On 3 July 2013 the revised Accountancy Directive (Directive 2013/34) introduced new transparency rules for mining, oil and gas and logging companies ("extractive industries"), with the aim of bringing the European Union in line with the United States, which introduced similar laws in 2012 (as s.1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act) regulating the reporting of certain types of payments made by US extractive industry companies to local governments.

Both the US and the EU rules now require companies operating in the extractive industries to publish details of payments they make to local governments in exchange for access to natural resources. This includes royalty payments, bonuses, production entitlements, dividends, infrastructure improvements, licence fees and any taxes on profits.

In this article, originally published by Thomson Reuters (Professional) UK Limited in the International Energy Law Review at [2013] I.E.L.R. 273, Imogen Addington (nee Harding) of Dentons' Energy, Infrastructure and Project Finance practice provides insight into the scope and effect of the change in regulation and the potential problems and issues the regulations may present for the extractive industries.

Background to the Accountancy Directive

On 25 October 2011, the European Commission launched a package of measures to support entrepreneurship and responsible business. One of the proposals in the package was the revision of the Fourth and Seventh Company Law Directives (Accounting Directives 78/660 and 83/349) in addition to a number of changes to the Transparency Directive (2004/109).

On 3 July 2013, the revised Accountancy Directive (Directive 2013/34) was enacted, the main objective of which was to simplify financial reporting obligations and to reduce the administrative burden for small and medium-sized entities (SMEs). However, it also introduced new transparency rules for mining, oil, gas and logging companies (hereinafter referred to as "extractive industries"), with the aim of bringing the European Union into line with the United States, which introduced similar laws in 2012 (as s.1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act")) regulating the reporting of certain types of payments made by US extractive industry companies to local governments.

Both the US and the EU rules now require companies operating in the extractive industries to publish details of payments they make to local governments in exchange for access to natural resources. This includes royalty payments, bonuses, production entitlements, dividends, infrastructure improvements, licence fees and any taxes on profits.

The United Kingdom's implementation of the Extractive Industries Transparency Initiative (EITI).

Shortly after the revised Accountancy Directive was enacted on 3 July 2013, the United Kingdom launched its implementation of  the EITI on 9 July 2013. This followed the Prime Minister announcing on 22 May 2013, jointly with President Hollande, that the United Kingdom and France were signing up to the EITI, which is a global standard that promotes revenue transparency and accountability in the extractive sector. In order to be considered as a candidate for EITI, the United Kingdom must meet the following five criteria:

  1. it must issue an unequivocal public statement of its intention to implement the EITI;
  2. it must commit to work with civil society and companies on implementation;
  3. it must appoint a senior individual to lead implementation;
  4. it must establish a multi-stakeholder group (MSG) with representatives from government, industry and civil society to oversee implementation; and
  5. the MSG must agree and publish a fully costed work plan and a timetable for implementation. 

Once accepted as a candidate, the United Kingdom will have 18 months to publish an “EITI report” which must reconcile what companies say that they pay in taxes, royalties and signature bonuses with what the government (HM Revenue and Customs, and the Department of Energy and Climate Change) has received. To reach compliance (anticipated to take two to three years), the United Kingdom would need to undergo an independent validation to check that it is complying with EITI rules.

In the United Kingdom, the Department for Business, Innovation and Skills (BIS) is responsible for leading the EITI implementation with support from the Department for International Development (DFID) and the Business Minister, Jo Swinson.

Accountancy Directive

The requirements under the revised Accountancy Directive apply to payments made by limited liability companies registered in the European Union, in any country worldwide in which they operate. The Directive applies to public interest entities and large undertakings which exceed two of the following criteria:

  1. turnover of €40 million;
  2. assets of €20 million; or
  3. average number of employees during the financial year equalling 250. 

The implementation deadline for the Accountancy Directive is 20 July 2015.

Transparency Directive

Similar rules are also to be included in a new EU Transparency Directive which, once entered into force, will be applicable to all companies listed on EU-regulated stock markets that are active in the extractive industries (Securities: Issuers Trading on a Regulated Market, Transparency Requirements Procedure File 2011/0307COD).

Under both the Accountancy and Transparency Directives, companies will publish the information annually in a report, with the first disclosures expected to be published in 2015 or 2016. Crucially, extractive companies will have to report all payments of €100,000 and above made for each individual resource project that they operate. The policy aim of the legislation is to foster greater transparency in the extractive industries. The intention is to achieve this by enabling local people living in resource-rich regions where companies operate extractive industry projects to track the payments made to the government and determine whether such payments are being used to fund local and national development.

Likely level of impact and concerns raised over the Accountancy and Transparency Directives

The proposed reporting requirements set out in the revised Accountancy Directive, and the new EU Transparency Directive (once enacted), may not be revolutionary. In substance the requirements mirror the guidelines developed by the EITI (which the United Kingdom is in the process of implementing (as discussed above)), and s.1504 of the Dodd-Frank Act, which many corporations adhere to as best practice.

However, once the requirements of the Directives have been adopted by the EU states, disclosure of payments to governments will be a legally enforceable obligation. This will have significant ramifications for EU companies, the extractive industries and the communities in which those industries are based and operate.

Conflicting legal obligations

Some companies are already expressing concern that the blanket application of the disclosure requirements set out in these Directives is incompatible with their legal obligations in countries where disclosure of project payments to the government is prohibited by national law, such as China, Angola, Qatar and Cameroon.

Two international oil companies have already published statements and legal opinions confirming that the local laws in many of the jurisdictions in which they operate would not permit disclosure of project payments without official consent. If such consent was withheld, the only course of action would be for the company to withdraw from the project in question, or to make the disclosure and risk local criminal sanctions for breach of national disclosure laws.

As an indication of potential future disputes in the European Union, the US Securities and Exchange Commission (SEC) was successfully challenged on the issue of conflicting disclosure requirements in July 2013. As a result, the SEC is now rewriting the rules to accommodate disclosure where companies cannot disclose under local law. Several large institutional investors, senators and charities have called on the SEC to take this opportunity to rewrite the disclosure rules in a tighter way.

Interestingly, Allianz Global Investors, UBS Global Asset Management, Boston Common Asset Management, Calvert Investment Management and 40 other investment firms, controlling more than US$5.6 trillion in assets under management, have called on the SEC to synchronise the US regime with the regime promulgated by the EU in the revised Accountancy Directive.

Costs of compliance

Companies are concerned about the considerable cost of ensuring and maintaining compliance with the new transparency regimes in the European Union and the United States. In practice, corporations listed in both the European Union and the United States will need to ensure compliance with the two similar, but ultimately different, regimes. For example, the types of payments companies must disclose under the two regimes differ significantly, and the Dodd-Frank Act is generally more prescriptive on the level of detail of the reporting.

Under the revised Accountancy Directive, Member States must introduce and implement penalties that are effective, proportionate and dissuasive. A proposal to impose penalties of up to 10 per cent of group turnover was mooted but not included in the enacted legislation.

Similarly, under the EITI, it is up to the participating governments to decide what penalties should be imposed in order to ensure that companies comply with their disclosure obligations. In the United States, disclosures are subject to liability under Section 18 of the Securities Exchange Act of 1934. This provides a private right of action for any person who both:

  1. relies on a false or misleading statement or omission made in the disclosures; and
  2. buys or sells a security at a price affected by that statement or omission.

It is a defence if the issuer acted in good faith and without knowledge that the statement was false or misleading. Certification of disclosures by the CEO or CFO is not required.

The amendments to the EU Accountancy and Transparency Directives are part of a global push for G8 countries to agree similar measures. On 12 June 2013, Canada committed to establishing mandatory reporting standards for Canadian extractive companies with the government agreeing to a recommended framework expecting to have its final endorsement by the end of November 2013.

Whilst the sentiment should be applauded by all concerned, the piecemeal “state by state” approach to disclosure and reporting requirements is likely to create inconsistencies, confusion and higher costs for companies operating in the global extractive industry.

Distortions to competition

Furthermore, the obligation to disclose sensitive financial information could distort competition in the industry, with EU and US companies burdened by increased cost of compliance whilst global competitors may not be subject to the same requirements.

However, such risks may be overstated with some non-governmental organisations reporting that up to 90 per cent of corporations operating in the extractive sector will be subject to disclosure regulations. Indeed, the changes proposed by the European Union indicate a growing global appetite for greater transparency in the extractive industry.

Conclusion

The issues highlighted above as legal conflicts, compliance costs and market competition suggest that the rules do not necessarily reflect the legal and commercial realities of operating in the extractive industries.

Furthermore, the disclosure regime only partially assists in overall transparency policy objectives. The new EU transparency regime is intended to benefit local communities living in resource-rich emerging markets by providing access to previously unavailable information. While these reforms are without doubt a step in the right direction for the industry, a disclosure regime is itself not a cure for corruption and tax evasion. Disclosure in the extractive industries must be underpinned by tax and fiscal regimes promoting a fair redistribution of profits.