Why Beneficial Ownership is important for Lebanon

Armed with a law that surpasses the international standard, Lebanon has a serious chance to be a world-leader in disclosing the real owners behind companies both contracted and subcontracted to work in the oil and gas sector.

At the same time, the country is looking to accede itself to a prestigious club of nations that set the global standard for the oil and gas industry, known as the Extractive Industries Transparency Initiative (EITI).

As Lebanon moves towards drilling its first exploratory well by the end of the year, we explore why these two issues are key in order for Lebanon to maximize the economic and social benefits of its nascent oil and gas sector.

In January 2017, Lebanon announced its intention to join the EITI, a club of 52 nations that have chosen to adhere to minimum standards of transparency in extractive industries. “It’s all about following the whole chain, from getting the dirty stuff out of the ground, to how it gets monetized in government, to then how it goes to benefit the people,” Eddie Rich, the deputy head of the EITI, told LOGI.

This aim of this process is to avoid falling into what has come to be known as the “resource curse,” whereby countries rich in natural resources tend to have high levels of corruption, conflict and poverty. “Part of the solution is to make sure that everybody has information about the sector,” Rich said.

Lebanon regularly ranks among the most corrupt nations in the world, occupying the 138th post  in 2018, according to Transparency International. Corruption among politically exposed people - i.e. those involved in politics or closely affiliated with politicians - is historically rampant, including in the awarding of large state contracts.

Watchdog groups have raised concerns that this phenomenon could be replicated in Lebanon’s oil and gas sector, which has the potential to be a multi-billion dollar industry.

“If you have corruption and the wrong people are being awarded licenses, you have the scope for non-qualified actors to be involved, and that could drive up costs, diminish shareholder returns and eat into government tax revenues,” Rob Pitman, a governance officer at the Natural Resource Governance Institute, told LOGI. “In the worst case scenario, unqualified companies can cause environmental safety and social failures.”

Often, corrupt actors hide behind complex webs of companies, with the aim of concealing their identity, thus allowing them to stay out of the public eye and escape accountability.

In a step to fight back against this phenomenon, EITI has mandated that all member-countries disclose the real owners behind companies contracted in the extractive industries sector, a process known as the disclosure of “beneficial ownership.”

While Lebanon is still early on in the process of joining the EITI, it has actually surpassed the EITI’s standard with the adoption in 2018 of the Strengthening Transparency in the Petroleum Sector Law (STPS).

In addition to mandating the disclosure of beneficial ownership of direct license-holders, the law, in it’s article 10.7, calls for the disclosure of beneficial ownership of all subcontracted companies.

Matthieu Salomon, a senior governance officer at the NRGI, estimated that the costs of projects subcontracted to third parties in extractive industries can represent between 50 to 90 percent of all the costs involved in the sector. It’s a “huge amount of money ... that can be a source of benefit to local companies, but can also be prone to capture by corrupt forces,” Salomon told LOGI.

“I think its key to emphasize here that what Lebanon has done is actually quite progressive, its at the leading edge of current practise,” Pitman added.

So on paper at least, Lebanon is among the world leaders on transparency in the oil and gas sector. But Civil Society MP Paula Yacoubian, who remarkably was able to add article 10.7 during debate of the law in Parliament, said she feared its implementation would be much more difficult. “The problem is that we’re always very good on paper, but less so when it comes to action,” she told LOGI. Yacoubian’s concerns are supported by facts: some 52 Lebanese laws currently remain unimplemented by the government, according to the latest tally by Speaker Nabih Berri.

“I was surprised it passed. I’m not sure they [other MPs] knew what they were voting on, because I don’t think it would have passed so easily if they did,” Yacoubian said.

The STPS Law will soon get its first test, as French company Total - which leads the consortium that has qualified to explore two maritime oil blocs - is set to hold tenders to subcontract a number of logistical services for exploratory drilling in the next months.

Rich said that Lebanon had a chance not only to secure transparency in its own oil and gas sector, but to push world standards forward through the EITI. “The EITI has always evolved from the country-level up. This could be the way Lebanon innovates EITI,” he said.

But first, Lebanon has to get into the EITI.

Since announcing its intention to join more than two years ago, there has seen slow progress. Energy Minister Nada Boustani in March rekindled the process, calling on civil society to hold elections for their members to a body at the heart of the EITI, known as the “Multi Stakeholder Group (MSG).”

This body is composed of representatives of the government, companies involved in the sector, and civil society organizations, and aims to facilitate the flow of information and create trust between the various parties. Lebanon must compose this body and craft both an EITI work plan and beneficial ownership roadmap before it can submit its candidacy; a process that usually takes around a year.

On June 18, Boustani was set to deliver a keynote address at the opening ceremony of the EITI Global Conference in Paris; however due to unexpected commitments she will no longer be attending, as explained by the EITI secretariat.

LOGI has advocated for the MSG to be formed before Boustani takes to that stage, in order to strengthen Lebanon’s international stature, especially at a time when the government is aiming to show it is ready to introduce reforms in order to secure soft loans pledged by the international community at the CEDRE conference last year.

“The EITI is a strong motivation of an extra commitment to both local and foreign constituencies to demonstrate seriousness about transparency,” Salomon said. “I think Lebanon could really stand out as a global leader on these issues and push the direction of travel of this kind of anti-corruption work.”

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