DoddFrank and EITI Thomas Chen Embassy of the

Dodd-Frank and EITI Thomas Chen Embassy of the United States of America

Dodd-Frank Overview (HR 4173) � To prevent a repeat of the 2008 financial crisis � Passed in January 2010 � To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Section 1502 and 1504 � � � 1502: Combat the trafficking of conflict minerals in Eastern Congo/Great Lakes Region – the 3 T and 1 G 1504: Reporting of payments to foreign and U. S. governments by companies engaged in the commercial development of oil, gas and mining sectors Securities and Exchange Commission issue regulations to promulgate the law ◦ Took over a year for comments to be trickled in and SEC finalize the regulations � Adopted by the SEC on Aug 22, 2012 ◦ Sections 1502 and 1504 of the Act amends the Securities Exchange Act of 1934 by adding a new section, Section 13(q)

Hillary Clinton’s message � We see it every day - how development of natural resources has fueled corruption, mismanagement. It's the so-called "oil curse" or resource curse" that actually impedes inclusive, broad-based, economic growth. And so you set a new standard for transparency. We're working very hard to try to make sure that it is implemented effectively. I think everybody is benefited by the disinfectant of sunshine and the spotlight to hold institutions accountable. And the Section 1504, which is what the SEC is promulgating rules on, complements other efforts at transparency that we are committed to.

Who must disclose � The issuer is required to file an annual report with the SEC regardless of the size of the company or the extent of business operations � The issuer engages in the commercial development of oil, natural gas, or minerals. � The new disclosure requirements apply to domestic and foreign issuers � In addition, the issuer is required to disclose payments made by a subsidiary or another entity controlled by the issuer.

Who must disclose � � � Foreign governments include sub-national level; but only federal government of the U. S. Also includes companies that at least majority-owned by a foreign government Commercial development of oil, natural gas, or minerals” includes ◦ ◦ ◦ Exploration Extraction – including production of oil and gas Processing – for minerals it has to be before the smelting/refining stage Export – from the country Acquisition of license for any such activity Note: Does not include marketing, transportation not for export usage, ancillary activity – such as the manufacturing of a product used in the commercial development of oil, gas and minerals

What Must Be Disclosed Payments (by project) includes • Taxes (corporate only, personal income and consumption exempt) • Royalties • Fees (including license fees) • Bonuses • Dividends (except when the Govt is a common shareholder) • Production entitlements • Infrastructure improvements Not include – social payments for CSR purposes (not common revenue stream)

What must be disclosed The following information § § § § Type and total amount of payments made for each project. Type and total amount of payments made to each government. Currency used to make the payments. Financial period in which the payments were made. Business segment of the resource extraction issuer that made the payments. The government that received the payments, and the country in which the government is located. The project of the resource extraction issuer to which the payments relate. Caveat – Project undefined

“not de minimis” � Within rules: the types of payments specified in the ◦ Any payment (whether a single payment or a series of related payments) that equals or exceeds $100, 000 during the most recent fiscal year.

How and When � How It Must Be Disclosed: ◦ Annually by filing a new form with the SEC. The information must be included in an exhibit and electronically tagged using the e. Xtensible Business Reporting Language (XBRL) format. � When It Must Be Disclosed: ◦ No later than 150 days after the end of its fiscal year. ◦ Comply with the new rules for fiscal years ending after Sept. 30, 2013. For the first report, most resource extraction issuers may provide a partial report disclosing only those payments made after Sept. 30, 2013.

NO EXCEPTIONS � Companies operating in countries that prohibit such disclosures by law � Where contracts prohibit disclosure because of confidentiality or commercially sensitive info � Different listing rules and disclosure requirements

Wide Support � The Commission received over 149, 000 form letters (including a petition with 143, 000 signatures) – including companies, academics, NGOs, foreign governments � Commentators generally supported transparency efforts and offered numerous suggestions for revising certain aspects of the proposal in the final rules

Economic Implications � The SEC found that the likely initial cost of implementation for companies would be close to $1 billion with ongoing costs estimated at between $200 and $400 million � Per company time and cost: a total of approximately 4, 800 -9, 600 total man-hours and costs approximating between $2, 000 to $4, 000 – a fraction of a percentage of large extractive industry’s yearly revenues

Challenges � Competitive disadvantage over SOEs – evidence? – FCPA � Uniformity: EU’s new law � the lack of project definition has led to concern from some that reporting will not be standardized and that defining "project" in an overly broad way could obscure information

Conflict Minerals � The U. S. Congress enacted Section 1502 of the Act because of concerns that the exploitation and trade of certain “conflict minerals” by armed groups is helping to finance conflict in the DRC region and contributing to a humanitarian crisis. The U. S. wants to break the link between armed groups and the illicit minerals trade.

Section 1502 � The rule requires companies that file reports with the SEC - and use any tin, tantalum, tungsten and gold in its products - to conduct due diligence in order to determine if was sourced from the DRC or an adjacent country and whether these minerals indirectly benefit armed groups or abusive armed forces in the Africa Great Lakes region. � Companies must publicly disclose their due diligence measures on an annual basis.

Onus � Requires the issuer to submit a report to the Commission that includes a description of the measures it took to exercise due diligence on the conflict minerals’ source and chain of custody � Report to include a description of the products manufactured or contracted to be manufactured that are not “DRC conflict free, ◦ Facilities ◦ Country of origin ◦ Location of the mine/efforts to determine

Onus ctd � All companies are required to complete initial reports by May 31, 2014 for calendar year 2013 and thereafter on May 31 each year. � For an interim period of 4 years for smaller companies and 2 years for large companies – companies may classify their products as “DRC conflict undeterminable” � No de minimis exception

Implications � Non-SEC reporting companies worldwide in the supply chain of reporting companies’ diligence efforts � Reputation risk and developmental impact by singling out the DRC � OECD guidelines and states’ legislations

U. S. EITI support � Largest donor to the EITI trust fund - the U. S. Government has representation on the Management Committee that oversees the facility � Kimberly Process � Voluntary Principles � Extractive industries in the fisheries, timber and other renewable sectors � New PPA

Conclusion � These are legislations – unlike EITI!! � 1502: We urge all governments in the region not to provide support to armed groups or to allow indirect support from their territory � 1504: We encourage other governments and regional organizations to adopt similar transparency standards.