Fall 08 resource matters The Global Magnitsky Effect How will U.S. sanctions against Israeli billionaire Dan Gertler affect the DR Congo’s extractive sector? February 2018 Contact : [email protected] The impact of U.S. sanctions against Gertler on Congo’s extractive sector resource matters In December 2017, the U.S. government sanctioned Israeli billionaire Dan Gertler under the Global Magnitsky Act for high-level corruption The sanctions intend to cut off the businessman, as well as other designated companies, from the U.S. financial system and will have major impacts well beyond the American borders. Resource Matters estimates that Swiss commodity trader Glencore owes nearly $200 million in royalties to Gertler-affiliated companies over the next two years. South African miner Randgold has committed to providing exploration assistance on a Gertler-controlled gold concession. Both companies have said they would “comply with sanctions,” but neither has stated whether it has broken off their partnership with Gertler for good. Nor has the Congolese government said how it would deal with Gertler’s companies that own two oil blocks in eastern Congo. Will the government revoke those titles – or will it instead retaliate against sanctions that affect one of its closest business associates? The real impact of Global Magnitsky will depend on them – and on the U.S. Treasury, tasked with enforcing the measures and adding new entities to the sanctions list. Cover: The Global Magnitksy sanctions list shows that Dan Gertler holds both Israeli and Congolese nationalities. © Resource Matters 2018 2 The impact of U.S. sanctions against Gertler on Congo’s extractive sector resource matters The Global Magnitsky Effect How will the U.S. sanctions doesn’t get much worse for a against Israeli billionaire businessman than U.S. sanctions,” Gertler affect Congo’s an investment banker told Resource extractive sector? Matters. 2017 ended rather dramatically for And yet, the real impact will depend Israeli billionaire Dan Gertler, one of on how Gertler’s existing partners the most controversial businessmen comply with the sanctions. Six in the Democratic Republic of weeks after the sanctions, Congo. On December 21st, two Randgold, Congo’s foremost gold days before the mining magnate’s operator, announced that it is called 44th birthday, U.S. President Donald ‘force majeure’ and said that it Trump sanctioned him under the wanted to stop providing exploration Global Magnitsky Act,1 a new law services to Gerler’s gold mining that allows the American president company. Likewise, Glencore, the to sanction human rights abusers Swiss commodity trading giant that and corrupt actors.2 owes Gertler nearly $200 million in royalties over the next two years While the international press and under outstanding contracts, told civil society have criticized Gertler’s Resource Matters that it has not controversial mining and oil deals in paid any royalties since the 3 Congo for many years, this is the sanctions were enacted. However, first time a foreign government has the legal conundrum for both of explicitly targeted the mining Gertler’s partners is not over yet, magnate for high-level corruption in and neither company has provided Congo. a final update on whether they have definitively interrupted their It is also the first time a government business relationship with Gertler’s has imposed “tangible and companies. significant consequences”4 for such practices. Other Congo-focused The real impact of Magnitsky will sanctions had so far targeted depend on their ultimate decisions security officials involved in human as to how to deal with Gertler going rights violations or ministers who forward. It will also depend on the obstructed the electoral process as reaction of Congo’s political President Kabila has sought to cling authorities. Will the government on to power beyond the keep protecting the businessman? constitutional mandate, which Or will the government revoke the ended in December 2016. This time, two oil blocks that Gertler’s the sanctions touch the core of a sanctioned companies own in financial system. According to the eastern Congo? U.S. Treasury, “Gertler has acted for or on behalf of [Congolese A corrupt network “that President Joseph] Kabila.”5 threatens the stability of political systems” The sanctions intend to cut off Gertler and his businesses from the The U.S. Treasury said Gertler is a American financial system. “It “billionaire who has amassed his 3 The impact of U.S. sanctions against Gertler on Congo’s extractive sector resource matters fortune through hundreds of millions and companies, risk severe of dollars’ worth of opaque and penalties if they grant him loans or corrupt mining and oil deals in the process his wire transfers.11 Democratic Republic of the American individuals risk up to 20 Congo.”6 The deals allegedly years in prison for violating the resulted in a $1.3 billion loss to sanctions.12 Congo.7 According to the Global Magnitsky Executive Order, his Even non-American banks will most corrupt practices have “reached likely decline to process dollar such scope and gravity that they transactions involving sanctioned threaten the stability of international entities. Such wires generally have political and economic systems.” to transit through correspondent banks in the United States, which The U.S. Treasury also sanctioned have to block and report on any key components of Gertler’s attempted wire that comes to their network, including his holding attention.13 French bank BNP companies Fleurette and Rozaro, Paribas settled for a record $8.9 16 of their subsidiaries, the Gertler billion penalty for concealing its Family Foundation and Gertler’s financial operations in Sudan, Iran Congo-based manager, Pieter and Cuba in violation of U.S. Deboutte. 8 Jarvis, the company that sanctions.14 In the largely dollarized runs in-country operations from an extractive sector, the extraterritorial office located a few blocks away impact on Gertler, his holdings and from President Kabila’s residence, subsidiaries will be significant. also features on the sanctions list. Nearly half of all entities the United No more Euros? No more States targeted that day were linked WhatsApp? to Dan Gertler. Gertler and his counterparts could Fleurette Group declined to theoretically still rely on euros, comment on the sanctions.9 The Congolese francs or any other non- group has systematically denied U.S. currency. And yet, even non- any wrongdoing. US entities will think twice before doing business with the Gertler One direct effect is that Gertler is no network. longer welcome in the United States of America. This might be the least This is in part because of the vivid of the billionaire’s worries. The red due diligence flag fluttering front American judiciary, in an action that and center as a result of the pre-exists and is separate from the Magnitsky sanctions’ allegations of sanctions, is investigating the corruption. For years, PR firms, tax corrupt deals of one of Gertler’s haven-based registered agents and most important former business some foreign investors have partners, New York hedge fund dismissed media coverage of Och-Ziff, including the role of Och- Gertler’s suspicious deals. This Ziff’s former managers.10 time, the warning comes straight from America’s Office of Foreign More fundamental is that the Assets Control (OFAC). This brings sanctions intend to cut Gertler’s ties due diligence obligations to a whole with the U.S. dollar system. U.S. new level. persons, which includes individuals 4 The impact of U.S. sanctions against Gertler on Congo’s extractive sector resource matters Under Construction More importantly, any of Gertler’s business and political circles, partners is at risk of being prevents its users from transferring sanctioned if it keeps dealing with its services to sanctioned the billionaire. The U.S. Treasury individuals.16 Fleurette’s website, can sanction anyone it determines fully operational on the day of the to have “provided financial, material, sanctions, has since reverted to or technological support for, or being ‘under construction’.17 goods or services to or in support Facebook has blocked the account of” a sanctioned entity. It does not of a warlord with 4 million followers matter whether such support is in who was sanctioned on the same cash or in kind, in dollar or in Swiss day as Gerlter – although Gertler’s francs. It also does not matter own profile still seems active.18 “It’s whether the service provider is hard to see how [Facebook] American, Israeli or Kazakh. wouldn’t be bound by this law,” sanctions expert Philippe Urofsky Since this is the first round of Global told online media outlet Quartz.19 Magnitsky sanctions and no implementation regulations have Anyone who helps a been issued, there is no definition yet of ‘financial, material or sanctioned entity to a technological support’ that could computer, a vehicle trigger these so-called secondary or lodging could sanctions. Under a similar sanctions program specifically relating to the potentially end up on Democratic Republic of Congo the sanctions list. however, this concept has been defined very broadly: anyone who When asked whether it is still helps a sanctioned individual to a providing services to Fleurette, PR computer, a vehicle or lodging could firm Powerscourt said it does not potentially end up on the sanctions comment on its clients. In the same list.15 email, it did answer in name of Fleurette that the latter declines to Some IT service providers have comment, suggesting it is still adapted their policies to this risk, providing PR support to the 20 although application of sanctions in sanctioned entity. the Internet world has been tricky. WhatsApp, a messaging service actively used in Congolese 5 The impact of U.S. sanctions against Gertler on Congo’s extractive sector resource matters How does this affect Glencore’s royalty Congo’s extractive conundrum sector? Glencore, one of the top five mining operators in the world,24 runs two In the Congolese extractive sector, major large copper-cobalt the primary source of Mr.