ZEITI Reconciliation report for the year 2013

ZAMBIA EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (ZEITI)

BENEFICIAL OWNERSHIP REPORT

September 2015

Moore Stephens LLP|Page1

ZEITI Beneficial Ownership Report

Table of Contents

SUMMARY

Overview

Key Findings

Recommendations

1.INTRODUCTION

1.1.Background

1.2.Objective

1.3.Nature and extent of our work

2.LEGAL FRAMEWORK OF BENEFICIAL OWNERSHIP DISCLOSURE

2.1.Legal and regulatory framework governing companies

2.2.Beneficial ownership in Zambia’s legal and regulatory framework

2.3.Disclosure requirements for listed companies

2.4.Disclosure requirements for mining companies

2.5.Disclosure requirements for Government officials

2.6.Disclosure requirements in Company registers

3.INFORMATION ON BENEFICIAL OWNERSHIP THAT SHOULD BE DISCLOSED ACCORDING TO EITI STANDARD

3.1.EITI requirements

3.2.Beneficial ownership declaration format

4.PROPOSED DEFINITION OF BENEFICIAL OWNERSHIP

5.COMPANY RESPONSES

5.1.Data collection methodology

5.2.Summary of company responses

5.3.Full company responses

ANNEXES

Annex 1: Template beneficial ownership declaration

Annex 2: Extractive companies included in the scope of the 2012-2013 EITI Reports

LIST OF ABBREVIATIONS
CA / Companies Act [1994]
EITI / Extractive Industries Transparency Initiative
FQM / First Quantum Mining and Operations Ltd-BM M S
LuSE / The Lusaka Stock Exchange
GRZ / Government of the Republic of Zambia
SEC / Securities and Exchange Commission
SOE / State Owned Entriprise
ZCCM- IH / Zambia Consolidated Copper Mines – Investment Holdings Plc
ZEC / Zambia EITI Council
ZEITI / Zambia Extractive Industries Transparency Initiative

SUMMARY

Overview

Transparency about company and government payments is important for accountability, but tells citizens little about who owns extractive companies and ultimately benefits from thesecompanies’ activities. In many cases, the identity of the real owners – the ‘beneficial owners’ – of the companies whohave acquired rights to extract oil, gas and minerals is unknown, often hidden behind a chain of corporate entities. This opacity can contribute to corruption, money laundering and tax evasion in the extractive sector.

Revealing the real people behind companies is critical to achieving genuine reforms in Zambia and to strengthen the status of EITI Compliant countries.

The EITI Board agreed in February 2013 that following a period of testing and learning, EITI should in the future encompass thedisclosure of beneficial ownership in oil, gas and mining companies operating in implementing countries.

By launching this report, Zambia seeks to ensure that information about extractive companies’ beneficial owners is available to the public. The objective of this report is to assess the feasibility of requiring beneficial ownership disclosure through the EITI, including reviewing existing disclosure practices in the country and identifying suitable approaches for disclosure.

For this purpose, the Extractive companies selected in the reconciliation scope of the 2012-2013 EITI reports were requested to declare their ultimate beneficial ownership.

Methodology for data collection

Prior to requesting beneficial ownership data, we prepared written instructions covering completion of reporting template and conducted a workshop in Kitwe to explain the BO definition and to provide further explanations on the instructions and templates.

During this workshop, the reporting template was presented to the companies and reporting instructions and guidance notes were explained. The presentation contained illustrative practical examplesof identification of the ultimate BO.

Following the workshop, Moore Stephens sent information requests, the reporting template and guidance to each of the companies included in the 2012-2013 Reconciliation report scope. Requests were sent by email using contact information provided by the ZEITI Secretariat. Reporting companies were given a period of 2 weeks within which they were required to submit the completed Template directly to us. These templates had to be signed by an authorised representative of the companies selected.

After the reporting deadline of 26 June 2015, Moore Stephens contacted the companies which failed to provide a response by email and invited them to disclose their ownership again. Calls were also made to each of the companies which had not responded to encourage them to submit the information requested.

Where companies did not respond but they or their parent companies were understood (from information from their website) to beeither publicly listed or state-owned, this has been reported and references or links were included in the report accordingly.

Obstacles encountered during the pilot study

Most of the companies did not attend the workshop especially those mainly relevant for the disclosure of BO data, i.e not publicly listed.

Most of the participants were at middle management level with limited access to BO data.

Some participants expressed concerns about BO reporting costs (time consuming) and theirinability to identify the Beneficial Owner,especially when there is a chain of companies between the beneficial owner and the extractive company in Zambia.

There is a complete lack of understanding on behalf of some companies of the importanceof BO disclosureand itscorrelation within the EITI process.

Key Findingsand recommendations

Appropriateness of the agreed beneficial ownership definition and related information on company ownership

The proposed BO definition was shared with MSG members but has yet to be discussed at the Committee level.

The appropriateness of the BO definition proposed in the report needs to be addressed by MSG on the basis that EITI multi stakeholders will give their feedback in order to agree thepercentage shareholding in a company that a person has to hold or controls in order to qualify as a beneficial owner and take necessary action to implement the BO reporting process.

Exhaustiveness and quality of the beneficial ownership information disclosed

A training workshop was held prior to the dispatching of the BO reporting templates. During this workshop, the reporting template was presented to all reporting entities and instructions and guidance notes were provided for the preparation of the BO declaration.

We noted that most of the companies did not attend the workshop and those present were mostly listed and wholly owned by publicly listed companies.

During the workshop, companies raised the question of BO declaration cost and substance. They also raised questions about the definition and mechanisms to collect such data.

In total, 30 companies participated in the ownership review including eighteen (19) publicly listed (wholly-owned subsidiaries of public listed companies) and state owned companies.

We were provided with beneficial ownership details by 9 mining companies (including 8 publicly listed and state owned companies) and partial information from 1 company.Only one company, ‘GRIZZLY MINING LIMITED’ (among the non-listed) provided the information requested in the template but without specifying the date of birth, national identity number, date when Beneficial interest was acquired and whether the Beneficial Owner is politically involved person.

Eleven (11) publicly listed (wholly-owned subsidiaries of public listed companies) and state owned companies have also participated in the survey but they did not submit a BO declaration. Where companies have not responded but they or their parent companies are understood to be either publicly listed or state-owned, information was included in this report on the basis of the official company’s websites.

Despite repeated requests for information, eight (9) companies have not provided any ownership information.

Therefore, we cannot reasonably conclude that this report duly covers the ultimate beneficial ownership of extractive companies in Zambia as at December 2014.

We recommend that the ZEITI Secretariat should ensure that reporting entities are made aware of the importance of the BO declaration. Particular attention should be given to the ownership of companies which are not owned by listed companies or SOEs.

Furthermore, we strongly recommend that more training should be provided to companies on BO reporting requirements. During training, the BO template should be presented and instructions and guidance notes should be provided for the preparation of BO declaration.

Regulation of the BO concept

On the basis of this report, MSG needs to decide on a definition of beneficial ownership which would be included in a revised version of the TOR. The issues to be considered with regards to the definition of BO include whether to cover ownership chains and which ownership thresholdsto pursue.

It is also recommended that MSG launches a consultation with GRZ along with extractive industry companies engaged in the country to agree a standard format for companies to display, substantiate and update ultimate beneficial ownership information according to EITI Requirement 3.11.

For this purpose, MSG could consider the setting up of a sub-committee in which CSO, regulators, companies, experts and other stakeholders are represented. This committee will allow for an exchange of information on the effectiveness and future developments of disclosure rules and regulations.

Given the issues raised by companies regarding BO definition and mechanisms to collect such data, it is recommended to issue guidance along with the regulation to assist companies in determining whether an individual is the ultimate owner of the company. Further guidance is available from international organisations, such asFinancial Action Task Force (FATF), Global Witness and NRGI which represent options that ZEITI could pursue.

Regulatory Reform

According EITI requirement 3.11(a) it is recommended that implementing countries maintain a publicly available register of the beneficial owners of the corporate entity(ies) which bid for, operate or invest in extractive assets, including the identity(ies) of their beneficial owner(s) and the level of ownership.

Currently, there is no comprehensive and publicly available database on beneficial ownership in line with the new EITI Standard. The country does maintain a publicly available register (Company register) with basic information on corporate entities. Information which may be accessed at BRELA includes the corporate entities full names, legal status, and year of incorporation and list of directors, but not ultimate beneficial owners.

MSG should launch a consultation with GRZ to initiate a regulatory reform aimed at bringing the Zambian disclosure rules and regulations in par with internationally acceptable standards.

Laws, regulations and contracts should all build in requirements for beneficial ownership disclosure, so that this becomes a standard requirement within Zambia’s legal framework. This could be achieved by:

  • including the definition of ultimate beneficial ownership in the mining and oil and gas acts;
  • including the BO disclosure requirements in the forthcoming mining and oil and gas contracts which are currently under negotiation;
  • extending the disclosure rules required by the Securities Act [1993] and Companies Act [1994] to include ultimate beneficial owners;
  • improving the current company register to provide beneficial ownership information;
  • requiring extractive companies to identify those persons with significant controls over the companies and maintain a register of those persons;
  • requiring extractive companies to disclose additional information on government officials as defined in Section 2.5 of this report. In the same way, foreign politicallyinvolved persons should also be considered; and.
  • making a BO register publically available, fully searchable and freely available online and stating clearly any exemptions if applicable.

By requiring extractive companies to provide this information to a central registry, there are additional benefits to EITI stakeholders, tax authorities and law enforcement agencies in saving time and being able to track the ownership structure of a company without waiting for the publication of the EITI report.

Making this information publicly available has advantages in terms of promoting transparency, building public trust and ensuring CSO and other stakeholders know better who the beneficial owners of the corporate entity(ies) that bid for, operate or invest in extractive assets are.

Company Register reform

Company register stipulated by the Company Act is a valuable source of information about the ownership of legal persons. The company register includes basic information on a company, such as company name, proof of incorporation, legal form and status, address of the registered office, basic regulating powers and list of directors.

However, the current company register des not include beneficial ownership information and is established to facilitate company formation and access to related information for trade purposes only. Consequently, the implementation of the beneficial ownership requirements through the existing company registry will need to substantially change its role, functions and resourcing.

A well-resourced and proactive company registry holding beneficial ownership information can be an effective mechanism because it allows stakeholders to access such information from a single source.

Whatever the option selected for BO disclosure support (central register or Company register), the basic information in the Company register should be made publicly available to facilitate timely access by EITI stakeholders and relevant authorities. Itis important to maintain a web-based system which provides current and relevant information about BO. Assurances and appropriate mechanisms also should be implemented in order to access, maintain and update information related to the beneficial owners.

Tim Woodward150 Aldersgate Street

PartnerLondon EC1A 4AB

Moore Stephens LLP

September 2015

1.INTRODUCTION

1.1.Background

The Extractive IndustriesTransparency Initiative (EITI) is a global coalition of governments, companies and civil society working together to improve transparency and accountability in the management of revenues from natural resources.

EITI issued a new global standard for transparency in the oil, gas and mining industries in July 2013 (the “EITI Standard”). With the new EITI Standard, the scope of EITI was expanded, in recognition of the need for greater disclosure on issues including beneficial ownership to arm citizens with the information they need to scrutinise oil, gas and mining sector deals, and to guard against corruption risks.

A pilot study was launched with the aim of assessinghow realistic it would be to obtain information for beneficial ownership disclosure of companies operating in the EITI sector.This study included reviewing existing disclosure practices and identifying suitable approaches to obtain disclosure from these companies.

Zambia joined EITI as a candidate country in May 2009 and became fully compliant on 19 September 2012. Zambia signed up for the pilot study and agreed to include beneficial ownership information in its 2012 and 2013 EITI reports, which were published in December 2014.The informationrelating to the beneficial owners of 30 mining companies included in these reports were however, inadequately disclosed.

Therefore, the Zambia EITI Council decided to collect additional information from the 30 mining companies in accordance with the EITI Requirement 3.11 which stipulates that “It is recommended that implementing countries maintain a publicly available register of the beneficial owners of the corporate entity (ies) that bid for, operate or invest in extractive assets, including the identity (ies) of their beneficial owner(s) and the level of ownership. ……Where such registers do not exist or are incomplete, it is recommended that implementing countries request companies participating in the EITI process provide this information for inclusion in the EITI Report….”

1.2.Objective

The purpose of this Report is to address the current difficulties met while requesting information relating tothe ultimate beneficial owners (as defined by EITI Requitement [3.11]) from extractive companies other than those publicly listed.

The report also recommends a standard definition of the term “Beneficial Ownership”, minimum reporting requirements, sharing of information amongst relevant Government Agencies and enforcement of disclosure requirements for beneficial owners. By implementing the recommendations of this report, it is expected that Zambia’s extractive companies will improve transparency and contribute to better compliance with regards to EITI disclosure requirements on beneficial ownership data.

1.3.Nature and extent of our work

We have performed our work in accordance with the terms of reference set out in the Request for Proposal and approved by the EITI International Secretariat.

The services requested included a review of key laws governing the disclosure of ownership information in Zambia and of any existing registers in the country as well as proposing a definition of beneficial ownership, consistent with EITI requirements, including ownership thresholds, for consideration by the Zambia EITI Council.

The report consists of three (3) chapters presented as follows:

  • an overview of key laws governing companies’ disclosure of ownership information (Chapter 1);
  • a description of information on beneficial ownership which should be disclosed in accordance with EITI Requirements (Chapter 2) ; and
  • a proposal for the definition of beneficial ownership (Chapter 3).

2.LEGAL FRAMEWORK OF BENEFICIAL OWNERSHIP DISCLOSURE

2.1.Legal and regulatory framework governing companies

Zambian law is based on the English Common law system. The legal framework governing companies incorporated in Zambia is the Companies Act [1994][1]. The Companies Act [1994] provides guidelines for the formation, administration, and winding up of registered corporate bodies.

There are various types of companies which can be formed in Zambia; namely limited by shares, limited by guarantee and unlimited companies. Furthermore, in Zambiaa company can be classified either as a private company or a public company. A “private company” means a private company limited by shares, a company limited by guarantee or an unlimited company. On the other hand, a “public company” means a company incorporated as such, being a company satisfying §14 of the Companies Act[1994].

Public limited companies are regulated by the Securities Act, Chapter 354[2] of the Zambian Legislation. All public limited companies must register with the Securities and Exchange Commission (SEC) and their shares must be traded on the stock exchange.

Public limited companies are either “quoted” on the stock exchange (i.e. available for trading, but with no additional listing requirements) or are “listed” (i.e. must follow the LuSE’s listing requirements).

The Patents and Companies Registration Office (PACRO) is an executive agency of the Ministry of Commerce, Trade and Industry (MCTI). PACRO is responsible for company registrations and protection of commercial property rights. PACRO’s company registration activities are defined by the Companies Act [1994].