Lawmakers in the European Parliament will be under pressure this autumn to follow America’s lead in adopting tough financial disclosure rules aimed at combating corruption in overseas mining and petroleum operations.
The US Securities and Exchange Commission (SEC) earlier this month adopted disclosure standards that apply to US-registered companies with overseas mining and petroleum operations.
The move was welcomed by anti-poverty and human rights campaigners who say transparency will help fight back-room deals and exploitation in developing countries with large mineral or hydrocarbon reserves.
Europe will now face pressure to replicate the US regulations in revising an old EU law, the 2004 Transparency Directive, to create what in effect would become a global standard for industries operating in conflict areas, emerging countries with weak rule of law and developing nations with newly discovered mineral reserves.
Clare Short, who chairs the Extractive Industries Transparency Initiative (EITI), recommends that the EU align its draft rules with the Americans “so that companies don’t have do one set of reports under the US rules, and another set of reporting under the EU rules.”
“As far as possible [the EU should] make the rules compatible with the US rules, just to make it lean and clear and not heavily bureaucratic and difficult,” Short, a former British MP and international development secretary, told EURACTIV in a telephone interview.
MEPs on the European Parliament’s legal affairs committee are due to consider a recast of the Transparency Directive in mid-September. The revamped directive was unveiled by the European Commission in October 2011 to close loopholes and streamline reporting.
Denmark followed up during its rotating EU presidency in the first half of the year by encouraging adoption of the new directive.
More ‘loopholes’ emerge
But there are some key differences between the European proposals and the US rules, which stem from a sweeping package of financial and consumer reforms know as the 2010 Dodd-Frank Act.
ONE International, a poverty-fighting group with offices in Europe, Africa and the US, complains that the draft EU proposals would create a new loophole by exempting corporations from reporting their interests if a law in a country where they are operating bars such disclosures.
The exemption “could incentivise countries to develop repressive laws outlawing transparent reporting – the so-called tyrant’s charter,” says a recent statement by ONE, whose board includes the singer Bono and former US Secretary of State Condeleezza Rice.
The SEC, in contrast, turned aside industry associations’ efforts to include a similar exception in the US measures. The petroleum industry had argued that such rules could force American companies out of Angola, China and Qatar, important markets which have laws restricting financial disclosure.
Although Europe and the US are largely in sync on the transparency standards, there are other differences. Europe’s directive would cover forestry as well as mining and petroleum. Unlike the EU draft, the US requires companies to file project-by-project financial reports. The draft EU law requires more general country-by-country investment disclosures.
On both sides of the Atlantic, the disclosure rules have been controversial. The powerful American Petroleum Institute, representing the big oil companies, and the International Association of Oil and Gas Producers (OGP) in Europe contend that the rules would put them at an unfair advantage against unscrupulous companies or state-owned firms that are not registered in either the US or Europe.
The trade groups also fear that disclosing details of specific projects could expose them to unfair competition in bidding and contracting.
Industry groups had pressed lawmakers to model the regulations on the EITI’s decade-old standards, which oblige implementing companies to disclose their payments for mining and petroleum operations and governments to report what they receive. The goal was to cut back-room contract deals and shed light on an industry prone to political manipulation.
Today, 14 countries, 60 corporations and charities like Oxfam participate in the Oslo-based initiative. Some 22 nations are candidates, and one country – Madagascar – has been suspended. The European Commission is also a partner in EITI.
“In developing countries rich in oil, gas and mining, the discovery of these resources tends to lead to an increase in corruption and poverty and a proneness to conflict,” Short, the EITI chair, said. “That is just a tragedy because hundreds of millions of people could have their lives improved if there resources were better managed.”
“Transparency is part of the remedy just to get better accountably because companies tend to be quite secretive about what the contract is and sometimes politicians are secretive and the money’s not well spent,” she added.
Europe increasingly depends on raw materials from emerging economies. Nearly all the supply of rare earth metals used in electronics and industry are produced by China. According to the European Association of Mining Industries, Metal Ores and Industrial Minerals, more than 50% of major reserves or raw materials are located in countries with a per capita gross national income of $10 per day or less.
'Big step forward'
Charities and human rights groups have long campaigned for legally binding laws that would affect hundreds of companies, citing business deals involving rogue regimes and lucrative mining concessions used to finance wars in Angola, Sierra Leone, Congo and other countries.
They also complain that closed-door deals between politicians and corporations have kept petroleum-rich countries like Nigeria largely impoverished.
Eloise Todd, the Brussels director of ONE, called the SEC decision “a big step forward.”
“We urge the European Parliament and member states to back a strong EU extractive transparency law,” Todd said in a statement. “By doing so, Europe will show its commitment to eliminating extreme poverty by ensuring the vast potential of Africa’s natural resources is harnessed to improve the lives of some of the world’s poorest people.”
Paul Collier, an Oxford economics professor and author of The Plundered Planet: How to Reconcile Prosperity With Nature, said: “The SEC ruling makes it more likely the current global boom in commodities will help poor countries escape poverty. Transparency will force governments’ to be more prudent in how they spend the revenues from natural resources," he said in a statement issued by ONE International, for which he serves as an advisor.
"As the Arab Spring so ably demonstrated, ordinary citizens care deeply about transparent and accountable governance. It now incumbent on other countries, starting with Europe, to implement similar rules as quickly as possible and achieve a global standard,” Collier said.
Daniel Kaufmann and Veronika Penciakova, in an analysis published 28 August by the Brookings Institution in Washington, write: "The robust implementation of the SEC rules on transparency in natural resources as mandated by Section 1504 of the Dodd-Frank Act will be an important step forward, but it will not be sufficient. In order to make extractive industry transparency a global norm, the EU and other financial centres need to follow the lead taken by the United States. Building on its success in promoting the US rules on Section 1504 advocacy organisations, such as the Publish What You Pay Coalition and its main NGO members, as well as key investors, need to now fully focus on the passage of a similarly strong set of transparency rules in the European Union."
Peter Eigen, a member of the Africa Progress Panel and founder and chair of the Advisory Council of Transparency International, said of the SEC action: "Similar effective reporting measures must be adopted by the European Union under its Accounting and Transparency Directives. This will require all European governments and parliamentarians to work together to avoid a softening of the rules proposed by some delegations in Europe - including the German delegation - but explicitly rejected under US law."
The Dodd-Frank Wall Street Reform and Consumer Protection Act became law in the United States in 2010. It included two provisions that affect corporations involved in mining and petroleum drilling overseas, which regulators adopted on 22 August 2012:
- Section 1502 supports international efforts to prevent guerrilla fighters or renegade state forces in Great Lakes region of Africa from profiting off the sale of mined raw materials.
- Section 1504 – known as the Cardin-Lugar rule – imposes disclosure standards on US-registered companies engaged in overseas mining and petroleum operations.
The European Parliament is due to take up in September 2012 a proposed transparency directive covering the foreign mining and petroleum operations of EU-registered companies.
- 17-18 Sept.: Scheduled meeting of the European Parliament's legal affairs committee.
EU official documents
- European Commission: Transparency proposal
- Commission: Transparency requirements for listed companies [FR] [FR] [DE]
- Commission press release: More responsible businesses can foster more growth in Europe (25 October 2011) [FR] [FR] [DE]
- Commission memo: Proposal for Directive on transparency requirements for listed companies and proposals on country by country reporting – frequently asked questions (25 October 2011)
- Commission memo: Financial reporting obligations for limited liability companies – frequently asked questions (25 October 2011)
- Commission memo: Social Business Initiative – Frequently Asked Questions (25 October 2011)
- Commission memo: Corporate Social Responsibility: a new definition, a new agenda for action(25 October 2011)
- Commission: Consultation on Financial Reporting on a Country-by-Country Basis by Multinational Companies(October-December 2010) [Summary report of the public consultation] [Summary report of the public consultation] [Contributions by stakeholders]
NGOs and Think-Tanks
- ONE International: Bono and ONE praise U.S. oil deal rules, call transparency “the best vaccine against corruption”
- Friends of the Earth Europe:EU must take further steps to hold companies accountable (25 October 2011)
Business and Industry
- Extractive Industries Transparency Initiative: Clare Short: disclosure requirements complement EITI
- European Association of Mining Industries, Metal Ores & Industrial Minerals
- International Council on Mining and Metals: Transparency in mining sector is on the rise, reveal new figures by ICMM and GRI
- American Petroleum Institute: Analysis of Section 1504 of the Wall Street Reform and Consumer Protection Act (11 February 2011)