John wiley & sons economics of conflict private sector activity in armed conflict

Mark TaylorEmerging Conclusions March 2002 Economies of Conflict: Private Sector Activity in Armed Conflict Emerging Conclusions These Emerging Conclusions offer a preliminary analysis o

Mark Taylor

Emerging Conclusions March 2002

Economies of Conflict:

Private Sector Activity in Armed Conflict

Emerging Conclusions

These Emerging Conclusions offer a preliminary analysis of the findings

of four reports from the Economies of Conflict policy research series,

which examines the links between private sector activity and armed

conflict In addition, the four reports are presented here in electronic

form on an enclosed compact disc The occasion is the symposium

“Economic Agendas in Armed Conflict: Defining and Developing the

Role of the UN”, co-organized by the International Peace Academy and

Programme for International Co-operation and Conflict Resolution, and

sponsored by the Government of Norway, on 25 March 2002 in New

York

These and additional forthcoming reports from the series are available

from the PICCR web-site at www.fafo.no/piccr

The Economies of Conflict project is supported by the Government of

Mark Taylor

Emerging Conclusions – March 2002

Fafo

Economies of Conflict: Private Sector Activity in Armed Conflict

Programme for International Co-operation and Conflict Resolution

© Fafo Institute for Applied Social Science 2002Cover page: Agneta Kolstad

Printed in Norway by: Centraltrykkeriet AS

Preface 5

1 Introduction 7

2 Preliminary Findings 11

2.1 Anarchic Exploitation 12

2.2 Criminalized Transactions 15

2.3 Militarized Production 17

2.4 Conflict Commodities 20

2.5 Rogue Companies 23

2.6 Emerging Conclusions 25

3 Executive Summaries 27

Dirty Diamonds 28

Fuelling Conflict 33

Illicit Finance and Global Conflict 38

The Logs of War 47

About the Authors 53

Appendix: Contents of the Economies of Conflict CD, Version 1 54

The four reports presented here in electronic form on compact disc are being

released for the first time on the occasion of Economic Agendas in Armed Conflict:

Defining and Developing the Role of the UN, a symposium co-organized by the

In-ternational Peace Academy and PICCR, and sponsored by the Government ofNorway, on 25 March 2002 in New York These reports will be released in printedformat in the coming months

The Executive Summaries of the reports are reproduced below, as is a table ofcontents for the compact disc itself We have gathered from the authors a number

of related primary and secondary source documents and included these on the pact disc in order to provide background and context to the studies and to give thisversion of the compact disc additional utility Much of what is included on thecompact disc is also available on the Fafo web site at www.fafo.no/piccr, which will

com-be updated regularly with additional material Later in 2002, the Economies of

Con-flict series will release additional reports on regulatory options, the private security

sector, small arms, and brokers

It should be emphasised that Economies of Conflict is an analytical policy-oriented

project, aimed at a better understanding of processes and behaviour as the basis for

suggesting policy options The reports issued as part of the Economies of Conflict series

do not seek to accuse or shame particular firms or governments Rather, the studiesapproach the private economic dynamics involved in armed conflict from withineach sector, asking the question, How does certain private sector activity help sus-tain armed conflict and what can be done about it?

In designing the research programme, PICCR opted for an industry tive The industries identified below have been selected based on their identifica-tion in the literature and through practice (as evidenced by on-going work of non-governmental organisations, governments, or multilateral institutions) They are by

perspec-no means exhaustive of the ecoperspec-nomic dimensions of war, but they represent some

of the industries that are, perhaps, most relevant to the challenges to international

peace and security posed by contemporary armed conflicts Although the studies

do address illicit activities within licit industries, the project has yet to commissionstudies related to the specifically criminal activities linked to armed conflict (e.g.narcotics, trafficking in human beings, etc.)

As with past PICCR projects, we have chosen an inductive approach, seeking

to contribute to these arenas through an analysis of experience and lessons-learned.PICCR commissioned studies from practitioners and researchers engaged in issuesrelated to the industry and war, or the industry and corporate social responsibility,and with a keen sense of what has worked – and what has not worked - in practice

The Economies of Conflict project was launched in the spring of 2001 and since

that time we have benefited from the input and support of a growing number ofpeople Principal among these has been Ambassador Wegger Strømmen at theNorwegian Permanent Mission to the United Nations, who has watched the projectgrow since its inception Karen Ballentine, Research Coordinator and Program

Associate on the International Peace Academy’s project Economic Agendas in Civil

Wars, has been extremely helpful and, along with the excellent staff at IPA, has made

the Fafo-IPA cooperation on these issues both easy and effective Our team of searchers deserve special thanks, both for their openness to our approach to theresearch task and their willingness to share their knowledge with each other across

re-the seminar table My thanks also to Leiv Lunde, an advisor on Economies of

Con-flict and the author of an upcoming report from the project, for his help and

per-spective over the past year, and to Christian Ruge, a PICCR colleague, who has made

an invaluable contribution to the project I am also grateful to the Government ofNorway, which provided financial support for the project, and to those Norwegianofficials who have contributed their perspectives on policy issues Of course, none

of the above bears responsibility for any inaccuracies or omissions that might occur

in these reports The views and recommendations expressed in these reports, ing this summary of emerging conclusions, are those of the authors alone and donot necessarily reflect the views of Norway, its Government or officials, or Fafo.These emerging conclusions present a work in progress Your comments would

includ-be welcome and should includ-be directed to pisk@fafo.no

Mark Taylor

Programme Director, PICCR

Series Editor, Economies of Conflict

1 Introduction

Today’s warlords, governments and non-state actors alike, make use of global cial and commodity markets to transform control over natural resources into warfighting capacity Under the cover of secrecy and unaccountability provided by war,legally or illegally produced commodities are traded on the legitimate, but highlyunregulated, global markets to obtain financial resources, weapons and other ma-teriel needed to sustain the war

finan-The economic dimensions of wars are not new Yet, the horrors of recent warsseem to have thrown into stark relief the inadequacy of our attempts to end them.Despite the terrible human cost of the wars of the past decade – millions of liveslost or ruined, societies irrevocably scarred, and economies destroyed – it has be-come increasingly clear that recent wars have far outstripped our ability to bring them

to definitive conclusion1 and that the economies of these conflicts may play a cial part in sustaining them

cru-As a priority for international action, the economic dimensions of conflicts havebeen catapulted to the top of the international agenda by increasing concerns aboutthe dark sides of globalization Since 11 September 2001, the U.S.-led internation-

al effort to target terrorist financing and logistics has underlined the importance ofglobal financial and criminal networks to national and regional security Today, acommon, global infrastructure of financial services is used to facilitate transactionsinvolving drug money, small arms, diamonds, smuggled timber, the proceeds ofcorruption, human trafficking and terrorist finance The apparent ease with whichlicit and illicit economic goods and services are able to move between ‘black’, ‘grey’2

and ‘white’ markets has forced governments to seek greater financial sector ability The failures of financial oversight and corporate accountability apparent inthe spectacular bankruptcy of the U.S.-based Corporation Enron have added to a

account-1 While the number of armed conflicts has dropped since the early 1990s, of those that continue 66 per cent were more than 5 years old in 1999 and 30 per cent were more than twenty years old In addition, many conflicts which were suspended in the 1990s – not least in Europe, the Middle East,

and Central Asia – have not been resolved; see Dan Smith, Trends and Causes of Armed Conflict, Berghof

Handbook for Conflict Transformation (April 2001).

2 The term ‘Grey markets’ is used here in its more generally legal sense, referring to markets which bridge legal or ‘white markets’ and the trade in illegal ‘black’ market goods.

growing sense of uncertainty about the transparency and accountability of firmsoperating internationally.

Concerns about the economic dimensions of international peace and securityappear to be converging with an evolving agenda for greater corporate accountabil-ity Intense activity is underway in several arenas to better understand and respond

to the economic driving forces of violent conflict and war Governments and tilateral organisations, non-governmental organisations, multinational corporationsand industry associations, have all in recent years launched or participated in initi-atives to study or develop policy options for dealing with economies of armed con-flict Campaigning NGOs and industry have moved to address private sector links

mul-to conflict through the increasingly significant lens of corporate social ity (CSR) Multilateral institutions, including the World Bank, the OECD, and theUnited Nations, have begun to tackle the issue from their own perspectives (mac-ro-economic analysis, global policy co-ordination, sanctions).With this convergence

responsibil-in mresponsibil-ind, PICCR’s Economies of Conflict project has been structured to build on the

bodies of work that have emerged from these efforts and to provide input to them.3

Summary: Conflict Commodities and Rogue Companies

With the rise to prominence of ‘conflict diamonds’, and to a lesser extent ‘conflicttimber’, there is a growing sense that goods produced in an economy torn by armedconflict are, or should be, morally suspect The tendency to view such goods as ‘con-flict commodities’ is a direct result of an increase in consumer sensitivity resultingfrom successful campaigns on issues related to corporate social responsibility andhuman rights, and the increasing concern that such activities run counter to efforts

to maintain international peace and security It is arguable that an international moraland political norm is gradually emerging which views private sector activity thatsustains armed conflict as unacceptable

The notion of conflict commodities possesses inherent dangers Countries pendent upon a limited number of exports could face serious economic hardshipshould the ‘conflict commodity’ label taint their product Companies with legiti-mate investments in such countries face the potential for significant losses and height-ened risk to their reputations These dangers were recognised early on by

de-3 For a summary of UN oriented initiatives see, e.g., “Economic Agendas in Armed Conflict: ning and Developing the Role of the UN”, Background Paper prepared by The International Peace

Defi-Academy and The Fafo Institute for Applied Social Science, on the occasion of a symposium sored by the Government of Norway, Monday, 25 March 2002, New York A comprehensive look at the full spectrum of regulatory options relevant for the private sector is being developed for publica-

spon-tion as part of the Economies of Conflict series in the Spring 2002; see www.fafo.no/piccr.

governments, industry and NGOs concerned about conflict diamonds, and theyhave guided efforts to define the problem and develop remedies.

Despite the risks, there is as yet no agreed definition of what might constitute aconflict commodity By looking at those commodities already linked to the financ-ing of armed conflict, the Economies of Conflict studies sought to describe thespecific activities involved in the production and marketing of such goods, includ-ing payments processes and related financial services What emerges is a picture ofconflict commodities as goods exploited to sustain armed conflict and produced orbrought to market by anarchic exploitation, criminalized transactions, and milita-rised production

The policy communities in the international public and private sectors are gaged in trying to identify what mix of private and public policies will be most ef-fective in addressing the role of private sector activity in sustaining armed conflict.Defining complicity and developing policy options now will help member states andcompanies position themselves in relation to a consensus forming around the issue

en-of conflict commodities

Unfortunately, this is unlikely to be enough

Certain companies, some of a relatively small size but operating

international-ly, continue to use armed conflict as a cover for more or less anarchic exploitation.These companies profit from the fighting and are often connected with the powers

at the head of repressive rebels or governments The activities of these companiesare often crucial to the prosperity or survival of these powers, often in direct con-tradiction to international attempts to make peace

These are rogue companies, firms that participate in and benefit from the itarization of production, criminalized transactions and anarchic exploitation Yet,

mil-the Economies of Conflict studies identify activities carried out by companies with

legitimate business interests that would fit into these categories As the activities andconsequences associated with conflict commodities begin to be better understood,and as the consensus around notions of conflict commodities begins to solidify, anumber of companies engaged in otherwise legitimate activities could find them-selves on the wrong side of international opinion

The Economies of Conflict studies portray a complex range of licit and illicit

ac-tivities that result – directly and indirectly - in a number of intended and unintendedconsequences Judging from the pace of recent policy development, internationalcompanies – and their ‘home’ and ‘host’ states - will need to adopt clear, verifiablepositions on core issues about their operations in situations of armed conflict Theelaboration of a clearly defined concept of conflict commodities and rogue compa-nies would have considerable utility with regard to private sector CSR initiatives Itwould help all sides – industry, NGOs, and government – by providing some

transparency to the negotiation of agreed standards The analysis and definitionssuggested below are offered as a departure point in the discussion of these issues.

2 Preliminary Findings

The first studies produced under Economies of Conflict reinforce the view that

deci-sion-making about private sector activity in armed conflict is mired in significantuncertainty Practitioners in governments, multilateral organisations, firms andNGOs have few definitive or operational understandings of what might constituteharmful private sector activity in armed conflict.4 Company officers need to knowthe risks involved in certain investment opportunities and, in the context of increas-ing demands for corporate social responsibility, need a better idea where lie the moral

or political trip-wires Practitioners charged with managing international peace andsecurity require operable definitions upon which policy responses can be based.Governments, those home to multinational corporations or those hoping to attractinvestment, need to know about the political and economic implications of certaincompany actions, at home and abroad

The first four reports in the series - covering the oil, diamond, timber and nancial sectors – describe a complex combination of activities spanning productionprocesses, trade, the provision of services, and touching upon public and privateinstitutions What emerges is a tentative categorisation of specific activities thatenable - directly and indirectly – rebels or governments to sustain armed conflict.Three categories of activity are described below, followed by an analysis of poten-tially useful definitions of conflict commodities and rogue companies The findingsare preliminary The analysis presented here is subject to change based on furtherresearch and the conclusions of additional papers to be published as part of the

fi-Economies of Conflict series in the spring and summer of 2002.

4 See, e.g., Private Sector Actors in Zones of Conflict: Research Challenges and Policy Responses, a report

of the Fafo’s PICCR and the International Peace Academy project on “Economic Agendas in Civil Wars.” Thursday, April 19, 2001, International Peace Academy, New York Rapporteur: Jake Sherman.

2.1 Anarchic Exploitation5

Governments and rebels alike make use of global financial and commodity markets

to transform control over natural resources into war fighting capacity Legally orillegally produced commodities are traded on the legitimate, but highly unregulat-

ed, global markets to obtain financial resources, weapons and other materiel

need-ed to sustain the war In all four of the sectors studineed-ed to date – diamonds, timber,oil, and financial services – private sector activity consists of a series of transactionswhich often combine the perfectly legal and legitimate with the thoroughly illegal

or illicit More often than not, the borders between these categories are ill defined.One of the principle reasons for the uncertainty of private economic decision-making in armed conflict is the significant lack of relevant regulatory frameworks.State sovereignty implies that a government is likely to exploit its natural resources

if it feels the need to mount a military defence, which is usually expensive But armedconflict usually results in the destruction or weakening of government institutions,which lends itself to loss of administrative effectiveness and de facto sovereignty,6

as well as a direct reduction in transparency and accountability of governments Thus,while certain activities may be clearly illegal under domestic law, they may not beenforced; many others are simply unregulated In other cases, the problem of hav-ing to enforce or regulate activities that contribute directly to conflict is solved byhaving them formally legalized

There is little in the way of international public or commercial law against whichthe legality of private sector activities in armed conflict might be tested or from whichpolicies might be derived In fact, all of the studies describe a lack of internationalregulation or enforcement related to these activities.7 Together, these domestic andinternational regulatory gaps contribute to the blurring of the definitions of licitand illicit economic activities in armed conflict

For those involved in armed conflict, the exploitation of resources is made sible by this relatively unregulated or anarchic state of affairs In some cases, certainindustries seek out such situations:

pos-5 The term ‘exploitation’ is used here in its most general and neutral sense of utilising an object for profitable ends or to obtain potential benefits.

6 States have asserted a permanent right to sovereignty over their natural resources and wealth The

establishment of this right was a particularly important part of statehood for developing countries emerging from colonial rule In addition, most governments justify military action as a form of self- defence, a right enshrined in international law.

7 An analysis of the debate around regulatory options is forthcoming as part of the Economies of Conflict

series later in 2002.

“The tropical timber industry traditionally engages leaders of countries with largeforest resources and weak institutions Abiding by ‘local business practices’, itnegotiates deals to extract raw materials as cheaply as possible This mode ofdoing business suits the warlord economy extremely well…The state of disor-

der created by conflict suits the perpetuation of these business practices.” (The

Logs of War, 2002).

Thus, armed conflict in countries can result in a destructive downward spiral of shadybusiness practices and poor governance But armed conflict can also result from thesedynamics Governments - of developing and industrialised countries alike - are notalways inclined to govern with transparency and accountability In fact, “[h]alf theworld’s [diamond] production or more is mined in countries with unstable or se-cretive governments, an almost foolproof recipe for expanded and deepened crim-inality” (Dirty Diamonds, 2002)

This relative anarchy in domestic jurisdictions is mirrored by a largely lated international financial system The illicit financial networks imbedded in theinternational financial system facilitate the illicit aspects of the trade in conflictcommodities The absence of an international regulatory framework, or of agree-ment on universalized domestic regulation, means that at present legitimate bankswould have a hard time trying to avoid handling the proceeds of government cor-ruption or illicit proceeds gained through the exploitation of armed conflict TheIllicit Finance study finds that money laundering and international financial arbi-trage are crucial in undermining the accountability of domestic governments orprivate companies:

unregu-“[f ]inancial transparency is a core structural requirement by which governments,regulators, law enforcement, judiciaries, civil litigants, and journalists can exerciseoversight and insist on the accountability of both important private sector and publicsector actors Its absence facilitates impunity, which in turn often leads to conflict.”(Illicit Finance, 2002)

In the case of the oil industry, most companies find the extremes of anarchic ploitation to be counterproductive Quite apart from the legal requirements of re-lating to government, oil production requires the security and legal/administrativeguarantees that only governments can provide Thus, in situations of armed con-flict, oil companies are usually allied with governments Yet, oil companies can con-tribute to corruption and other governance problems directly related to the growth

ex-of oil revenues A key problem lies in the lack ex-of transparency ex-of oil company ments to governments, which can

pay-“[O]bscure the direction and volume of oil revenue flows A large influx of easyoil revenue into a non-transparent system invites corruption, in turn creatingincentives to further limit transparency and accountability Under such

conditions, much oil wealth allegedly has disappeared into off-budgetary counts.” (Fuelling Conflict, 2002).

ac-By seeking out weak jurisdictions, or by contributing to the weakening of tic governance, businesses can help to perpetuate or accelerate the deterioration inaccountability The downward spiral through corruption towards state failure iscaused in part by - and results in - the loss of domestic control over the resource:

domes-“In a developing country with few resources other than vast tracts of forest,control of this natural capital is control of power…Allocation of timber con-cessions becomes a mechanism for rewarding supporters and mobilizing wealth

to prop up the existing regime The result has often been massive corruption andloss of revenue to the state It has also contributed to the erosion of democraticprinciples as elected politicians and state officials put the rights of companiesbefore those of the population they are supposed to represent Protected by

powerful allies, timber companies become the de facto resource owners and state forestry institutions become the clients of the logging extractors rather than vice

versa.” (The Logs of War, 2002).

For governments, the loss of territory through armed conflict, or loss of control tofavoured individuals or private companies, results in the loss of effective control overthe resource What a government may claim by right and what it can actually ex-ploit may be very different: de jure state ownership can be rendered meaningless inpractice by de facto control over the resource by individuals, private companies and/

or their political-military allies If taking or retaining political power in a particularcountry requires control and exploitation of the resource, then investment and pro-duction become the keys to political power and an extension of state sovereignty.Companies can come to play a central role in the political-economy of a conflictand may help determine the effective exercise of state sovereignty

As made clear in the studies, how companies play these roles depends upon anumber of factors, not least the nature of the investment and industrial activity.Common to all four studies are descriptions of a lack of transparency of transac-tions, a weakening or loss of government control, and the impunity of firms andgovernments, in the proliferation of conflict commodities and the sustainability ofeconomies of armed conflict in general

Anarchic exploitation is made possible by a lack of governance mechanisms atthe domestic and international levels, described above as a series of regulatory gaps.Poor governance may lead to political instability and conflict, but institutionalweakness may also result from armed conflict, making war a good time to for cer-tain companies to take advantage of poor monitoring and enforcement These dy-namics, in the context of regulatory gaps, can significantly blur the lines dividing

licit and illicit activity If the private sector can be assumed to prefer low levels ofgovernment interference, a state of war could be said to represent an ideal regulato-

ry environment for some industries But exploitation during armed conflict canpromote corruption, impunity, and the incapacitation of government regulation orcontrol over a countries own natural wealth

2.2 Criminalized Transactions

Up and down the supply and demand chains - from legal trading in illegally duced commodities, to illegal transfers of perfectly legal revenues – more or less il-licit transactions involved in financing armed conflict help to criminalize procure-ment, marketing and payments

pro-It is estimated that in 1999 approximately 50 per cent of European Union ical timber imports consisted of illegally logged timber, a figure that is probablyrepresentative of worldwide imports An estimated 20 per cent of the global dia-mond trade is illicit In both cases, logs or rough diamonds that are stolen are thenlegally imported to consumer countries “Surprisingly, there is no law that prevents

trop-a Europetrop-an country from importing the products of illegtrop-al trop-and ‘conflict’ timberoperations Indeed, in the industrialised countries of the West, there is no legisla-tion that can prevent this from happening… Timber is, of course, a legally tradable

commodity.” (The Logs of War, 2002) So, too, are rough diamonds.

“At a meeting of the inter-governmental Kimberley Process in Moscow in July

2001, the Guinean Delegation unveiled its new certificate of origin, and askedother countries present not to allow, henceforth, the importation of Guineandiamonds without the certificate The EC representative replied that EU coun-tries could import whatever they want, from wherever they want, and were notbound by any Guinean document While this suggested an almost willing ac-ceptance of criminality, the EC representative was in fact correct: documents such

as Guinea’s certificate of origin have no standing in international law and no

backing under current trade agreements and regulations.” (Dirty Diamonds,

2002)

Central to the problem of the legal importing of illegal commodities are questions

of export and import controls Both the The Logs of War and Dirty Diamonds

re-ports address in some detail the regulatory options for producer and consumer tries, inter-governmental co-operation as well as industry However, the diamondand timber trades both suffer from the misrepresentation of shipments In fact, there-labelling of timber shipments, or the ‘blending’ of legal and illegal diamonds

coun-during transhipment, are crucial for ensuring the access of illegal diamonds or ber to consumer markets.

tim-Organized crime has been implicated in the activities of all four of the sectors

covered here Fuelling Conflict reports allegations of covert illicit arms deals and logistical support provided by an oil company to rebels in coups d’etat in Africa (Fuel-

ling Conflict, 2002) For the most part, however, most arms deals involving the oil

industry, while heavily criticized and somewhat murky, appear to have been legal.The same cannot be said for the diamond and timber trades The illegal pro-duction and marketing practices of diamonds and timber have proven attractive tocriminal organisations and networks “The timber trade is characterized by endemiccorruption, links to organized crime and, in numerous instances, to various war-

ring factions”(The Logs of War, 2002) Much the same is true for significant parts of

the diamond industry: “Conflict diamonds are essentially illicit diamonds that havegone septic They have simply been used for a new purpose - to pay for weapons in

rebel wars” (Dirty Diamonds, 2002) Indeed, the regulation gap described below

represents an opportunity for dodgy middlemen willing to assume the higher risks

of a environment in which contracts are unenforceable.8

The transactions involved in financing armed conflict are similarly criminalized:

“Illicit finance is also a key facilitator of civil war…The laundering of the proceeds

of crime is a necessary means to carry out the trade in diamonds that has fuelledarmed conflict in Liberia, Angola and Sierra Leone, together with their accompa-

nying arms deals and payoffs.” (Illicit Finance, 2002) Central to the effectiveness

of illicit financial services, are the licit financial networks across which they ate In the global financial system, the transformation of money from ‘black’ to

oper-‘white’ via ‘shades of grey’ is only marginally more difficult than ‘blending’ diamonds,

or mislabelling timber:

“In recent years, with every substantial national, regional, or global failure ofgovernance, a financial scandal has been found in close attendance Accompa-nying each financial scandal has been the systemic use of banking and financialsecrecy to hide criminal activity Over the past decade, this pattern has playedout repeatedly in jurisdictions all over the world Repeatedly, political conflictand major political destabilizing activity, including grand corruption, narcoticstrafficking, arms smuggling, and civil war have been facilitated and sustained

by illicit finance networks embedded in the world’s licit financial services

infra-structure.” (Illicit Finance, 2002).

8 More information in this regard will be available in a forthcoming publication on these ‘brokers’

to be released as part of the Economies of Conflict series later in 2002.

As with the trade in illegal or conflict diamonds or timber, there is no internationalregulatory framework that governs the international financial system as a whole.Regulatory jurisdictions are domestic, and regulators are dependent upon compa-

ny transparency and inter-governmental cooperation to obtain oversight over fundsmoved out of their jurisdiction Offshore banking has made possible the practice

of arbitrage, the practice of structuring international transactions for maximumprofitability and minimum regulatory oversight or risk While not illegal, arbitragemakes illicit finance possible, as financial institutions can move “their riskiest and

least attractive transactions to jurisdictions that require the least transparency”

(Il-licit Finance, 2002).

Rarely are the marketing chains or revenue streams of a conflict commodity orits producer entirely illegal from start to finish Nor are the supply lines of combat-ants necessarily run as criminal networks, or filled with illegal goods But experi-ence indicates that to operate effectively, the procurement, marketing and paymentsprocesses related to armed conflict consist of a series of transactions that combinethe perfectly legal and legitimate with the thoroughly illegal or illicit

The term ‘criminalized transactions’ is suggested here as a potentially usefulanalytical category within which to group some of the illegal, illicit and generallyquestionable transactions that help to fuel armed conflict Transactions involved inthe economies of armed conflict could be said to be criminalized by their facilita-tion of or profiting from the trade in illegally produced (stolen) commodities; im-proper or unregulated import-export practices (smuggling); the misrepresentation,blending or miss-labelling of conflict commodities (fraud); the diversion of legallyobtained revenues (theft); illicit financial dealings (some arbitrage, all money laun-dering); or the involvement of criminal organizations

2.3 Militarized Production

The three reports covering extraction industries – diamonds, oil and timber – alldescribe varying degrees of military activity associated with the production of pri-mary commodities The spectrum of activity ranges from protection of oil installa-

tions by security companies, to de facto invasion by state or rebel armies in the

pur-suit of natural resources Although similar patterns emerge across the three sectors,each affected company or community faces conditions specific to its situation Inall three sectors, however, the evidence suggests that a key relationship betweenproduction and armed conflict is established once production is militarized.Militarization of production occurs when a commodity becomes of strategicsignificance for a military faction Rebels in Angola, Sierra Leone and the Democratic

Republic of Congo (DRC) have made the control of alluvial diamond mining astrategic military objective Similarly, rebels movements and government armies inBurma, Cambodia, Liberia, and from Zimbabwe have deployed to secure loggingareas and have facilitated the logging of tropical timber, or carried out the loggingthemselves.

Opportunity is the determining factor in the transformation of rough diamondsinto a strategic commodity Diamonds, particularly alluvial diamonds, are a “low-volume, high value commodity…[t]hey are highly portable and…readily accessi-

ble” (Dirty Diamonds, 2002) Timber is only marginally less so:

“Compared to most forms of resource extraction, logging is a relatively easyactivity, requiring low investment for quick return A few soldiers with chain-saws and trucks can generate hundreds of thousand of dollars in a relatively shorttime; a well-resourced company can generate hundreds of millions… In moreextreme cases military intervention in another country is based around the at-tempt to control that country’s resources For a warring faction in control of forestland, logging is one of the quickest routes to obtain significant funding with

which to continue the conflict.” (The Logs of War, 2002).

In the case of conflict diamonds, opportunity exists primarily through access toalluvial diamonds: since rough diamonds are “low-volume, high-value” they are more

easily marketed Similarly, in their study of conflict timber, The Logs of War finds

that access equals opportunity with respect to tropical timber However, compared

to rough diamonds, the physical size of the logs makes their marketing more pendent upon military control of transportation routes out of the conflict zones, asufficient level of corruption at transit points, and the willingness of otherwise le-gitimate timber companies to launder these logs of war onto the global market.The military activity associated with oil production does not follow the samepattern as that of diamond and timber production The relatively high costs involved

de-in producde-ing and marketde-ing oil mean that, for rebels and governments alike, accessdoes not equal opportunity For an oil field to represent a revenue opportunity itrequires investment, usually by an oil company Unlike the diamond and timbersectors, in which production could be profitable to anyone who controls access tothe resource, oil companies – national, multinational or both - are a necessary con-dition for production to take place at all

In a situation of armed conflict, this places the oil production companies in apotentially pivotal position Formally, oil companies typically adopt a position ofpolitical neutrality Yet, their production is a source of revenue for governments andruling elites that depend upon these revenues to finance their war-fighting capaci-

ty In addition, in a number of cases, oil companies have arranged more or less ert arms transfers to host governments, often justified by the companies involved

cov-on the grounds of improving the capacity of the host government to provide rity for oil installations.

secu-Oil production in situations of armed conflict usually places investment in harmsway and the company remains at the mercy of the shifting balance of military forc-

es during the conflict.9 Oil production requires the investment and the guarantees(contracts, security, etc.) that only an alliance between oil companies and govern-ments can provide Most companies, dependent upon the host government forconcessions and protection, find governments to be their natural allies:

“Common accusations are that companies have allowed militaries to use airstrips,helicopters, roads and other oil company infrastructure for offensive militarypurposes In some cases host governments even appear to be using oil companysecurity as a cover for waging military campaigns against political or ethnic en-emies Some of the most serious accusations levelled against international oilcompanies have involved direct or indirect assistance in procuring weapons for

host country governments, and in some cases even for rebel groups.” (Fuelling

Conflict, 2002).

Thus, the militarization of oil production in armed conflict is indirect Companiesmay provide logistical or other support - usually to governments - but rebels orgovernment troops are unlikely to be involved in the production of oil, or even themanagement or oversight of production facilities However, military activity assuresaccess to the resource through the control of territory, provides security to the pro-duction processes and investments, and enables local or regional marketing activi-ties

In the diamond and timber industries, the nature of the production processmeans that, access to the resource and control of marketing routes are enough tomake them a viable economic activity for rebels and government forces The extrac-tion of rough diamonds in armed conflict zones is often an informal affair, run al-most entirely by the military power in control of the region In the timber industry,logging companies play a crucial role, but where they operate they tend to “side withwhoever controls forest territory…in many instances insurgent groups…political,

military and criminal groups” (The Logs of War, 2002) Where it occurs, the

milita-rization of diamond and timber production is direct, in the sense that state or rebelmilitaries are more often than not integral to the production process

For all three commodities, exploitation is in large part determined by the extent

to which the commodity can be said to have become of strategic value to the force

in question Usually, the opportunity for profitable exploitation – defined as access

9 The usual exception being off-shore oil installations which can become targets during intra-state wars.

to a high value resource and to their markets – is the deciding factor, but ment may also be necessary to make access and marketing viable Still, the central-ity of military activity to the production of all three of these commodities is hard to

invest-avoid In some cases, where there is ready access to the resource, the military is the company and its troops are the labour pool In others, they operate as sector-wide

protection rackets, determining the production cycles, ‘managing’ or victimisinglabourers and protecting or attacking investments Over time, and to the extent that

a force exercises continuous control of a territory and roads, they can influence

pro-duction cycles and determine the viability of investments This is, in a phrase,

mil-itarized production Production may be considered to have been milmil-itarized once

military personnel or military activity become a direct or indirect part of the duction process

pro-2.4 Conflict Commodities

With the rise to prominence of ‘conflict diamonds’, and to a lesser extent ‘conflicttimber’, there is a growing sense that goods produced in an economy torn by armedconflict are, or should be, morally suspect Indeed, the activities of companies dealing

in such commodities are increasingly viewed as illegal or a challenge to internationalsecurity The Security Council, through its panels of experts and/or monitoringmechanisms, has described the sanctions busting activities of a number of compa-nies As described in the reports summarised here, the law courts in a number ofcountries have heard cases involving allegations of dubious and illegal behaviour bymuch larger multinational corporations The news media in many more countrieshave reported similar activities by otherwise legitimate companies operating inter-nationally, sometimes forcing government action in response

It is arguable that this activity represents the gradual emergence of an tional moral and political norm under which private sector activity that sustainsarmed conflict is unacceptable The growing tendency to view certain products as

interna-‘conflict commodities’ is a direct result of an increase in consumer sensitivity resultingfrom successful campaigns on issues related to corporate social responsibility andhuman rights Yet, there is no agreed definition of what constitutes a conflict com-modity

The definitions that have emerged to date have originated as a result of attempts

to grapple with the role of specific commodities in fuelling armed conflict, mostnotably diamonds The term ‘conflict diamonds’ was an invention of the media, anattempt to summarize a phenomenon confronting the UN, the industry and NGOs.Like all media shorthand, it has its drawbacks, but its usefulness as a category has

been confirmed by the fact that definitions have been suggested both by the UNGeneral Assembly and by the inter-governmental series of meetings, known as ‘theKimberley Process’.

The UN GA defined conflict diamonds as ‘rough diamonds which are used byrebel movements to finance their military activities, including attempts to under-mine or overthrow legitimate governments.’ The Kimberly Process settled on thefollowing:

Conflict Diamonds means rough diamonds used by rebel movements or theirallies to finance conflict aimed at undermining legitimate governments, as de-scribed in relevant United Nations Security Council (UNSC) resolutions inso-far as they remain in effect, or in other similar UNSC resolutions which may beadopted in the future, and as understood and recognised in United NationsGeneral Assembly (UNGA) Resolution 55/56, or in other similar UNGA reso-lutions which may be adopted in future

Two common aspects of these definitions are immediately apparent First, both areconcerned with the use of diamonds as a source of finance This is accurate, as thefinancial exploitation is arguably the single most important role that diamonds play

in sustaining armed conflict However, the definition ignores the impacts of mond wars (battles for control of diamond territory) or the toll which military con-trol of a diamondiferous region may have on the population and how that maycontribute to perpetuating the conflict

dia-Second, both definitions have a clear pro-state bias This is to be expected as bothdefinitions have emerged from fora in which states play a dominant role As alreadynoted, there is nothing in international law that might prevent states from exploit-ing natural resources to finance their war fighting capacity In fact, principles of statesovereignty entail a responsibility on the part of governments to provide securityand to retain a monopoly on the means violence Similarly, state sovereignty entailsthe right of a government to exploit its natural wealth to this end But are all states

or government forces in armed conflict necessarily practicing legitimate production

or exploitation of a resource? Would this hold true for a commodity-financed pressive regime, one that put its profits towards maintaining the machinery of re-pression and war?

re-The definition for ‘conflict timber’ offered by re-The Logs of War takes a more

bal-anced approach It is based less on the principles of international relations and ter reflects the economic and logistical processes as work:

bet-“For the purposes of this study, conflict timber refers to timber that has beentraded at some point in the chain of custody by armed groups, be they rebelfactions or regular soldiers, or by a civilian administration involved in armed

conflict or its representatives, either to perpetuate conflict or take advantage of

conflict situations for personal gain.” (The Logs of War, 2002).

This definition specifically strikes a balance between states and rebels It seeks todefine conflict timber by virtue of logs having been traded or controlled at somepoint by an armed group or parties to a conflict However, while true to the reality

of conflict timber, this approach to conflict commodities also runs up against statesovereignty, albeit from a different angle from that of conflict diamonds: in a situ-ation of armed conflict, military force will almost certainly be required to ensurethe marketing and possibly also the production of timber Given the acknowledgedright of a state to exploit its natural resources, it must be assumed that a state’s mil-itary could at some point be involved in timber transactions in, for example, man-aging or securing production or marketing of timber (see militarised productionabove) Governments are unlikely to accept a definition of a conflict commoditythat may prevent it from exercising its right to exploit

To get around this, The Logs of War qualifies its definition by seeking to ascribe

intent Rebels or government soldiers could be considered to be handling conflict

timber if the trade was intended “to perpetuate conflict or take advantage of

con-flict situations for personal gain” This, too, is more balanced than the concon-flict monds definitions, which describes the “overthrow” or “undermining” of govern-ments as the sole problematic objective It is useful, too, because it specificallyidentifies the criminal dimension of “personal gain”, which would almost certainlycapture most repressive elites (assuming “personal gain” includes the use of profitsfor patronage to accrue political power, not just enrichment) But this definitionwould also fall prey to the principles of states rights, which include the right to self-defence if attacked and assumes the right to exploit its natural wealth to this end

dia-“Perpetuating” and “taking advantage” of armed conflict may be morally suspect,but, in a situation of armed conflict, it would difficult to impute this intent to agovernment that asserted its right of self-defence

What emerges from the Economies of Conflict studies completed to date is that a

definition of conflict commodities should probably be based on activities involved

in the production and marketing of such goods, rather than on the actors involved.The categories outlined above suggest that a definition of a conflict commoditywould include reference to commodities made possible by anarchic exploitation,criminalized transactions and militarised production

These categories are only preliminary and require further development Theyappear at first to be far too broad and therefore unlikely to be politically viable.Certainly, further research into industry activities is needed to provide greater clar-ity as to definitions, as well as to identify the approximate volume of trade in con-flict commodities However, when applied to a particular commodity in the specific

context of the armed conflict (e.g Sierra Leone diamonds, Liberian timber, nese oil, etc.), these criteria might offer a more specific understanding of the nature

Suda-of the role Suda-of the private sector in sustaining conflict By identifying activities andtransactions that help sustain armed conflict, such definitions help clarify the na-ture of culpability rather than trying to generalize about the character of parties to

a conflict or their private sector allies

A focus on activities also makes it easier for concerned citizens, shareholders,industry associations and others to hold governments and companies accountablefor their actions This would enable all concerned – NGOs, multilateral organisa-tions, companies and governments - to develop definitions of complicity in armedconflict that would be relatively transparent and comprehensible across the differ-ent sectors In using the categories suggested here, the objective should not be tocast the analytical net as widely as possible, but to enhance the predictability ofdemands for regulation or socially responsible corporate behaviour These catego-ries suggest an ability to refine the analysis to enable characterizations to be madeabout investments and transactions

2.5 Rogue Companies

Armed conflicts have created a niche market for companies willing to avoid tion and assume greater levels of risk These companies - some relatively small insize but operating internationally – use conflict as a cover for their operations, orprofit from supplying the combatants, or both The companies operate illegally inmany cases, but many other times they are not technically in violation of any law.The work of the UN sanctions committees’ independent panels of experts and/ormonitoring mechanisms has shown that they are often closely connected with therepressive powers at the head of rebel movements or governments, often in directcontradiction to UN sanctions, or other efforts to promote security or peace Theyare, in a sense, rogue companies

regula-Rogue companies are involved in all three categories of activity that define flict commodities: anarchic exploitation, criminalized transactions and militarised

con-production Yet, the Economies of Conflict studies identify activities carried out by

companies with legitimate business interests that would fit into these same ries As the activities and consequences associated with conflict commodities begin

catego-to be better underscatego-tood, and as the consensus around notions of conflict ities begins to solidify, a number of companies engaged in otherwise legitimate ac-tivities could find themselves on the wrong side of international opinion

commod-The Economies of Conflict studies portray a complex range of licit and illicit

activi-ties resulting – directly and indirectly - in a number of intended and unintendedconsequences The elaboration of a clearly defined concept of ‘rogue companies’would have considerable utility with regard to private sector CSR initiatives It wouldhelp all sides – industry, NGOs, and government – by providing some transparen-

cy to the negotiation of CSR and armed conflict standards Judging from the pace

of recent policy developments, it is possible that, sooner rather than later, thoseinternational firms which have taken on CSR initiatives related to human rights orthe environment will have to add the armed conflict lens to their collection of duediligence perspectives Eventually, companies will need to adopt clear, verifiablepositions on core issues about their operations in situations of armed conflict or riskbeing tarred with the same brush as rogue companies

As policy and law develop, it is not inconceivable that rogue companies will oneday find themselves named by the Security Council as threats to international peaceand security and treated accordingly Ultimately, rogue companies could face a range

of targeted sanctions that would affect their management and operations tionally with a view to influencing their behaviour in relation to one or more armedconflicts The utility of such measures for the Council might increase if corporatesanctions proved effective in targeting specific economic and political interests, could

interna-be shown to have relatively minor consequences for civilian populations

What companies might qualify as rogue companies? To the extent that nies have participated in the conflict sustaining activities outlined above, the as yetsimplistic definition of rogue companies offered here would encompass large parts

of the tropical timber industry, a number of international banks, certain nies dealing in rough diamonds, and certain multinational oil companies Thus, tothe extent that they have handled finances related to armed conflict, certain banksoperating in problematic jurisdictions identified by the OECD’s Financial ActionTask Force (FATF) may qualify as rogue companies However, a company that loomslarge in the trade in rough diamonds may not qualify as a rogue company if it hasparticipated in attempts to address those aspects of the trade that lend themselves

compa-to the creation of conflict commodities Similarly, oil companies that have attempted

to deal with aspects of the militarization of oil production – for example, through

implementation of the Voluntary Principles on Security and Human Rights – may also

be excluded

As indicated above, the definition of conflict commodities - and its corollary,rogue companies – may be too broad For example, the categorisation presentedabove does not distinguish between activities that are directly or indirectly linked

to sustaining conflict In addition, it remains unclear as to where responsibility liesfor making a determination as to the status of a commodity or a company

The result is that, in the presently fluid policy context, and in the absence of

sharp-er definitions of the activities that create conflict commodities, simple participation

in the economy of a country in armed conflict could implicate companies involved

in certain industries in the production of conflict commodities as they are definedabove Clearly, the risk to reputations of companies could present a significant dis-incentive for investment by some companies

In fact, the risks will continue to rise for all concerned so long as the actions ofthe worst of the rogue companies are not checked and some clarity is not brought

to the debate For developing countries, where the bulk of some primary ities are to be found, the danger of a foreign investment freeze - driven by fears overdamaged company reputations or brand profiles - may become an increasingly fright-ening possibility Similarly, industrialised countries – whether primary commodityproducers or not - will need to pay greater attention to the involvement of theircompanies abroad, or risk feeling the political fall-out from actions over which theyhave hitherto had little control Before the agenda can move much further, howev-

commod-er, additional research and dialogue is necessary in order to identify precisely whatactivities would cause a good to be classified as a conflict commodity and a compa-

ny to be considered a rogue

2.6 Emerging Conclusions

• The kinds of activities described in the Economies of Conflict studies completed

to date represent significant challenges to the effective exercise of state sovereignty,corporate social responsibility and international peace and security

• Private sector activity in armed conflict is marked by the convergence of chic exploitation, criminalized transactions, and militarized production

anar-• Goods exploited to sustain armed conflict and produced or brought to market

by anarchic exploitation, criminalized transactions, and militarized productioncould be described as conflict commodities

• Companies involved in the production, marketing or payments related to flict commodities could be described as rogue companies Company involvement

con-in the activities related to conflict commodities may be direct or con-indirect

• The distinction between licit and illicit goods or transactions is misleading Inthe production or marketing of goods from armed conflict situations, there areperfectly legal actors involved in dubious transactions, and known criminalsinvolved in legal activity

• While understandable, the moral-political distinction between rebels and statesthat appears in most inter-governmental action in this regard is probably un-helpful for effective policy formulation The evidence indicates that both stateand non-state actors alike have been engaged conflict sustaining private sectoractivity.

• The complexity of the subject implies that, in the development of analytical tools,priority should be placed on the need for transparency of analysis, rather than

on achieving consensus on definitions

• Transparency of analysis is probably best achieved through a focus on the ities involved in sustaining conflict, rather than on the actors involved

activ-• Definitions of conflict sustaining activity should be deployed as analytical toolsand regulation pursued through the appropriate frameworks

• The complexity of the activities and interests involved indicates that there is nosimple or single regulatory option The political hurdles, too, suggest govern-ment and business would oppose a simplistic solution Therefore, an array ofremedies, voluntary as well as coercive, may be required

• Where regulatory gaps exist, new options will need to be formulated to addressthe problematic activities These should be developed through multi-party dia-logue

3 Executive Summaries

This section contains the executive summaries of the four reports from the

Econo-mies of Conflict series that are included on the compact disk enclosed These reports

will be published separately in printed format during the spring of 2002