Approximately two years ago, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. As noted in this previous post, tacked to the end of the massive Dodd-Frank bill at the last minute was a “miscellaneous provision” titled Section 1504 “Disclosure of Payments by Resource Extraction Issuers.” Prior to being tucked into Dodd-Frank, the substance of Section 1504 languished in the Senate. (See here for a prior post regarding S. 1700 introduced in the Senate in September 2009).
As I noted in the prior posts, bribery and corruption are bad, but that does not mean that every attempt to curtail bribery and corruption is good or represents sound public policy.
Case in point is Section 1504. In short, Section 1504 will substantially increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments. As I’ve noted before, Section 1504 is akin to “swatting a fly with a bazooka” and is an attempt to legislate an issue that was sensibly put to rest in the mid-1970′s when Congress held extensive hearings on what would become the FCPA.
Here is some background. The FCPA as enacted in 1977 contained (and still contains) an outright prohibition on improper payments to “foreign officials” to obtain or retain business (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions. The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.
As to these disclosure provisions, many people, including, most notably Senator Proxmire (D-WI – a Congressional leader on what would become the FCPA), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate. Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”
The final House Report (see here) on what would become the FCPA is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected): “Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements.”
In this prior post, I analogized that Section 1504 is like having to report one’s speed on the highways even though there are speed limits in place.
I previously stated as follows. “The FCPA already criminalizes improper payments made to the ‘foreign government’ recipients targeted in Section 1504 to the extent those payments are made to “obtain or retain business.” Do we really now need a law that requires ‘Resource Extraction Issuers’ to disclose all such payments, even perfectly legitimate and legal payments?”
In passing Dodd-Frank , Congress apparently said yes to this question (although I wonder if most voting in favor of Dodd-Frank even knew the miscellaneous provision was tagged onto the bill).
Pursuant to Dodd-Frank, the SEC issued proposed rules (see here) in December 2010.
And that’s pretty much where things stand at the moment even though the SEC originally planned to adopt final rules between January – March 2011 - as noted in this previous post. The long delay in SEC final rules implementing Section 1504 is perhaps further evidence as to the folly of this ill-conceived legislation.
A few updates to pass along regarding Section 1504.
As noted in this recent release, Oxfam America (an international relief and development organization) recently filed a complaint (here) against the SEC “for unlawfully delaying the issuance of a Final Rule implementing” Section 1504.
The release states as follows. “Congress set a deadline of April 17, 2011, for the SEC’s promulgation of the final rule that is needed to bring Section 1504 into effect. The SEC has now missed this statutory deadline by one year and one month. Oxfam America notified the SEC on April 16, 2012 that it would file suit if the regulatory agency did not issue a final rule within 30 days. [...] Unfortunately, the SEC’s pattern of delay gives no assurance that it will ever promulgate a Final rule without the involvement of this Court.” As noted in the release, “Oxfam America is represented in this matter by Baker Hostetler LLP, one of the largest law firms in the US, and EarthRights International, an organization dedicated to defending human rights and the environment through legal actions and other strategies.”
Thereafter, as noted in this story from The Hill, “oil companies are seizing on a White House executive order that promotes international regulatory harmony to seek an exemption from upcoming federal rules that would force energy producers to disclose payments to foreign governments.” This May 18th letter to the SEC from the American Petroleum Institute, states that ”if the Commission were to issue a final rule that requires reporting even when it conflicts with foreign laws, such a rule would cause exactly the type of unnecessary competitive harm that the Executive Order seeks to avoid.”
Section 1504 has not been all bad. As noted in this prior post and as relevant to the current “foreign official” debate, Section 1504 demonstrates that when Congress wants to, it knows how to pass a bill that captures state-owned or state-controlled enterprises (SOEs). In short, Section 1504 defines “foreign government” to “include  a department, agency, or instrumentality of a foreign government or a company owned by a foreign government.” If instrumentality can include SOEs (as the enforcement agencies maintain) why the need for the additional clause “or a company owned by a foreign government” in Section 1504?