Amendment in Financial Reform legislation sets new global standard for corporate transparency

Communities living in resource-rich countries won a historic victory today when the U.S. Congress passed landmark transparency legislation as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Once signed into law in the coming days by President Obama, the provision will require oil, gas, and mining companies registered with the US Securities and Exchange Commission (SEC) publically disclose their payments to governments for the extraction of natural resources on an annual basis.

This legislation sets a new standard for transparency in the extractive industry while encouraging other countries to pass similar measures. Once the provision takes effect — likely beginning in 2012 — payments to governments will be publically available to citizens in resource-rich countries, providing crucial information to hold governments accountable for the spending of this revenue. Senator Cardin (D-MD), one of the transparency provision's lead supporters added, "This provision is a critical part of the increased transparency and corporate responsibility that we are striving to achieve in the financial industry. Given the catastrophic events in the Gulf of Mexico, oil companies, in particular, should well understand that secrecy fosters instability, corruption and greater risk. We now have the tools to help people in resource-rich countries hold their leaders accountable for the money made from their oil, gas and minerals."

The SEC will now commence with rulemaking and a public comment period before the requirements take effect; a process that will take up to a year before completion. Once SEC disclosure rules are in place, covered companies would begin disclosures in their annual reports on an ongoing basis.

The extractive provisions in the Dodd-Frank bill sets new international standards for transparency in the extractive industry, making government revenues generated from the commercial development of oil, natural gas, and minerals public. “Creating a reporting requirement with the SEC can capture a larger portion of the international extractive corporations than any other single mechanism — thereby setting a global standard for transparency and promoting a level playing field,” wrote Senators Cardin and Lugar in an article in Politico.  

The provision covers 90% of the major internationally operating oil and gas companies. Of the 50 largest oil and gas companies by reserves (2007), eighteen are national oil companies that generally do not operate internationally.  These companies are not registered with the SEC or any other exchange and their operations are usually limited to their home country, where their operations are often not subject to open market competition. In these circumstances, they do not compete with American companies.

Of the remaining 32 internationally operating companies, 29 are covered by the provision. This includes Canadian, European, Russian, Chinese, Brazilian and other international companies.  The three companies not covered are Gazprom (London); Petronas (Kuala Lumpur) and the Romanian National oil company (Bucharest). 

The provision covers the majority of the top 15 international oil and gas companies ranked by Fortune magazine according to total revenues. Most of these are not American-based firms. Of these 15 top companies with international operations, ranked according to their total revenues in 2007, all but three of them are listed with the SEC.  Only three of these are American companies. Together, these listed companies together accounted for over $2.2 trillion dollars in revenues and close to $200 billion in profits.

Of the ten most successful mining companies, as ranked in the 2010 Forbes Global 2000, eight are listed with the SEC.  Only two of those are American companies.  Together, these eight companies accounted for nearly $270 billion in sales and $26 billion in profits in 2007.

Publish What You Pay US, a coalition of over 30 human rights, environmental, socially responsible investment, religious, and anti-corruption and good governance groups, including ERI, advocated for the passage of this provision. “This is a game changer,” said Isabel Munilla, Director of Publish What You Pay United States. “This legislation sheds light on billions in payments between oil and mineral companies and governments. Citizens now have a powerful tool they can use to scrutinize the levels of public spending on economic development, environmental protection and health and human services.” This provision will ensure that taxpayers and shareholders will no longer unknowingly fund dictators or fuel conflict, and will be privy to how their investments are being spent.  According to Senator Patrick Leahy (D-VT), “Transparency is good for U.S. taxpayers, it encourages more accountable government, and a better business environment for foreign investors.” 

ERI has been an active member of the Publish What You Pay Coalition since 2008, lobbying Congress while providing public education, letter writing, advocacy and training to other organizations in support of the transparency legislation. Discussing EarthRights International’s reason for supporting the bill, Paul Donowitz, ERI’s Campaign Director stated, “For years, companies like Chevron and Total have paid governments hundreds of millions of dollars related to resource extraction in countries like Burma. The transparency provision of the financial reform bill provides residents of resource-rich countries like Burma information they need to hold their governments accountable.”

Revenues paid to governments by companies in the extractive industries are often used to fuel conflict, and empower undemocratic regimes like Burma’s to retain power and oppress their own people. Increasing evidence demonstrates that revenues generated from the extraction industry contribute to the “resource curse” in developing economies. Instead of benefiting from the vast revenues created by extraction projects, energy and mineral-rich countries are too often plagued by instability, poverty, conflict, and corruption.  In Burma, a lack of transparency has contributed to authoritarianism and gross human rights violations, directly linked to the natural gas industry.  

According to ERI’s new report, “Energy Insecurity: How Total, Chevron, and PTTEP Contribute to Human Rights Violations, Financial Secrecy, and Nuclear Proliferation in Burma (Myanmar),” the Burmese regime receives over 62 percent of the net revenue from the Yadana pipeline, operated by Chevron and Total, which, in addition to contributing to human rights abuses in the project area, may be fueling the junta’s nuclear ambitions.  Data from a leaked 2008 IMF report indicates that 70 percent of Burma’s foreign exchange reserves are from gas exports and that gas-related payments from corporations, amounting to billions of dollars, contributed only one percent of total budget revenue. Had these revenues entered the state budget, they would have accounted for 57 percent of the total budget.  The majority of the gas revenues are held in offshore banks (never entering Burma’s state budget), with potentially hundreds of millions channeled into personal account of individuals closely associated with the ruling military junta in two offshore banks in Singapore.

ERI calculates that from 1998 to 2009, the Yadana gas pipeline generated US $9.031 billion. The Burmese regime’s share, after costs, was approximately US $4.599 billion, of which US $915 million was taken in-kind for domestic gas use, while the rest was taken in cash.  The companies, including Chevron and Total, which profit from the Yadana gas pipeline, have refused calls to disclose payments made to the military.  Meanwhile, forced labor, murder, and other human rights abuses continue along the pipeline. Clearly, today’s legislation will shine much-needed light on the billions of dollars in revenue the Burmese junta receives from the sale of natural gas.

EarthRights International’s Executive Director, Ka Hsaw Wa, commenting on the impact of the payment transparency provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act for Burma, stated, “Once implemented, the people of Burma will begin to know how much the junta receives from our natural wealth, and pressure will build on the authorities to spend these resources on critical needs, like health care and education.”  Ka Hsaw Wa continued, “No longer can the generals transfer millions dollars of Burma’s money to offshore accounts and regime cronies with impunity. There is still more work to be done on many areas in Burma, but today’s legislation makes it that much harder for the generals to misuse our resource wealth.”

Unsurprisingly, members of the oil and gas industry lobbied against the transparency legislation. The American Petroleum Institute (API), a national trade association representing about 400 corporate members, including major oil and gas companies, made several misleading claims in a letter to members of the Senate.  “API feels that requiring only U.S-listed extractive companies to disclose revenues creates a competitive disadvantage for these companies in the global energy marketplace," the letter claimed.  Senator Lugar responded to the argument, contending in a letter to the Financial Times that the legislation would apply to foreign companies as well.  In an article in The Hill, Senator Cardin called the argument a “red herring.”

Originally a stand-alone bill known as the Energy Security Through transparency Act (ESTT) (introduced by Senators Benjamin Cardin (D-MD) and Richard Lugar (R-IN) in September, 2009), the extractive industry transparency section in the  Dodd-Frank Wall Street Reform and Consumer Protection Act contains the substantive provisions of the ESTT.

Critical support for the provision came from Senators Tim Johnson (D-ND), Russell Feingold (D-WI), Charles Schumer (D-NY) and Richard Durbin (D-IL). Both the Senate Banking Committee Chairman Christopher Dodd (D-CT) and the House Financial Services Committee Chairman Barney Frank (D-MA) supported the Senate amendment during conference negotiations.