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Tuesday
May092017

Martin Kenney: Shell’s Nigeria mess shows why we need more disclosure

Tom Fox recently wrote a post for the FCPA Blog about allegations that Shell made a £1.1 billion ($1.42 billion) payment for an oil field license in Nigeria, with half the money ending up in a company owned by a Nigerian government official.

Having initially denied any wrongdoing, incriminating emails leaked to the staff at advocacy group Global Witness prompted Shell to claim there was a commercial impasse that could only be breached by their dealing with the company concerned.

Maintaining its innocence, Shell stated that it had done nothing wrong and this was a matter for the Nigerian government over how it chose to apportion the license fee.

Whether these payments amount to corruption by a major oil company remains to be seen. What is clear is that this is precisely the sort of development that I have commented upon and predicted previously, when considering the SEC Rule, repealed by the U.S. Senate in February of this year.

The Extractive Industries Disclosure Rule -- adopted in 2012 and finalized in 2016 --  was intended to force those companies in the industry to disclose any payments over $100,000 made to foreign governments. The rule was set to go into effect in 2018.

My concerns about its repeal were simple. Energy companies might recommence the sort of under-the-table-payments that many in law enforcement had fought to prevent, and that we hoped had been substantially confined to a darker past. The Shell/Nigeria story seems a classic case in point and indicative of the type of situations we could be returning to with much greater frequency with the abandonment of the SEC rule.

Natural resources like oil belong to "the State," in this instance the people of Nigeria. So why was license money allegedly “re-allocated” to a company owned by a Nigerian government official? These diversions of revenue are extremely damaging to developing nations. They hold back growth and impact directly upon the poorest of people who should be benefiting from oil exploration and the revenue it generates. The $700 million in question could have been used to build hospitals -- part of an infrastructure that supports those unable to fend for themselves.

Any form of corruption blights a society. Those engaging in it not only let themselves, their corporations, and their nations down, but are hammering nails into the coffins of those who may die needlessly due to shortages of medication or food needed to sustain them and their families (not to mention other areas of failing public services and infrastructure).

This is not being melodramatic. The impact of corruption (especially Grand Corruption) cannot be overstated. The United Nations and other organizations dedicated to improving life for the global poor are struggling to convince governments of the damage being wreaked on countries criminally exploited by corrupt leaders and big business.

The decision to abandon the Extractive Industries Disclosure Rule is likely to fuel corruption. Without the rule, we are potentially opening up the floodgates for big business to return to the “good old days” when tax-deductible backhanders were an everyday occurrence, especially when doing business with developing nations.

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Martin Kenney, pictured above, is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI and focused on multi-jurisdictional fraud and grand corruption cases www.martinkenney.com |@MKSolicitors.

Reader Comments (2)

I agree that repealing the anti-corruption disclosure rule was unfortunate and that the Shell Eni mess is a good example for this.

I co-authored a paper and presented it at the 2017 OECD Global Anti-Corruption & Integrity Forum on March 30th in Paris

https://www.oecd.org/cleangovbiz/Integrity-Forum-2017-Ozelli-Russell-payment-disclosure.pdf

https://www.oecd.org/cleangovbiz/Integrity-Forum-2017-Ozelli-Russell-payment-disclosure-poster.pdf.

The paper proposes standardizing payment disclosure across the world, in all industries to improve public sector transparency given the involvement of global PPPs in world economic development. This proposal can be used as a replacement for the recently repealed US payment disclosure rule for the extractive industries and could help in bringing transparency to payments made to governments and government officials.

Here is an abstract of the article:

Is This Payment Reportable?
Global Standard for Payment Disclosure
By Selva Ozelli, Roger Russell

The need for globally applicable transparency and anti-corruption legislation gained momentum after the global credit crisis of 2007/2008 that was tied to losses from opaque leveraged mortgage-backed securities, which were hidden in tax havens. It wreaked havoc in the world economy, by threatening the collapse of the world’s largest financial institutions, and was cured by the bailout of banks by national governments. The credit crisis played a significant role in the decline in consumer wealth, wide spread real estate foreclosures, evictions, bankruptcy of businesses, prolonged unemployment and a worldwide downturn in economic activity. The ensuing large increases in government debt have produced several sovereign debt crises that lead to government agencies increasingly using public private partnerships (PPP) with multinational enterprises (MNE) from all industries to fund public procurement projects. At the same time, the continuous and voluminous press leaks with the aid of whistle-blowers shed light on the numerous offshore accounts, offshore entities belonging to top-level politicians, signalling the influence of narrow interests on public decision making for their own profit. These conditions necessitated national austerity measures with world regulators increasingly cooperating with one another to clamp down on corruption and tax evasion and were the driving force behind the global legislative initiatives to promote transparency and accountability.

This article provides an overview of the anti-corruption and transparency reporting requirements that have been adopted around the world since the credit crisis that are complimentary to the functioning of UNCAC. This article also proposes to establish a streamlined global standard for payment disclosure to foreign governments, as a part of the Country-by-Country Report (BEPS 13) for MNE’s involved in all industries (CbCR-Payment).
May 9, 2017 | Unregistered CommenterSelva Ozelli
Thank you FCPA Blog and thank you Martin Kenney for your excellent piece.

You hit the nail on the head re the removal of the SEC's second rule for Section 1504 of the Dodd-Frank Act, which as you say was due to come into operation over this next year. In a bizarre twist of fate, had the SEC managed to promulgate its first rule for 1504, within the time frame mandated by Congress, a rule would theoretically have been in place some 10 days prior to completion of the corrupt deal mentioned above. This would have required Shell and its partner, the Italian oil giant Eni, to have disclosed their payment - and under such circumstances, I doubt whether the deal, at least in this format, would have gone ahead.

Instead, both companies participated in - indeed were intimately involved in the construction of - the arrangement by which their payment for Nigeria's biggest offshore block would be paid instead to private hands. This story is set to run and run, as the prosecution that is now building in Milan, Italy, gears up for later this year. Watch out for further revelations as the case goes to court, which we expect will demonstrate the extent to which highest-level officials in both companies were involved - notably, just as both companies were swearing to having ensured good systems of checks and balances to fight corruption, due to their deferred prosecution agreements with the DoJ. One could imagine how cross DoJ officials will be, once they realise the contempt the companies' highest officials obviously had for their DPA agreements.

But perhaps the biggest crime, which you point to, is the removal of the the rule for Section 1504. It is hard for me to imagine a more undemocratic, not to mention lacking in credible process, than that which was used to remove it. A proposition was put forward, remarkably matching "Big Oil's" exhausted and long-since discredited arguments (actually destroyed arguments would be a better description,see the public record of submissions to the SEC during the last rule-making) in both houses, there was a total lack of debate where the reality could be considered, and vote in the Senate took place like a "dawn execution" the next morning. The arguments to not disclosing did not stack up at any point over the past decade, let alone this time. All Congress and Trump have succeeded in doing is to once again aid and abet the continuity of the kinds of practice you described above - perhaps that was the point?!
May 9, 2017 | Unregistered CommenterSimon Taylor
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