Palm oil firms use ‘shadow companies’ to hide deforestation links: report

The report shows that some of the world’s biggest palm oil firms use opaque corporate structures allegedly to conceal their ties to destructive practices such as rainforest and peatland clearance.

Major agribusiness firms are using opaque corporate structures to gain access to palm oil sourced from plantations operating in violation of their sustainability commitments, according to an investigation into the practice by a leading research group.

The report, by risk analysis group Chain Reaction Research (CRR), alleges that large conglomerates in Southeast Asia’s plantation sector often deliberately hide the true ownership of controversial assets without relinquishing control.

As a result, deforestation takes place at plantations that belong to the same ultimate owners as firms that subscribe to No Deforestation, No Peat, No Exploitation (NDPE) sourcing policies. These firms have promised to refrain from clearing forest and peatland, grabbing land from rural communities, and abusing their laborers.

Under pressure from civil society groups, large corporations up and down the palm oil supply chain began to issue NDPE policies five years ago.

But to avoid losing control of assets found to be in breach of these policies, palm oil firms established side businesses controlled by family members and sold off assets to related parties in a bid to cover their tracks, the report alleges.

“The biggest issue for us is to stop deforestation. We are particularly concerned about this ‘shadow company’ issue as it really threatens NDPE policies, by allowing growers to continue to deforest, and allowing them to still find a market with companies with NDPE policies,” Chris Wiggs, a consultant with Aidenvironment, a partner organisation of CRR, told Mongabay.

For years, Wilmar and Gama have worked together, with Gama doing the dirty work so Wilmar’s hands stay clean. 

Kiki Taufik, head of forests campaign, Greenpeace Southeast Asia-Indonesia

The biggest palm oil traders, he said, “have so far appeared reluctant to tackle this issue, and that has allowed deforestation to continue and for these growers to continue to deforest without serious ramifications.”

The CRR report, which focuses on Indonesia, Malaysia and Papua New Guinea, names Sawit Sumbermas Sarana, Gama, Bintang Harapan Desa, and the Fangiono, Tee, and Salim family business groups as some of the culprits. The use of opaque ownership structures in the palm oil sector threatens to “delegitimize the NDPE efforts,” according to CRR, while minority investors and financiers of the companies may also face reputational and market risks if linked to the practice.

In a separate report, Greenpeace detailed how the world’s largest palm oil refiner, Wilmar International, was linked through family connections to Gama, one of the companies featured in the CRR report, which the environmental group said had recently destroyed an area of rainforest twice the size of Paris in Indonesia’s Papua province.

“Our investigation has exposed Wilmar’s dirty secret,” Kiki Taufik, head of Greenpeace Southeast Asia’s Indonesian forests campaign, said in a statement. “For years, Wilmar and Gama have worked together, with Gama doing the dirty work so Wilmar’s hands stay clean. But now the truth is out, and Wilmar CEO Kuok Khoon Hong must act now to save his reputation.”

Gama was established by Martua Sitorus, Wilmar’s co-founder, and his brother in 2011. Wilmar, Greenpeace notes, has an unresolved history of social conflict and exploitation on its plantations and has on several occasions sold off its most controversial concessions to Gama, which was still under the control of Martua’s family in the period since Wilmar became the first palm oil trader to publish its own NDPE policy in 2013.

But in the five years since the policy was published, investigators studying satellite imagery found Gama had destroyed some 215 square kilometers (83 square miles) of rainforest or peatland, while Wilmar continued to buy from the firm.

Martua and his brother-in-law, Hendri Saksti, resigned from Wilmar in the wake of the Greenpeace report, while Wilmar has said it has stopped purchases from Gama. In a statement to Mongabay, a Wilmar spokesperson said the company “takes very seriously Greenpeace’s allegations of complicity by Wilmar with Gama.”

Wilmar’s position is that both Martua and Hendri had asked to resign in 2017, but were convinced to remain in their positions until suitable replacements were found. Wilmar says it accepted their recent resignations “to put to rest allegations of conflict of interest between Wilmar and Gama.”

“We reiterate that Wilmar and Gama are two separate corporate groups operating independently of each other. Neither company has control over the other,” the spokesperson said.

But such claims of innocence prompted skepticism from civil society groups and investigators who have researched the issue.

Wiggs of Aidenvironment said it appeared that the use of opaque corporate structures in the palm oil sector was deliberately employed by companies who wished to shirk their sustainability commitments.

“We are seeing multiple examples of companies that, on the face of it, are not linked to problematic plantations, or have publicly divested from them, but when you access the notary acts for these plantations, you discover that they are still linked to these companies,” he said. “Of course there are other reasons why this might be, but it is likely it is to hide them from NDPE policy compliance.”

He added that numerous examples uncovered by CRR demonstrate this. For example, the ownership of Bewani Oil Palm Plantations in Papua New Guinea is controlled by members of the Tee family, who own four supposedly NDPE-compliant palm oil mills in Malaysia.

“This development, being on forest and with serious social and legal issues, violates the policies of all the main traders with such policies,” Wiggs said. “Are the Tee family deliberately separating their interests in the mills from their interests in PNG so one doesn’t affect the other?”

Selwyn Moran, a researcher who has extensively studied the use of beneficial ownership by agribusiness and extractive firms in the region, said the use of shadow companies took three forms: offshore holding companies where the beneficial owner was unknown; nominee agreements, where the owner enlists someone to act on their behalf—a legal grey area; and networks of speculators and brokers who pioneer concessions before selling to established plantation companies.

“I think there is widespread evidence that the key palm oil traders have been deliberately turning a blind eye to these practices, by continuing to buy from groups which use these shadow structures, even though they are aware, or could easily find out, that they are connected to companies which continue to violate their NDPE policies,” he said.

“Of course, it would be easy, and entirely legitimate, for trading companies to demand transparency over ownership from their suppliers, but this is not happening. It is one of the key loopholes in the NDPE process, by which large amounts of deforestation-linked and exploitation-linked palm oil are getting into the supply chains of companies with NDPE policies.”

One of the key questions driving investigations of the practice is the motivation the companies have in making use of schemes that involve substantial reputational risk. Moran says other than ensuring continued market access, companies can in some cases avoid regulatory compliance and to remain at arms length from the illegality, corruption and violence that still plagues the plantation industry in countries like Indonesia.

“Cash for permits is still believed to be very common, as is using techniques of intimidation and coercion to grab the lands of indigenous peoples or peasant farmers,” he said.

“Members of local political elites, high-ranking members of the police and military or land and timber mafia may all be involved in financing or brokering oil palm expansion, but don’t want their name appearing on the share register. In other words there is a lot that plantation companies typically want to hide.”

This story was published with permission from Mongabay.com

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