Trafigura’s lesson for China

Chinese leaders will meet with African heads of state next month to discuss trade and investment. The recent conduct of Swiss-based commodity traders Trafigura, writes Salil Tripathi, presents a stern warning about due diligence.

In 2005, traders at a Swiss-based multinational commodity trading company called Trafigura spotted an opportunity to make quick profit. A Mexican refinery was selling contaminated petrol at a very low price because it did not need it and could not process it. But there was a catch: such oil is useless unless it is processed properly to separate the oil, which can be used again, from the waste, which must be disposed of. The process is expensive, polluting, complicated – and can cause an adverse reaction to people, if they are exposed. The waste is difficult to get rid of: most developing countries have banned the practice altogether.

Trafigura’s traders were aware of this, but thought that the opportunity that the price represented was too good to pass up, given the rate at which oil prices were rising elsewhere. If they could process the oil and turn around the oil quickly, they stood to make huge gains. The problem was how to get rid of the waste. But they figured they would deal with that later.

Trafigura chartered a ship which made a journey across the Atlantic. Ports it called at – or wanted to call at – turned down the cargo once they realised what it contained. Finally, a company in Côte d'Ivoire, a small nation on Africa’s west coast, decided to take the shipment, with apparently no prior training in handling such cargo. The Ivorian company decided to dump the pollutants in various parts of the country’s capital, Abidjan, with its owners reportedly unaware what the consequences might be. Many people were exposed to the waste: some experienced breathing difficulties. Some 15 people died, many more claimed to have been affected by the pollutants. The government arrested a Trafigura executive, and the company paid a fine in return of his release. Meanwhile, nearly 30,000 victims filed a claim in a court of law, which is now reaching settlement. Without admitting wrongdoing, the company has offered compensation to claimants, irrespective of the nature and scale of injury, of about US$1,640 each.

International non-government organisations had been campaigning against the company. Okechukwu Ibeanu, the United Nations special rapporteur on toxic waste, went on a mission and concluded that Trafigura’s due diligence was inadequate. He cited the work of John Ruggie, the special representative to the UN secretary-general on business and human rights, who last year presented a new framework to look at the interplay of business with human rights. Under that framework, governments have the legal obligation to protect human rights. Businesses have the responsibility to respect rights. And when there is an abuse, there is a need for effective remedies.

This gets complicated when foreign companies are involved, because it is harder to assign accountability. Operating under different jurisdictions may serve a legitimate private interest for companies, but it is not necessarily conducive to the public interest at all times. Victims find it more difficult to seek remedies; it makes it more expensive to mount legal challenges; and it makes it difficult for small, under-resourced NGOs to investigate their affairs. The complex structure of holding companies also discourages prosecutors from taking on cases, even when NGOs or news media highlight instances of human rights abuse.

Companies have entirely legitimate reasons for operating from different locations and setting up headquarters for purposes of tax planning. Companies also have the right to protect their capital from expropriation and have the right to repatriate their profit where laws permit. But when complex structures are designed to conceal assets to ward off potential liability from people whose rights may have been abused due to corporate misconduct, then the state has to step in – to defend the public good and public purpose.

Nothing in human rights law requires that the state must own all resources – but it has the primary obligation to regulate, which it cannot abandon. When companies operate from multiple jurisdictions, conduct their affairs in that space where national jurisdictions do not apply due to extraterritorial implications, and the appropriate international regulatory framework has not yet been designed, they will pursue their self-interest. But if there are adverse consequences borne by people who live in weakly-administered jurisdictions, then that must stop. Companies’ responsibilities to respect human rights include undertaking due diligence. A stronger framework is needed to ensure that tragedies like the one in Abidjan do not recur.

A lesson for China?

Trafigura is not a Chinese company. So, why is this matter important for Chinese companies?

China is actively seeking economic opportunities at home and abroad, as the country experiences huge growth in its economy, its need for natural resources and its desire to create jobs for its vast population. Many Chinese companies have grown in size; some – like its oil and mining companies, and some manufacturing companies – are becoming world leaders.

The history of the interaction between large companies and developing countries shows that the balance of power between them is uneven. While laws apply equally and evenly to all governments, the reality is that only a few governments are able to implement all laws fairly and fulfil their responsibilities. This asymmetry can be problematic: the company can – and sometimes does – dictate terms that are beneficial for its own investors and shareholders, even if its consequences are adverse for people elsewhere.

For example, when labour costs rise and a company invests in another country, the main reason it chooses to go to the other location is lower labour costs. While there is no uniform global wage, companies have the responsibility to respect internationally recognised human rights, which means they should adhere to the higher standard, so that those who live in developing countries are not exploited.

The record of Chinese companies operating abroad is now coming under scrutiny. For instance, in the Democratic Republic of Congo, reports allege that Chinese companies do not treat their workers fairly. In the last Zambian elections, the role of Chinese companies became an electoral issue. In Nigeria, Chinese traders have been targeted and attacked by local businesses that resent their competitiveness. In Sudan, the main oilfields have Chinese investment. NGOs have alleged that Chinese contribution to the Sudanese economy has helped the Sudanese government to finance the conflict in the country, a charge that the Sudanese authorities deny.

In the past, multinational firms from western countries operated in the developing world, and poor practices of some of them led to human rights abuses, which built a tide of opposition against their presence. The fourth ministerial meeting of the Forum on China-Africa Cooperation (FOCAC) will be held in Sharm el-Sheikh, Egypt, in November. As the Chinese authorities have said during previous summits, China sees itself as an equal partner of African countries. This equality implies mutual respect. It is therefore incumbent upon Chinese companies, many of them state-owned, to operate under the highest standards of labour, environment, and human rights – if they are to live up to the promise of the Beijing declaration.

There has been no known case of Chinese company being involved in an incident like the one in Abidjan. But why tempt fate?

Salil Tripathi is policy director at the Institute for Human Rights and Business in London. He has been a senior visiting fellow at the Kennedy School at Harvard University and is member of several leading advisory panels on business and human rights.

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