Oil Industry Fights Global Progress on Revenue Transparency with Lawsuit Against U.S. Disclosure Regulations

In an attempt to turn back worldwide progress on mandatory transparency requirements, the oil industry took a swing this week at a U.S. law that requires extractive companies to publish the payments they make to governments. In a lawsuit filed in the federal courts in the District of Columbia on Wednesday, the American Petroleum Institute (API) and other trade associations are seeking to strike down the law and the rules that implement it, insisting that mandatory disclosure is unconstitutional, arbitrary and capricious.

API is trying to stem a tide of legal transparency requirements that began in the United States and has spread across the globe.  At issue are the payments that oil, gas, and mining companies make to governments, which have traditionally been kept secret from regulators, investors, and the people of the resource-rich countries in which the companies operate.  The secrecy surrounding these revenue flows – which can reach into the billions of dollars for a single project – fosters corruption, deprives citizens and investors of critical governance information, and can even catalyze political instability.

The Publish What You Pay (PWYP) coalition, a global network of NGOs (including ERI), faith-based organizations, trade unions, and investor groups, has been advocating for years for governments to adopt laws requiring disclosure of this information.  The initiative received a major boost in June 2010, when the Congress included mandatory payment disclosure in the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Section 1504 of the Dodd-Frank directed the Securities and Exchange Commission (SEC) to write rules within 270 days requiring extractive companies that are publicly listed in the U.S. to disclose the payments they make to each government for each of their extractive projects.

This statutory directive touched off a heated debate between the oil industry and civil society groups.  In comments to the SEC, oil companies charged that Section 1504 would force them to violate the secrecy laws of the countries in which they operate and cost them untold billions of dollars in compliance costs and lost business.  They insisted that the SEC grant them exemptions for countries where disclosure is prohibited, keep their disclosures confidential rather than releasing them to the public, and define the term “project” at an aggregated level.  NGOs, investors, legislators, academics, and even celebrities noted that the industry’s claims were based largely on innuendo rather than fact, pointing out that no countries actually prohibit the disclosures in question, that the exemptions requested would swallow the rule, and that it would be completely inconsistent with the statute to withhold the disclosures from the public.  These commenters concluded that the compliance costs of the rule were actually minimal, and that disclosure was unlikely to result in serious competitive harms.

The SEC eventually issued a final rule on August 22, 2012 – more than a year late, and only after ERI sued the SEC on behalf of PWYP coalition member Oxfam America – that rejected most of industry’s arguments, settling on a rule with public reporting of disclosures, no exemptions, and a disaggregated approach to projects.  API’s lawsuit objects to the SEC’s rule, insisting that the SEC’s economic analysis was flawed and that it failed to minimize competitive harms.  It also challenges Section 1504 itself, making a novel argument that the law constitutes an infringement on extractive companies’ First Amendment free speech rights.  This argument may be seen as part of a larger narrative in which large corporations seek unprecedented constitutional protections under the guise of freedom of speech, using the infamous Citizens United case as a point of departure, but fight to avoid legal responsibility or accountability for their actions, as in the currently pending Kiobel case at the U.S. Supreme Court.

Meanwhile, however, the rest of the world has moved on.  The European Union has taken great strides to adopt a payment transparency rule that parallels the SEC’s rule but goes even further – it will include large unlisted companies and the forestry industry, and if a vote by the European Parliament’s legal affairs committee stands, may extend to the banking, construction, and telecommunications industries.  In Canada, the top mining trade associations have agreed to work collaboratively with the PWYP network to develop a binding payment disclosure regime as well.  The Extractive Industries Transparency Initiative (EITI), a voluntary multi-stakeholder initiative that seeks to reconcile extractive companies’ payments with official government receipts in participating countries, is considering adopting features of the SEC rules to enhance its disclosures.  There is even talk of translating Section 1504-style disclosures into general international financial reporting and accounting standards, which would apply in every country.

Given the broad progress on transparency around the world, it is unclear what API’s next move is.  Even, if the oil industry wins its U.S. legal challenge – which seems unlikely, given the tremendous amount of work, careful analysis, and wide-ranging debate that informs and supports the SEC’s rule – it still faces regulation in Europe that will be, if anything, even stricter than the U.S. rules, and the possibility of truly global standards that parallel Section 1504.  A large percentage of the companies covered by the U.S. rule will also be covered by European or Canadian rules, which may well take effect before the SEC’s legal challenge is resolved.  Will Big Oil really try to roll back each of these developments, one by one?  Or will it finally accept that increased payment transparency is to everyone’s benefit – good for investors, good for communities – and yes, good for business?