In the event that Shell and Eni’s handling of the deal is found to be in breach of U.S. anti-bribery laws, investors, who were not given the opportunity to assess these payments, could also be on the hook for penalties that could be in the hundreds of millions of dollars.
By Simon Taylor | December 7, 2013
Lack of new disclosure rules for foreign government access puts investors at risk
Conspicuously missing from the Securities and Exchange Commission’s annual update on regulatory activity released last week is a rule requiring companies to disclose what they pay foreign governments for access to natural resources. The agency needs to put an immediate end to these secret payments if it is to do its job of protecting investors.
When the SEC proposed disclosure rules in August 2012 as part of the 2010 Dodd-Frank financial law, the American Petroleum Institute (which represents companies such as Shell, ExxonMobil and Chevron) sued the SEC to keep their deals – and the public – in the dark. In July, a federal court supported the institute’s case and ordered the SEC to revise its original payment disclosure rule. The SEC needs to make the rewrite a top priority so that a new version of the rules is released in early 2014.
Investors must demand that the SEC focus on revising the foreign payment disclosure rule as soon as possible, and ensure that the new rule be as strong as the original rule. This is not about the SEC carrying out “social change,” as was suggested by SEC Chair Mary Jo White in a speech this October at Fordham Law School. Dodd-Frank intended to protect shareholders by obligating companies to disclose financial information that informs investment decisions.
We can see this at work with a recent incident involving Shell and the Italian oil company Eni. Subsidiaries of both companies paid the Nigerian government $1.092 billion in 2011 for a prized offshore oil block – payments that Global Witness uncovered in court documents filed in London and New York and reported on last year.
At the same time, the Nigerian government had a separate agreement to pay the same amount to a Nigerian company controlled by convicted money-launderer and former oil minister Chief Dan Etete (he was minister during the regime of corrupt dictator General Abacha), in effect “monetising” an asset to the tune of a billion dollars that Etete had acquired in suspicious and possibly illegal circumstances.
Outrage over the scandal in Nigeria has prompted members of the Nigerian House of Representatives to call for the deal to be scratched; if that happens, Shell and Eni could be at risk of losing their entire investment, leaving investors to foot the bill. In the event that Shell and Eni’s handling of the deal is found to be in breach of U.S. anti-bribery laws, investors, who were not given the opportunity to assess these payments, could also be on the hook for penalties that could be in the hundreds of millions of dollars.
If a strong disclosure rule had been operational when the deal was constructed, in line with the rules the SEC originally proposed in August 2012, this problem could have been avoided.
Corruption in the oil sector creates an unstable business environment that is bad for the oil companies and bad for investors. The Nigerian government’s failure to lift residents of the oil-producing regions out of poverty, despite billions in revenues, because of corrupt practices, is not just bad for the Nigerian people; it is also bad for the bottom line. Communities in Nigeria’s oil-producing region that feel cheated of their fair share of oil revenues have organized paramilitary groups that routinely cut production by attacking oil installations, as Shell’s managers know all too well. In 2008 a heavily-armed militia group attacked Shell’s Bonga oil field, which accounts for 10 percent of Nigerian output.
Ironically, before the recent American Petroleum Institute secrecy blitz, the U.S. was considered the leader in global transparency. Dodd-Frank inspired numerous countries around the world to pass similar foreign payment disclosure laws.
In June the European Union passed a law requiring companies listed or registered in any of the EU’s 28 countries to disclose payments to foreign governments, country-by-country and project-by-project, in keeping with the SEC’s original rule. Major U.S. companies with European subsidiaries – such as ExxonMobil, Chevron, ConocoPhillips, Marathon, Anadarko and Apache – will have to comply with this EU law.
Big Oil has argued that strong payment disclosure rules would make reporting more expensive, but by creating a double reporting standard with the EU, the watered-down rules the industry is looking for in the U.S. would make reporting more expensive, and once again, hurt investors.
The SEC has the power to ensure that the U.S. continues to meet the standard it set for itself. Secret payments hurt the people in the countries where oil is drilled, and they also hurt the people that Dodd-Frank was designed to protect: investors who own shares in companies operating in those countries. The SEC needs to understand that a revised payment disclosure rule that is as strong as the original is not just about human rights; it’s also about protecting shareholders, which has always been the agency’s top priority.
Taylor is founding director of Global Witness, a human rights group that campaigns to break the links between natural resources, armed conflict and human rights abuses.