CapitolWire February 2012

CapitolWire

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The Brussels Connection to Capitol Hill

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BRUSSELS Résidence Palace Rue de la Loi 155 1040 Brussels, Belgium

Contact: Tyson Barker tyson.barker@bfna.org (+1) 202.384.1993 www.bfna.org

Contact: Thomas Fischer thomas.fischer@bertelsmann-stiftung.de (+32 2) 280.2830 www.bertelsmann-stiftung.de/brussels

CapitolWire is a joint publication of the Bertelsmann Foundation offices in Washington, DC and Brussels. It connects the European Parliament to Congressional policy and politics, and contributes to a common trans-Atlantic political culture. CapitolWire is an occasional publication that highlights issues, legislation and policymakers relevant to the European Parliament’s legislative cycle. This publication also looks at the Congress from the point of view of European Parliament staffers and offers timely operational analysis.

The State of Play: Transparency in Extractive Industries KEY POINTS • In July 2010, the US Congress passed the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The bill contains Section 1504 (the Cardin-Lugar provision), which requires publicly listed extractive-industry companies in the US to report their payments to governments at home and abroad to the SEC. Civil-society groups, communities, investors and governments will then have access to this payment information.

• The Cardin-Lugar provision has some significant differences from EU legislative proposals under consideration. Cardin-Lugar includes the oil, gas and mining sectors, and it is limited to publicly traded companies. The EU draft legislation includes the timber industry and applies to public and private companies. It also permits exemptions based on host-country prohibitions.

• Originally slated for regulatory promulgation in April 2011, the new rules under Section 1504 have been delayed and are now scheduled for release in 2012.

This could push back full implementation to 2013.

In 2010, the US Congress passed the Dodd-Frank Act, the most sweeping reform of financial regulation in more than a generation. One of the bill’s most innovative legislative components was Section 1504, also known as the Cardin-Lugar provision in recognition of its chief sponsors, Senators Ben Cardin (D-MD) and Richard Lugar (R-IN).

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The legislation requires oil, gas and mining companies reporting to the Securities and Exchange Commission (SEC) to disclose their public payments made to governments in every country of operation. US publicly traded companies will be required to report on a countryby-country and project-by-project basis. The data will be available in an annually updated, interactive database that will show comparisons across countries and projects, and track the traffic of payments to government departments and officials for licensing, leasing and/or other concession-level arrangements.

The provision’s goal is to increase the transparency and accountability of government revenues generated from these industries in resource-rich countries, including those in Africa, Asia and Latin America. Some observers have noted that the law could change the way that the developed world interacts with governments of resource-rich countries and begin the process of lifting the resource curse.

The Long Road to Passage

Inspiring People. Shaping the Future.

CapitolWire The quest for including disclosure requirements in US law goes back to debates around the Foreign Corrupt Practices Act (FCPA) in the mid-1970s.

The Brussels Connection to The FCPA prohibits “improper payments to foreign government officials to assist in obtaining or retaining business”. At that time, Congress had considered including disclosure requirements.

Instead, it settled on a version of the bill emphasizing mandated prohibitions on “types of payments” that companies could provide. It did not, however, include any means of disclosure for more public oversight. More recently, efforts have led to a breakthrough in injecting transparency into the relationships between US-based extraction companies and the resource-rich host countries in which they operate. These efforts were led by organizations such as Publish What You Pay (PWYP) and included an amalgamation of NGOs, investors and politicians.

The push for transparency legislation was originally planned as an independent piece of legislation, the 2009 Energy Security Through Transparency Act (ESTT). This bipartisan, Senate-based legislation built on previous bills such as the proposed Extractive Industries Transparency Disclosure Act (EITD), originally introduced in 2007 and 2008. But it became clear that the most effective way to pass ESTT was to tack it on as a “rider” to mammoth financialservices-regulatory reform. The amendment was slated for a Senate vote in May 2010 but did not reach the floor due to procedural restrictions. That rider, Section 1504, was championed by Senator Patrick Leahy (DVT) and Congresswoman Maxine Waters (D-CA) during the conference process, in which parallel bills passed in the House and Senate are reconciled.

WASHINGTON, DC 1101 New York Avenue, NW Suite 901 Washington, DC 20005 USA Contact: Tyson Barker E-mail: tyson.barker@bertelsmannfoundation.org Tel: (+1) 202.384.1993 www.bertelsmann-foundation.org

BRUSSELS Résidence Palace Rue de la Loi 155 1040 Brussels, Belgium Contact: Thomas Fischer E-mail: thomas.fischer@bertelsmannstiftung.de Tel: (+32 2) 280.2830 www.bertelsmann-stiftung.de/brussels

The Senate sponsors of the legislation with Bono. The One Campaign strongly supports Section 1504.

How the EITI Works

Extractive Companies Disclose Payments

Government Discloses Receipt of Revenues

Independent Administrator Reconciles the Payments

EITI Country Report

Oversight by a Multi-Stakeholder Group

(representatives from government, extractive corporations, and civil society)

Source: Olcer, D., 2009. Extracting the Maximum from the EITI. Working Paper No. 276. OECD Development Centre.

Available at: www.oecd.org/dataoecd/56/60/42342311.pdf

President Obama with other world leaders at the UN, launching the Open Government Partnership in September 2011.

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On July 15, 2010, the Dodd-Frank Act passed Congress. Once implemented, the rule will capture a large swath of the global extractive sector. Of the world’s top ten mining companies, eight are listed on US stock exchanges. For international oil companies, 29 of the top 32 are US-listed.

These companies include PetroChina, ExxonMobil and BP. Not included are Petronas (Kuala Lumpur), Gazprom

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People.

Shaping Future.

G20 “to put corruption in its agendaInspiring and make it harder for corrupt officials the to steal from their own people and stifle their nation’s development”. President Obama announced that the US would implement the Extractive Industries Transparency Initiative (EITI) at the launch of the Open Government Partnership (OGP) in New York in September 2011.

CapitolWire (London) and Petrom, the Romanian national oil company (Bucharest), although the last two would fall under EU legislation.

Since the Dodd-Frank Act’s passage, Washington has continued to highlight The Brussels Connection to resource transparency as an effective development and anti-corruption tool.

At the Millennium Development Goals summit in September 2010, US President Barack Obama noted the role of payments to governments by oil, gas and mining companies as a source of corruption in resource-rich countries. He called on the

Since 2006, the EITI has been a set of disclosure principles to which governments can

Capitol voluntarilyHill adhere. However, EITI does not have a requirement for project-level disclosure.

One reason that it lacks teeth is that the reporting requirements are extremely broad, making it easier to hide where payments are received.

EITI less meaningful.

BRUSSELS WASHINGTON, DCThis can render Advocates for Section 1504 argue that1101 the New Cardin-Lugar and EITI compliance in the Résidence Palace York Avenue,provision NW Rue de la Loi Suiteas 901Section 1504 compel companies US are complementary. Provisions such to155 disclose the 1040 Brussels, Belgium Washington, DC 20005 USA money they contribute while EITI stipulates that governments disclose what is done with Contact: Thomas Fischer Contact: Tyson Barker that money. As such, the two legislative provisions, taken together, capture both sides of the E-mail: tyson.barker@bertelsmann- E-mail: thomas.fischer@bertelsmannequation. foundation.org stiftung.de Tel: (+1) 202.384.1993 www.bertelsmann-foundation.org

Tel: (+32 2) 280.2830 www.bertelsmann-stiftung.de/brussels

Next Steps in the US and Around the Globe Transparency and development advocates have turned their focus to two subsequent goals: 1) creating an international framework of similar transparency laws; and 2) expediting the rule-making process at the relevant US regulatory agency, the SEC. EU Internal Market Commissioner Michel Barnier has released revisions of the Transparency and Accounting Directives that would re-frame Europe’s regulatory environment and compel Europe-based industries to adhere to similar provisions.

According to Ian Gary of Oxfam America, passage of the EU law would bring 60 percent of publicly traded companies in the extractive industry under a transparent regulatory framework. This would allow consumers, shareholders and good-governance advocates access to a large reservoir of data on how industry money is being spent in resource-rich countries from Angola to Libya.

However, significant discrepancies between the US and EU provisions remain. While EU legislation exempts companies when a host country prohibits disclosure, Section 1504 does not. Some organizations working on transparency, such as the European Network of Debt and Development (Eurodad), have speculated that these exemptions could lead to a proliferation of host-country restrictions that could render the legislation less effective.

Waiting for the SEC Ruling In the Dodd-Frank Act Congress required the SEC to issue rules on Section 1504

by April 15, 2011. Despite strong support letters from members of Congress and other government agencies, including USAID, the promulgation of these rules has been delayed twice, first to December 2011 and now well into 2012. Congressman Jim McDermott (D-WA), one of the legislation’s chief proponents in the House, admonished the SEC, saying that “the law gave 270 days to promulgate regulation [that it is currently much] overdue and could lose another calendar year [if action is not taken].”

As in the EU, one of the most prominent points of contention in setting the rules for implementing Section 1504 will be the definitions of “project”, “foreign government” and “commercial development”. The SEC has yet to release its final definition on what constitutes a project, although that is expected with the other rulings in 2012. Many US advocacy groups, such as Oxfam US and PWYP US, have pushed for reporting to be required at the lease or licensing level. They have received support from the US Department of Interior, among others, for this effort.

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