1. What will the legislation do?
There are two pieces of legislation (The Extractive Industries Transparency Disclosure Act in the House and the Energy Security through Transparency Act in the Senate) that would require all companies registered with the Securities and Exchange Commission (SEC) to report their payments to foreign governments for the extraction of oil, gas and minerals on a country-by-country basis. All payments would be disclosed as part of financial statements that are already required by the SEC. This would apply to both American and international companies listed with the SEC, which covers the majority of the largest oil, gas and mining companies in the world. The requirement would set an international standard for the public disclosure of such information.
2. Why is the legislation needed?
It is well documented that a lack of transparency in the oil, gas, and mining industries, especially in countries that depend heavily on income from these sectors, often goes hand-in-hand with government corruption. In the oil, gas and mining sectors it is not enough to merely target bribery: highly complex financial arrangements coupled with a lack of transparency mean that the funds of overseas mining and oil companies—including American companies—often end up being channeled to corrupt purposes.
Investors need to be able to assess the risks of their investments. Investors need to know where, in what amount, and on what terms their money is being spent in what are often very high-risk operating environments. These environments are often poor developing countries that may be politically unstable, rife with corruption and have a history of civil conflict fueled, in part, by natural resources.
The US must it maintain its place on the forefront of the international community by doing what it can to weed out the rampant corruption in so many oil- and mineral-producing states, while at the same time promoting its own national and energy security interests. Rampant corruption could undermine public confidence in US business, both at home and abroad, risking serious political repercussions.
Such a regulation would not criminalize any business transactions or create any new civil causes of action for business transactions. It would merely require disclosure of payments in a discrete but vital segment of the international economy. In doing so, it would constitute a crucial piece of the multi-pronged international effort to weed-out corruption in the extractive industries and thereby to make the business environment more favorable to international firms navigating these often difficult waters.
3. Who would be covered by this regulation?
The regulation would apply to corporations that have issued securities that have been registered in the United States or who are required to file periodic reports with the SEC.
Companies listed on the New York Stock Exchange and those registered with the Securities Exchange Commission include many European and non-western companies.
4. Would this amendment be a disadvantage to U.S. firms?
No, this regulation would not be a disadvantage to U.S. firms because it does not single out U.S. companies. As described above, it would apply not only to U.S. firms, but to all oil, gas and mining companies registered in the U.S. This includes most significant extractive industry multi-nationals, including European, Canadian and Australian companies as well as those from emerging markets such as China, Africa, Brazil and Russia.
Some major national oil companies (NOCs) that operate internationally – such as one of China’s NOCs – are listed in the U.S. While some smaller NOCs are not listed, those companies lack the technology, expertise and capacity to compete with internationally competitive extractive companies. These NOCs also face their own constraints, including lack of access to capital, making them less of a competitive threat. The only NOC of any significance operating internationally that is not listed in the U.S. is India’s Oil and Natural Gas Corporation (ONGC). However, ONGC faces tight constraints on international expansion, including the Indian government’s concern over expenses and reputational risks, pressure to subsidize India’s downstream sector, and a huge brain drain problem.
Thus, the amendment applies to the majority of the major global extractive companies, and the NOCs that the amendment does not cover do not pose a major competitive threat to U.S. companies.
5. How much will it cost companies? the government?
The cost to extractive companies to report payments should be minimal as companies already conduct internal audits and have revenue information available. The requirement would simply mean that companies need to incorporate reporting requirements into their integrated auditing.
Likewise, the cost for the U.S. government would be minimal providing high impact at a low cost. Associated costs would include website maintenance and any necessary oversight or enforcement.
More background information on the ESTT Act available here.
Detailed Question and Answer on the ESTT Act available here.
