For Canadian resource companies, the cost of doing business abroad is about to go up.
New reporting requirements passed under the U.S. Dodd Frank financial overhaul bill will require resource extraction issuers to disclose all payments made to governments over $100,000, beginning in 2014. The Securities and Exchange Commission regulations will add new expenses for Canadian mining and energy companies listed in the U.S., and may hinder their competitiveness overseas.
Section 1504 of the bill is intended to empower citizens of resource-rich countries to hold their governments accountable for the money they receive, which often lines the pockets of corrupt officials rather than going to the betterment of the population. The regulations also seek to shed light on illegal payments made by companies to gain access to resources in developing nations.
The SEC's new requirements are part of an international crackdown on corruption, which has been steadily gaining momentum since the Organization for Economic Co-operation and Development signed its anti-bribery convention in 1997. As part of its obligations as signatory, Canada passed the Corruption of Foreign Public Officials Act (CFPOA) in 1999. But it is only in the past five years that Canadian authorities have been taking serious steps toward enforcement.
"There was precious little action on enforcing the law until 2007," said Janet Keeping, chair of the anti-bribery organization Transparency International Canada. The major shift came in 2007 after Canada signed the United Nations Convention Against Corruption, and the RCMP formed two special teams to focus on cases of Canadian companies making illicit payments abroad.
In June, 2011, an RCMP case against Niko Resources led to a $9.5-million fine against the Calgary oil and gas company for bribing a Bangladeshi government official. It marked the first major prosecution under the CFPOA, and sent a message to Canadian companies that the government would no longer overlook corrupt activity.
"The Niko Resources case said, 'we are going to take this seriously, this isn't just tokenism on the international scene,' " Ms. Keeping said.
In Transparency International's annual ranking, Canada moved from last place among the G7 nations in 2011 to being listed among the most improved countries in 2012 for it's anti-bribery efforts. Now, according to their annual report, the Canadian authorities are working on 34 open files.
One of the most high-profile cases of corruption under investigation by the RCMP involves Canadian construction and engineering company SNC-Lavalin and its dealings abroad. Stephen Jarislowsky, chairman of Jarislowsky Fraser Ltd., SNC's largest shareholder, observes that in many countries, if you are not a friend of the government, you cannot operate there.
"In effect, bribery is part of doing business," Mr. Jarislowsky said. "It is official cultural habit."
The "do as the Romans do" defence, however, may no longer hold. With the international anti-bribery movement gaining a mandate from the SEC, which regulates companies that make up 57 per cent of the global resource extraction industry, greasing the wheels of commerce will face high hurdles in the near future.
But there are considerable growing pains associated with coming into compliance with this new regulatory regime.
Kevin Cramer, partner at Osler Hoskin & Harcourt LLP in New York, says the most obvious way Section 1504 will affect Canadian companies is the cost of compliance. The SEC adopted the rule in December, 2010, and a lengthy comment process followed.
The SEC estimates the initial cost to the industry to be $1-billion, and as much as $400-million for continued compliance. Lobby groups for the oil and gas industry have criticized the SEC for not taking into account the cost of lost competitiveness in their estimates.
Toronto gold producer Barrick Gold "estimated that the initial setup time and costs associated with the rules implementing Section 13(q) would require 500 hours to effect changes to its internal books and records, and $100,000 in IT consulting, training, and travel costs," according to the SEC.
Calgary-based oil and gas firm Talisman Energy suggested the threshold for disclosure be payments over $1-million. Talisman argued that this level of reporting ensures transparency without "clouding the data with largely irrelevant information." Indeed, the burden of disclosure on Talisman will be significant; the company has 7,100 provincial licences in Canada alone.
The second concern for Canadian companies, Mr. Cramer said, is the disclosure of sensitive information to competitors. According to Karen Harbert, president of the U.S. Chamber of Commerce's Energy Institute, "the SEC's 'extraction rule will require [companies] to turn over their playbooks for how they bid and compete."
But the international coalition of NGOs, Publish What You Pay, points out that Section 1504 requires companies to publish payments, not offers of payments, meaning competitors will not be able to manipulate the bidding process based on information contained in SEC disclosures.
One of the biggest risks to competitiveness is the possibility that Canadian companies will have to withdraw from a host country that forbids reporting payments to governments.
Along with other companies, Exxon Mobil Corp submitted a letter to the SEC requesting exemption in situations of this nature, but they were rejected. This puts companies in "the untenable position of having to choose between violating US laws … or abandoning operations in foreign countries that prohibited such disclosure," said Mr. Cramer. In general, Mr. Cramer warns Canadian companies to be more vigilant leading up to, and following, the enactment of the regulations.
Lobby groups representing the oil industry filed a lawsuit against the SEC on Oct. 10, demanding that disclosure under the new law be confidential. Senator Richard Lugar, the Republican side of the bipartisan pair that sponsored the rule, called the lawsuit frivolous, asserting that with oil prices as volatile as they are, the industry needs more transparency, not less.
It looks as though this level of disclosure will soon be the norm. The EIU, and Canadian regulators are discussing legislation that closely mirrors section 1504. The hope is that the global trend toward increased transparency and greater enforcement of bribery laws will put companies around the world on equal ground.