Visiting Professional, DPLF
The United States, once called the global champion of transparency for the extractive industry, recently took a major step backwards – and we all lose.
In 2010, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that included Section 1504, a landmark effort to improve the transparency and accountability of oil, gas, and mining companies. According to Section 1504, companies listed on the US stock exchange and engaged in commercial development of oil, gas, and minerals must publish detailed reports of what they pay to U.S. and foreign governments on a country-by-country and project-by-project basis. Payments from extractive corporations to governments include taxes, royalties, production entitlements, and dividends, among others. After a convoluted process due to multiple legal challenges initiated by the American Petroleum Institute and other organizations, in 2016 the Securities and Exchange Commission (SEC) adopted the final rules for the implementation of Section 1504 starting on fiscal years ending on or after September 30, 2018.
However, in an action undermining U.S. anticorruption leadership, last month President Donald Trump signed into law a joint resolution, passed by Congress pursuant to the Congressional Review Act (CRA), to repeal the SEC’s rule and bar the enforcement of Section 1504 of the Dodd-Frank Act.
While the rules implementing Section 1504 have been repealed, the SEC is still mandated to adopt revised rules requiring extractive companies to disclose payments to governments that meet Section 1504 criteria. Nonetheless, the CRA expressly prohibits the SEC from issuing new rules that are substantially similar to the repealed ones without further statutory authorization. Given the current political context, it is very unlikely that Congress will enact such authorization.
The overall objective of mandatory disclosure of payments to governments by extractive corporations as established in Section 1504 is to promote greater transparency and accountability of governments regarding natural resource revenues. Most oil, gas, and mining companies operate in developing countries rich in natural resources that have weak institutions in addition to unstable political and economic systems. Such is the case of many countries in the Latin America and Caribbean (LAC) region, which is “the world’s leading source of metals and the second most important source of oil.” According to Oxfam America’s report Show Us the Money, between 2010 and 2014 alone, developing countries’ governments received a conservatively estimated total of $1.55 trillion for the oil extracted from such countries. Managed wisely, these proceeds could be invested in critical development projects, such as education, healthcare, infrastructure, and agriculture. However, the secrecy surrounding the deals between corporations and governments has allowed them to operate without public oversight, enabling mismanagement, corrupt practices, and even conflict funding. Therefore, transparency and publicity of the payments that governments receive from extractive companies is vital.
The American Petroleum Institute and some mining companies argue that mandatory public disclosure of payments to governments is overly burdensome and diminishes their competitive advantage. However, most firms already collect that information for bookkeeping purposes and other extractive companies have begun disclosing that information without suffering competitive harm. Moreover, the Inter-American Development Bank (IDB) in the report Transparent Governance in an Age of Abundance: Experiences from the Extractive Industries in Latin America and the Caribbean explains the positive impact of provisions that mandate extractive entities to publish what they pay to governments, such as Section 1504. First, the report explains that governments would be able to establish a revenue accountability mechanism to overcome corruption, standardize information of natural resource contracts and funds within governmental offices to ensure the effective collection of payments, as well as distribute funds efficiently both at national and subnational levels. Second, the report describes how citizens of LAC countries could use the information to hold government officials accountable for the management of natural resources revenues, identify corrupt practices in the revenue stream either from the company or the government, and better assess the proceeds that may be expected from extractive projects. Finally, the report addresses the benefits for the industry, which will have more information to assess and manage the risk of extractive projects and adjust investment accordingly, as well as show the value of the projects to the communities to assuage opposition. The benefits described along with the alarming situation of communities affected by extractive activities make a compelling case for enhancing transparency and publicity of payments to governments within the extractive industry.
Despite the current failure of the US to implement Section 1504, alternatives which promote transparency have emerged around the world. For example, Canada adopted a regime for the mandatory reporting of payments to governments pursuant to the Extractive Sector Transparency Measures Act (ESTMA) that came into force in June 2015. Extractive entities subject to ESTMA are required to publicly report payments to all levels of Canadian or foreign governments of C$100,000 or more, for each financial year that begins after June 1, 2015. Moreover, the government of Canada is reportedly considering establishing an independent Human Rights Ombudsperson for Extractive Industries, which could potentially contribute to advancing transparency in this sector (DPLF sent a letter to Prime Minister Justin Trudeau urging the government of Canada to create the Ombudsperson’s Office and to ensure its independence to effectively investigate complaints of human rights violations by Canadian extractive companies operating abroad). Furthermore, in 2013, the European Union enacted a mandatory payment disclosure for the extractive industries.
Another relevant effort is the Extractive Industries Transparency Initiative (EITI), a global standard to promote an open and accountable management of extractive resources, which requires disclosure of information throughout the whole extractive industry value chain. However, the EITI will only reach its full potential insofar provisions that mandate disclosing government payments for natural resource extraction, such as Section 1504, are enacted and implemented by governments. It is worth mentioning that there are other alternatives within the International Law realm to push for transparency in the extractive industry. For instance, the UN Guiding Principles on Business and Human Rights have been increasingly implemented by corporations and governments and can serve as a tool for advocates. The Guiding Principles include several standards to enhance transparency in business enterprises’ operations, such as the responsibility to communicate their human rights impacts. Additionally, the pending treaty on business and human rights has the potential to provide stronger rules for transparency.
In 2010, the U.S. became a hero in the fight against corruption in the extractive sector, since Section 1504 would generate valuable data to establish a revenue accountability mechanism via a multistakeholder approach, ensuring that natural resource wealth is allocated for sustainable development projects complying with international human rights standards. It is a shame that six years later, the U.S. has relinquished its leadership role in the global oil, gas, and mining transparency movement, weakening peoples’ ability to hold governments and companies accountable for the exploitation of natural recourses. However, the initial enactment of the groundbreaking Section 1504 encouraged a global movement for transparency which will hopefully continue to grow despite the current resistance by the U.S. government.