On the docket was a proposal for a revised regulation implementing the Cardin-Lugar anti-corruption provision, Sec. 1504 of the Dodd-Frank act, that requires all oil, gas and mining companies listed on U.S. stock exchanges to report their payments to governments, including royalties, taxes, bonuses. The bipartisan measure, originally sponsored by Sen. Lugar, a Republican, and Sen. Ben Cardin, a Maryland Democrat, is a simple but effective way to bring transparency to the notoriously secretive extractive industries.
Implementation of Cardin-Lugar was held up by court battles and a final regulation implementing the legislation was struck down nearly two years ago by President Trump and the Republican Congress. In the meantime, 30 other countries followed American leadership by enacting their own Cardin-Lugar-type laws. For several years they have been mandating payments disclosure by extractives companies listed on their exchanges, including some of the world’s largest—Shell, BP, Total of France, ENI of Italy, mining giants BHP Billiton and Rio Tinto, even Gazprom and Rosneft of Russia.
But because of political pressure from the powerful U.S. oil industry, America has fallen from leader to laggard in the battle to stem resource-related corruption. Russian companies are now more transparent than U.S. giants ExxonMobil or Chevron.
But instead of reclaiming the mantle of leadership with a strong replacement rule, the SEC on Dec. 18, 2019, the day of Trump’s impeachment, voted 3-2 in an open meeting to propose a watered-down version that is far weaker than the international standard now in place. Said SEC commissioner Allison Herren Lee, who voted against the proposed rule, “We would deviate widely from existing international disclosure regimes and severely limit the utility of the required disclosure.”
Kathleen Brophy, head of the Publish What You Pay-US coalition of anti-corruption NGOs which supported the original Cardin-Lugar legislation, said that rather than allowing citizens to hold their governments to account for natural resource payments, “The draft rule….would instead enable bribery and corruption.”
Among the major changes in the proposal: instead of requiring reporting project by project, as all the other jurisdictions do, it would allow companies to lump many payments together. Such aggregation will do nothing to expose or deter corrupt deals as Congress intended. And it would not provide investors the kind of information they say they need. The proposal also allows companies to hide many payments by arbitrarily raising the threshold of what needs to be reported and it creates new exemptions for reporting any data at all. For instance, it proposes totally exempting “small” extractives companies that have revenues of only $1.07 billion or less—which means roughly 43 percent of all the covered oil, gas and mining companies could still keep all their payments secret. This would put American investors at a disadvantage compared to investors in Canada and Europe, who would have access to more information about such companies on their exchanges.
Ironically, the SEC already knows, based on its own history, that project-level reporting is essential to curb corruption. In rejecting proposals by the American Petroleum Institute (API) for a weak rule in 2016, the commission said, “our own experience in implementing the Foreign Corrupt Practices Act leads us to believe that the granular disclosures that our definition will produce will better help combat corruption than the aggregated (and anonymized) disclosures that the API Proposal would yield. We have found that requiring issuers to maintain detailed, disaggregated records of payments to government officials significantly decreases the potential for issuers and others to hide improper payments and as such their willingness to make such payments.”
SEC Chairman Jay Clayton, a political independent who voted with the two Republican commissioners, said an important issue with the 2016 rule, raised by the oil companies and their Congressional allies, was “the high costs of compliance and the potential for competitive harm” from disclosing financial data to the public.
Those are good questions. And they have been answered. Based on several years of experience by hundreds of companies, large and small, listed in Europe and Canada, the costs of reporting the data are easily manageable. No company has reported any competitive harm. Authoritative government reviews in Canada and Britain have confirmed that their laws are not burdensome, don’t cost jobs and don’t harm their companies’ competitiveness. This includes foreign subsidiaries of some of the American oil giants. Inexplicably, the SEC ignored all this evidence.
In fact, as Commissioner Lee pointed out, by breaking so sharply from the established global norms, “we would complicate compliance for issuers already reporting under those international regimes….It seems to me that the way to minimize compliance costs would be to propose a rule that is consistent with the existing international regimes….Not by proposing a rule that requires them to calculate different payments…”
While the two Republican commissioners complained that SEC shouldn’t be in the business of trying to curb global corruption (even though the agency has been enforcing the Foreign Corrupt Practices Act for many years), Chairman Clayton, who has shown real leadership since he was appointed in 2017, disagreed: “For decades and decades, we have been a leader in anti-corruption, in ferreting out illicit payments to governments and in bringing actions. And I’ve often lamented that we have too few followers. We should remember that we have been a leader in this area. I hope more will follow. I believe that this type of disclosure may help more follow.”
That’s encouraging news. The proposed regulation is just that, a proposal. It was published in the Federal Register this week--coincidentally, the same week the Senate impeachment trial formally began--starting a 60-day clock. The public now may make comments, propose improvements, and offer data to support a rule that will accomplish what Congress set out to do on a bipartisan basis: allow citizens of resource-rich countries to follow the money and pressure their leaders to spend it for the public’s welfare, not private gain.
Fighting global corruption should not be a partisan issue. As Sen. Lugar often said, it’s a matter of national security—no American political party benefits from the poverty, violence, disease, unrest, radicalization, mass migration and militarism that afflicts so many corrupted, resource-rich countries. As other rich countries have understood, combatting this “resource curse” is in our own self-interest and causes no harm whatsoever to honest oil and mining companies. The SEC should act in the national interest and issue a final rule that complies with Congressional intent and puts America back in its traditional leadership role in international anti-corruption efforts.