The UK Reports on Payments to Government Regulations 2014 (the Regulations), which came in to force on 1 December 2014, require all large or listed oil, gas, mining and logging companies to report yearly on payments made to governments worldwide. The aim is to provide greater transparency in these extractive industries to support anti-corruption and to enable citizens of these resource-rich countries to hold their governments to account.
The Regulations will affect a large number of companies, not only some of the world's largest extractive companies such as BP, Royal Dutch Shell and Rio Tinto, but also those operating in frontier countries
These Regulations implement the EU's anti-corruption measures as set out in its 2013 Accounting Directive (2013/34/EU). The UK is the first EU member state to implement its requirements, well in advance of the 20 July 2015 deadline, with France also expected to adopt its own implementing measures imminently.
Who is affected by the Regulations?
The companies affected by the Regulations fall into two categories: "Large Undertakings" and "Public Interest Entities" involved in mining, quarrying or logging.
A "Large Undertaking" is a company meeting at least two of the following criteria:
- its balance sheet total on its balance sheet date exceeds GBP 18 million
- its net turnover on its balance sheet date exceeds GBP 36 million
- the average number of employees during the financial year to which the balance sheet relates exceeds 250
In essence, a "Public-Interest Entity" is one whose transferable securities are admitted to trading on a regulated market. This would therefore include companies on the Official List (but not AIM), as well as certain credit and insurance entities.
Subsidiaries are exempt from reporting if their relevant payments are included in the consolidated report of the parent company in accordance with the Regulation; or with provisions implementing the 2013 Accounting Directive in another EU member state.
As the UK is the first EU member state to implement the 2013 Accounting Directive, the Regulations therefore include transitional provisions which exempt a subsidiary from reporting for the first year if its parent company is registered in another member state.
What must be reported?
All payments to a government must be reported. The payments must be broken down on a country, project and payment type basis (for example tax, royalty, licence fee, payments for infrastructure improvements, and signature, discovery and production bonuses).
The definition of government is broad and includes any national, regional or local authority of a country, as well as any department, agency or entity that is controlled by the government authority.
It is important to note that not only monetary payments need to be reported, but also payments in kind, and a value must be attributed to these. By way of example, if a royalty liability was satisfied by the delivery of 1,000 barrels of oil, the report would need to identify the monetary value of the oil as well as the volume delivered.
However, the Regulations do set out certain exemptions to the reporting requirements. A payment below GBP 86,000 does not need to be reported if it relates to a single obligation and is not part of any related series of payments. For example, a single payment for a license of GBP 75,000 falls below the threshold, whereas four payments of GBP 25,000 for a single licence require reporting in aggregate.
Payments, activities or projects cannot be artificially split to avoid the application of the Regulations.
When must the report be made?
A report must be made on a yearly basis. Companies are given 11 months following their respective year-end to submit the report to Companies House. The first reports will relate to financial years which begin on or after 1 January 2015 and will therefore be available during 2016. The report will then be made available on the public register.
The 11 month timeframe will however, for listed companies at least, be reduced to 6 months through changes to the European Transparency Directive (2004/109/EC). The Financial Conduct Authority is currently consulting on changes to the Disclosure and Transparency Rules, and is proposing a new DTR 4.3A, which will affect extractive and logging companies whose securities are listed on a UK regulated market, whether or not the company itself is incorporated in a member state, provided the UK is its home state for the purpose of the European Transparency Directive.
Although the Regulations determine what is to be included in the report, a suitable format for the report has yet to be released.
Draft guidance on the Regulations, endorsed by the Department of Business Innovation and Skills, was published on 5 November 2014 with finalised guidance expected this year.
Penalties for non-compliance
The aim of the penalty regime set out in the Regulations is to ensure compliance and is similar to other regimes included in the Companies Act 2006.
In the event that Companies House becomes aware of a missing or incomplete report, the company in question is given 28 days to comply or to otherwise confirm why a report has not been filed. Failure to do so may lead to a fine. If a company fails to complete a report, not only the company, but also its directors, could be subject to a criminal conviction and either a fine or imprisonment. Directors are also subject to these penalties if they provide a report or statement that is misleading, false or deceptive.
The Regulations will affect a large number of companies, not only some of the world's largest extractive companies such as BP, Royal Dutch Shell and Rio Tinto, but also those operating in frontier countries, particularly Africa.
Extractive companies must now assess whether they will be affected by the Regulations and, if so, to what extent. They should familiarise themselves with the content of the Regulations (and watch out for the upcoming guidance) to ensure that the first reports in 2016 are timely made and satisfy the requirements set out in the Regulations. Companies should also now consider the adoption of policies with respect of payments to governments if they do not already exist, as well as implementing procedures and audit processes to track and record such payments.
The US had also planned a law similar to the Regulations for some time, included as section 1504 of the Dodd Frank Act. However, challenges to the legality of the provision from the oil lobby has forced the US Securities and Exchange Commission to reconsider its wording, and is expected to propose a reworded provision by the end of 2015. We shall see.