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Leveling the Transnational Playing Field

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A Review of Global Transparency Initiatives in the Extractive Industry

Co-Authored by: Luay Al Khatteeb* and Omar Al Saadoon**

President Barack Obama on his re-inauguration in 2009 stated 'Transparency... will be the touchstones of this presidency'. This statement would appear to have more credence for the global extractive industry judging by the increasing number of transnational transparency initiatives, ambit of transnational legislation, the growing emphasis on corporate governance and relatively recent multinational prosecutions of companies such as Baker Hughes, Halliburton, ABB, Vetco Gray, Royal Dutch Shell, Total and Siemens.

The reality of corruption in rentier states, particularly those in transition towards a decentralized and democratic system of government such as Iraq is that host governments are caught in a fundamental paradox. On the one hand, vast energy resources seemingly insulates rentier governments from (a) pressures to combat corruption and (b) depending on their citizens for revenue through taxation. On the other hand, the negative impact on foreign direct investment in direct correlation to a country's ranking in reputable global corruption surveys as well as the ratification of multilateral conventions and initiatives is slowly yet inexorably turning the tables on state level and administrative corruption.

Furthermore and more importantly, extractive companies are under increasing pressure to comply with the spirit and the letter of transnational anti-corruption legislation and consequently expect host governments to help deal with problems of discretionary and opaque decision-making which could potentially render everyone at board level down to foreign agent/partner liable to domestic and international civil and criminal sanctions.

This article offers the readers an overview of the current framework of international conventions, laws, initiatives and developments designed to promote an integrated system of global transparency relating to extractive industries.

OECD Convention

The convention on combating bribery of foreign officials in international business transactions effectively requires member states to ensure that a bribe and the proceeds of a bribe of a foreign official are subject to financial sanctions including confiscation. Whether international investment banks in receipt of proceeds of state corruption will be required to disclose information falling under domestic 'secrecy' laws remains to be seen, but as we have seen in dealings between US and Swiss Authorities, the momentum in favor of transparency is turning.

United Nations Convention Against Corruption

This convention which boasts over 140 member states is unique in that a number of its members are not a party to any other anti-corruption treaty. The convention is important in a few respects in that it confers private rights of action against member states; facilitates intergovernmental cooperation for the repatriation of stolen or misused funds and entitles governments to take measures against corruption by canceling 'tainted' contracts or withdrawal of concessions.

Extractive Industries Transparency Initiative

The Extractive Industries Transparency Initiative (EITI) compromises member states and over 25 leading companies in the oil, gas and mining sectors. Signatories to EITI are committed in making public disclosure of oil production and revenues in order to optimize the use of those revenues.

EITI have however published new and greater standards which require more detailed disclosure from member states including revenue allocations and expenditures as opposed to just collating and reconciling information. This may present a huge challenge for rentier states such as Iraq not least due to the fragmented way the various Federal Ministries work together and the chronic lack of experienced public sector capacity.

The Tentacles of US Legislation

The petrodollar will continue to ensure, for now, that anti-corruption laws such as the US Foreign Corrupt Practices Act of 1977 and Sarbanes-Oxley of 2002 focusing on corporate compliance all have effective extra-territorial reach.

The practical implications are of immediate significance in a few respects. The US Department of Justice will, in its investigation, consider issues such as a foreign official's ability to influence the outcomes of decisions in the public sector of the host nation. Secondly, the US Department of Justice are (in theory) able to establish US jurisdiction on an alleged matter of corruption outside the US-based on e-mails sent to a server in the US or a transfer of criminal proceeds to a US bank account. Thirdly, a parent company based in the US may be held liable for the acts of its subsidiary.

It is worth noting US extractive companies are increasingly insisting on imposing contractual obligations on national oil companies as part of tendering negotiations to comply with their corporate ethics policy though whether this is applicable in practice and to what extent is uncertain but may depend on the anti-corruption policy of the national oil company and any mandatory anti-bribery or corruption laws.

The application of the FCPA is less clear regarding its application to national oil companies partially owned by an international oil company through a joint venture and where the host government has a controlling majority stake as well as dictating operational policy. National oil companies in some Gulf countries with foreign shareholders have comprehensive policies to deal with anti-corrupt practices which form part of their corporate governance as well as their tendering and contractual provisions. However practical enforcement by national oil companies of such policies and national anti-corruption legislation will depend in reality on the degree of separation of powers as enshrined by those countries' constitutions and geopolitical factors.

World Bank/International Bank for Reconstruction and Development

It is necessary to note both of these institutions have issued guidelines setting out sanctions for violations of anti-corruption measures applicable to the borrower host government, the bank's personnel and all those in the supply chain receiving payment on funded projects. Such sanctions include referral of criminal cases to national countries, cancellation of the awards of contracts and blacklisting borrowers from gaining finance in the future.

Transparency International

Transparency International has established itself as a leading independent body designed to draw global attention to the level of institutional corruption in 177 countries particularly those with extractive industries. It produces a report 'The Corruption Perception Index' which measures the perceived levels of public sector corruption in countries worldwide on a scoring system from 0 (highly corrupt) to 100 (very clean).

A key finding of Transparency International as per this report published in 2013 is that political parties are perceived to be the most corrupt institutions and that not one country got perfect marks!

The report singled out Iraq as being affected by 'corruption at the highest levels of the state...'

Trace International

TRACE International and TRACE Incorporated are independent non-profit membership organizations that collectively offer members, multinational corporations and international law firms services such as anti-bribery training for corporate governance, authoritative assessments of anti-corruption/bribery legislative and the regulatory framework of countries with extractive industries as well as bespoke due diligence on all those involved in the supply chain of the host country including agents or commercial intermediaries.

The Pearl Initiative

The Pearl Initiative was established in 2010, in collaboration with the United Nations Office for Partnerships and the United Nations Global Compact, as a not-for-profit, by-business for-business organization working to improve corporate accountability and transparency across the Gulf Region. It is supported today by a growing group of forty Middle East-headquartered and multinational companies of diverse sectors, including extractive industries, and is a Private Sector initiative to encourage companies to proactively take a lead in raising standards of governance, integrity, anti-corruption, and reporting, because it makes business sense.

The Pearl Initiative has a number of existing programs dedicated to anti-corruption, including with Saudi Arabia's National Anti-Corruption Commission, Nazaha, and is developing a series of related workshops along with the UN Global Compact which it expects to roll-out across the region.

Conclusion

The playing field of transnational efforts against corruption is becoming more aggressive and arguably more effective judging by the number of high-profile multi-jurisdictional prosecutions or investigations of key players.

However it is not only transparency initiatives and legislation that is leading the way on transparency in the extractive industry. The International Bar Association in conjunction with bodies such as the UN Global Compact, the OECD and UNODC recently launched the first global anti-corruption project designed, in part, to raise awareness of the effects of corruption and promote best practices in this area amongst legal professionals.

The International Association of Oil and Gas Producers whose membership in the upstream industry produces over half of the world's oil also promotes awareness of transparency of revenues and combatting corruption.

Finally, it is a welcome and positive development that information regarding legislative and regulatory provisions of rentier states are now freely and easily accessible thanks in no part to smart phone technology. The advent of 'apps' is helping to facilitate the re-assessment of the 'risk-reward calculation' of committing corrupt practices and together with global initiatives, conventions, laws and corporate practices helping to level the playing field in transparency in the global extractive industry.
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*Visiting Fellow at Brookings Doha Centre and Founder of Iraq Energy Institute
**Middle East Committee Member of the AIPN and Senior Legal Advisor of the ADNOC Group