SEC Delays Corporate Anti-Corruption Measure
WASHINGTON -- Oil and mining interests are fighting back against an anti-corruption measure included in last summer's financial reform package that was supposed to go into effect at the end of this week.
Despite a statutory April 15 deadline, the Securities and Exchange Commission has delayed its final rulemaking on the measure, which calls for publicly traded companies listed on U.S. stock exchanges to disclose how much they pay foreign governments to acquire drilling and mining rights in their countries.
The new requirement is intended to make it more difficult for foreign leaders to hide and pocket the funds that energy and mining companies pay them. Oil and mining interests -- which have historically turned a blind eye to where their money went once it left their hands -- are complaining that the new rule will endanger contracts and give an advantage to competitors unburdened by such requirements.
The American Petroleum Institute -- the tip of the formidable spear that is Washington's oil and gas industry lobby -- has led the fight against the measure.
In an email to The Huffington Post, API spokesman Carlton Carroll wrote: "We have made a strong case that this would place [Securities and Exchange Commission]-listed firms at a competitive disadvantage when competing for international contacts, and we hope the SEC will keep these concerns in mind as they work through the rulemaking process."
NOT THE ONLY DELAYED RULE
The SEC, which was tasked by July's Dodd-Frank Wall Street Reform and Consumer Protection Act with implementing dozens of new rules to protect investors, has now punted on three due this week: The resource extraction measure as well as requirements that companies disclose whether they use "conflict minerals" from the Democratic Republic of the Congo or an adjoining country, and that mining companies make public their safety and health standards.
An SEC spokesman, asked about the reason for the delay, directed The Huffington Post to earlier statements by the commission to the effect that, the nature of the requirements in question "differs from the disclosure traditionally required by the Exchange Act" and therefore necessitated particularly extensive public input.
The commission is also widely considered to be overworked and understaffed.
The recently postponed, 102-page proposed rule for "disclosure of payments by resource extraction issuers" was first published in December, and the SEC opened the window for comments for 30 days.
But the commission was soon swamped with responses from special interests -- including several requests for more time to respond. In late January, it extended the comment period another 30 days -- making the April 15 deadline for a final rulemaking all but impossible.
And just a few days ago, the commission updated its calendar for Dodd-Frank rulemakings to show that it doesn't intend to have the resource extraction rules (or the conflict mineral rules or the mine safety rules) finalized until sometime between August and December at the earliest.
"I don't see it as significant that it slipped -- although it certainly is serious for an agency to miss a deadline that's in a statute, with zero outreach to Congress to explain," said Neil Brown, a senior staffer with the Senate Foreign Relations Committee. "We all want the best rule possible," he said.
The anti-corruption measure's inclusion in the Dodd-Frank bill spurred European governments to approve similar rules. Ironically, those may be in place sooner than the ones in the United States.
"This has kicked off what looks like regulatory harmonization in other markets," said Isabel Munilla, U.S. director of Publish What You Pay, a pro-disclosure group funded by humanitarian and human-rights groups including the Open Society Institute. "Essentially what this is going to do is establish a global standard."
Nevertheless, advocates worry that a delay in the U.S. could slow down the international momentum -- and might even be a sign that the SEC is backing away from the full intent of the law.
"I think it's quite important that this ruling be implemented as quickly as possible, as was the congressional intent," said Paul Bugala, an analyst who monitors oil, gas, mining and timber companies for Calvert Asset Management, a socially responsible investment company. "Not only because the issues at hand are important enough that we need these standards imposed as soon as possible, but because at the end of the day, I think a lot of the other markets are waiting for the final rules from the commission."
"There's definitely a possibility that there could be backsliding, given all the industry pressure," said Corinna Gilfillan head of the U.S. office for Global Witness, a group that promotes policies to stop natural resource corruption and conflict.
The provision made it into Dodd-Frank after being proposed as a separate bill by the bipartisan duo of Sens. Richard Lugar (R-Ind.) and Ben Cardin (D-Md.), as a way of combating what's known as the "resource curse."
"History shows that oil, gas reserves, and minerals frequently can be a bane, not a blessing, for poor countries, leading to corruption, wasteful spending, military adventurism, and instability," Lugar explained in a floor speech in support of the measure. "Too often, oil money intended for a nation's poor ends up lining the pockets of the rich or is squandered on showcase projects instead of productive investments."
Lugar pointed to the "classic case" of Nigeria, which is "the eighth largest oil exporter," he said. "Despite $ 1/2 trillion in revenues since the 1960s, poverty has increased, corruption is rife, and violence roils the oil-rich Niger Delta."
The U.S. is not immune from the instability in Nigeria and other petro-states, the Indiana Senator warned. "This 'resource curse' affects us as well as producing countries. It exacerbates global poverty which can be a seedbed for terrorism, it empowers autocrats and dictators, and it can crimp world petroleum supplies by breeding instability," said Lugar.
It's a dynamic most vividly on display today in countries such as Equatorial Guinea, a resource-rich but poverty-ridden nation that is the scene of endemic public corruption and squandering.
"We also know that countries are more likely to prosper when governments are accountable to their people," Barack Obama told the United Nations a few months after Dodd-Frank's passage. "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," the President said.
THE ARGUMENTS AGAINST
While corporate interest groups like the American Petroleum Institute are vociferously opposed to the new SEC disclosure rules, their logic can sometimes be elusive.
Some of API's reasoning, as expressed in its 47-page letter to the SEC, is circular at best. For example, it argues that too much disclosure could... harm disclosure. "Unless implemented properly, Section 13(q) could also undermine many years of progress on international transparency," the group wrote.
Or, disclosure could confuse people: "We also note that overly detailed reporting could harm investors, reduce competition, and impair efficiency by confusing investors with voluminous amounts of immaterial information and causing companies to incur substantial additional compliance costs."
Or, disclosure could get employees killed: "There are situations where the public disclosure of detailed payment information could jeopardize the safety and security of our member companies' operations and employees."
The API's solutions? Allow the disclosures to be fudged "by allowing issuers to aggregate data from multiple agreements relating to the same resource." Or keep the data hidden from the public altogether: "An exemption for commercially sensitive information could be implemented consistent with long-standing practice under the Freedom of Information Act."
In an opinion column for The Hill, Misty McGowen, director of federal relations for the API, tried to draw a parallel between the new requirement and a British museum that got a guard dog to protect its rare teddy bears. “[L]ike the museum’s Doberman, Section 1504 could lead to unintended and unwelcome consequences,” she warned. (The dog ate them.)
But it's always a mistake not to take the API seriously, and its most ardent request, echoed by its member companies, is that the SEC allow an exemption to the disclosure requirement in cases when the host country prohibits such disclosures by law.
Advocates of the measure say there's no evidence that any such laws exist yet. But they also agree that if such an exemption was approved, then the countries that don't want disclosure -- precisely the countries the law is intended to affect -- would simply declare it illegal going forward.
"From our perspective, the legal arguments aren't there," said Munilla, the disclosure advocate from Publish What You Pay. "They're saying kind of crazy stuff. It doesn't really pass the stress test."
DEALS WITH DICTATORS
One possible reason the industry is having such a hard time making a persuasive argument is that it can't publicly acknowledge why all this really matters: Although bribery is already outlawed by the Foreign Corrupt Practices Act, disclosure could put an end to sweetheart deals with dictators, made on the condition that no one knows how much money is involved.
The Nation's Daphne Eviatar traveled to Angola in 2004 "to try to understand how a country so rich in the most coveted resource of our time--oil--can fall to the bottom of almost every scale of human development."
"It's no secret that Angola's leaders are siphoning off huge amounts of state money," she wrote. "But lurking beneath the sinister statistics and corrosive corruption is the murky involvement of Western governments and multinational oil companies."
Now a senior associate at Human Rights First, Eviatar tells HuffPost that disclosure is an important lever "where you have major corporations dealing with notoriously corrupt governments who then hide the amount of money they take in from those contracts, and spend very little of it for the benefit of their own populations."
The multinationals "know perfectly well who they're dealing with in those countries," she said.
And a recent New York Times article about how Libyan leader Muammar Gaddafi extracted billions from major Western companies -- including a $1 billion "signing bonus" from California's Occidental Petroleum -- makes the problem particularly timely.
It is the industry's request for exemptions -- which would inevitably be used precisely in the countries the legislation is aimed at -- that is the primary battleground as the SEC goes forward with the final rulemaking.
The industry has found champions within the Republican Party, including Reps. Spencer Bachus (R-Ala.), the new chairman of the House Financial Services Committee, and Gary Miller (R-Calif.).
They wrote, in their comment to the SEC, that the entire measure, "is highly problematic and almost certainly would not have survived in its enacted form through regular order consideration in either body." (It was, in fact, added at the last minute.)
The congressmen urged the SEC to define key terms narrowly, and to "provide an exemption for reporting payments when a disclosure would cause a company to violate foreign laws." Otherwise, they warned, the provision will cost U.S. companies business and "will further constrain U.S. job creation and undermine economic growth."
But Sen. Cardin, who co-wrote the measure, disagrees: "The language of Sec. 1504 is very clear: there should be no exemptions for confidentiality or for host-country restrictions."
"It would be too easy for countries who want to avoid disclosures to simply pass their own law against disclosure," Cardin wrote in his SEC comment. "The purpose of Sec. 1504 is to not allow for exemptions for confidentiality or other reasons that undermine the principle of transparency and full disclosure."
Bugala, the Calvert analyst, notes that there aren't any exemptions in the SEC's proposed rules -- and that there shouldn't be, despite corporate America's pleas.
"At the end of the day, that's the essence of reform," he said. "That's the sign of a good reform, that it's causing pain where it should."
Dan Froomkin is senior Washington correspondent for the Huffington Post. You can send him an e-mail, bookmark his page; subscribe to his RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get e-mail alerts when he writes.