China’s mining industry has found both a literal and figurative gold mine in the Philippines through some of estimated 500,000 small-scale miners operating throughout more than 30 of the Philippines’s 80 provinces.

Two decades ago the government pushed through the People's Small-Scale Mining Act of 1991, and more recently, the Indigenous Peoples Rights Act, which gives indigenous miners priority rights over mining applications. These applications, which bar the use of explosives, cyanide, mercury and heavy or sophisticated drilling machines, skiploaders and excavators, are granted by local governments for a mere P10,000 (US$241).

But the romantic idea of the hard-working local, out there with pan and shovel, is sadly out of synch with reality. Operating through lawyers in the Philippines and co-opting Filipino proxies, the Chinese firms circumvent the enormous time – five to 10 years – and expense of complying with large-scale mining requirements, using the locals to purchase mining permits or special ore extraction permits to avoid large capital requirements, fees, and taxes associated with large-scale mining.

The gold is usually transported by ship from mining provinces like Surigao del Norte to ports such as those in Cebu where they are shipped by private plane outside of the Philippines, typically to Hong Kong, where one of the world’s largest gold depositories has just gone into operation at Hong Kong International Airport. The Israeli-based owners of the facility refused comment on their operations.

The numbers of Chinese piling in to loot Filipino resources are increasing. Overwhelmed authorities have arrested more than 100 Chinese nationals since January for their involvement in illegal mining operations. The Philippine Mines and Geosciences Bureau has expressed alarm over the increasing number of Chinese nationals working mines illegally.

The Department of Environment and Natural Resources concedes that the industry is plagued with rampant misdeclaration, undervaluation and illegal export of minerals from the Philippines to China. It also acknowledges that large-scale mining operators have been hiding under small-scale mining permits to avoid paying their full tax obligations. In 2008, the department disclosed that an estimated three million tonnes of mineral ores processed in China were unaccounted for by the Philippines, thus depriving the national and local governments of billions of pesos in tax revenues.

Industry sources suggest that Chinese mining firms claiming to manage small-scale ventures actually engage in large-scale operations, using heavy equipment, mercury, cyanide, and various types of explosives to extract ore, contrary to national mining laws. The Chinese companies thus are gaining a reputation for trampling on environmental standards. Often cited as among the world’s worst violators of occupational health and safety standards in their own country, they are being blamed in the Philippines for fast-rising floods during heavy rains, landslides, poisoned water bodies, soil erosion, deforestation, and even a decline in farm output in areas where there has been a surge in questionable projects.

Certainly the minerals aren’t being passed legally through official channels. In June, the environmental agency sought help from the Presidential Anti-Organized Crime Task Force and the Bureau of Customs after the Mines and Geosciences Bureau reported a 38 percent first-quarter decline from the previous year in production value, from P31.40 billion (US$752 million) to P9.61 billion, a shortfall of P11.79 billion. The mines bureau attributed the drop to the smuggling of mineral ores abroad, particularly to China. The environment agency has formally recommended to the Philippine Government that the smuggling of mineral resources from the Philippines be declared a crime of economic sabotage.

The Chinese companies offer notoriously malleable local politicians the right price and the right deals, which local government officials justify, arguing that little to none of the tax and permit revenue paid by large western mining firms to the national government is ever remitted to local government units, as required by law.

It also appears that the government is not holding China to the same legal benchmarks that are applied to Western firms. Indeed, the other traditional foes of western mining – the Catholic Church, environmentalists, and other activists generally leave the Chinese companies alone while placing formidable obstacles in the path of western mining companies, whose standards are usually considerably higher.

The Mines and Geosciences Bureau concedes that some Chinese investors buy local companies with mines still in the early stages of development. Chinese companies are also increasingly partnering with other Chinese firms that want to invest in the same mine site, thus eliminating competition and bringing in more resources to accelerate a project.

In the Philippines, a 100 percent foreign-owned company is allowed to obtain mineral processing permits, mineral exploration permits and financial technical assistance agreements. Mineral production sharing agreements, however, must adhere to the Philippines’ constitutional requirement of 60-40 ownership in favor of a Filipino company.

By actual count, however, as of July 31, 2012 the mining bureau listed only five Chinese companies with processing permits, 14 with production sharing agreements and just two with exploration permits. None has a financial technical assistance agreement with the government.

Yet, according to industry sources inside and outside the Philippines, at least 40 Chinese mining investors are involved in mineral extraction. That is because many operate under the names and licenses of their Filipino counterparts or subsidiaries. For example, Philippine mining company Oriental Synergy has a production sharing agreement on Dinagat Island but has also partnered with the Chinese company Macao Quanta in a separate agreement assigned to Filipino partner Minahang Bayan ng Mamamayan ng Dinagat Island Cooperative. The Ecleo family, the island’s ruling and most dominant political clan, heads the small-scale mining cooperative.

The majority of small-scale miners are also accused of illegally selling their output to the black market or to foreign buyers abroad at below market value to evade taxes and government fees. There are related allegations that these small-scale miners go beyond the allowed tonnage and land area limits. Industry sources assert that in some cases, small-scale miners haul 50,000 tonnes of ore per month from a five-hectare area, and thereafter simply renew their small-scale mining permits issued by the local government.

Following the renewal, the small-scale miner only needs to show proof of active extraction to secure a longer-term permit. Indeed, these types of permits have apparently become a venue for larger firms that simply want to speed up mineral collection. Given such mining practices, it is no surprise that these operations devastate the land.

Corruption and manipulation of the law has rendered national agencies such as the DENR helpless in regulating and monitoring small-scale mining operations, as provincial mining and regulatory bodies often become rubber-stamp institutions of local politicians who are working in collusion with the mining companies.