Proposed U.S. Oil and Mining Transparency Rule Will Not Deter Corruption
20 December 2019
The U.S. Securities and Exchange Commission (SEC)’s proposed oil and mining transparency rule published this week would fail to achieve the level of payment disclosure necessary to deter corruption in the natural resource sector.
The SEC adopted strong rules in 2012 and 2016 which led the way in creating a global standard for transparency in the extractive sector. Those rules were never fully implemented and the SEC has now come back from the drawing board with a rule that falls well short of the standard that it previously established.
The proposed rule seeks to implement Section 1504 of the 2010 Dodd Frank Act. Section 1504 instructs the SEC to require U.S.-listed oil, gas and mining companies to disclose their payments to governments around the world for the right to explore and extract resources. The 2012 rule was struck down following a legal challenge led by the American Petroleum Institute, and the 2016 rule was nullified by a Republican-led Congress early in the Trump administration.
The disclosure provision in the 2010 Dodd Frank Act was a bipartisan effort championed by Senator Ben Cardin and the late Senator Richard Lugar. The law established an international standard of granular project-level payment transparency which is now being implemented by law in the 28 European Union member states, Canada and Norway, and the complementary Extractive Industries Transparency Initiative.
This form of reporting provides critical and relevant information to citizens who can use it to hold governments accountable for the use of public funds and to deter corruption in relation to specific extractive projects. Investors are also able to use information at this level to manage risk. Key to disclosure is the notion that “projects” are based on the contract or other legal agreement between a government and company, an approach recently endorsed by the IMF as a global norm.
Through European and Canadian laws, hundreds of companies have disclosed over the last five years more than USD 800 billion of vital project-level payments with no reports of losses or commercial harm. The companies include oil majors BP, Shell and Total, mining giants BHP Billiton, Rio Tinto and Glencore, and state-owned national oil companies such as Russia’s Gazprom and China’s CNOOC.
The SEC is now proposing to dispense with a contract-based project definition and has instead adpoted an approach favored by a few transparency-averse U.S. oil companies and their lobby, the American Petroleum Institute, allowing them to aggregate payments for multiple projects. Corruption risks are present at the contract level and oversight actors need granular information to improve governance outcomes in resource-rich countries, many of which find themselves in persistent poverty.
NRGI’s initial review of the proposed SEC rule has identified several other deficiencies including an overly high disclosure threshold; reporting exemptions for alleged cases where foreign law or a pre-existing contract prohibits disclosure; an extended reporting deadline; and a lower level of liability for companies that misreport.
The SEC’s proposed rule would mean critical payments would remain hidden from public view, to the detriment of the international transparency and anticorruption efforts Section 1504 inspired.
During the upcoming 60-day public comment period, the SEC has an opportunity to bring its rule back into line with the established global transparency standard. It also has an opportunity to bring corruption-prone commodity trading payments into its disclosure framework, something the Swiss parliament has just signaled it will do if other trading hubs act accordingly.