The US move to implement financial regulation on the activities of mining and extractive industries in poor and war-torn countries has prompted calls for similar legislation in the EU. The US Securities and Exchange Commission passed two regulations on 22 August, 2012, implementing sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank regulation has been described as the most important piece of financial legislation introduced in the US since the great depression.
The US move to implement financial regulation on the activities of mining and extractive industries in poor and war-torn countries has prompted calls for similar legislation in the EU
The US Securities and Exchange Commission passed two regulations on 22 August, 2012, implementing sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank regulation has been described as the most important piece of financial legislation introduced in the US since the great depression.
The aim of the Commission’s newly-introduced regulations is to reduce the economic, environmental and social damage to poor and war-torn countries by mining and extraction activities, and applies to every US-listed company, not just the operators.
The focus of the regulations is on minerals and oil and gas extraction and companies involved in the commercial development of these resources. There have been calls for the European Union (EU) to follow the US example (and it is expected that it will), so it is an area that companies listed in the EU should watch with interest.
The first regulation requires all US-listed companies to scrutinise their supply chains and verify whether or not they are ‘involved’ in extraction activities in conflict areas. And ‘involved’ does not simply mean operating a business that extracts such materials, but a business that may use them as one of hundreds of components in the manufacture of their products.
Its aim is to ‘name-and-shame’ companies and by doing so alert their shareholders and consumers in an effort to prevent the use of ‘conflict minerals’. Detractors of the legislation are sceptical that monitoring will prevent the use of minerals from war-torn countries, but supporters claim that this new transparency will make a difference.
Countries that will be covered by the rules include the Democratic Republic of Congo and other central African countries including Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia.
Some have also expressed concern that instead of helping war-torn regions by encouraging responsible sourcing, this legislation could contribute to further economic challenges for these countries, amounting to a de facto embargo on minerals exports. They fear that rather than submit the required reporting, companies will avoid these countries altogether and therefore the costs and burden of the new rules. Supporters of this view favour adopting a risk-based due diligence framework to encourage responsible sourcing. They believe that this approach would achieve the desired objective of transparency and avoiding the use of ‘conflict minerals’ without further harming the economies of these countries.
Some companies have argued that the complexity of their supply chain and the difficulty in obtaining information from suppliers as to the origin of minerals in purchased products and components will make the rules difficult to put into practice.
The second regulation requires extractive companies to disclose the payments they make to host governments. These are payments made to a foreign government (including sub-national governments) or the US government. The types of payments related to commercial development activities that need to be disclosed under the new rules include taxes, royalties, fees, production entitlements, bonuses, dividends and infrastructure improvements.
Sums totalling US$100,000 [€79,400] or more per project must be disclosed. The scope of the term ‘project’ has not been defined. Detractors say that project-level data may not be the most useful measure, arguing that the lack of a proper definition means that there is a risk that there will be inconsistencies between disclosures, making analysis and benchmarking very difficult.
Supporters of the measure believe that a project-by-project approach is better than companies making disclosures for each affected country and welcome the fact that the legislation does not exempt disclosure of payments even where such disclosure is prevented within the relevant state – the so called ‘tyrant’s veto’.
There is no clear evidence that such anti-disclosure laws already exist, but campaigners fear that not excluding them would leave the door open for regimes to bring in such laws in order to deliberately frustrate the rules.
An associated issue which has attracted much debate is that of competitiveness. Groups lobbying against the new US rules believe that requiring companies to disclose by-project costs would give competitors access to valuable data which is currently confidential, and point to the already significant costs in both seeking to prevent, as well as losses resulting from, industrial espionage to US and EU companies as evidence of the real risks of this change. Others claim that there is little evidence for this fear, stating that payment structures are already well known in the industry. They believe that the new US disclosure rules will simply prevent bribery.
Only time will tell if the concerns expressed about the new rules are borne out, as US companies start implementation. It also remains to be seen if the EU will take the same approach as the US when legislation is finalised. What is certain is that the arguments on both sides will continue to run.
Contact
Philip Mogridge now heads the minerals team at Stephens Scown LLP in the UK. The firm has more than 70 years’ experience representing mining and minerals clients. He can be contacted on +44 (0)1392 210700 or email
