We recently blogged about Britain’s Deputy Prime Minister affirming the UK’s commitment to the Equity In Extractives Transparency Initiative (“EITI”). Our article can be read here. Last week the UK confirmed that it has begun taking steps to become EITI compliant. However, in the US, a transparency initiative suffered a setback earlier this month when a US District judge ruled in favour of the American Petroleum Institute’s legal challenge to section 1504 Dodd-Frank Act 2010.
The EITI is a global standard ensuring transparency and better governance of natural resources, which was introduced in 2002. The EITI Standard requires companies to publish the details of what they pay governments, and governments to publish the details of its receipts in the extractives sectors.
The UK becoming EITI compliant may not have a huge impact domestically in relation to its relatively small natural resource wealth by comparison to hydrocarbon rich countries. However, as the UK has taken the lead in the global push for transparency in extractives, for instance, by using its chairmanship of the G8 as a platform, it therefore does need to lead by example. The idea is to implement the initiative in the UK and make it work in a way that incentivises others to follow suit. As Business Minister and UK EITI champion, Jo Swinson, said on 9 July:
“Oil, gas and mining can, if well managed, deliver precious economic benefits to the populations of developing countries. Too often the assets from resource-rich countries in the developing world are not benefitting local people. At the G8 summit last month, more and more countries across the world recognised how vital transparency and accountability are in these industries.
In Britain, we have already seen some of the biggest oil, gas and mining companies voicing their support of this important initiative. Today’s commitment by industry and NGOs to work together is a big step. This will result in greater transparency, help build a stronger economy and means that people around the world benefit fairly from the natural resources of the countries in which they live.”
The US, Australia, Germany, France and Italy are also expected to become EITI compliant, which will create more of a balance among the countries that implement EITI. At present, there is only one Western country implementing the EITI Standard, Norway. This has sparked criticism that Western countries are not implementing the same measures that they require developing countries to adopt. However, although not EITI compliant, the US and EU have implemented their own disclosure standards that are arguably stricter than the EITI standard.
Section 1504 of the US Dodd-Frank Act requires all companies registered with the Securities and Exchange Commission (“SEC”) and dealing in extractives to publish what they pay US and foreign governments on a country-by-country and project-by-project basis. On 12 June 2013, the European Parliament voted in favour of the Transparency and Accounting Directives, which require European companies to report payments of over 100,000 Euros at project level and government level.
However, the section 1504 regime suffered a recent setback. The American Petroleum Institute (“API”) challenged the legislation arguing that SEC should release an anononymised collection of company disclosures and not the full disclosures of each company. API’s position was that the Dodd-Frank requirement would put US companies at a commercial disadvantage because US companies would be obliged to report and publish competitive information that can be used against them by global competitors. API further argued that the regime would compromise contracts in countries that prohibit disclosure of payments such as China, Angola, Cameroon and Qatar. SEC argued that confidential disclosures are not allowed by section 1504 of the Dodd-Frank Act.
The court held that the SEC had misread the statute in refusing to grant any exemptions and had made a serious error in denying exemptions for countries that prohibit payment disclosure. The court found that these independently invalidated the SEC’s section 1504 rule under Dodd-Frank and vacated the rule back to SEC. Meanwhile, the House of Representatives has also passed a Bill (H.R. 1613) containing a provision that seeks to water down section 1504 of the Dodd-Frank Act.
Although section 1504 has been sent back to SEC due to ambiguity in the statute, this does not signal the death-knell of the rule. Some commentators have pointed out that the rule may return in the same form but with a stronger justification, as the court seemed to be criticising SEC’s failure to use its discretion to conduct a full analysis rather than the requirement for public disclosure itself. The decision nevertheless has been seen by some civil society organisations as representing a blow for the anti-corruption agenda in the US, and they query how certain elements of the oil industry can at the same time as contesting section 1504 be an active participant in the implementation of EITI in the US.
For the EITI to be effective, it needs to be a truly global standard. The experience in the US highlights how disclosure standards implemented by one country, the US, can be undermined by discrepancies in the standards implemented by others such as China, Cameroon, Angola and Qatar. Another challenge to achieving a truly global standard is resistance from companies operating in the extractive industries. Although a large number of companies have become EITI Supporting Companies because they recognise that EITI can facilitate better risk management and enhance company reputation as well as assisting in the fight against government corruption, some continue to perceive EITI as an unwelcome intrusion on their commercial activities. It will be important for the EITI Supporting Companies to demonstrate and publicise the positive aspects of the initiative and fully implement the EITI principles to make EITI a global success. It is encouraging to see Western countries, which are not considered resource-rich nor endemically corrupt, such as the UK, taking steps to become EITI compliant. This will serve to encourage solidarity and consistency in the pursuit of transparency in the extractives industry.