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Monday
Feb062017

Congress votes to kill extractive industries disclosure rule

The U.S. Senate voted Friday to repeal an SEC rule that would have required oil and gas and mining companies to disclose each year all of their payments to foreign governments for exploration and production rights, permits, taxes, and other things.

The House passed the bill earlier last week. It now goes to President Donald Trump for his signature.

The disclosure rule was set to go into effect in 2018. It was first adopted by the SEC in August 2012 under the Dodd-Frank Act and finalized in late June 2016.

Lawmakers used the Congressional Review Act to repeal the disclosure rule. That law allows a simple majority in Congress to repeal rules finalized in the past 60 legislative days. The SEC's approval of the final version of the extractive disclosure rule fell within the 60-day legislative deadline.

Anti-corruption activists had said payments to foreign governments were often bribes in disguise. They said the disclosure rule would help opposition politicians and local NGOs hold regimes accountable.

Business groups had argued that the law would stigmatize U.S. companies for making legal payments to foreign governments and reduce their ability to compete globally.

The Foreign Corrupt Practices Act doesn't prohibit payments to foreign governments. It outlaws corrupt payments made directly or indirectly to foreign officials, political parties, or other covered organizations to win or keep business.

Repealing the SEC extractive industries disclosure rule won't change the FCPA anti-bribery provisions or the books and records and internal controls provisions of the FCPA that the SEC enforces.

Nearly all natural resource deals involve foreign governments, which typically control their country's resources directly or through state-owned enterprises. Energy companies, for example, usually pay foreign governments for the right to explore for oil and gas, and then they pay royalties on the eventual production. Those payments, as well as taxes and other fees, would have been disclosed each year under the SEC rule.

*     *     *

In mid 2013, a federal judge in DC threw out the first version of the SEC's extractive industries disclosure rule. Judge John Bates said the SEC's refusal to allow any exemptions to companies was "arbitrary and capricious."

The U.S. Chamber of Commerce and other business groups had asked the SEC to allow companies to privately disclose the payment data to regulators, and to protect commercial interests by limiting public disclosures to a more general compilation of the payments.

After the federal court ruling, the SEC rewrote the rule to allow reporting companies to pursue case-by-case exemptions for commercially-sensitive information or to comply with foreign laws against disclosing resource extraction-related payments to those countries’ governments.

The first disclosures under the finalized rule would have been due in September 2018. Covered companies would have been required each year to disclose the type and total amount of payments made on a project-by-project and country-by-country basis.

Even after repeal of the U.S. rule, many SEC-reporting oil and gas and mining companies will still have to disclose payments to foreign governments under rules in place in Europe and Canada.

In April 2013, the European Union adopted a disclosure rule largely mirroring the SEC rule. The EU action directed member countries to require oil and gas, mining, and logging companies to report all payments to governments of €100,000 or more.

*     *     *

The SEC and EU rules were pushed by a coalition of NGOs that included Christian Aid, Global Financial Integrity, Global Witness, and Transparency International.

Last week, Jana Morgan, director of the U.S. chapter of the Publish What You Pay coalition, told Sam Rubenfeld of the Wall Street Journal that repealing the SEC rule sent "a very disturbing message” about House Republicans’ commitment to fighting corruption.

“Why are Republicans prioritizing voiding an anti-corruption rule that has been adopted in 30 other countries around the world when the message the Trump administration ran on was one of ‘draining the swamp’?” she said.

The SEC commissioners adopted the original extractive industries disclosure rule in 2012 on a 2-1 vote (there were two recusals).

Commissioner Daniel Gallagher voted against the rule. In a dissenting statement he talked about the anti-competitive impact on U.S. companies:

And let’s be clear; we’re talking about real competition. Although it would be natural to assume that our large and familiar domestic oil and gas companies fill the list of the world’s top ten, that isn’t the case. State-owned oil companies, some of them truly huge even by reference to our largest domestic publicly held oil and gas companies, are major competitors. I am talking about national oil companies in Russia, China, Iran, and Venezuela among others. These companies do not operate in the highly transparent, intensely regulated world of U.S. issuers. And, they will reap competitive advantage through today’s rules.

A statement published last week by Global Witness called the extractive resources disclosure rule "a key part of U.S. efforts to curb the corruption that keeps poor countries poor and threatens U.S. national interests and global security around the world."

Simon Taylor, a co-founding director of Global Witness, said in the statement that repealing the rule was a "pro-corruption" move by the Trump administration and the Republican-controlled Congress and "a sign that not only do they think corruption is perfectly acceptable but that they intend to become pro-active enablers of corruption.”

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Richard L. Cassin is the publisher and editor of the FCPA Blog.

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