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International Business Obligations

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Focus: Extractives – further international reporting demands

22 April 2010

In brief: The United States Congress is currently considering legislation that will require extractives companies to report on the payments they make to foreign governments in the countries in which they operate. This development comes in the context of increasing international pressures for greater transparency and accountability in revenue flows to government received from the extractive industries. Partner Annette Hughes , Senior Associate Rachel Nicolson and Lawyer Dora Banyasz report.  

How does it affect you?

  • If passed, the legislation will require all extractives companies that file with the US Securities and Exchange Commission (the SEC) to report to the SEC on the payments they make to foreign governments, irrespective of whether they operate or are based in the US.
  • The proposed legislation indicates that the international landscape on these issues is moving towards a higher level of scrutiny and transparency through compulsory mechanisms. This is matched by increasing scrutiny by non-governmental organisations, stakeholders and government of the flow of benefits from resources projects. 
  • For financiers of oil, gas or other extractives projects, these higher levels of reporting will give added security and knowledge of country risk around their project investment. It will also enable companies that do business with the extractive industries, and other stakeholders in the industry, to better understand and scrutinise the practices and projects of the resources companies with which they are involved.

International context: The Extractive Industries Transparency Initiative

The legislation before Congress follows significant consideration of transparency-related issues at the international level, particularly by the key body operating in this field, the Extractive Industries Transparency Initiative (the EITI). The EITI is an international multi-stakeholder institution dedicated to improving transparency and accountability in the extractive industries. Launched in 2002, it is a coalition of governments, companies, civil society groups, institutional investors and international organisations that is directed at creating a global standard for revenue transparency. The EITI has established a voluntary framework for oil, gas and mining companies to publish the payments they make to governments, and for governments to disclose all material revenues received from these companies. This information is made publicly available, in a comprehensible format.

A number of countries and many large extractives companies are supporters of the EITI. Countries can either have supporter status, which represents only a formal endorsement of the initiative, or become an EITI compliant country, which requires completing an independent assessment and evaluation of whether certain key indicators have been met. The US is currently a supporting country of the EITI, as is Australia. 

The EITI represents an effort to combat what is known as the 'resource curse', the phenomenon whereby developing countries that are resource-rich often experience high levels of poverty, corruption, poor governance and internal conflict. Transparency of resource revenues is considered to be one way of strengthening governance, by providing citizens with the information needed to hold their government accountable for use of resources revenues. 

Transparency initiatives in the US

A bipartisan bill to enact the Energy Security Through Transparency Act of 2009 (the ESTT Act) was introduced to the US Senate on 23 September 2009. It is currently under consideration by the Senate Committee on Banking, Housing, and Urban Affairs.

The ESTT Act builds on the Extractive Industries Transparency Disclosure Act of 2008, introduced to the Senate and House of Representatives in 2008. It also builds on the findings of a 2008 report prepared by the Senate Foreign Relations Committee, entitled Petroleum and Poverty Paradox: Assessing U.S. and International Community Efforts to Fight the Resource Curse. The report highlights the links between strong governance, accountability, energy security, energy prices and transparency.

If passed by Congress, the ESTT Act will require companies (described as resource extraction issuers) that are registered and file with the SEC to disclose to the market any payments they make to foreign governments, as well as to the US Federal Government, for the commercial development of oil, natural gas and minerals. This will be implemented through an amendment to section 13 of the Securities Exchange Act of 1934, inserting a new subsection entitled 'Disclosure of Payment by Resource Extraction Issuers'. 

Importantly, this new provision would apply to all companies that are required to file an annual report with the SEC, irrespective of whether they operate or are based in the US. This means that it will apply to many of the world's largest extractives companies. 

Apart from introducing changes to reporting requirements, the ESTT Act states that Congress is of the view that the US Administration should work with foreign governments, including those in the G8 and the G20, to establish similar reporting requirements in other domestic jurisdictions.

This proposed legislation represents a significant shift away from the voluntary practices that have applied to extractives revenue reporting towards a more far-reaching mandatory reporting standard. It is a recognition of the links between natural resource management, social and economic development and a stable investment climate in resource-rich countries.

What will need to be disclosed under the ESTT Act?

The new reporting standards will require disclosure by all companies engaged in the commercial development of oil, natural gas or minerals of any payment made to a foreign government for the commercial development of oil, natural gas and minerals.

'Payment' means a payment that is made to further the commercial development of oil, natural gas or minerals, and includes taxes, royalties, fees, licences, production entitlements, bonuses, and other material benefits as determined by the SEC. Reporting of any payments made by a subsidiary or partner of the resource extraction issuer, or an entity under the control of the resource extraction issuer, will also be required. 

'Foreign government' includes an officer or employee of a foreign government, an agent of a foreign government, a company owned by a foreign government, or a person who will provide a personal benefit to an officer of a government if that person receives a payment.

The 'commercial development of oil, natural gas and minerals' is defined to include the acquisition of a licence, exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, as determined by the SEC.

It is expected that the reporting requirements will largely be modelled on those in the EITI, and the information is to be included in a company's annual report. This is generally information that companies already have and therefore the cost of compliance will be relatively low.  

The ESTT Act would also require the SEC to publish online, to the extent practicable, a compilation of the information that companies would be required to report under these new rules. 

Conclusion

As a result of its breadth of application, this proposed amendment to the reporting requirements of extractives companies will, in effect, set a new international standard for transparency in financial reporting in this industry.

Certain companies are already voluntarily publishing this kind of information in their annual reports, but a mandatory framework covering many of the largest international extractives companies will have significantly greater impact across the board. It is also likely to encourage other countries to introduce similar reporting requirements. For example, a Labour parliamentarian in the United Kingdom recently introduced a notice of motion urging the UK Parliament to consider adopting similar legislation to the ESTT Act. At the moment, there is no similar legislation being proposed in Australia. However, Australian companies listed with the SEC will be required to comply with the ESTT Act when it is passed, and as international pressure to improve transparency in extractive industries mounts, it is possible that comparable requirements will be introduced in Australia. 

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