On 9 April 2013, the organs of the EU through their informal “trilogue process” have reached agreement on the scope of changes to the Accounting Directive aimed at simplifying the reporting obligations of SMEs across the EU. However, the changes also include amendments (expected to be replicated in due course in changes to the Transparency Directive) that will require the extractive industry to make public the payments they make to governments in relation to their projects. The final text (which is yet to be published) is likely to be ratified in the summer by the Council of Ministers and EU Parliament.
Assuming all the changes are ratified, all corporates listed in the EU and all large unlisted EU corporates in the oil, gas, mining and logging industries will be required to report and explain any individual payments of more than €100,000 made to the government of any country in which they are operating, as well as reporting the total amount paid. (A “large” company is any company which exceeds two of the following criteria: (i) turnover of €40m; (ii) total assets of €20m; and (iii) 250 employees.)
This would include any taxes on production or profits, as well as any bonuses, royalties, license fees or other payments. Disclosure will be required to be made not just at government or country level, but at project level as well. This latter obligation brings the EU changes more closely into line with similar obligations introduced by the Securities and Exchange Commission (SEC) in August last year for all US registered and listed extractive companies with overseas operations, although the US rules do not apply to logging operations. The US rules will come into effect in 2014. According to Transparency International, the combined scope of the EU and US rules “will cover 90 per cent of the world’s major international extractive companies”.
The stated purpose of these new rules is to encourage better management of resources in developing countries and accountability for the use made of funds received by the governments of resource-rich countries with high levels of poverty. By requiring corporates to publish details of all payments on a project-by-project basis, it is hoped that the relevant governments will be more easily held to account by their people, thereby hindering tax evasion and corruption and supporting poverty reduction. The policy is intended to work in tandem with the development aid policies and promises of Member States by promoting a more sustainable form of development through wider initiatives in support of democratisation, human rights and self-help.
Those calling for even greater transparency did not get all they had hoped for, however. There were calls for the disclosure requirements to include project turnover, profits, employee numbers and costs and assets as well, so that it would be possible to hold companies and governments to account as to whether the correct amount was paid (e.g. in taxes) on any given project. Pressure groups had also fought to include other industries within the ambit of these changes, without success. Nevertheless, Ministers did agree to include a requirement that they review the changes in 2015 to decide whether to include other industries, in particular telecommunications and construction.
One of the potential difficulties that the new regime may create is that some jurisdictions where extractive companies operate have laws making it illegal to disclose the sorts of information required by the amended Directive. While there were calls to include an exception to take account of this problem, the EU (like the SEC in the US) has decided to apply the new rules across the board on the basis that such an exception could encourage the very jurisdictions that these laws are designed to make accountable, instead to introduce further laws banning disclosure.
While these changes are unlikely on their own to achieve the lofty aims of stamping out corruption and tax evasion in resource-rich developing countries, they represent a further evolution in the supra-“regulation” of, in particular, international business. They can be seen as forming part of a piece with the strengthening of: (i) anti-corruption and money laundering laws around the world (increasingly with an extra-territorial dimension, of which the UK Bribery Act 2010 is perhaps the paradigm example); (ii) increasing regulatory oversight in the financial sector; (iii) pressure on “off-shore” jurisdictions and those with a banking secrecy culture to adopt more cooperative approaches towards disclosure of financial and corporate information in the fight against fraud, corruption and tax evasion (with the French President promising only this week to introduce measures to stamp out the use of tax havens by French banks, stating “Tax havens have to be eliminated in Europe and around the world”); and (iv) similar expansion of the transparency and reporting obligations of lifesciences companies kick-started by the US Sunshine Act.
The requirements also represent an interesting and somewhat novel development in the fight against corruption, in that while these changes impose obligations on corporates, their focus is on combating corruption by governments and their officials. These are not changes designed to make it more difficult for improper payments, per se, to be paid by companies to public officials. On the contrary, their purpose is to shine a light on legitimate payments by corporates to governments in order to make it more difficult for those governments to hide their receipts from scrutiny and corruptly to misuse those funds.
The expansion of the criminal laws affecting corporates underpin and reflect the evolving expectations of Western democratic society in relation to corporate ethics. The growing body of regulation and disclosure requirements, such as these amendments to the Accounting Directive, coupled with the growing pressure placed by the US and EU on offshore states to open the books to scrutiny, support those laws by requiring minimum international standards of internal oversight, governance and disclosure, compliance with which makes it all the more difficult for corporates and government officials to hide inappropriate activities from the public gaze. As these changes and disclosure requirements develop further, it will become more difficult and unprofitable for corporates to ignore ethics and compliance issues; indeed there will be little purpose in doing so, as much of the hard work will already have been done in complying with the unavoidable disclosure and transparency requirements.
The pace of this change is such that corporates in unregulated sectors and industries are increasingly facing corporate governance and internal controls requirements akin to those in the regulated sectors, who may be expected to have more experience and ready-made resources for managing risk and compliance requirements. Yet all are now being judged through the same lens. For some, this will prove too much. The cultural changes required and cost of compliance will be prohibitive or their failures will be exposed and lead to heavy punishment. However, for those already advanced in the implementation of sophisticated governance and controls as part of a modern corporate ethical culture, these changes, while bureaucratic, will hold little fear and will offer competitive advantages as against their slower to move competitors.