On 20 July 2013, a new Accounting Directive (Directive 2013/34/EU of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings) came into force. EU Member States have until 20 July 2015 to pass implementing legislation to give effect to the Accounting Directive.
While the main objective of the updated Accounting Directive is to simplify the financial reporting obligations of small and medium enterprises across the EU, Chapter 10 requires “large undertakings” and “public-interest entities” active in the extractive or logging industries to report annually and in detail on payments made to governments worldwide in connection with projects in those sectors. The Directive effectively puts onto a statutory footing a requirement to follow the voluntary terms of the EITI (the Extractive Industries Transparency Initiative).
As previously reported, (please click here for link to our previous Law-Now) a large undertaking is any undertaking (broadly, a public or private limited company) which exceeds two of the following three criteria: (i) turnover of €40m; (ii) total assets of €20m; and (iii) 250 employees. “Public-interest entities” are EU registered undertakings with securities on a regulated market, as well as credit institutions, insurance undertakings or companies designated as public interest entities by an EU Member State by virtue of their business, size or number of employees. The payments caught by Chapter 10 include any payment (or series of related or linked payments) exceeding €100,000 related to production entitlements, taxes, royalties, dividends, signature, discovery and production bonuses, licences and infrastructure improvements and the like. The Accounting Directive is explicit in indicating that payments will be reportable based on substance not form – it will not be acceptable to seek to structure payments in a manner designed to avoid the reporting requirements.
The reports are to be publicly available within the EU. Although earlier draft proposals suggested there may be exemptions to the reporting requirement where such disclosures would breach secrecy laws in the countries where the relevant payments were made, the final Directive deliberately does not include such an exemption, on the basis that this would defeat the policy objective behind its being introduced – i.e. to make transparent to local populations how much governments earn from projects in the relevant sectors, so that they may be held to account as to the use of those funds.
On the other side of the Atlantic, the United States District Court for the District of Columbia (the Court) recently vacated the Securities and Exchange Commission’s (the SEC) Rule intended to give effect to a provision of the Dodd-Frank Street Reform and Consumer Protection Act (the Dodd-Frank Act), which also requires companies in the extractive sector (but not logging industry) to disclose payments made to foreign governments. The Court held that the SEC had promulgated a rule which misread the Dodd-Frank Act by requiring the disclosures to be made public and that the SEC’s decision to deny any exemption from disclosures where it would be illegal under some foreign laws was “arbitrary and capricious”. The Court vacated the Rule and there is therefore presently no equivalent requirement in the United States to that imposed by the Accounting Directive. It remains to be seen what new rule the SEC decides to adopt as a result of the Court’s decision, but there is a significant possibility that it will not be as strict as the requirements imposed by the EU. This could result in multiple and inconsistent reporting obligations for global extractive businesses, with all the time and cost implications that entails.
The Accounting Directive only applies to EU undertakings that meet the various criteria, although foreign subsidiaries of EU parent undertakings can be caught where the parent is required to provide consolidated financial reports. However, this will soon be complemented by a new Transparency Directive (amending Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market). This revised Transparency Directive will extend the reporting obligations contained in Chapter 10 of the Accounting Directive to non-EU undertakings whose securities (including secondary securities where the primary listing is outside the EU) are traded on a regulated market in the EU.
The level of reporting required under the Accounting Directive (and the Transparency Directive for non-EU issuers) marks a step-change in the levels of transparency now expected of the extractive (and logging) sector. This will involve a “regulatory” administrative cost that the large extractive corporates can absorb, but it will also place such corporates in a very difficult legal position where they have projects in jurisdictions that make such disclosures illegal. This could have implications for local subsidiaries, but also the individuals employed by them, as well as senior officers of the EU parents if and when they wish to visit those jurisdictions in future. While the public policy underpinning Chapter 10 of the Accounting Directive may be considered noble in intent, there are legal and practical difficulties with achieving those aims in practice. The clash of laws mentioned above cannot be ignored and will need to be tackled. However, in a technological age that has generated communication and information channels that are taken for granted in the West, those same technological innovations can be used by governments (and we have seen many examples of this in recent years) to curtail that freedom of access. Our Western democratic solution to assist in solving the failures of mineral-rich, democracy-poor nations to invest the earnings from major extractive projects in education, health and the like for the local populations, may have little practical application in countries where internet access is limited and controlled and where literacy is confined to small groups of ruling minorities.
However, the Accounting Directive is a signal of intent from the EU and an indicator of the direction of travel. While currently confined to a limited group within the extractive and logging sectors, the Directive contains a review mechanism which explicitly requires a reconsideration of the limited scope of Chapter 10 in 2018 by reference to the undertakings and sectors covered. It takes no leap of the imagination to expect similar obligations to fall on other groups in due course.