Transparency WinDonna Cline April 26, 2013
A Victory for Transparency Rules, and for Equatorial Guinea: The U.S. Court of Appeals has Dismissed a Lawsuit Challenging Company Reporting Requirements.
The U.S. Court of Appeals for the District of Columbia Circuit has dismissed a lawsuit filed by the American Petroleum Institute (API), deciding it does not have authority to hear the case. The API, a trade organization that represents over 500 companies engaged in the international oil and gas industry, filed the lawsuit in October 2012 against the U.S. Securities and Exchange Commission (SEC) in response to its final regulations on Section 1504 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Oral arguments in the case were heard by the Court of Appeals on March 22, 2013. On April 26, the Court of Appeals dismissed the API petition, citing lack of jurisdiction as its reason to not continue. However, this is not the end of the lawsuit, as the API’s complaint is still pending in the U.S. District Court for the District of Columbia, and will proceed in that forum.
Section 1504, also known as the “Cardin-Lugar” Amendment, charged the SEC with the task of promulgating rules requiring companies to disclose payments to foreign governments in connection with projects related to the commercial development of oil, natural gas, or other minerals. It aims to combat the “resource curse,” a phenomenon that plagues many resource-rich countries whereby proceeds from oil, gas, or other natural resources are wasted or mismanaged while poverty and inequality grow. Congress intended that the information regarding payments made to such a country will empower its citizens to hold their rulers accountable for corruption and mismanagement. Section 1504 was modeled after (and meant to improve upon) the Extractive Industries Transparency Initiative (EITI), a voluntary international initiative where extractive-industry companies provide information about money paid to states in an effort to achieve transparency.
After the Cardin-Lugar Amendment was passed, the SEC issued its proposed rule and set a time period for public comments. Numerous industry representatives, including members of the API, submitted comments on the proposed rule. Many non-governmental organizations also submitted comments, including EG Justice, an advocacy organization that promotes human rights, the rule of law, transparency, and civic participation in Equatorial Guinea. The SEC’s final rule was issued in August 2012; it requires public disclosure of payments to foreign governments in excess of $100,000 in an annual report submitted to the SEC. The report must include details about the amount and type of payment, and applies not only to the parent company, but also to any subsidiary companies and companies under the parent company’s control.
Less than two months later, the API, along with the U.S. Chamber of Commerce, the Independent Petroleum Association of America and the National Foreign Trade Council, sued the SEC in both the District Court and Court of Appeals, attacking both Section 1504 of the Dodd-Frank Act and the SEC’s final rule. Regarding Section 1504, the lawsuit claims it violates the First Amendment to the U.S. Constitution by compelling companies to engage in speech, and should be declared null and void. Regarding the SEC rule, the lawsuit alleges it also violates the First Amendment of the U.S. Constitution and should be vacated and set aside. Oxfam America, an international nonprofit organization that promotes international development and relief, filed a motion to intervene, arguing the lawsuit would negatively impact citizens in resource-rich countries by depriving them of information that would enable them to fight against corruption and poverty.
Equatorial Guinea is one such country. It is sub-Saharan Africa’s third largest oil producing nationwith the tenth largest oil reserve in Africa; as of January 2012, Equatorial Guinea was estimated to have oil reserves of 1.1 billion barrels. However, as noted by the IMF, despite its high per capita income, Equatorial Guinea still “ranks among the lowest in available social indicators.” Two thirds (75%) of Equatoguineans live below the poverty threshold of $2/day, and many lack access to clean water and sanitation. Equatoguineans have an average life expectancy of only 51 years. Meanwhile, government leaders have lined their pockets with oil extraction revenues. Oil revenues are squandered on “showcase projects,” such as an $830 million luxury complexbuilt ahead of the 2011 African Union summit, or the building of a new capital city in the middle of the country, for an undisclosed amount. This is why Section 1504 and the SEC rule are especially relevant to Equatorial Guinea.
The Parties’ Arguments
The API has argued that both Section 1504 and the SEC final rule unlawfully compel speech by requiring companies to publicly disclose the payments they make to foreign governments. In the Plaintiffs’ view, such disclosure violates the First Amendment “because the content compelled . . . is intended to aid particular interests in a political dispute in other nations.” In response, the SEC argued the required disclosure involves purely factual information of a non-ideological nature, and thus does not give rise to any First Amendment issues. Oxfam agreed with the SEC on this point, and strongly argued against API’s claim; disclosures of purely factual information, as required by the SEC rule, have never been found to compel speech in violation of the First Amendment. Oxfam pointed to Supreme Court jurisprudence establishing securities-related speech and disclosure can be regulated without violating the First Amendment. Bottom line: securities-related speech is not ideological speech, and therefore is not subject to heightened scrutiny; Section 1504 and the SEC final rule do not violate the First Amendment.
The API also claimed the SEC acted “arbitrarily and capriciously” by requiring public disclosure (instead of confidential disclosure) of the company’s payments to foreign governments. The SEC replied, noting that Congress specifically intended for Section 1504 to set a new international transparency standard. Oxfam also noted Congress’s intent here; the insertion of the Cardin-Lugar Amendment into Section 13 of the U.S. Securities and Exchange Act is evidence Congress intended the data to be disclosed publicly (Section 13 addresses the public reporting regime for listed companies). Oxfam also argued that even if Congress did not mandate public reporting, it was reasonable for the SEC to interpret a public reporting requirement from the law; Section 1504’s core purpose is to allow access to payment information, and secret or confidential reporting would undermine that purpose. How can you have meaningful transparency if you anonymize the disclosure of facts?
The Plaintiffs also alleged that the SEC’s final rule fails to define the term “project,” thereby increasing implementation costs. According to the API, defining “project” as a geologic basin or province would both permit companies to aggregate data and narrowly tailor the rule, resulting in less infringement on the companies’ First Amendment rights. In its reply, the SEC explained it did not define the term “project” to allow companies flexibility; in the extractive industry there is not a single agreed-upon application of the term, and individual SEC reports already demonstrate companies understand what constitutes a project.
Finally, the API insists the rule should be overturned because it does not allow for exemptions in situations where foreign law prohibits the disclosure of payment information. The SEC countered, arguing that permitting exemptions would again undermine the purpose of Section 1504. Furthermore, allowing exemptions might encourage foreign governments to adopt or interpret laws to prohibit the disclosure of payment information. Lastly, the SEC stated it did not receive evidence of any currently existing laws that prohibit the disclosure of payment information. In its Intervenor Brief, Oxfam identified four countries with laws that do prohibit disclosure of certain payment data, but none of those jurisdictions had a law that clearly applies in the specific kind of disclosures requested by Section 1504. According to Oxfam, even if a case were to arise where a country’s law prohibited the disclosure of payment data, the possibility remains for a company to seek authorization from the foreign government to make the required disclosure.
There is still hope for Equatorial Guinea.
If Section 1504 and the SEC’s final rule are upheld by the District Court, they could significantly assist with bringing transparency to the oil and gas industry and their activities in Equatorial Guinea, something the country sorely lacks. President Obiang, Equatorial Guinea’s ruler since 1979, uses the country’s finances to control the population, and has publicly stated Equatorial Guinea’s oil resources are a “state secret.” So, despite sporadic assurances from President Obiang of increased transparency, his government has failed to undertake any verifiable or serious programs to that effect. In fact, Equatorial Guinea was expelled from the EITI in 2010 after failing to meet transparency requirements. A year later, the Equatoguinean government blocked the IMF from publishing its 2011 Article IV report. At the moment, no other mechanism exists for citizens of Equatorial Guinea to know how much their government receives from companies extracting natural resources in the country. Section 1504 and the SEC rule would make vital information available to the public, allowing citizens to fight the systematic corruption and poverty that has continuously plagued their country.
Oil companies currently operating inside Equatorial Guinea would have to publicly disclose payments made in excess of $100,000 to the government for projects relating to the commercial development of oil and gas. Exxon Mobil Corporation, Marathon Oil Corporation, Hess Corporation, and Noble Energywould all be covered by the SEC rules. Public disclosure of this information would actually protect these companies from being pressured by the government into entering into potentially unethical – and possibly illegal – business agreements. Anticorruption organizations and policy-makers have questioned the source of assets President Obiang’s son, Teodoro Nguema Obiang Mangue, owns in the United States. The U.S. Department of Justice has initiated a forfeiture action against his property — believed to have been obtained from the proceeds of corrupt activities in Equatorial Guinea. A public paper trail of payments made to the Equatorial Guinea government could protect oil companies from being implicated in such corrupt activities.
As for the lawsuit, several possibilities remain. The API could appeal the Court of Appeals decision. The District Court could rule in favor of the SEC and choose to uphold its final rule. Or, it could side with the API and overturn both Section 1504 and the SEC’s final rule. Overturning Section 1504 and the SEC rule would thwart many global citizens’ best chance of accessing information about revenues from oil extraction. Despite the API’s resistance to the SEC rule, there are indications of a global movement toward increased transparency. In Canada, the Mining Association of Canada, the Prospectors and Developers Association of Canada, Publish What You Pay Canada and Revenue Watch Institute recently established the Resource Revenue Transparency Working Group for the purpose of promoting the transparency effort in the extractive industries in Canada. Likewise, Europe has been working to finalize disclosure rules modeled after the SEC’s regulations (with the European Parliament reaching a deal on the transparency rules), and the Dutch government recently rejected the idea of exemptions from oil and gas extraction company reporting requirements. As for the API, not all of its members back the lawsuit; one of the API’s members, Statoil, who has been a leader in oil transparency since 2007, has publicly withheld its support for the litigation. These are all clues that even if Section 1504 and the SEC rule are overturned, another attempt at transparency would not be too far off. However, a District Court decision to uphold the laws could help turn the tide in Equatorial Guinea towards reform.