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Revoking Dodd-Frank Transparency Provision Sparks Corruption Discussions

Bill would require disclosure of payments to foreign governments and possibly spotlight unaccounted revenue, but could give foreign governments an advantage.

A debate about payment disclosures to foreign governments is brewing as a result of President Trump signing a bill that repeals a SEC regulation mandating energy companies and others in the natural extraction business to disclose payments made to foreign governments.

The revocation of the SEC rule is raising discussions about corporate transparency, its impact on shareholders and whether it fosters corruption in foreign governments that then foster poverty and terrorism. 

The controversial rule Section 1504 of the Dodd-Frank Act required the SEC to adopt a rule that mandates resource companies under SEC jurisdiction (both US and non-US) to disclose the type and amount of payments they make for each resource development project, plus the total of payments made to each government.

The measure to repeal Section 1504 passed by a vote of 52-47 strictly according to party lines and was done in a pre-dawn vote on Feb. 3. The revocation of the transparency provision was done by the Trump administration to overturn Obama-era rules on “excessive regulation,” which Trump said is impairing job creation and corporate competitiveness. According to The Hill, the vote is “a major win for oil producers and other companies in extractive industries. 

But the repeal has become the focal point for more discussions about corruption, terrorism, corporate governance, transparency and shareholder rights that have all more or less broken down along the lines of Democrat and Republican philosophies.

Corporate corruption is certainly not new. The British East India Trading Company obtained duty-free treatment for its goods exported from the Far East in the 1600s by bribing foreign rulers. A World Bank Report from 2016 found a strong link between poverty and corruption that affects everyone. “Corruption is stealing from the poor, and that hurts efforts to promote inclusive growth and shared prosperity. By its nature, corruption undermines the integrity of society, damages equal access to opportunity, increases poverty and invites fraud and corruption,” the World Bank said. 

Section 1504 of Dodd-Frank required oil, natural gas and mineral companies to report payments made to foreign governments. Congress and President Trump’s decision to eliminate it can fuel corruption and hinder the ability of citizens to benefit from natural resource extraction revenues, some contend. The rule was contentious even when it was being proposed. The SEC originally issued Section 1504 (also known as the Cardin-Lugar amendment) in August 2012, but it was delayed after a lawsuit challenging the rule was filed by the American Petroleum Institute and other business groups. A new rule was issued on June 27, 2016..

Corruption is a Global Issue  

While the issue of transparency and corruption is contentious in the US, it also is a major global issue. A report in Foreign Affairs said that since Section 1504 was enacted, 30 countries have passed similar disclosure rules for mining and other companies that extract natural resources. “And because large-scale corruption is a driver of insecurity, conflict, and terrorism, repeal of the SEC rule makes Americans less safe,” according to Kate Bateman of the World Resource Institute (WRI). Corrupt governments , such as those in the Ukraine and Nigeria, also finance terrorism, which makes it unsafe for Americans, she contended.

 In another report, the WRI said that revoking the provision would have forced oil companies to disclose payments made to the government of Angola, for example, for the right to extract oil, or the government of Turkmenistan to disclose who paid it to get the rights to access the nation’s gas reserves. “Secrecy around such payments can fuel corruption and hinder the ability of citizens to benefit from government revenues,” the WRI said.

More specifically, the group cited a report from Nigeria’s auditor general that found $16 billion in oil revenue was unaccounted for in 2014 alone. Section 1504 was intended to increase transparency about errant funds. This regulation would “help citizens understand the financial arrangements their government has entered into, track the use of these resources and hold officials accountable.” One of the leading industries against Section 1504 was the oil industry, which argued the SEC rule “would damage their competitiveness.”

 Also weighing in against the revocation was Maxine Waters (D-Calif), ranking member of the US House Committee on Financial Services, who wrote that “striking Section 1504 would mean that Big Oil companies like ExxonMobil would be able to continue their questionable dealings with corrupt parties, such as Vladimir Putin and Russia. In addition, ExxonMobil, which was headed by Trump-nominee for Secretary of State Rex Tillerson, led the fight in opposing Section 1504 when it was first introduced. Clearly, they didn’t want the American people to know what they were up to,” she said.

Alternately, the Heritage Foundation said the SEC’s transparency requirements “do nothing to further the securities laws’ purpose of protecting shareholders or providing them with information that is material to their investment decisions.” In an article, David Burton, a senior fellow in economic policy, said the transparency requirement was “politically motivated” and did not serve shareholders’ interests. In his paper, Burton even found that the SEC’s disclosure laws “increased violence from armed groups that “looted civilians and committed violence against them. This is because Dodd–Frank created an incentive for armed groups to find alternative sources of revenue. They moved away from conflict minerals to unregulated sources of mineral revenue or to violent looting of civilians.”

Similarly, Americans for Tax Reform said the disclosure provision adds “to an already unreasonable compliance burden on US companies. The SEC’s own estimates found that the ongoing compliance costs of the resource extraction rule would be between $173 million and $385 million annually.

“Additionally, by requiring US companies to publicly disclose proprietary information under the rule, the SEC is giving America’s international competitors an enormous advantage in the global market. Such unnecessary and self-inflicted regulatory wounds only serve to reduce American prosperity by harming US competitiveness and consumers in the long run.”

  By Chuck Epstein  

 

| Christine.Giordano@strategic-i.com | 212-217-6929