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Lifting the Resource Curse: Will Dodd-Frank Do the Trick?

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Don't think Wall Street reform has much to do with Afghan corruption? Think again, says Congress, President Obama, and a broad coalition of human rights and sustainable development NGOs.

As we all know by now, the landmark Dodd-Frank Wall Street Reform Act passed in July 2010 contains a slew of new rules to rein in abuses in the financial sector. One of its most interesting features, however, is aimed not at wrongdoing by American commodities traders, but at corruption and conflict in the countries where commodities themselves are extracted from the ground. Packed into the bill's 2,300-odd pages is a somewhat overlooked but nonetheless far-reaching provision that requires publicly traded oil, gas and mining companies to disclose the payments they make to foreign governments in exchange for the rights to drill and dig.

From Congolese gold mines and Nigerian oilfields to the rainforests of Borneo and soon -- if the Pentagon is to be believed -- the mountains of southern Afghanistan, natural resource abundance is too often linked to corruption, conflict, and human rights abuses. One promising strategy to help lift this so-called "resource curse" involves natural resource revenue transparency. The idea is simple: force international companies to disclose what they pay -- and to whom -- and then let local stakeholders and international NGOs make use of this information to hold corrupt leaders accountable.

Until it was signed into as Section 1504 of the Dodd-Frank bill, this novel disclosure requirement was the cornerstone of a relatively obscure bill sponsored by Senators Richard Lugar (R-IN) and Ben Cardin (D-MD), first introduced in September 2009 after years of persistent lobbying by human rights, anti-corruption, and sustainable development activists. In fact, the bill was so low profile that big corporations from ExxonMobil on down were caught by surprise when the provision was inserted into Dodd-Frank at the 11th hour. Groups like the Publish What You Pay Coalition, Revenue Watch, Transparency International, and Global Witness deserve heaps of praise for pushing the issue of transparency and extractive industries to the fore, as do Senators Lugar and Cardin, who have led efforts to ensure that the United States continues to be a leader in the fight against foreign corruption.

Karin Lissakers, Director of the Revenue Watch Institute, has already authored a great piece here on The Huffington Post describing the bill in detail, and many others -- including, most recently, President Obama in his September 22 speech to the UN General Assembly -- have chimed in to praise the legislation as a responsible, forward thinking measure that will make a real difference in the lives of millions.

Unfortunately, less attention has been given to some of the bill's shortcomings. Big Oil, of course, is already gearing up to fight the new transparency rules, arguing that disclosure of financial data will be expensive and will hinder U.S. competitiveness at a time when we need all the economic growth we can get. This line of reasoning is an obvious red herring; since most big foreign oil and mining companies list shares on American stock exchanges, they, too, will be obligated to report payments to the SEC, just like domestic firms. And anyone who argues that transparency, per se, is bad for business should take a good long look at the history of the Foreign Corrupt Practices Act, which generated a virtuous "race to the top" and allowed U.S. businesses to seize the high ground on international bribery early on, forcing other countries to play an expensive game of catch-up over subsequent decades.

More troubling than these competitiveness or cost concerns is a serious -- and entirely overlooked -- mismatch between the bill's means and ends. As I explain in great detail in a forthcoming article in the Georgetown Journal of International Law -- available for download here -- the legislation's new transparency requirements rely for their effectiveness on SEC enforcement and shareholder activism, but seek to end foreign government corruption, not the domestic corporate malfeasance for which investor protection laws were written. Unlike the fight against insider trading, say, countering overseas corruption requires real, sustained engagement with faraway local actors and institutions. While disclosure of information by oil and mining firms may help, the bill's focus on shareholders' interests masks a dangerous disconnect between the protection of investors and support for foreign anti-corruption activists.

The SEC, as it works to draft implementing regulations, is no doubt aware of this issue. And NGOs are working hard to find creative ways to get disclosed revenue data back into the hands of local citizens, who can make the best use of it. Still, the bill is no panacea; lifting the "resource curse" will ultimately require much stronger medicine than Dodd-Frank can provide.

For more information on Section 1504 of the Dodd-Frank Act, see my article or visit Global Witness, the Revenue Watch Institute, the Publish What You Pay Coalition, or Transparency International.

To comment publicly on the SEC's implementing regulations, visit the agency's online comment site.