MAC: Mines and Communities

Freeport-Rio Tinto: Gold's other price

Published by MAC on 2005-12-28

Freeport-Rio Tinto: Gold's other price

by Jane Perlez and Raymond Bonner / New York Times

28th December 2005

JAKARTA. The closest most people will ever get to the remote Indonesian province of Papua, or the operations of Freeport-McMoRan, is a computer tour using Google Earth to swoop down over the rain forests and glacier-capped mountains where the American company mines the largest gold reserve in the world.

With a few taps on a keyboard, satellite images quickly reveal the deepening spiral that Freeport-McMoRan has bored out of its Grasberg Mine as it pursues a virtually bottomless store of gold hidden inside. The images also show a spreading soot-coloured bruise of almost a billion tons of mine waste that the company, based in New Orleans, has dumped directly into a jungle river of what had been one of the last untouched landscapes in the world.

What is far harder to discern is the intricate web of political and military ties that have helped shield Freeport-McMoRan from the rising pressures that other gold miners have faced to clean up their practices. Only lightly touched by a scant regulatory regime, and cloaked in the protection of the military, Freeport-McMoRan has managed to maintain a nearly impenetrable redoubt on the easternmost Indonesian province as it taps one of the country's richest assets.

Months of investigation by The New York Times found a level of contacts and financial support to the military not fully disclosed by Freeport-McMoRan, despite years of requests by shareholders concerned about potential violations of U.S. laws and the relations between the company and a military whose human rights record is so blighted that the United States severed ties for a dozen years until November.

Company records obtained by The Times show that from 1998 through 2004, Freeport-McMoRan gave nearly $20 million to military and police generals, colonels, majors and captains, and to military units. Individual commanders received tens of thousands of dollars, in one case up to $150,000, according to the documents. The records were provided by an individual close to Freeport-McMoRan and confirmed as authentic by current and former employees.

Freeport-McMoRan said in a written response to The Times that it had provided a secure working environment for its more than 18,000 employees and contract workers in accordance with U.S. and Indonesian laws.

"There is no alternative to our reliance on the Indonesian military and police in this regard," the company said. "The need for this security, the support provided for such security, and the procedures governing such support, as well as decisions regarding our relationships with the Indonesian government and its security institutions, are ordinary business activities."

While mining and natural resource companies sometimes contribute to the costs incurred by governments in securing their operations, any payments to individual officers would raise questions of bribes, said several people interviewed by The Times, including a former Indonesian attorney general who said it was illegal under Indonesian law for officers to accept direct payments.

The Times's investigation also found that, according to one current and two former company officials who helped set up a covert program, Freeport-McMoRan intercepted e-mail messages to spy on its environmental opponents. Freeport-McMoRan declined to comment.

More than 30 current and former Freeport-McMoRan employees and consultants were interviewed over the past several months for these articles. Very few would speak for attribution, saying they feared retribution by the company.

Freeport-McMoRan's close support of the military is one measure of its extraordinary working environment in Papua. In the 1960s, when Freeport-McMoRan entered Papua, its explorers were among the very first outsiders ever encountered by local tribesmen.

Since then, Freeport-McMoRan has built what amounts to an entirely new society and economy, all of its own making. Where nary a road existed, Freeport-McMoRan, with the help of the San Francisco-based construction company Bechtel, built virtually every stitch of infrastructure over impossible terrain in engineering feats that it boasts are unparalleled on the planet.

That history, the extreme remoteness of Papua and the long ties the company has with Indonesian government have given Freeport-McMoRan sway over a 21st-century version of the old company town, built on a scale unique even by the standards of modern mega-mining.

"If any operation like this was put forward now, it wouldn't be allowed," said Witoro Soelarno, a senior investigator at the Indonesian Department of Energy and Mineral Resources, who has visited the mine many times. "But now the operation exists, and many people depend on it."

For years, to secure Freeport-McMoRan's domain, James Moffett, a Louisiana-born geologist who is the company chairman, assiduously courted Indonesia's dictator, Suharto, and his cronies. Freeport-McMoRan paid for their vacations, some of their children's college education, and cut them in on deals that made them rich, current and former employees said.

On the Freeport-McMoRan board, in the United States, Moffett turned to influential people outside the fields of mining, like Henry Kissinger, the former U.S. secretary of state, and J. Stapleton Roy, a former U.S. ambassador to Indonesia.

Together with a roster of former CIA and U.S. military officials, those powerful allies helped Freeport-McMoRan navigate the intricate byways of Indonesian politics as well as its deepening entanglement with the military.

It was a marriage of mutual convenience. As Freeport-McMoRan prospered into a company with $2.3 billion in revenue, it also became one of the largest sources of revenue for the Indonesian government, in some years the biggest. It remains so.

Freeport-McMoRan says that it provided Indonesia with $33 billion in direct and indirect benefits from 1992 to 2004, almost 2 percent of the Indonesian gross domestic product. With gold prices hitting a 25-year high of $540 an ounce this month, the company estimates it will pay the Indonesian government $1 billion this year.

With Suharto's ouster in 1998, after 30 years of unchallenged power, Freeport-McMoRan's special place was left vulnerable. But its importance to the Indonesian treasury and its carefully cultivated cocoon of support have helped secure it against challenges from local people, environmental groups and even the Indonesian Environment Ministry.

Letters and other documents provided to The Times by government officials show that the ministry repeatedly warned the company since 1997 that Freeport-McMoRan was breaching environmental laws. They also reveal the deep frustration of Environment Ministry officials.

The frustration stems from an operation that Freeport-McMoRan estimates will generate six billion tons of rock and waste before it is through, more than twice as much earth as was excavated for the Panama Canal.

Much of that waste has already been dumped in the mountains surrounding the mine or down a system of rivers that descends steeply onto the low-lying wetlands, close to Lorentz National Park, a pristine rain forest that has been granted special status by the United Nations.

A multimillion-dollar study in 2002 by a U.S. consulting company, Parametrix, paid for by Freeport-McMoRan and its joint venture partner, Rio Tinto, and not previously made public, noted that the rivers upstream and the wetlands inundated with waste were now "unsuitable for aquatic life." The report was made available to The Times by the Indonesian Environment Ministry.

The Times made repeated requests to Freeport-McMoRan and to the Indonesian government to visit the mine and its surrounding area, which requires special permission for journalists. All the requests were turned down.

Freeport-McMoRan declined to make any official available for an interview and would respond to questions only in writing. A cover letter signed by its legal counsel, Stanley Arkin, said that Grasberg is a copper mine, with gold retrieved as a by product, and that many journalists had visited the mine before the government tightened its rules in the 1990s. "Freeport-McMoRan has nothing to hide," Arkin wrote.

At Grasberg, Freeport-McMoRan Copper and Gold is mining the third-largest copper deposit in the world. The mine also has proven reserves of 46 million ounces of gold, according to the Freeport-McMoRan 2004 annual report. This year, Mining International, a trade journal, called the Freeport-McMoRan gold mine the biggest in the world.

Social tensions erupt

Since Suharto's ouster, Freeport-McMoRan employees say, Moffett's motto has been "no tall trees," a call to keep as low a profile as possible.

But even before then, the new world that Freeport-McMoRan created was growing smaller. By the mid-1990s, with production in full swing, and the expanding impact of the Grasberg operations ever more apparent, Freeport-McMoRan was beset on all sides.

Environmental groups, able to coordinate more effectively by using the Internet, made Freeport-McMoRan a target. Local tribes were more and more restless at seeing little benefit for themselves as vast riches were extracted from their lands. And some Indonesian military commanders in Papua saw increasing value of the mine as ripe for the plucking.

To fortify itself, Freeport-McMoRan, working hand in hand with Indonesian military intelligence officers, began monitoring the e-mail messages and telephone conversations of its environmental opponents, said an employee who worked on the program and read the e-mail.

Lawyers for Freeport-McMoRan were nervous, said a person who was at the company at the time, but the lawyers decided that no law prohibited the company from reading e-mail messages outside the United States.

Social tensions around the mine, meanwhile, were growing, as was the population in Papua. The province, mostly animist and Christian because of long years of missionary work, is distinct in many ways from the rest of Indonesia, the largest Muslim country in the world. Almost from when Indonesia became independent, Papua had rumblings of a separatist movement.

For many years Freeport-McMoRan maintained its own security force, while the Indonesian military battled a weak, low-level insurgency. But slowly their security needs became entwined.

No investigation has directly linked Freeport-McMoRan to any human rights abuses, but increasingly it became associated in the minds of Papuans with abuses by Indonesian military units, which in some cases used company facilities.

Finally, in March 1996, long-simmering anger at the company erupted in rioting when anti-mine sentiment among different groups coalesced into what was perhaps the biggest threat to the company to this day. The mine and its mill were shut down for three days. Rioters destroyed $3 million in equipment and ransacked offices.

The company intercepted e-mail messages that, according to two persons who read them at the time, suggested that certain military units, the community and environmental groups were working together.

In recent interviews, current and former Freeport-McMoRan officials recalled how they were stunned when, among those rioting, they saw men with military haircuts, combat boots and walkie-talkies. They seemed to be directing the rioters, at one point, to a Freeport-McMoRan laboratory, which they ransacked.

It was not long before a worried Moffett flew to Indonesia in a company jet.

Freeport-McMoRan declined to comment on the meeting that followed. But a company official who was there recounted that Moffett met with a group of senior Indonesian military officers at the Sheraton Hotel in the lowland town of Timika, near the mine. An all-powerful general, Prabowo Subianto, son-in-law of Suharto and commander of the Indonesian Special Forces, presided over the meeting.

"Moffett, to protect you, to protect your company, you have to help the military here," Prabowo began, according to the company employee who was present.

Moffett is said to have replied: "Just tell me what I need to do."

The cost of security

In short order, Freeport-McMoRan spent $35 million on military infrastructure: barracks, headquarters, mess halls and roads. It also gave the commanders 70 Land Rovers and Land Cruisers, which were replaced every few years. Everybody got something, even the navy and air force.

Freeport-McMoRan set up a special department, the Emergency Planning Operation, to handle the new relationship with the Indonesian military. It began making direct monthly payments to Indonesian military commanders, while a Security Risk Management Office handled the payments to the police, according to company documents and current and former employees.

Freeport-McMoRan gave the military and the police in Papua at least $20 million from 1998 to May 2004, according to company documents. In interviews, current and former employees said that at least an additional $10 million was also paid during those years.

Seven years of accounting records were provided to The Times by an individual close to the company. Additional records for three years were provided by Global Witness, a non government organization that released a report last July, "Paying for Protection," about the relationship between Freeport-McMoRan and the Indonesian military.

Diarmid O'Sullivan, who works for Global Witness in London, criticized the payments. It may be necessary for a company to help governments with security, he said, but "they should give the money through the proper channels, in a transparent way."

Freeport-McMoRan told The Times, "Our books and records are transparent and accurately reflect the support that we provide."

That support, the company said in its responses, included "mitigating living costs," as well as "infrastructure, catered food and dining hall costs, housing, fuel, travel, vehicle repairs, allowances to cover incidental and administrative costs, and community assistance programs conducted by the military and police."

The company said all its expenditures were subject to a budget review.

The records received by The Times listed payments to individual military officers under headings such as "food cost," "administrative services" and "monthly supplement."

Current and former employees said that the accounting categories did not reflect what the money was actually used for and that it was likely that much of the money went into the officers' pockets. The commanders who received the money did not have to sign receipts, said current and former employees.

The records list the commander of the troops in the Freeport-McMoRan area, Lieutenant Colonel Togap Gultom, as being the largest recipient of funds. He declined to be interviewed.

During six months in 2001, the records list him as being given just under $100,000 for "food costs," and more than $150,000 the next year.

The records also list payments to at least 10 other commanders of a total of more than $350,000 for "food costs" in 2002.

By 2003, following the Enron scandal and passage of the Sarbanes-Oxley Act in the United States, which imposed more rigid accounting practices on companies, Freeport-McMoRan began making payments to military and police units instead of individual officers, according to records and current and former employees.

The company paid police units in Papua slightly under $1 million in 2003, according to the records.

Freeport-McMoRan told The Times that "company policies take into account the potential for human rights abuses in determining what types of assistance to provide."

According to the records received by The Times, the Mobile Brigade, a paramilitary police unit often cited by the U.S. State Department for its brutality, received more than $200,000 in 2003.

Questions of accountability

Freeport-McMoRan has resisted nearly any detailed disclosure of its payments to the military, saying they are legal and even required under Indonesian law.

Marsillam Simanjuntak, who was minister of justice and later attorney general in one of the first governments after the fall of Suharto, said it was a violation of Indonesian law for soldiers or police officers to accept payments from a company.

But many companies do it, he said. The better question to ask, he said, was, "Is it allowed by the laws of the United States?"

This year, the New York City pension funds submitted a shareholder resolution asking Freeport to review its policy on paying the Indonesian police and military. They argued that payments could violate the Foreign Corrupt Practices Act, which forbids U.S. companies to pay bribes to foreign officials. Freeport opposed the resolution.

In 2002, the funds submitted a similar resolution demanding that Freeport disclose how much it was paying to the military. Freeport kept it off the ballot.

In later filings with the U.S. Securities and Exchange Commission, Freeport reported that it had paid the military a total of $4.7 million in 2001 and $5.6 million in 2002.

Freeport, in its responses to The New York Times, said it was complying with the Voluntary Principles on Security and Human Rights, a set of guidelines drawn up by the State Department.

They recognize that natural resource companies "may be required or expected to contribute to, or otherwise reimburse, the costs of protecting company facilities."

The principles do not address the question of direct payments to individual officers. Nor do they require companies to account for the payments.

Freeport has also said that the payments were required under its Contract of Work, its basic agreement with the government of Indonesia, first signed in 1967 and updated in 1991.

The company declined to provide a copy of the contracts to The Times.

A copy of each was provided by Denise Leith, author of "The Politics of Power: Freeport in Suharto's Indonesia." They contained no language requiring payments to the military.

Evelyn Rusli contributed reporting.

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