by Michael Connor

A new U.S. measure designed to combat corruption in resource-rich countries by requiring mining and energy companies to disclose payments to foreign governments was highlighted this week by U.S. President Barack Obama in a speech at the United Nations Millennium Development Goals Summit in New York.

Obama at United Nations_Sep 2010_FeatureThe requirement is a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by Mr. Obama in July.

Section 1504 of the Act mandates that publicly -held “resource extraction” companies disclose, in their annual reports to the U.S. Securities and Exchange Commission, information regarding payments made to any foreign government or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals.

In his speech to the U.N. General Assembly, Mr. Obama cited a need for “broad-based economic growth” among nations, but he also noted “certain ingredients upon which sustainable growth and lasting development depends” and which may be lacking in cases.

Mr. Obama said:

We also know that countries are more likely to prosper when governments are accountable to their people. So we are leading a global effort to combat corruption, which in many places is the single greatest barrier to prosperity, and which is a profound violation of human rights.  That’s why we now require oil, gas and mining companies that raise capital in the United States to disclose all payments they make to foreign governments.  And it’s why I urged the G20 to put corruption on its agenda and make it harder for corrupt officials to steal from their own people and stifle their nation’s development.

The disclosure provision in the Dodd-Frank Act is designed to combat what has been called the “Resource Curse” of corruption in countries that are rich in natural resources but often lacking in internal regulation and governance procedures.

The U.S. Justice Department has prosecuted a number of mining and energy firms in recent years under provisions of the Foreign Corrupt Practices Act (FCPA), which prohibits the payment of bribes to foreign officials.

One of  the most notorious FCPA cases, for example, has involved $6 billion in contracts between 1995 and 2004 for construction of liquid natural gas facilities in Bonny Island, Nigeria.  Several U.S. and international companies have pled guilty to criminal and civil charges of paying bribes; to date they’ve paid a total of $1.28 billion in penalties in connection with the scheme, according to the Justice Department.

“The statistics don’t lie – this industry attracts corruption more than any other,” says James Tillen, who heads the FCPA and anti-corruption practice at the law firm Miller Chevalier.

Section 1504 of the Dodd-Frank Act differs from the FCPA, according to Mr. Tillen, by substantially broadening disclosure requirements.   Where the FCPA addresses illegal payments and bribes to individuals, the new provision requires disclosure of all payments to governments, including legal payments for taxes, royalties and license fees.

“This is going to capture completely legitimate data,” Mr. Tillen says, and will create a new incentive for energy and mining companies to bolster existing compliance programs.  Among likely changes are improved audit mechanisms to capture data related to government payments and increased oversight of third-party representatives and agents, he says.

The law firm Shearman and Sterling, in a commentary (PDF) on the Section 1504 provision, says that in addition to increased costs of establishing appropriate disclosure procedures, mining and energy companies may also have to deal with “public relations concerns” resulting from public disclosure of payments.  In addition, disclosure “could put U.S. reporting issuers at a competitive disadvantage in commercial negotiations with foreign governments” relative to companies not subject to U.S. regulation.

In considering what payments are subject to regulation, the Dodd-Frank Act directs the SEC to consider the guidelines of the Extractive Industries Transparency Initiative (EITI).   The EITI is a coalition of governments, companies, civil groups, investors and international organizations whose stated goal is “to strengthen governance by improving transparency and accountability in the extractives sector.”

According to the EITI web site, “3.5 billion people live in countries rich in oil, gas and minerals. With good governance the exploitation of these resources can generate large revenues to foster growth and reduce poverty. However, when governance is weak, it may result in poverty, corruption, and conflict.”

EITI says about 50 of the world’s largest oil, gas and mining companies – including majors such as Alcoa, BP, Chevron and ExxonMobil – “support and actively participate” in the EITI process.  About 35 resource-producing countries have either agreed to comply or said they intend to comply with EITI guidelines, according to EITI.

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