In 2013, in a global effort to aid accountability and governance in resource rich countries, the EU passed two directives (the Accounting Directive “AD” and the Transparency Directive “TD”, collectively the “Directives”) which require companies incorporated in an EU Member State and operating in the extractive industries to file annual reports with their home Member State disclosing payments made to governments in the countries in which they operate. Each of the Directives has a slightly different (although overlapping) scope. The UK government has adopted two different mechanisms to enact the provisions of the Directives into national law:
- it has published a new set of regulations entitled “Reports on Payments to Government Regulations 2014” (the “Regulations”). The Regulations transpose the AD into national law and the UK Government Department for Business, Innovation and Skills (the “BIS”) has confirmed that it intends, subject to parliamentary approval, to bring the Regulations into force by 1 December 2014 which would require affected undertakings to report from the start of their financial year commencing on or after 1 January 2015 (well ahead of the 20 July 2015 deadline set by Europe for implementation of the AD); and
- whilst EU Member States have until 26 November 2015 to implement the TD, the Financial Conduct Authority (the “FCA”), at the request of BIS, has consulted on changes to the existing Disclosure and Transparency Rules to make them comply with the TD and to bring such changes into effect in respect of financial years also commencing on or after 1 January 2015 (the “FCA Rules”).
Which entities will be subject to the Regulations and the FCA Rules, what are they required to disclose and what are the penalties for non-compliance?
The Regulations will apply to large undertakings and public interest entities engaged in mining, the extraction of oil and gas, quarrying or logging of primary forests incorporated in the UK.
Undertakings are defined as limited companies and limited liability partnerships as well as limited partnerships, partnerships or unlimited companies each of whose partners or members is a limited company or limited liability partnership.
A large undertaking is an undertaking (whether or not listed) whose registered offices are in the UK and which meets at least two of the three following criteria:
- a balance sheet total which exceeds £18,000,000;
- a net turnover which exceeds £36,000,000; or
- an average number of employees which exceeds 250.
The Regulations do not explicitly state whether, for the purposes of determining if an undertaking is a “large undertaking”, these criteria are to be applied to undertakings on a standalone or a group consolidated basis however, on reading the Regulations as a whole, the criteria would seem to apply on a standalone basis.
Public interest entities are defined as undertakings:
- which are credit institutions or insurance undertakings;
- which have otherwise been designated as a public interest entity; or
- whose transferable securities are admitted to trading on any regulated market of an EU Member State including the Main Market of the London Stock Exchange and regardless of whether such undertaking is incorporated in an EU Member State.
All payments of £86,000 or more made to a government across the world must be disclosed on a by country, by project and by payment type basis. In this context, the term “government” includes state-owned enterprises, departments, agencies and other government-controlled entities, whether or not in the EU and the term “payments” includes payments made in money or in kind. Parent undertakings must prepare consolidated reports relating to the whole group (unless the group benefits from certain exemptions). Subsidiaries incorporated in the UK must also produce their own reports, unless relevant payments have been disclosed by its parent and the parent is subject to the laws of an EU Member State. It is an offence to deliver false information in a report or fail to file a report within 11 months after the company’s year-end.
The FCA Rules
The FCA Rules will apply to both UK incorporated companies that have securities on a regulated market anywhere in the EU and non-UK incorporated companies that have securities traded on a regulated market in the UK. Note that, the former will also be subject to the Regulations, whilst the latter is only subject to the FCA Rules. Unlisted large UK incorporated companies will only be covered by the Regulations but the scope of the disclosure requirements under the Regulations and the FCA Rules are, broadly speaking, very similar.
Entities covered by the FCA Rules will be required to produce a disclosure report which complies with the Regulations. The FCA will apply its usual sanctions for breach of its Rules.
The London Stock Exchange’s AIM Market is not a regulated market. Nevertheless, one could anticipate that AIM companies are also likely to become subject to the FCA Rules, for example, by way of enhanced guidance published by the London Stock Exchange for extractive companies.
Do similar reporting requirements exist elsewhere?
All EU member states must adopt appropriate measures transposing the AD and TD into national law by 20 July 2015 and 26 November 2015 respectively. Canada is expected to introduce mandatory reporting standards by June 2015. Russia and Japan have also made commitments to introduce such requirements.
In the USA, the Securities and Exchange Commission (the “SEC”) attempted to introduce similar reporting rules as far back as 2012 driven by the Extractive Industries Transparency Initiative, However, following a challenge by a coalition of US oil industry associations, the reporting requirements were rendered unlawful by the U.S. District Court of Columbia (the “Court”) in July 2013. One of the grounds of complaint upheld by the Court was that the SEC rules did not include exemptions applicable when a company operates in countries which ban disclosure of payments (e.g. Angola, China and Qatar). It is anticipated that the SEC will introduce new moderated reporting rules in 2015.
In the event that the SEC does introduce new reporting rules, companies affected by both the EU and US regimes could become subject to increased compliance challenges and costs because, although these two regimes are likely to be similar, the actual disclosure items and requirements under them could vary significantly.
What is the impact on companies?
In addition to the increased compliance challenges and costs mentioned above, any disclosure under the Regulations in a country whose national laws prohibit disclosure of payments to the government would require the consent of those governments. If such consent is not obtained, the affected company may need to withdraw from a particular project or country because of the conflict between local laws and the Regulations. Another consequential impact may be that companies from countries with no equivalent accounting and disclosure regime could have an unfair commercial advantage over those companies which have to comply with the Regulations (or their equivalent), both in terms of participating in projects and compliance costs.
So, in conclusion, will the new reporting regime likely to be effective?
The introduction of mandatory reporting of payments by the EU and proposed introduction of similar measures by other states is certainly a step in the right direction. However, much like the global battle against tax evasion, in order to ensure effective disclosure of payments made to governments by companies operating in the extractive industries, equivalent reporting standards must be implemented world-wide. Otherwise, not only will companies be faced with conflicting obligations but those which are from jurisdictions enforcing stricter regimes may find themselves at a disadvantage to their counterparts operating elsewhere.