On August 22, 2012, the Securities and Exchange Commission (SEC) adopted final rules requiring oil, natural gas, and mining companies to report to the SEC certain payments to foreign governments. The new rules are aimed at increasing transparency in the global resource extraction industry but may create confusing and onerous Foreign Corrupt Practices Act (FCPA) compliance burdens for many U.S. and foreign companies. For some, the requirements may present an obstacle, but for companies that get ahead of the new rules and tailor their FCPA policy and protocols appropriately, the requirements may be the pivot point they need to step toward a lean and effective compliance regimen.
The new rules require all U.S. or foreign companies engaged in the commercial development of oil, natural gas, or minerals that file an annual report with the SEC (Resource Extraction Issuers or REIs), to disclose certain payments made to foreign governments (including instrumentalities, local governments, and companies majority owned by a foreign government). The required disclosures include payments to foreign governments for:
- Fees (including license fees),
- Production entitlements,
- Dividends, or
- Infrastructure improvements
that are made to further the exploration, extraction, processing, or export or the acquisition of a license for these activities. The rules also require that REIs report such payments made by a subsidiary or other entity “controlled by the issuer,” with “control” to be determined by the REI, based on all relevant facts and circumstances.
REIs will file a report of all such payments – whether a single payment or a series of related payments – that equal or exceed $100,000 during the financial year. The payments will be reported on the new Form SD, and the payment information must be included in an exhibit to the form electronically tagged using the Extensible Business Reporting Language (XBRL) format. Reports will be required for fiscal years ending after September 30, 2013.
The new rules leave companies with two major tasks to undertake by the time of implementation next fall: they must determine whether (1) they themselves, their subsidiaries, or payments they make are covered under the rules; and (2) their current compliance measures are adequate to identify, track, and report payments that are or will be covered under the new rules.
Determining the Scope
Public companies whose primary business is the extraction of oil, natural gas, or minerals will almost certainly fall in the ambit of the new rules. But what of the companies that serve those companies? Are they involved in the “commercial development” of oil, natural gas, or minerals?
In the final rules release, the SEC notes that transportation activities generally would not be included within the definition of commercial development unless those activities are directly related to the export of the oil, natural gas, or minerals. However, commercial development will include exploration for oil, natural gas, or minerals. So where does a company fall if it is transporting an offshore oil rig to the next jobsite? Is that company performing a non-export transport activity, or is it involved in exploration? Given the vast amount and variety of extraction activity underway around the world, the nuances of these definitions could become very important.
A company must also decide whether payments are covered, and therefore reportable, under the new rules. Global companies will have to decide whether certain of their affiliates are “controlled” for the purposes of these rules. The rules state an REI should decide, considering all relevant facts and circumstances, whether it has the direct or indirect power to cause the direction of the management and policies of the entity, whether through ownership of voting shares, by contract, or otherwise.
If an REI decides that its subsidiary or affiliate is controlled, the REI must also decide whether and which payments fall under the new rules. Companies must decide whether payments qualify among the types of payments to foreign governments that fall under these rules, as well as whether those payments are “not de minimis.” The definition of not de minimis includes single payments and “series of related payments” throughout a fiscal year, leaving companies to parse out the question of what makes payments “related” for the purposes of these rules.
As with any new regulation, nuance and detail will emerge through time and the application of the rule. For now, however, companies will be forced to make their best guesses, and it seems unlikely that any of them will be eager to be the first test case for the SEC.
Reviewing Compliance Policies
Companies affected by the new rules will face several questions as they review internal policies. Current corporate procedures, such as FCPA or accounting policies, may already cover much of what is required under the new rules. A review may be necessary, however, to ensure that the company has in place the means to identify covered payments that the company or its controlled subsidiaries and affiliates will make.
Once the company develops a means to identify the covered payments, the company may need to implement systems to identify, track, and tag covered payments for reporting. These systems will likely need to include the designation of personnel responsible for XBLR tagging and filing reports. Finally, the company’s policies should include some mechanism to check the accuracy and transparency of the identification and reporting process.
These reporting requirements may appear thick, difficult, and burdensome at first. But the FCPA books and records provisions already require accounting and internal controls measures that may lay a solid foundation for compliance. Companies may therefore be able to address these reporting requirements as part of existing FCPA compliance policies. The connection between the new SEC rules and existing FCPA regulations may lead to a natural symbiosis between the compliance measures instituted in response.