Financial Transparency in the US and the EU: A Reader

by Isabelle Ramdoo

This reader gives a brief overview of what is contained in the two sections of the US Dodd-Frank Act and in the EU Proposal to review the Transparency Directives and Accounting Standards, regarding specific requirements for companies involved in extractive industries.

The US Legislation: What is the scope regarding extractive resources (1)?

In July 2009 U.S. Representative Barney Frank proposed a comprehensive federal financial reform, known as the US Wall Street Reform and Consumer Protection Act (Dodd Frank Act). President Obama signed the bill into law in July 2010.

(i) Section 1502 of the Act directs the U.S. Securities and Exchange Commission (SEC) to adopt new rules for domestic and foreign companies listed on US stock exchanges that use “conflict minerals” originating in the Democratic Republic of Congo (DRC) or in “adjoining countries”.

(ii) Section 1504 of the Act requires companies listed on the SEC to publish in their annual reports any payment made by the company, a subsidiary of the company, or an entity under control of the company to a foreign government or U.S. government for the purpose of the commercial development of oil, natural gas or minerals.

What is covered?
Under section 1502, “conflict minerals” include columbite-tantalite (coltan), cassiterite, gold, wolframite or their derivatives, or any other minerals determined by the U.S. to be financing conflict in the DRC or an adjoining country. “Adjoining” countries are countries that share a border with the DRC, and include Angola, Burundi, Central African Republic, Republic of the Congo, Rwanda, Sudan, Tanzania, Uganda and Zambia.

Under section 1504, commercial development of oil, natural gas or minerals includes exploration, extraction, processing, export and other significant actions relating to oil, natural gas or minerals, or the acquisition of a license for any such activity, as determined by the SEC.

What are the requirements?
Under section 1502, companies will have to submit an annual detailed disclosure to the SEC. The report will be audited and published on the company's website. It will include a description of the measures taken by the company to exercise due diligence regarding the source and chain of custody of conflict minerals; a description of the products manufactured or contracted to be manufactured that are not DRC conflict free, a description of the facilities used to process the conflict minerals, the country of origin of the conflict minerals and the efforts made to identify the mine or location of origin.

Given the wide use of “conflict minerals” in the manufacturing industry, if Section 1502 is interpreted in its broadest sense, a large number of companies are likely to be subject to the requirements. It is however unclear whether a product manufactured by a subsidiary of a reporting company would be subject to the new disclosure requirements.

Under section 1504, reporting companies will need to describe any payment made for each project by the company, a subsidiary, or an entity to a foreign government or the U.S. government for the purpose of the commercial development of oil, natural gas or minerals. Payments include taxes, royalties, fees, bonuses, production entitlements and other material benefits that the SEC determines are part of the commonly recognised revenue stream for the commercial development of oil, natural gas or minerals and are not de minimis.

Where does the legislation stand?
The SEC is yet to promulgate the rules to implement these requirements.

The EU Directive: What is the scope regarding transparency?

In October 2011, the European Commission proposed amendments to the existing Directive on transparency requirements for companies and to the Directives on accounting rules for annual accounts and consolidated accounts. The Proposal introduced a new obligation for listed and large non-listed extractive and logging companies to report all material payments to governments, broken down by country and by project, when these payments have been attributed to a specific project.

What will be covered?
All large non-listed companies and all companies listed on EU regulated markets, with activities in logging of primary forests and extractive industries, even if they are registered in a third country.

What are the requirements?
Types of payments to be reported include production entitlements, taxes on profits, royalties, dividends, signature, discovery and production bonuses, licence fees, rental fees, entry fees and other considerations for licences and/or concessions, other direct benefits to the government concerned. The information disclosed on payments to governments would be publicly available to all stakeholders either through the stock market information repository or the business registry in the country of incorporation (Annual detailed disclosure).

Where does the Proposal stand?
The Proposal has been submitted to the Parliament and the Council. While there is a general agreement on more transparency, discussions have stalled between Parliament and member states over the disclosure made to governments on a project-by-project level. While Parliament is largely supportive of these rules, many member states are instead pushing for rules for companies to publish what they pay to central and local governments, without breaking down payments by project.

How does the EU Proposal differ from the US Proposal?
In general, the EU and the US proposals are broadly similar regarding transparency requirements for listed companies in mining, oil and gas industries. Both require companies to disclose information by project and at country level. However, the EU regulation goes a step further by extending the requirements to large unlisted companies. The EU Directive also covers the logging industry, which is not covered by the US Regulation. However, the EU Regulation does not cover conflict minerals. Unlike the US proposal, the EU Regulation provides for a limited exemption for companies operating in counties where disclosure of payments could potentially be charged as a criminal offense. A safeguard to prevent abuse is however forseen.

Footnotes

(1) See Paul Weiss (2010) Client Memo – The Dodd Frank Act’s Requirements relating to conflict minerals, mining and resource extraction companies.

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