Dirty Minerals and Sunshine

Michael D. Goldhaber

Corporate Counsel

11-01-2012

Sneaked into the Dodd-Frank Act are a pair of provisos that aim to harness the Securities and Exchange Commission's reporting requirements to promote corporate social responsibility and the rule of law. Section 1502 is the "conflict minerals" law that requires manufacturers using gold, tin, tungsten, and tantalum from the Congo region to avoid those mined by exploited workers [see "Gut Check"]. Section 1504 is the "Publish What You Pay" law. As interpreted, it requires every energy or mining company listed in the United States to disclose every tax, fee, royalty, or other payment above $100,000 to any state or state-controlled entity on earth. The goal is to combat corruption and break the "resource curse" that blights so many nations seemingly blessed with natural wealth.

Even before publication, Publish What You Pay inspired debate in Canada, Australia, Korea, Peru, and above all the European Union. As EarthRights International's Jonathan Kaufman suggested to the SEC, section 1504 is helping "to crystallize a global norm of transparency." The same may be said of section 1502 and the ethical sourcing of minerals from conflict zones.

Meanwhile, back in the U.S., the battles between human rights lobbyists and the more resistant industry groups shifted from the legislative to the regulatory stage. The final rules published by the SEC in September reflect a split decision. Conflict minerals went to industry. Publish What You Pay went to the transparency advocates.

The minerals rule exempts retailers and miners, and allows businesses that are covered to defer compliance for two to four years. The carve-out was foreordained by the sloppy drafting of the law, which refers only to manufacturing. But while the law would be stronger if those influential players had direct obligations, it should still capture all potentially tainted products at some point in the supply chain.

The transparency rule disappointed industry by requiring payments to be reported for individual projects rather than for countries as a whole. This is a huge step forward from the Extractive Industries Transparency Initiative, a 2003 code that operates at the level of countries, and it's crucial to the advocates' theory of how the law will work. The main hope is that by seeing which government entities are getting how much, and comparing those inflows with state budgets, local activists will be able to spot the theft of public funds by corrupt officials. Secondarily, showing the money flow will inform the dialogue in each country over the regional allocation of public funds. Usually left unsaid is that it might deter the use of corporate payments to disguise corporate bribes, or to support unsavory security forces.

The SEC also denied corporate lobbyists' wish to carve out countries that ban disclosure. Of course, this would be a loophole big enough for any kleptocrat to drive a gold-plated Rolls Royce through, and the SEC reasoned that it would frustrate Congress's intent. Likewise, the commission ruled that it would frustrate congressional intent to create an exemption for confidential information. Transparency advocates argued that disclosures would not routinely give sensitive data to competitors because payment structures in the industry are already well-known.

When the SEC released its proposed rule in December 2010, the agency devoted only eight pages to a cost-benefit analysis, and virtually none to a quantification of costs. This did not satisfy the American Petroleum Institute—which, according to The Wall Street Journal , is advised on this issue by Gibson, Dunn & Crutcher's Eugene Scalia, who made his name shooting down SEC rules.

In its comments, the API called on the SEC to consider the effects on efficiency, competition, and capital formation. Rather than finalize the rule, the SEC needed to repropose it, the API argued. Otherwise, the API bluntly warned, the courts would vacate the rule because the public had no chance to comment on a meaningful cost-benefit analysis.

The SEC didn't take the hint. But it did, in its final rule, devote 69 pages to "Economic Analysis." New compliance systems, the SEC reckoned, would cost the 1,100 covered companies $1 billion up front, and $200–400 million per year. But the really big costs are more speculative. The SEC granted that U.S. issuers might need to withdraw from countries that ban disclosure (while noting that this becomes less likely as other actors adopt similar laws), and accepted arguendo that such bans are in place in Angola, Cameroon, China, and Qatar (which the transparency advocates dispute). It then examined unnamed operations by covered companies in those countries, and found one project that could alone result in a $12 billion loss to one company.

Can one really imagine Qatar forcing Shell to withdraw from the Qatargas LNG projects over transparency concerns? The SEC evidently can. But while competitive burdens of this sort might cost billions, the SEC concluded that such burdens are inherent in the terms and purpose of the statute. It also noted that the rule held the potential for gains in stability and good governance, which would immeasurably benefit the U.S. and improve the multinational investment climate.

If Gene Scalia and the API choose to fight, maybe they can win on the narrow grounds that the SEC should have reproposed the rule before finalizing it. But this would only buy time, and it hardly seems worth the inevitable ill will.