The SEC could help tackle corruption in resource-rich countries around the world -- but the oil industry is getting in the way.
Angola, Africa’s second-largest oil producer, is regarded as one of the most corrupt countries in the world. And American oil lobbyists are only making the situation worse: They are exploiting Angola by seeking to delay and weaken the implementation of a crucial U.S. transparency law.
That law, Section 1504 of the Dodd-Frank Act, also known as the Cardin-Lugar amendment, promises a breakthrough in preventing dirty deals and illicit payments being made for natural resources around the world, similar to the shady transaction recently uncovered by Foreign Policy. If implemented fully, the law would make U.S. oil and mining companies disclose the payments they make to governments across the world, including in Angola. However, oil lobbyists have been making misguided arguments that laws in Angola and three other countries prevent the required disclosures.
Angolan officials secretly profiting from the country’s oil riches is not a surprise. It is only the latest episode in a sad history that goes back for decades. Global Witness, where we work, began exposing the complicity of the international oil and banking industries in the plundering of state assets during Angola’s 40-year civil war in our 1999 report A Crude Awakening. This was followed by our 2002 report All the Presidents’ Men, which called on the oil companies operating in Angola to "Publish What You Pay" (PWYP). Under this rallying call, Global Witness co-launched the PWYP campaign, which is now an international coalition of more than 790 civil society organizations in over 60 countries, including Angola, advocating for transparency laws such as Section 1504.
These efforts are intended to prevent scandals similar to the Trafigura deal covered in Foreign Policy, which provide a glimpse of the endemic corruption in Angola’s oil industry. Only a few days before Foreign Policy published its story, media reports about leaked documents relating to other corruption claims caused the share price of SBM Offshore, a Dutch oil services company operating in Angola, to plummet 17.9 percent when markets opened. SBM released a statement challenging the validity of the leaked documents, saying that they are partial, taken out of context, contain outdated information, and are not representative of the facts. SBM had also already disclosed to its investors that it was conducting an internal investigation into questionable payments in Angola. However, the dramatic stock drop suggests that SBM investors had not anticipated the scale of the corruption risk exposure.
Another oil services company active in Angola, Weatherford International, which is listed on the New York Stock Exchange and headquartered in Switzerland, has recently pleaded guilty to violations of the U.S. Foreign Corrupt Practices Act (FCPA), including bribery of the executives of Sonangol, Angola’s state oil company. It has agreed to pay fines of $253 million to settle the case, one of the largest FCPA settlements ever.
These cases illustrate the urgent need for transparency in Angola’s oil sector. The successful implementation of Section 1504 would have a particularly transformative impact in Angola, where almost all active international oil companies are listed or registered in the United States or European Union. As a result, these companies would be required to report payments made to the Angolan government under Section 1504 or the similar EU Accounting and Transparency Directives (passed in June 2013).
Both these U.S. and EU laws require oil, gas, and mining companies to publish their payments to governments, such as taxes, royalties, and license fees, broken down by country and by project so that citizens in resource-rich states can track payments and ensure they are used for public benefit. Without this detailed information, investors are limited when trying to understand and evaluate the risk of their investments. This is why investors representing $5.6 trillion in assets — including the leading sustainable investment firm (Calvert), the largest U.S. pension fund (CalPERS), and the world’s largest private wealth manager (UBS) — are supporting a strong implementation rule for Section 1504.
But elements of the oil industry, represented by the American Petroleum Institute, are fighting to weaken Section 1504 and other laws. In particular, they would like to be exempt from reporting payments made to the Angolan government, claiming that such disclosures are banned under Angolan law.
This argument, however, is contradicted by clauses in the standard Angolan oil contract (used in the country for over three decades) that allow for such disclosures when required by law, including by a securities regulatory authority. And in fact, Norway’s major oil company, Statoil, is already publishing similar information about its payments in Angola without suffering any repercussions. Nonetheless, the oil industry used unfounded claims about conflicting laws in Angola and three other countries (Cameroon, China, and Qatar) to persuade a federal judge to set aside the implementing rule for Section 1504 on July 2, 2013. The Securities and Exchange Commission (SEC) now has to revisit the rule, which should happen this year.
Put simply, allowing legal exemptions within the final rule for any country would be terrible policy. It would perversely encourage corrupt tyrants to pass laws in their own countries banning disclosure — thus over-riding Section 1504, rendering the principled law little better than what we have called a "dictator’s charter." In effect, then, exemptions would hide payments in places like Angola, where transparency is arguably most essential.
While the SEC prepares to revisit the rule, oil lobbyists are also trying to limit the information disclosed under Section 1504 in any country, anonymizing and aggregating the data so that payments are neither linked to individual companies nor to specific contracts and projects. This would strip the required disclosure of the critical information needed to protect investors and prevent corruption.
The implementation of Section 1504 must ensure that payments are given by project and company, without any exemptions. Anything less would in effect aid and abet the continuation of illicit payments.
A weakened U.S. law would fall fatally behind the emerging global standard for revenue transparency. Inspired by Section 1504, strong legislation has been passed in the European Union and in Norway, and Canada is also considering equivalents. The recently agreed-upon rules of the voluntary Extractive Industry Transparency Initiative (EITI), moreover, include payment disclosures that match EU laws and Section 1504; they will apply to over 25 member countries.
It is imperative that the SEC now match the emerging global transparency standard that the United States itself kick-started. The SEC must re-issue a robust 1504 rule in order to protect the interests of investors, avoid creating double standards, and help end corruption in countries like Angola.
This corruption is not just a domestic problem, and so solutions cannot be located exclusively inside Angola (or any other country). As Foreign Policy reported, efforts by investigative journalist Rafael Marques de Morais to expose corruption in the country have been met by the Angolan government with unspecified criminal charges, violence, and death threats. It is not reasonable to expect that corruption exposure will come from locals who risk their safety and livelihood. U.S. regulators and companies must also assume their role as leaders on transparency, rather than being part of the problem.