Empowering financial regulators with a new way to expose corporate arbitrage

In summary

Using equity mapping, a team of researchers at City, University of London have developed an innovative technique for capturing and interpreting the inner architecture of modern firms.

This technique empowers regulators by providing concrete evidence of gamesmanship and jurisdictional arbitrage perpetrated by the corporate sector.

Led by Professor Ronen Palan and Professor Anastasia Nesvetailova, the ‘CORPLINK’ project’ is being used by the Organisation for Economic Co-operation and Development (OECD) to map risks in the sector and improve regulations.

The Extractive Industries Transparency Initiative (EITI) whose standards are adopted by 55 countries has amended its reporting guidelines for industry in light of the findings of this research.

Furthermore, journalist Carole Cadwalladr of The Observer reached out to Professor Palan in 2017 to aid her investigation and subsequent groundbreaking exposé on Cambridge Analytica and Facebook.

What did we explore and how?

CORPLINK set out to generate new thinking about the relationship between firms and states. The research team correlated corporate maps for 22 firms, with shareholder and accounting data to identify the existence and location of arbitrating structures in the corporate ecology.

In doing so, the CORPLINK method created new possibilities for going beyond the generic approach to jurisdictional arbitrage.

An area of ‘known unknowns’ could now be mapped in detail that had previously been unavailable; this equity mapping approach identifies with a great degree of confidence the precise location of arbitraging structures and the amount of revenues they control among the 100 largest multinationals in the world.

The team’s method was further refined in a consultancy project undertaken for the OECD on energy trading and adapted to identify patterns of organisation in the energy sector that can pose illicit finance risks.

The team’s analysis demonstrated that the sector – and in particular the five largest independent energy trading firms with a combined turnover in excess of USD $800 billion per year – are the most opaque organisations, operating almost exclusively through offshore financial centres.

From the project’s outset, Professor Palan was clear about its objectives.  He said:

Modern firms have been actively dividing themselves into hundreds and even thousands of multi-unit, multi-layered and multi-jurisdictional cells. This process has enabled organisations to build what we term as 'arbitrage power' - the capacity of organisations to shape the framework of the global economy to advance their interests.

Benefits and influence of this research

In July 2018, the OECD secretariat set up an Anti-Corruption Task Team (ACTT) to investigate the role of energy trading companies in illicit financial flows (IFFs) and invited Professor Nesvetailova to serve as expert advisor and develop a programme of work on IFFs and development, with a particular focus on commodity trading.

The task team concluded that IFFs operate through a global financial infrastructure, including banking and clearing systems, and company networks (subsidiaries, affiliates, holding companies), spanning both onshore markets and offshore financial centres and hybrid spaces.

To better understand these global networks, the Team Lead of Governance for Development of the OECD commissioned the CORPLINK team to produce equity maps of selected oil trading companies to profile and classify these energy-trading entities according to their ownership, equity, and financial accounting structures.

The aim was to assess the potential risk of IFFs and to shed light on the ways in which corporate identities involved in the oil and gas trade create and maintain conditions (complexity, dynamism, opacity) that might be conducive to illicit financial flows.

The results included changes in the reporting guidelines for of the energy trading corporate sectors. In addition, a company like Glencore (workforce circa 145,000) has promised in its annual report to shareholders to review its entire corporate structure with the view of improving transparency.

In another example of impact based on the team’s direct input, and in light of the findings from the OECD project, the Extractive Industry Transparency Initiative (EITI) – the global standard for the good governance of oil, gas, and mineral resources – introduced specific changes to its 2020 guidelines, which have already been implemented by companies including Trafigura.

And when The Observer’s Carole Cadwalladr contacted Professor Palan to inform her reporting on the way in which money is funnelled into political financing in the UK, the resultant ground-breaking exposé on Cambridge Analytica and Facebook became a huge story around the world.