Legislating Transparency in the Extractive Sector: Will the Securities and Exchange Commission Take the Lead?
July 18, 2011
Kathryn M. Martorana is campaign coordinator for Oxfam America's Oil, Gas and Mining Program, and a member of the Carnegie New Leaders. The views expressed in this article are those of the author and not necessarily those of Oxfam America. This article was first published on July 12, 2011, on Carnegie Council's online magazine Policy Innovations.
Corruption and financial secrecy have plagued resource-rich countries for decades, resulting in human rights violations, environmental degradation, and economic volatility. Transparency of oil, gas, and mining revenues in these countries will significantly curb the negative impact of extractive operations, and help shake the so-called resource curse by giving citizens information to hold their governments accountable.
One policy innovation in this area was the July 15, 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Bill, and with it Provision 1504, known as Cardin-Lugar, which requires all extractive companies registered under the U.S. Securities and Exchange Commission (SEC) to disclose payments made to foreign governments at the lease or license level. The enforcement process has now moved to the SEC where commissioners and staff are deliberating on how to write rules to follow the law.
This provision is part of the global trend toward financial transparency of the energy sector—seen in the recent passage of national laws such as in Ghana, global initiatives such as the Extractive Industries Transparency Initiative, and a strengthening of the standards of practice at international financial institutions.
Will 1504 End the Resource Curse?
Provision 1504 requires about 90 percent of the major internationally operating oil and gas companies to disclose payments on a project-by-project and country-by-country basis, with the data made public over the Internet. This will help reduce the level of secrecy surrounding the industry, provide shareholders with a more accurate representation of investment risks, and provide civil society groups with the information they need to hold recipient governments accountable for how they spend these revenues.
Extractive industries have the potential to lift a country out of poverty when the proper governance is in place. For example, Norway benefited from having strong democratic institutions and a regulatory framework in place prior to the development of its oil sector, and it now sits atop the UNDP Human Development Index. In comparison, Mali, where gold is a top export, ranks 160 out of 169 countries.
Governments with weak oversight agencies are able to divert funds away from the vital sectors—health, education, and infrastructure—that make countries strong and prosperous. Having a standard such as 1504 in place will benefit countries that already have an extractive sector, and it will help safeguard those countries that are developing new resources.
As part of the SEC rulemaking process, the agency collected public comments on what the implementation of Provision 1504 should look like. Members of Congress, financial investment firms, multinational corporations, and NGOs all submitted comments. CalSTRS, the second largest pension system in the United States, and investment giant TIAA-CREF have come out in support of the legislation, citing its importance for providing shareholders with comprehensive information on potential investment risks. [NOTE: Carnegie Council's retirement plan is managed by TIAA-CREF.]
Corporations have stated that this provision will reduce their competitive edge and limit their ability to win concessions from foreign governments. This argument is implausible because disclosure of sensitive information regarding commercial terms, proprietary technology, business models, and contracts is not required. The regulation even extends to some Chinese companies, including Petrochina Company Ltd, the principal holding company of China National Petroleum Company (CNPC), the Chinese National Offshore Oil Company Ltd. (CNOOC), and China Petroleum & Chemical Corporation (Sinopec). Some corporations such as Talisman Energy, Statoil, Newmont Mining, and AngloGold Ashanti already disclose payments in every country of operation.
Pieces of the Transparency Puzzle
Voluntary Initiatives: Once implemented through SEC rulemaking, the provision will set a new global standard to complement existing international voluntary frameworks such as the Extractive Industries Transparency Initiative. EITI brings together companies, governments, and civil society organizations to disclose financial flows, which are supposed to be checked for accuracy by an independent auditor. Since its inception in 2002, there have been 10 compliant countries and 24 candidate countries, as well as 50 participating companies and numerous civil society groups participating at the national and international level.
Yet EITI has its limitations. Payment disclosure often includes outdated information and is reported at the broader country level, leaving civil society unable to drill down to specific project-level payments. Implementation of Section 1504 would cast a wider net to capture governments and corporations not covered under EITI. There are many countries that have not joined EITI, and several have been dropped or suspended from the initiative for noncompliance.
Indigenous Peoples: Traditionally, extractive operations have been located in rural areas, where indigenous groups often register low levels of income and education. While these groups are protected under international law—such as the ILO Convention Concerning Indigenous and Tribal Peoples in Independent Countries, and the UN Declaration for Indigenous Peoples, to which the United States became a signatory in December 2010—enforcement mechanisms are weak and governments often ignore the rights of native groups by declaring that projects are in the interest of national security.
Environmental Protection: Similarly, developing countries often do not have strong environmental accountability agencies like the U.S. Environmental Protection Agency, and environmental accidents go unchecked as a result. Cyanide leakages from gold refineries in rural Ghana, severe air pollution from lead smelters in Peru, and forcible land removal in Cambodia all demonstrate the need for proper regulatory bodies to prevent such calamities.
Ghana Innovates: Over the past 100 years, Ghana has experienced the adverse effects of gold mining, which is why the West African nation is now working to ensure balanced and inclusive growth. With its recent discovery of vast offshore oil deposits in the Jubilee field, Ghana has taken positive steps to open the books in its emerging energy sector. This spring, President Mills signed the Ghana Petroleum Revenue Management Bill into law, requiring revenue receipts and expenditures to be reconciled by the Ministry of Finance and made accessible to the public. The law also establishes a Public Interest and Accountability Committee (PIAC) to help manage revenue flows and encourage economic diversification. Provision 1504 should help the country attain these objectives.
The IFIs: In addition to the regulatory frameworks created by nations and intergovernmental bodies, the international financial institutions play a critical role in setting best practices for the energy sector. The IFC recently revised its Performance Standards for companies that receive financing. And, in May 2011, the IFC adopted a requirement of Free, Prior and Informed Consent—a practice that enables indigenous peoples living near extractive operations to have open access to accurate information prior to exploration. It also mandates that citizens be provided with appropriate venues to accept or deny the project.
The CSR Case for Transparency: Globalization and the expansion of markets and technology have given multinational corporations the ability to access resources with ease. It is the role of all pertinent stakeholders to ensure that these business practices are carried out in an ethical manner. But what's in it for the companies? Investment security, stable stock prices, and accountability to their shareholders.
For every corruption scandal, cyanide leakage, or labor strike, a company stands to lose significant profit, while potentially jeopardizing stock stability. Ten thousand people took to the streets in Peru in 2004 to protest the expansion of Newmont Mining's Yanacocha Mine due to concerns about water contamination. Production was significantly delayed, resulting in a more than $1 billion loss in shareholder value and a volatile investment climate.
Payment disclosure will also allow companies to better protect against accusations of corruption, and insulate against bribery requests from local officials, as the publicly available data will have to comport with U.S. standards.
Bridging the Transparency Gap
Section 1504 of Dodd-Frank could set a precedent for similar regulations to be adopted in other markets across Europe and Asia, creating an international standard for transparent extractive operations. Already, the European Commission is planning to issue draft legislation that will parallel or exceed 1504.
It will be essential to build civil society capacity to monitor these payment disclosures to ensure the success of this framework. In the ongoing rule-making process, the SEC has an opportunity to demonstrate that the United States takes transparency and accountability seriously and intends to act as a global leader in fostering secure, equitable, long-term resource partnerships with developing nations.