In response to international developments, especially the inclusion of a requirement to report payments to governments in the US Dodd-Frank Act and developments driven by the Extractive Industries Transparency Initiative (EITI), the European institutions (the European Parliament, the Council and the Commission) have now reached agreement on the introduction of transparency requirements in the EU.
The new requirements are designed to address ‘resource curse’ (the paradox of many resource rich countries having relatively low standards of living and high levels of instability) by requiring disclosure by resource companies and making governments more accountable for the revenue they derive from resource extraction. They will have commercial, political, legal and administrative consequences for companies that are caught by them, including where conflict arises between international transparency requirements, local law and confidentiality obligations.
For most companies, currently we expect the changes to apply to financial years beginning on or after 1 January 2016.
Click here to view table.
The new requirements are set out in the Accounting Directive and the draft Transparency Amendment Directive. The European Commission has also published some helpful FAQs on country and project reporting.
If you would like to read our briefing on the other changes to the Transparency Directive please click here.
The changes will have commercial, political, legal and administrative consequences. Given this, companies caught by these changes should:
- identify the projects, agreements and arrangements where there is an obligation to make a relevant payment and establish whether disclosure is permitted under local law and the relevant contract or licence. Note that there is no exemption for disclosures that would breach local law or the underlying contract or licence. If disclosure is not permitted, seek advice on dealing with this;
- consider the relationship management issues the disclosure may give rise to. For example, how a government or joint venture partner that is not subject to the new rules will react to the disclosure of sensitive payment information;
- assess the impact of the changes on their accounting and internal control procedures. In particular, check that existing procedures for the approval and notification of relevant payments are sufficiently robust. Consider whether, looking forward, data should be independently verified. When entering into new projects, formally require suitable notification procedures to be put in place; and
- ensure that relevant staff have received appropriate training and understand the new disclosure requirements.