Oil Sector Warned Against Money Laundering

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Summary:

• The East African Crude Oil Pipeline (EACOP) development in Uganda, marked by the world’s longest heated pipeline, is met with enthusiasm, yet concerns arise over the country’s vulnerability to illicit financial flows, corruption, and regulatory challenges in its oil and gas sector.

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Excitement ensued last week as news broke that the East African Crude Oil Pipeline (EACOP) pipelines, having arrived at the Dar-es-Salaam port, are now slated for transport to a coating plant. Spanning an unprecedented 1,445km, the EACOP is set to become the world’s longest heated pipeline, connecting Hoima, where Uganda’s crude oil resides, to the Tanzanian port of Tanga upon completion. This enthusiasm reflects Uganda’s government’s strategic focus on leveraging its valuable “black gold.”

In line with the country’s Domestic Revenue Mobilisation Strategy from 2019/2020 to 2023/2024, oil and gas play a pivotal role in the extractives industry, serving as a key revenue generator. However, a recent four-year public inquiry by the Finance Intelligence Authority (FIA), released in August, revealed high money laundering risk ratings for the extractives industry due to vulnerability and medium threats.

Earlier, in 2016, the Global Financial Integrity (GFI) estimated that Uganda suffered a loss of Shs598.1b ($162.8m) in potential tax revenue due to illicit financial flows (IFFs) caused by trade mis-invoicing. IFFs, defined as illegal movements of money between countries, pose significant threats to global political and economic stability, offering minimal benefits to economies aspiring to capitalize on the oil and gas sector.

In developing countries like Uganda, IFFs often arise from aggressive tax avoidance exploiting legal gaps, such as international double-taxation agreements. The FIA, alongside other researchers, recognizes IFFs as a growing concern.

A report by the Advocates Coalition for Development and Environment (Acode) highlights the risks in the oil and gas industry, mainly attributed to the nature of the involved oil companies. Many international oil companies operating in Uganda’s oil sector are registered in tax havens, some with concealed ownership structures, heightening the risk of IFFs.

Acode’s report indicates that 5% of IFFs in the oil and gas sector result from corruption facilitated through offshore accounts, while 65% stem from commercial drivers, including abuse of Double Taxation Agreements, unequal Production Sharing Agreements, and stabilisation clauses. Base Erosion and Profit Shifting (BEPS) through abusive transfer pricing and profit manipulation exacerbate the situation.

Furthermore, Acode reveals that 30% of IFFs are linked to crimes such as misreporting petroleum volumes and quality, tax evasion, oil theft, bunkering, and violations of environmental standards and social regulations.

Mr. Peter Muliisa, Uganda National Oil Company’s chief legal and corporate affairs officer, emphasizes the severity of consequences for illicit activities in the sector. Mr. Julius Mukunda, Executive Director of the Civil Society Budget Advocacy Group, underscores the high regulation of Uganda’s oil and gas sector.