In June, the US affiliate of the Publish What You Pay coalition (PWYP US), a network of human rights organizations (including EarthRights International), investment advisory groups, anti-corruption activists, and others, scored a remarkable victory in the U.S. Congress with the passage of Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Provision requires all extractive industries registered in the US to disclose the payments they make to governments on a project-by-project basis. Now the fight for revenue transparency moves to the U.S. Securities and Exchange Commission (SEC), which is tasked with writing the regulations to implement Section 1504. ERI, both by itself and as part of PWYP US, submitted public comments to the SEC and assisted our allies from Burma to participate as well, in an effort to prevent the oil and mining industries from weakening the bill through the regulatory process.
Why does it matter for the public to be able to see and understand the streams of revenue that flow from extractive companies to the governments of the countries in which they operate? For investors, payments to host governments are an essential part of the financial obligations and arrangements, and are therefore key to understanding the risks of investment. Abnormally large or unusually structured payments might signify to a potential investor that a company’s projects are risky due to high levels of corruption. Alternatively, payments to particular officials might be significant if they indicate that the company is engaged in transactions with individuals or entities on UN or US sanctions lists, thereby exposing the company to risk of criminal penalties.
For local communities and watchdog groups in host countries, access to information can be even more crucial, particularly in states whose governments prefer to conceal revenue information from the public. In Burma, for example, spending on public health and education is abysmally low, in contrast to a flush military budget and a regime that spends lavishly on itself, using the funds collected from natural gas and other resource extraction. As ERI has documented abundantly, extractive companies provide critical financial support for the Burmese military which in turn provides security for the companies’ facilities and, in many cases, commits human rights violations against local individuals and communities. The ability to scrutinize the payments companies make to the Burmese regime, and other host governments, would provide communities with a valuable tool to advocate, in one way or another, for more responsible management of natural resource revenues, and to potentially pursue legal avenues for redress in cases of abuse.
Unfortunately (but not surprisingly for an industry built on external secrecy), many extractive companies are opposed to the disclosure provision because, they claim, disclosure would be difficult and expensive; it could put them at a competitive disadvantage vis-à-vis foreign, non-registered companies; and it could force them to violate non-disclosure agreements or their host countries’ legal prohibitions on disclosure. Yet on closer examination, none of these objections hold water. Most companies already keep track of the information that will, or should be, required, and if not, it would not be expensive to produce. The idea that being forced to disclose payments to governments would disadvantage companies covered by the law is a red herring, as the provisions of most natural resource contracts are in fact open secrets within the industry. Moreover, the law covers the vast majority of multinational extractive companies, even those based in foreign countries, so it would in effect level the playing field. As for the claim that legally required transparency would conflict with foreign statutes or contractual provisions, non-disclosure clauses typically include an exemption for disclosures required by law and few if any countries have such secrecy requirements enshrined in law.
Industry participants have proposed regulations that would undermine the effectiveness of the law. For example, if the corporations opposed to revenue transparency had their way:
- Foreign registered companies would be granted broad exemptions that would effectively excuse them from disclosing anything under Section 1504;
- Companies would only have to disclose payments from majority-owned subsidiaries, which would shield from disclosure the joint ventures through which much of the world’s oil and gas is extracted; and
- Payments would only be disclosed if they were “material” from the perspective of the enterprise’s balance sheet, which would obscure many transactions – for example, to security forces – that are relatively small in monetary terms but have a heavy impact on local communities and individuals (and bear strongly on investment risk).
The recommendations of PWYP US and members – including ERI and the Revenue Watch Institute – aim to secure regulations that carry out the letter and intent of the law. Moreover, the Human Rights Foundation of Monland (HURFOM), a Thailand-based group that advocates for the rights of communities in southern Burma, has submitted a detailed Comment explaining how important Section 1504 will be for human rights advocates in Burma and requesting robust disclosure provisions. Together, these organizations are pushing for regulations that cover the widest possible array of companies, require disclosure of a broad spectrum of payments to a level of detail that makes meaningful scrutiny possible, and include payments by all entities that are under the effective control or influence of the registered company. Only with such robust requirements can investors and affected persons and communities alike get a true sense of the payments flowing from companies to host governments as a result of resource extraction operations.
The SEC will issue proposed regulations in just a few weeks, taking into account the comments of industry representatives, civil society organizations, academics and others. At that point, all interested parties will have a second chance to comment and shape the final rules, which will be promulgated by April 2011. The battle over the regulations that will define who needs to disclose and what must be disclosed is extremely technical, but the details matter. ERI will continue to engage in this process, and to assist its partner organizations in Thailand and Burma to make US regulators understand why revenue transparency is a matter of human rights as well as investor protection.
