial. Such knowledge should be paired with increased attention to how international actors and networks facilitate and accommodate illegitimate private gains stemming from lootable West African natural resources. Acknowledgements The authors would like to thank the Swiss Agency for Development and Cooperation for constructive inputs on this paper. We are also grateful to the many insightful comments provided at an early stage by Morten Bøås of the Norwegian Institute of International Affairs and Tina Søreide of the Norwegian School of Economics. Colleagues from the Chr. Michelsen Institute read and commented on earlier drafts and provided us with very helpful comments and suggestions. All remaining errors and inconsistencies are the responsibilities of the authors. Shadow Value Chains. Tracing the link between corruption, U4 Issue 2017:7 www.U4.no illicit activity and lootable natural resources from West Africa Contents Abstract ................................................................................................................................................................................2 Acknowledgements ...........................................................................................................................................................3 1. Introduction ....................................................................................................................................................................6 1.1 Methodology ................................................................................................................................................................7 2. Background .....................................................................................................................................................................8 2.1 What do we know from the existing literature? ........................................................................................8 Natural resources and the financing of armed conflict ..................................................................8 Natural resources and the financing of terrorism ...........................................................................9 Natural resources and organised crime ........................................................................................... 10 Corruption in natural resource management .................................................................................. 10 2.2 Framing corruption and complicity in the four cases .......................................................................... 11 3. Case studies: How are natural resources used as a financial source for illicit activity? ................... 15 3.1 Sierra Leone – Are diamonds forever a rebel’s best friend? ............................................................. 15 Context ........................................................................................................................................................ 15 The importance of diamonds to Sierra Leone ................................................................................. 16 A historic perspective on the Sierra Leone Diamond Trade ....................................................... 17 How do diamonds divert from the legal value chain?.................................................................... 19 Do diamonds finance illicit activity? .................................................................................................. 21 How is the illicit trade facilitated by corruption? .......................................................................... 23 3.2 Liberia and timber: Rooting out the illicit trade? .................................................................................. 25 Context ........................................................................................................................................................ 25 The importance of timber to Liberia .................................................................................................. 26 How does timber divert from the legal value chain? ..................................................................... 27 Does timber finance illicit activity? ................................................................................................... 29 How is the illicit trade facilitated by corruption? .......................................................................... 30 4 Shadow Value Chains. Tracing the link between corruption, U4 Issue 2017:7 www.U4.no illicit activity and lootable natural resources from West Africa 3.3 Mali – Golden opportunities lost? ............................................................................................................. 32 Context ........................................................................................................................................................ 32 The importance of gold to Mali ............................................................................................................ 33 How does gold divert from, and reappear in, the legal value chain? ........................................ 34 Does ASM gold from Mali facilitate illicit activity? ..................................................................... 37 How is the diversion of gold from the legal market facilitated by corruption? .................................. 39 3.4 Nigeria – Oil as lubricant for networks of grievance and greed ........................................................ 41 Context ........................................................................................................................................................ 41 The importance of oil to Nigeria ......................................................................................................... 42 How does oil divert from the legal value chain? ............................................................................. 43 How is oil reintroduced into the legal value chain? ...................................................................... 44 Does oil theft finance other illicit activity? ..................................................................................... 45 How are oil theft and related illicit activity facilitated by corruption? ................................. 47 3.5 Summing up the findings ................................................................................................................................ 51 4. Entry points for external actors ........................................................................................................................... 56 What does this diagnosis of complexity mean for interventions in general? ..................................... 56 4.1 Recommendations ........................................................................................................................................... 57 4.2. Some key issues that merit further attention ...................................................................................... 62 5. References .................................................................................................................................................................. 65 5 Shadow Value Chains. Tracing the link between corruption, U4 Issue 2017:7 www.U4.no illicit activity and lootable natural resources from West Africa 1. Introduction Sierra Leone, Liberia, Mali and Nigeria all face grave challenges relating