U.S. Finance Reform Seeks to Combat Global “Resource Curse”

The “resource curse” has afflicted Nigeria for decades. Despite significant oil resources, the majority of the country earns less than US$2 per day.

Extractive industry companies that operate in U.S. markets will have to disclose any payments they make to governments worldwide as part of the financial reform bill that U.S. President Barack Obama is expected to sign into law this week.

Advocates of greater industry transparency in resource-rich developing countries managed to tuck the disclosure rule into the package of market regulations, claiming that the added transparency will limit investment risks abroad. More significantly, the rules would provide citizens in developing countries with essential information to combat the “resource curse”—the tendency of profits from oil, gas, or mineral deposits to adversely affect local economies and sometimes lead to conflict over these lucrative resources.

Oil, gas, and mining companies registered with the U.S. Securities and Exchange Commission (SEC) will be required to disclose publicly any payments made to government entities on a country-by-country and project-by-project basis as part of the financial statements already required by the SEC.

“With this far-reaching new law, citizens now have a reliable tool to ensure that the wealth created by natural resource extraction is used for essential social services such as health and education, as well as economic development opportunities,” said Radhika Sarin, coordinator of Publish What You Pay, a global coalition of 600 organizations lobbying for mandatory disclosure of extractive industry payments and related government revenues.

Nigeria, the world’s eighth largest oil exporter, has long struggled with crippling corruption associated with extraction of its petroleum resource. The country’s anti-corruption commission has accused successive military dictatorships of embezzling some $400 billion between 1960 and 1999. Meanwhile, the majority of the population earns less than US$2 per day.

Lawmakers said that the reporting requirements would be designed using the voluntary Extractive Industries Transparency Initiative (EITI) guidelines. The initiative, launched at the 2002 World Summit for Sustainable Development in Johannesburg, South Africa, and since supported by the Group of Eight (G8) world leaders, entails regular audits of company payments to governments and of the material revenues that companies receive from governments. Independent audits are arranged in cases where audits do not already exist, with steering groups comprising government, industry, and civil society representatives overseeing the validation process.

The new disclosure rules, to be issued by the SEC no later than nine months after the financial reform bill is enacted, would increase transparency in developing countries by expanding disclosure to countries not covered by the EITI (more than 25 countries are “candidates” for inclusion in the initiative but only three have been fully validated).

Advocates estimate that the rules would apply to hundreds of companies, including 90 percent of the world’s largest international oil and gas companies and eight of the world’s 10 largest mining companies. Firms based outside the United States that are still listed on U.S. stock exchanges, such as Shell and BP, would have to comply.

The American Petroleum Institute (API), a trade group that represents some 400 energy companies, opposes the disclosure rules. In a letter to U.S. legislators, Chief Executive Jack Gerard wrote that the measure would create an unfair disadvantage to companies that compete with quasi-governmental and national oil companies such as Russia’s Gazprom and the China National Petroleum Company. “Disclosing payments at this level of detail, including payments on a project level, means that foreign competitors would have access to very specific, proprietary information that can be used against U.S.-listed companies in contract negotiations and for other purposes,” Gerard said.

API also criticized the rules for its “unilateral approach.” However, the Hong Kong stock exchange enacted similar rules earlier this year and now requires mineral companies to include in their listing requests any information about taxes, royalties, or other payments to host governments on a country-by-country basis. Companies listed on the Hong Kong exchange must also disclose information regarding environmental, social, and health and safety risks associated with their projects.

In addition, the International Accounting Standards Board (IASB), a private London-based group that sets standards used in more than 100 countries, is considering a rule change that would require disclosure of payments to governments.

U.S. Senator Christopher Dodd (D-CT) urged other countries to follow the U.S. lead when he spoke on behalf of including the transparency amendment, named after its backers Senators Benjamin Cardin (D-MD) and Richard Lugar (R-IN), in the financial reform bill.

“It is part of a broader international effort to combat corruption, poverty, hunger, and disease throughout Africa, Asia, and Central America by providing a mechanism to ensure greater transparency for the many ways in which sometimes corrupt and authoritarian governments in those regions take in huge revenue flows from oil and gas producers or mining companies and then fail to adequately meet the needs of their own vulnerable populations with social spending funded by the income from these projects,” Dodd said. “I would hope that other nations and those in charge of major exchanges in London, Hong Kong, and elsewhere would follow the Cardin-Lugar approach on this.”

Ben Block is a staff writer with the Worldwatch Institute. He can be reached at bblock@worldwatch.org.

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