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

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
Norway.
Institute for Applied Social Science
P.O.Box 2947 Tøyen
N-0608 Oslo
/>Programme for International Co-operation and Conflict Resolution

Mark Taylor
Emerging Conclusions – March 2002
Fafo
Economies of Conflict: Private Sector Activity in Armed Conflict
Programme for International Co-operation and Conflict Resolution
2

© Fafo Institute for Applied Social Science 2002
Cover page: Agneta Kolstad
Printed in Norway by: Centraltrykkeriet AS
3
Contents
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
4
5
Preface
These Emerging Conclusions offer a preliminary analysis of the findings of four re-
ports from the Economies of Conflict policy research series, a project of Fafo’s Pro-
gramme for International Co-operation and Conflict Resolution (PICCR). These
reports are the first to emerge from the series, which examines the links between
certain private sector activity and armed conflict.
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 of
Norway, on 25 March 2002 in New York. These reports will be released in printed
format in the coming months.
The Executive Summaries of the reports are reproduced below, as is a table of
contents 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 com-
pact disc in order to provide background and context to the studies and to give this
version of the compact disc additional utility. Much of what is included on the
compact disc is also available on the Fafo web site at www.fafo.no/piccr, which will
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 studies
approach the private economic dynamics involved in armed conflict from within
each 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 perspec-
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
no means exhaustive of the economic dimensions of war, but they represent some
of the industries that are, perhaps, most relevant to the challenges to international
6
peace and security posed by contemporary armed conflicts. Although the studies
do address illicit activities within licit industries, the project has yet to commission

studies 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 issues
related 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 of
people. Principal among these has been Ambassador Wegger Strømmen at the
Norwegian Permanent Mission to the United Nations, who has watched the project
grow 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 re-
searchers deserve special thanks, both for their openness to our approach to the
research task and their willingness to share their knowledge with each other across
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 of
Norway, which provided financial support for the project, and to those Norwegian
officials 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, includ-
ing this summary of emerging conclusions, are those of the authors alone and do
not necessarily reflect the views of Norway, its Government or officials, or Fafo.
These emerging conclusions present a work in progress. Your comments would
be welcome and should be directed to
Mark Taylor

Programme Director, PICCR
Series Editor, Economies of Conflict
7
1 Introduction
Today’s warlords, governments and non-state actors alike, make use of global finan-
cial and commodity markets to transform control over natural resources into war
fighting capacity. Under the cover of secrecy and unaccountability provided by war,
legally or illegally produced commodities are traded on the legitimate, but highly
unregulated, global markets to obtain financial resources, weapons and other ma-
teriel needed to sustain the war.
The economic dimensions of wars are not new. Yet, the horrors of recent wars
seem 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 lives
lost 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 conclusion
1
and that the economies of these conflicts may play a cru-
cial part in sustaining them.
As a priority for international action, the economic dimensions of conflicts have
been catapulted to the top of the international agenda by increasing concerns about
the 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 of
global financial and criminal networks to national and regional security. Today, a
common, global infrastructure of financial services is used to facilitate transactions
involving drug money, small arms, diamonds, smuggled timber, the proceeds of
corruption, human trafficking and terrorist finance. The apparent ease with which
licit 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 account-

ability. The failures of financial oversight and corporate accountability apparent in
the spectacular bankruptcy of the U.S based Corporation Enron have added to a
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.
8
growing sense of uncertainty about the transparency and accountability of firms
operating internationally.
Concerns about the economic dimensions of international peace and security
appear 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 mul-
tilateral organisations, non-governmental organisations, multinational corporations
and 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
to conflict through the increasingly significant lens of corporate social responsibil-
ity (CSR). Multilateral institutions, including the World Bank, the OECD, and the
United Nations, have begun to tackle the issue from their own perspectives (mac-
ro-economic analysis, global policy co-ordination, sanctions).

With this convergence
in mind, 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 ‘conflict
timber’, there is a growing sense that goods produced in an economy torn by armed
conflict 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 resulting
from successful campaigns on issues related to corporate social responsibility and
human rights, and the increasing concern that such activities run counter to efforts
to maintain international peace and security. It is arguable that an international moral
and political norm is gradually emerging which views private sector activity that
sustains armed conflict as unacceptable.
The notion of conflict commodities possesses inherent dangers. Countries de-
pendent upon a limited number of exports could face serious economic hardship
should 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
3
For a summary of UN oriented initiatives see, e.g., “Economic Agendas in Armed Conflict: Defi-
ning and Developing the Role of the UN”, Background Paper prepared by The International Peace
Academy and The Fafo Institute for Applied Social Science, on the occasion of a symposium spon-
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-
tion as part of the Economies of Conflict series in the Spring 2002; see www.fafo.no/piccr.
9
governments, industry and NGOs concerned about conflict diamonds, and they
have guided efforts to define the problem and develop remedies.
Despite the risks, there is as yet no agreed definition of what might constitute a
conflict commodity. By looking at those commodities already linked to the financ-
ing of armed conflict, the Economies of Conflict studies sought to describe the
specific activities involved in the production and marketing of such goods, includ-

ing payments processes and related financial services. What emerges is a picture of
conflict commodities as goods exploited to sustain armed conflict and produced or
brought to market by anarchic exploitation, criminalized transactions, and milita-
rised production.
The policy communities in the international public and private sectors are en-
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 and
companies position themselves in relation to a consensus forming around the issue
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 companies
are 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 mil-
itarization of production, criminalized transactions and anarchic exploitation. Yet,
the Economies of Conflict studies identify activities carried out by companies with
legitimate business interests that would fit into these categories. As the activities and
consequences associated with conflict commodities begin to be better understood,
and as the consensus around notions of conflict commodities begins to solidify, a
number 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 unintended
consequences. Judging from the pace of recent policy development, international
companies – and their ‘home’ and ‘host’ states - will need to adopt clear, verifiable
positions on core issues about their operations in situations of armed conflict. The

elaboration of a clearly defined concept of conflict commodities and rogue compa-
nies would have considerable utility with regard to private sector CSR initiatives. It
would help all sides – industry, NGOs, and government – by providing some
10
transparency to the negotiation of agreed standards. The analysis and definitions
suggested below are offered as a departure point in the discussion of these issues.
11
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 significant
uncertainty. Practitioners in governments, multilateral organisations, firms and
NGOs have few definitive or operational understandings of what might constitute
harmful private sector activity in armed conflict.
4
Company officers need to know
the 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 and
security require operable definitions upon which policy responses can be based.
Governments, those home to multinational corporations or those hoping to attract
investment, need to know about the political and economic implications of certain
company actions, at home and abroad.
The first four reports in the series - covering the oil, diamond, timber and fi-
nancial sectors – describe a complex combination of activities spanning production
processes, trade, the provision of services, and touching upon public and private
institutions. What emerges is a tentative categorisation of specific activities that
enable - 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 findings
are preliminary. The analysis presented here is subject to change based on further

research and the conclusions of additional papers to be published as part of the
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.
12
2.1 Anarchic Exploitation
5
Governments and rebels alike make use of global financial and commodity markets
to transform control over natural resources into war fighting capacity. Legally or
illegally 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 studied to date – diamonds, timber,
oil, and financial services – private sector activity consists of a series of transactions
which 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 armed
conflict 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 be
enforced; 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 by
having them formally legalized.
There is little in the way of international public or commercial law against which

the legality of private sector activities in armed conflict might be tested or from which
policies might be derived. In fact, all of the studies describe a lack of international
regulation or enforcement related to these activities.
7
Together, these domestic and
international regulatory gaps contribute to the blurring of the definitions of licit
and illicit economic activities in armed conflict.
For those involved in armed conflict, the exploitation of resources is made pos-
sible by this relatively unregulated or anarchic state of affairs. In some cases, certain
industries seek out such situations:
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.
13
“The tropical timber industry traditionally engages leaders of countries with large
forest resources and weak institutions. Abiding by ‘local business practices’, it
negotiates deals to extract raw materials as cheaply as possible. This mode of
doing 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 shady
business practices and poor governance. But armed conflict can also result from these

dynamics. Governments - of developing and industrialised countries alike - are not
always inclined to govern with transparency and accountability. In fact, “[h]alf the
world’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 unregu-
lated international financial system. The illicit financial networks imbedded in the
international financial system facilitate the illicit aspects of the trade in conflict
commodities. The absence of an international regulatory framework, or of agree-
ment on universalized domestic regulation, means that at present legitimate banks
would have a hard time trying to avoid handling the proceeds of government cor-
ruption or illicit proceeds gained through the exploitation of armed conflict. The
Illicit Finance study finds that money laundering and international financial arbi-
trage are crucial in undermining the accountability of domestic governments or
private companies:
“[f]inancial transparency is a core structural requirement by which governments,
regulators, law enforcement, judiciaries, civil litigants, and journalists can exercise
oversight and insist on the accountability of both important private sector and public
sector 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 ex-
ploitation to be counterproductive. Quite apart from the legal requirements of re-
lating to government, oil production requires the security and legal/administrative
guarantees 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
of oil revenues. A key problem lies in the lack of transparency of oil company pay-
ments to governments, which can
“[O]bscure the direction and volume of oil revenue flows. A large influx of easy
oil revenue into a non-transparent system invites corruption, in turn creating

incentives to further limit transparency and accountability. Under such
14
conditions, much oil wealth allegedly has disappeared into off-budgetary ac-
counts.” (Fuelling Conflict, 2002).
By seeking out weak jurisdictions, or by contributing to the weakening of domes-
tic governance, businesses can help to perpetuate or accelerate the deterioration in
accountability. The downward spiral through corruption towards state failure is
caused in part by - and results in - the loss of domestic control over the resource:
“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 and
loss of revenue to the state. It has also contributed to the erosion of democratic
principles as elected politicians and state officials put the rights of companies
before 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 to
favoured individuals or private companies, results in the loss of effective control over
the 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 in
practice 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 particular
country 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 conflict
and may help determine the effective exercise of state sovereignty.
As made clear in the studies, how companies play these roles depends upon a
number 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 and
governments, in the proliferation of conflict commodities and the sustainability of
economies of armed conflict in general.
Anarchic exploitation is made possible by a lack of governance mechanisms at
the domestic and international levels, described above as a series of regulatory gaps.
Poor governance may lead to political instability and conflict, but institutional
weakness 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
15
licit and illicit activity. If the private sector can be assumed to prefer low levels of
government interference, a state of war could be said to represent an ideal regulato-
ry environment for some industries. But exploitation during armed conflict can
promote corruption, impunity, and the incapacitation of government regulation or
control over a countries own natural wealth.
2.2 Criminalized Transactions
Up and down the supply and demand chains - from legal trading in illegally pro-
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.
It is estimated that in 1999 approximately 50 per cent of European Union trop-
ical timber imports consisted of illegally logged timber, a figure that is probably
representative 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 then
legally imported to consumer countries. “Surprisingly, there is no law that prevents
a European country from importing the products of illegal and ‘conflict’ timber
operations. 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 asked
other countries present not to allow, henceforth, the importation of Guinean
diamonds without the certificate. The EC representative replied that EU coun-
tries could import whatever they want, from wherever they want, and were not
bound 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 coun-
tries, inter-governmental co-operation as well as industry. However, the diamond
and timber trades both suffer from the misrepresentation of shipments. In fact, the
re-labelling of timber shipments, or the ‘blending’ of legal and illegal diamonds
16
during transhipment, are crucial for ensuring the access of illegal diamonds or tim-
ber to consumer markets.
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 to
criminal organisations and networks. “The timber trade is characterized by endemic
corruption, 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 have

gone 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 fuelled
armed 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 oper-
ate. In the global financial system, the transformation of money from ‘black’ to
‘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 of
governance, a financial scandal has been found in close attendance. Accompa-
nying each financial scandal has been the systemic use of banking and financial
secrecy to hide criminal activity. Over the past decade, this pattern has played
out repeatedly in jurisdictions all over the world. Repeatedly, political conflict
and major political destabilizing activity, including grand corruption, narcotics
trafficking, 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.
17
As with the trade in illegal or conflict diamonds or timber, there is no international
regulatory 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 funds
moved out of their jurisdiction. Offshore banking has made possible the practice
of arbitrage, the practice of structuring international transactions for maximum
profitability and minimum regulatory oversight or risk. While not illegal, arbitrage
makes 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 or
its 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 payments
processes related to armed conflict consist of a series of transactions that combine
the perfectly legal and legitimate with the thoroughly illegal or illicit.
The term ‘criminalized transactions’ is suggested here as a potentially useful
analytical category within which to group some of the illegal, illicit and generally
questionable transactions that help to fuel armed conflict. Transactions involved in
the 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 legally
obtained 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 – all
describe 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. In
all three sectors, however, the evidence suggests that a key relationship between

production and armed conflict is established once production is militarized.
Militarization of production occurs when a commodity becomes of strategic
significance for a military faction. Rebels in Angola, Sierra Leone and the Democratic
18
Republic of Congo (DRC) have made the control of alluvial diamond mining a
strategic military objective. Similarly, rebels movements and government armies in
Burma, Cambodia, Liberia, and from Zimbabwe have deployed to secure logging
areas and have facilitated the logging of tropical timber, or carried out the logging
themselves.
Opportunity is the determining factor in the transformation of rough diamonds
into 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 easy
activity, requiring low investment for quick return. A few soldiers with chain-
saws and trucks can generate hundreds of thousand of dollars in a relatively short
time; a well-resourced company can generate hundreds of millions…. In more
extreme 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 forest
land, 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 to
alluvial 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 de-
pendent upon military control of transportation routes out of the conflict zones, a
sufficient 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 same

pattern as that of diamond and timber production. The relatively high costs involved
in producing and marketing oil mean that, for rebels and governments alike, access
does not equal opportunity. For an oil field to represent a revenue opportunity it
requires investment, usually by an oil company. Unlike the diamond and timber
sectors, in which production could be profitable to anyone who controls access to
the 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 a
potentially pivotal position. Formally, oil companies typically adopt a position of
political neutrality. Yet, their production is a source of revenue for governments and
ruling 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 cov-
ert arms transfers to host governments, often justified by the companies involved
19
on the grounds of improving the capacity of the host government to provide secu-
rity for oil installations.
Oil production in situations of armed conflict usually places investment in harms
way 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 for
concessions 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 military
purposes. In some cases host governments even appear to be using oil company
security as a cover for waging military campaigns against political or ethnic en-
emies. Some of the most serious accusations levelled against international oil
companies 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. Companies
may provide logistical or other support - usually to governments - but rebels or
government troops are unlikely to be involved in the production of oil, or even the
management or oversight of production facilities. However, military activity assures
access 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 process
means that, access to the resource and control of marketing routes are enough to
make 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 with
whoever 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 rebel
militaries 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.
20
to a high value resource and to their markets – is the deciding factor, but invest-
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
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 victimising
labourers 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 militarized once
military personnel or military activity become a direct or indirect part of the pro-
duction process.
2.4 Conflict Commodities
With the rise to prominence of ‘conflict diamonds’, and to a lesser extent ‘conflict
timber’, there is a growing sense that goods produced in an economy torn by armed
conflict are, or should be, morally suspect. Indeed, the activities of companies dealing
in such commodities are increasingly viewed as illegal or a challenge to international
security. The Security Council, through its panels of experts and/or monitoring
mechanisms, 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 of
countries have heard cases involving allegations of dubious and illegal behaviour by
much larger multinational corporations. The news media in many more countries
have 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 interna-
tional moral and political norm under which private sector activity that sustains
armed conflict is unacceptable. The growing tendency to view certain products as
‘conflict commodities’ is a direct result of an increase in consumer sensitivity resulting
from successful campaigns on issues related to corporate social responsibility and
human 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, most
notably diamonds. The term ‘conflict diamonds’ was an invention of the media, an

attempt 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
21
been confirmed by the fact that definitions have been suggested both by the UN
General Assembly and by the inter-governmental series of meetings, known as ‘the
Kimberley Process’.
The UN GA defined conflict diamonds as ‘rough diamonds which are used by
rebel movements to finance their military activities, including attempts to under-
mine or overthrow legitimate governments.’ The Kimberly Process settled on the
following:
Conflict Diamonds means rough diamonds used by rebel movements or their
allies 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 be
adopted in the future, and as understood and recognised in United Nations
General 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 are
concerned with the use of diamonds as a source of finance. This is accurate, as the
financial exploitation is arguably the single most important role that diamonds play
in sustaining armed conflict. However, the definition ignores the impacts of dia-
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 may
contribute to perpetuating the conflict.
Second, both definitions have a clear pro-state bias. This is to be expected as both
definitions have emerged from fora in which states play a dominant role. As already
noted, 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 state
sovereignty entail a responsibility on the part of governments to provide security
and to retain a monopoly on the means violence. Similarly, state sovereignty entails

the 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 re-
pressive regime, one that put its profits towards maintaining the machinery of re-
pression and war?
The definition for ‘conflict timber’ offered by The Logs of War takes a more bal-
anced approach. It is based less on the principles of international relations and bet-
ter reflects the economic and logistical processes as work:
“For the purposes of this study, conflict timber refers to timber that has been
traded at some point in the chain of custody by armed groups, be they rebel
factions or regular soldiers, or by a civilian administration involved in armed
22
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 to
define conflict timber by virtue of logs having been traded or controlled at some
point 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 state
sovereignty, 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 ensure
the marketing and possibly also the production of timber. Given the acknowledged
right 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 production
above). Governments are unlikely to accept a definition of a conflict commodity
that 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 conflict dia-

monds definitions, which describes the “overthrow” or “undermining” of govern-
ments as the sole problematic objective. It is useful, too, because it specifically
identifies the criminal dimension of “personal gain”, which would almost certainly
capture most repressive elites (assuming “personal gain” includes the use of profits
for patronage to accrue political power, not just enrichment). But this definition
would 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.
“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 a
government 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 commodity
would include reference to commodities made possible by anarchic exploitation,
criminalized transactions and militarised production.
These categories are only preliminary and require further development. They
appear 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
23
context of the armed conflict (e.g. Sierra Leone diamonds, Liberian timber, Suda-
nese oil, etc.), these criteria might offer a more specific understanding of the nature
of the role of the private sector in sustaining conflict. By identifying activities and
transactions 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 accountable

for their actions. This would enable all concerned – NGOs, multilateral organisa-
tions, companies and governments - to develop definitions of complicity in armed
conflict that would be relatively transparent and comprehensible across the differ-
ent sectors. In using the categories suggested here, the objective should not be to
cast the analytical net as widely as possible, but to enhance the predictability of
demands for regulation or socially responsible corporate behaviour. These catego-
ries suggest an ability to refine the analysis to enable characterizations to be made
about investments and transactions.
2.5 Rogue Companies
Armed conflicts have created a niche market for companies willing to avoid regula-
tion and assume greater levels of risk. These companies - some relatively small in
size but operating internationally – use conflict as a cover for their operations, or
profit from supplying the combatants, or both. The companies operate illegally in
many 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/or
monitoring mechanisms has shown that they are often closely connected with the
repressive powers at the head of rebel movements or governments, often in direct
contradiction to UN sanctions, or other efforts to promote security or peace. They
are, in a sense, rogue companies.
Rogue companies are involved in all three categories of activity that define con-
flict commodities: anarchic exploitation, criminalized transactions and militarised
production. Yet, the Economies of Conflict studies identify activities carried out by
companies with legitimate business interests that would fit into these same catego-
ries. As the activities and consequences associated with conflict commodities begin
to be better understood, and as the consensus around notions of conflict commod-
ities begins to solidify, a number of companies engaged in otherwise legitimate ac-
tivities could find themselves on the wrong side of international opinion.