In Search of Transparency: new SEC rules expose financial details of international oil and mineral industries

On August 22nd, the U.S. Securities and Exchanges Committee approved Section 1504, or the Cardin-Lugar provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This legislation was initially passed in 2010, but the SEC only now agreed to take action on this provision. Under the new rules this provision establishes, any oil or mineral company that is publicly listed on the U.S. stock exchange is required to disclose the payments it makes to foreign governments. This would include –but not be limited to –taxes, royalties, and other expenses at both the project and country level. The legislation will apply to 1,100 companies, or 90% of all internationally operating oil companies and many international mining companies.

Prior to this ruling, oil and mineral companies were able to conceal information about payments made to governments, a perfect environment for corruption and bribery to fester. Most notably in developing countries, authoritarian leaders sought to maintain the flow of petrodollars by accepting bribes. Now, the information on all payments made by these companies will be available to the public. Bono, the lead singer of the group U2 and an ardent advocate for fighting extreme poverty and preventable disease, voiced his support for the SEC decision and opined that, “transparency is the best vaccine against corruption.”

Proponents of the legislation believe that it will reduce corruption in oil- and mineral-rich countries, making these nations more attractive for investment in development projects. Also, there will be far less opportunity for corrupt leaders to co-opt petro- and mineral-dollars for their own private use.  There are currently sixteen developing countries with significant oil reserves that are poised to become oil exporters. These countries are at risk of becoming afflicted with the “resource curse,” where developing countries rich in natural resources are unable to utilize their burgeoning wealth, in part because of corruption and inefficient institutions. Most of these nations have been plagued by civil and interstate conflicts, which would be amplified by an increase in oil revenue without measures to ensure transparency. The rules that were instituted by the Cardin-Lugar provision will reduce the opportunity for corruption of petrodollars because companies will have to be explicit about what payments they are making, and to whom. The hope is that by increasing transparency, human rights abuses in oil-producing countries like Angola and Nigeria would diminish as the country becomes more open.

Those opposing the new rules, such as the U.S. oil industry, believe that companies will be revealing company secrets in disclosing their expenditures. They argue that these restrictions will force them to divulge “commercially sensitive” information regarding foreign projects. John Felmy, the chief economist for the American Petroleum Institute, equated revealing their payments to foreign governments to “publishing the recipe for Coca-Cola.” He derides the SEC ruling on the basis that nationalized petroleum companies, such as China National Petroleum and Russia’s Gazprom, not listed on the U.S. stock exchange may be able to use the information made public to gain a competitive advantage. However, the law will not require U.S. petroleum companies to disclose the royalty rate or commercial terms, only the type and total amounts of payments for each project. Many supporters of the legislation argue that the oil and mining companies are concerned with what will transpire when they are no longer able to offer bribes in exchange for preferential treatment. The introduction of transparency in business deals with governments will force these companies to reveal their payments, opening them up to public scrutiny, likely a reason for their hesitancy to comply.

Under the new legislation, the benefits of transparency will extend to both the resource-rich developing countries and to the developed countries. The legislation puts the U.S. at the forefront on this matter, “leading the world in the moral and economic necessity to choose transparency over shadow, rule of law over corruption,” as articulated by Senator Dick Lugar (R-Ind.), co-sponsor of the provision. By exposing the flow of payoffs to corrupt government officials, both companies and governments will be held accountable for their actions. Developing countries will gain from this openness, as a reduction in corruption will bring increased legitimacy to their governments. Developed countries will benefit from the stability generated by improved transparency in oil-and mineral-producing countries. These resource-rich nations have historically been three times more prone to be involved in violent international conflicts than states without oil.  As many oil-producing states have revolutionary governments, they remain at risk for armed conflicts, and reducing corruption through transparency will help these governments stabilize.

The SEC ruling will cause a very notable and important shift in the behavior of oil and mineral companies. Implementation of these new rules will generate increased transparency in the flow of money between private companies and governments, which will no longer be facilitated through under-the table deals. Corruption is a huge stressor to governments in developing countries, and while it remains to be seen how the SEC handles implementation of the approved rules, cautious optimism abounds at the potential for increased transparency and decreased corruption.