US corporate transparency legislation: Lifting the veil
The oil industry is worried that new US corporate-transparency legislation will undermine the EITI and its strategy of good governance
As the Extractive Industries Transparency Initiative (EITI) nears its 10th anniversary, the mechanism is unwittingly at the centre of a war of words over how best to ensure financial transparency in the resources sector. The dispute centres on new legislation in the US, which demands more transparency from companies than even the EITI requires – and oil companies don't like it.
Shell chief executive Peter Voser and Yves-Louis Darricarrere, the head of Total's exploration and production unit, both claim the legislation – the Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed into law last year – could undermine, or even threaten, the EITI's approach to transparency and good governance. Voser says Dodd-Frank was rushed. To the oil industry's dismay, the EU may now enact its own version.
The EITI, established in 2002, aims to set a standardised, internationally recognised procedure to ensure financial transparency in the energy and mining sectors. The initiative requires participating governments to report revenues they receive from companies operating in their resources sector and for those firms to report payments they make to host governments. The EITI board oversees this.
Joining the EITI is voluntary, but once a country is accepted as a candidate, financial reporting under EITI procedures is mandatory for operators working in that country. At present, 35 countries are EITI candidates, while 11 nations, ranging from Norway to less likely members such as Yemen and Nigeria, have achieved compliance with the initiative's reporting rules. The rapid growth of the EITI and its widespread acceptance, not just by countries with large resources sectors, but also by business itself, is nothing short of stunning.
US plays hard law
But the EITI is soft law. Reporting under its mechanism is mandatory only if a firm operates within a candidate or compliant country. And the US has not joined. Instead, Dodd-Frank adopts some of the initiative's language – pleasing non-governmental organisations (NGOs) such as the Publish What You Pay coalition – and its section 1504 enshrines the EITI's company-reporting requirement in law.
Dodd-Frank is similar to the Hong Kong exchange requirement that resources companies list payments on a country-by-country basis, but takes the Hong Kong rule a step further, requiring all firms that report to the US Securities and Exchange Commission (SEC) to detail payments made to governments on a project-by-project basis.
Meanwhile, the EU is considering enacting similar financial-transparency legislation of its own. Klaus Rudischhauser, a senior European Commissioner, says mandatory country-by-country rules could be proposed by November, with Dodd-Frank offering "the minimum standard". UK finance minister George Osborne and business secretary Vince Cable have given their backing to the move.
But wider application of Dodd-Frank's rules, instead of the EITI's ones, is a worry for some oil companies. Voser, Darricarrere and others in the petroleum industry consider Dodd-Frank nothing more than hard law enforcing transparency for the sake of it.
They argue that the SEC reporting requirement is anti-competitive. Only SEC-listed firms must comply, leaving them "playing poker with our cards on the table", says one executive. And, he argues, the SEC rule could also force operators to violate the sovereignty of states they operate in. On top of this, executives claim Dodd-Frank removes governments from the financial-transparency equation, an element of the EITI they see as vital to promoting good governance.
Voser says that, through the EITI, not just companies but governments can be held accountable. Instead of being "mere observers", he said, the initiative gives clarity about their revenue streams and where the money comes from. "Transparency for the sake of transparency is not enough," he said, referring to the US legislation. "It should be used to advance society. This is where the EITI succeeds and Dodd-Frank fails. For Dodd-Frank, the highest goal is transparency. There is nothing more."
Darricarrere was even more forceful in his defence of the EITI: "It does not merely record the statements of amounts companies pay, it compares payments received and explains discrepancies," he said. "It is a strategy of good governance, better than any legislation that simply requires some privately owned companies to declare what they pay."
NGOs don't share the oil industry's worries about Dodd-Frank, arguing that listing rules will shed light on payments companies make to governments in countries that do not implement the EITI. Isabel Munilla, the director of the US branch of Publish What You Pay, thinks Dodd-Frank is a "game changer" that "sheds lights on billions in payments". It gives citizens a tool to scrutinise public spending on everything from health services to economic development, she argues. Such information may empower civil society, which may push reluctant rulers to endorse EITI, too.
Karen Lissakers, the director of financial watchdog Revenue Watch Institute, says Dodd-Frank's disclosure requirements will give citizens the information they need to curb corruption and may even help investors lower their risk. "This type of legislation sets a higher global standard for financial transparency," she said.
But that doesn't wash with the oil companies. Jean-Francois Lassalle, a senior executive at Total, told Petroleum Economist that while the legislation carried a stick, "we favour the carrot". If you force a country to be transparent and they don't want to, it won't work, he says. "It is more intelligent to show the advantages of being transparent."
Such opposition from oil firms is a distraction for the EITI and Clare Short, who now chairs its board. She wouldn't be drawn on the furore, saying only that she is "all in favour of initiatives that encourage transparency".
Short is well-advised to be diplomatic, even if she feels Dodd-Frank and new EU legislation would complement the EITI, not threaten it. She also has to keep industry onside. Last year, her predecessor, Transparency International founder Peter Eigen, welcomed Dodd-Frank. But it later emerged that resource-company bosses who sit on the EITI board threatened to resign if Eigen pushed for Dodd-Frank-type legislation in Europe. Since then, the board has been more circumspect.
But Short is convinced of the virtues of publishing financial information. It can unleash a snowball effect, prompting the public to demand accountability from their governments over how income is spent. "When you get transparency, you start to get accountability and you start to get better use of resources," Short said. It is up to citizens to hold their governments to account, but "the information is there as ammunition".