Mining companies' dreams of sudden wealth leave them vulnerable to corruption in the rapidly expanding Asia-Pacific region, says a leading consultant who spearheaded transparency within the Canadian industry.

Ian Marshall told the recent Asia-Pacific Forum on Mining and Minerals in Vancouver that companies' unrealistic images of "easy money" leave them open to expropriation, restrictions on their capital, wars or insurrections, taxation or regulatory changes, violence, inadequately trained local employees, AIDS, malaria and other diseases.

As commodity prices soar, Canadian and other western mining firms are looking for new mining and exploration opportunities outside their borders. Despite their political instability, many Third World countries are attractive because they possess some of the richest mineral reserves on the globe.

But many Asia-Pacific governments - including strife-torn Myanmar - rank among the most corrupt in the world.

"From a country-risk perspective, you couldn't get more risk than (Myanmar), because you do have a possibility of regime change - hopefully," said Marshall in an interview. "But one doesn't really know what is going to happen. If there is a regime change, there could be quite a change in the mineral-tenure arrangements.

"Everything would be up for grabs when you go from a dictatorship to a democracy."

He said Canadian, U.S. and Australian firms seeking to invest in new mining projects will face high levels of corruption in most Asia-Pacific countries except Chile. Marshall called for firms to do a better job of detecting and combating corruption and assessing host countries' intentions to fight it.

Executives at national and regional levels in their home countries become insensitive to day-to-day strife and ignore intolerable risks, which foster corruption, in order to maintain the confidence and optimism necessary to achieve their operational goals, he said. As a result, they rely too heavily on over-confident managers based in developing countries.

"This is called the Garden of Eden syndrome," said Marshall. "Local management's confidence in their ability to manage generally causes them to avoid considering any risks (as) intolerable."

Transparency International (TI), a 90-country coalition that aims to combat corruption worldwide, ranks Myanmar, formerly known as Burma, as the most corrupt country among 180 nations studied, along with Somalia. The two countries finished in a tie for 179th place.

Marshall called on firms to ensure that all revenues not recovered as profits flow into a host country's social development. He said a mining company is primarily concerned about its investment when it should focus first on social development or environmental projects that directly or indirectly affect its project, the community or people nearby, and the national economy.

"If local peoples do not have a legal stake in the success of a project, there will often be attempts to get a stake by corruption or illegal means," said Marshall, a West Vancouver-based mining industry adviser and lawyer who recently retired from TI's board and helped launch TI Canada, which monitors Canadian firms' exposure to corruption.

Only three Asia-Pacific countries - Mongolia, East Timor and Peru - have implemented the Extractive Industries Transparency Initiative (EITI).

The initiative aims to ensure that revenue from oil, gas and mining contributes to sustainable development and poverty reduction, and supports the publication and verification of all company payments and government revenue from resource extraction.

"Knowing what companies pay and governments receive is a critical first step to holding decision-makers accountable for the use of revenues," he said.

EITI's supporters include the Canadian, U.S. and U.K. governments, such major firms as Anglo-American, Barrick Gold, BHP Billiton, DeBeers, Newmont and Rio Tinto, the International Association on Mining and Metals, International Monetary Fund, International Organization for Economic Development and World Bank Group.

Marshall called for firms to do a better job of detecting and combating corruption and assessing host countries' intentions to fight it.

He said companies should investigate whether a host country has sought to implement the 2003 UN Convention Against Corruption and technical anti-corruption assistance from the World Bank.

Firms should also find out whether a host government has responded to TI concerns, adopted fair-hiring practices for public servants that ensure they remain honest, promoted transparency in elections and political parties and systems, prevented conflicts of interest, and established codes of conduct for public officials.

Whistleblower systems that allow public officials to report wrongdoing to proper authorities without fear of reprisals are also crucial. Rules that require public officials to report gifts, outside employment or substantial benefits that may pose conflicts of interest should also be in place - along with requirements for public reporting and access to information.

Free media are also critical to a company's ability to uncover corruption. "It's well known that corruption thrives in the dark," said Marshall. "The less daylight that the press shines on government business, the more likelihood of corruption."

Marshall said senior corporate management and outside consultants must complement in-country managers' views on risk. Corporate managers are more likely to be sensitive to "country risks" because chances are they have suffered heavy financial losses while operating in other nations.

Although companies are willing to assess risk in the startup stages, they must look at long-term factors - beyond the current tenure of governments and current officials - and identify any societal factors that could lead to a change in direction, a shift in policy or political restructuring that could harm their investments.

Country risk is subjective, but the greater one's ability to manage a situation, the less risky the result.

"There are only three categories of risk that matter - negligible, manageable and intolerable," said Marshall. "I prefer to call them the good, the bad and the ugly."

Gaylord Watkins, a Canadian lawyer now based in Singapore who was sitting in the audience, questioned whether companies should simply not venture into countries where corruption is "endemic."

Marshall replied that good geology knows no political boundaries. Noting that a company he worked with pulled out of a country because of corruption, he said it's up to a CEO to take a "real lead" and decide what's at stake in a project that involves a corrupt government.

"If you don't think you can (complete a project free of corruption) or put up measures to prevent it, maybe you don't do it," said Marshall.

The activities of one major Canadian company - Vancouver-based Ivanhoe Mines Ltd. - in Myanmar came under scrutiny from Amnesty International, which sought assurances that it was not contributing to corruption in the Southeast Asian country. Ivanhoe has since sold its Myanmar project.

Michael Hitch, a UBC assistant mining professor who formerly served as Ivanhoe's vice-president of corporate development, said the company pulled out because it was streamlining its operations so that it could focus on Mongolia. The departure from Myanmar coincided with exits from Australia, Korea and China.

"It wasn't really to avoid the political or the public-relations backlash," said Hitch, who moderated the session at which Marshall spoke.

Hitch said he is not aware of any Canadian companies now working in Myanmar. The Canadian industry as a whole, he added, must take a stand against corruption.

"Our industry (involves) big packets of money moving back and forth from different things," he said. "It attracts, sometimes, not the best people."

He believes Canadian companies operate clear of corruption. Small firms may have an advantage over their larger counterparts when trying to avoid it.

"Small companies have the ability to move swiftly and to be able to sidestep a lot of the things that would hit a big company right in the forehead," he said. "But, by the same token, a small company may not have the same level of access and privilege that a big company might have."

Michael McPhie, president and CEO of the Mining Association of British Columbia, which hosted the conference, said the Canadian industry has "totally embraced" the idea of having transparency in transactions - but would still like to see more.

"Without that, what bar are you measuring your success on?" asked McPhie.

(Monte Stewart can be reached at monte@businessedge.ca)