On August 22, 2012, the U.S. Securities and Exchange Commission (SEC) adopted new disclosure rules affecting oil and gas and mining companies listed on U.S. exchanges or otherwise reporting to the SEC, which may impact their operations in places like Russia. The new rules, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, require “resource extraction issuers” to annually disclose certain payments made to the U.S. or foreign governments in connection with the commercial development of oil, natural gas and minerals (the Disclosure Rules). The Disclosure Rules, which are expected to apply to over 1,100 U.S. and foreign companies, are aimed at curbing corruption in oil-producing countries. The Disclosure Rules, by increasing transparency, are intended to work in tandem with the Foreign Corrupt Practices Act, which is also designed to fight corruption overseas.
The Disclosure Rules are to be set out in the new Rule 13q-1 and Form SD of the Securities Exchange Act of 1934. Compliance with the Disclosure Rules is required for fiscal years ending after September 30, 2013 and the first report need only disclose those payments made after September 30, 2013.
Companies That Must Disclose
The Disclosure Rules apply to “resource extraction issuers,” which are U.S. and foreign companies listed on U.S. exchanges or otherwise reporting to the SEC that are (i) required to file an annual report with the SEC; and (ii) engaged in commercial development of oil, natural gas, or minerals. The disclosure requirements also cover indirect payments made by a subsidiary or another entity controlled by the resource extraction issuer. The resource extraction issuer will need to make a factual determination of whether it exercises control of an entity based on a consideration of all relevant facts and circumstances.
Payments That Must Be Disclosed
The Disclosure Rules require resource extraction issuers to disclose payments (i) made to the U.S. federal government or a foreign government; (ii) made to further the commercial development of oil, natural gas or minerals (which the SEC defines broadly as exploration, extraction, processing and export, or the acquisition of licenses for any such activity); and (iii) that equal or exceed $100,000 (made as a single payment or a series of related payments) during the most recent fiscal year.
Payments that must be disclosed include (i) taxes (including corporate profits, corporate income and production, but not VAT, personal income tax or sales tax); (ii) royalties; (iii) fees (including license fees, rental fees, entry fees and concession fees); (iv) production entitlements; (v) bonuses (including signature, discovery and production bonuses); (vi) dividends (other than those paid to a government as a common or ordinary shareholder); and (vii) infrastructure improvements. The Disclosure Rules do not cover social or community payments, such as payments to build a hospital or a school. If a payment subject to disclosure is made in-kind, the resource extraction issuer may report it at cost or, if the cost is not determinable, fair market value, provided that it presents a brief description of how the monetary value was calculated.
The term “foreign government” is defined broadly to include not only the foreign government directly (including a subnational government; department, agency or instrumentality of a foreign government), but also any company that is at least majority-owned by a foreign government. In the case of Russia, which has many active state-owned companies, this would for example include state-owned oil and gas giants such as Gazprom, Rosneft and Gazprom-Neft, and thus payments, which fall under the Rules, made to such companies, would need to be disclosed in accordance with the Disclosure Rules.
Any disclosure under the Disclosure Rules would need to be made on a project-by-project basis (rather than a country-level disclosure), describing the type, category and amount of payments, currency, financial period, the business segment that made the payments, the government that received the payments, the country in which the government is located and the project to which the payments relate. Although the term “project” is left undefined, the SEC views each contractual arrangement with a government as sufficient basis to consider it a project.
Reactions to the Rules
The Disclosure Rules have received mixed reactions from the industry. Although many human rights and business transparency groups are applauding the new disclosure requirements as the right step to curb corruption and improve living standards in countries such as Russia, a number of industry groups have complained that the rules grant advantages to foreign competitors not listed in the U.S. (including most Russian companies) that do not have to make similar disclosures, especially if compliance with the Disclosure Rules will lead to disclosure of previously secret terms of the companies’ arrangements with governments or their strategies on winning lucrative government contracts. The Disclosure Rules will also have an unintentional consequence of forcing companies to disclose information about regular payments made to business partners that happen to be state-owned companies. Since resource extraction issuers do not have to comply with the Disclosure Rules until next year, it remains to be seen how the new disclosure requirements will affect their operations in countries such as Russia.