Resource Extraction Disclosure

Archive for the ‘Resource Extraction Disclosure’ Category

Judicial Challenge Filed As To Resource Extraction Disclosure Provisions

Wednesday, October 17th, 2012

The day after Congress passed the massive Dodd-Frank Act in July 2010, I published this post regarding Section 1504 (“Disclosure of Payments by Resource Extraction Issuers”), a “miscellaneous” provision tucked into the bill at the last moment. (The post provides a general overview of Section 1504′s provisions). I predicted that Section 1504 was sure to cause much angst and 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. I indicated that Section 1504 was akin to swatting a flay with a bazooka and that just because bribery and corruption are bad, does not mean that every attempt to curtail bribery and corruption is good.

As highlighted by various posts since July 2010, the SEC’s final rules implementing Section 1504 were long-delayed and only came into effect this past August. (See here for the final rules).

Against this backdrop, it is little surprise that last week the following organizations – the American Petroleum Institute, the Chamber of Commerce, the Independent Petroleum Association of America, and the National Foreign Trade Council - filed a complaint (here) in the U.S District Court, District of Columbia, against the SEC: seeking a judicial declaration that Section 1504 violates the First Amendment and is thus null and void; and seeking to vacate Section 1504 on the grounds that the SEC acted arbitrarily and capriciously in violation of the Administrative Procedures Act in implementing Section 1504′s final rules.

In pertinent part, the complaint alleges that Section 1504 compels “U.S. oil , gas, and mining companies to engage in speech - in violation of their First Amendment rights – that would have disastrous effects on the companies, their employees, and their shareholders.” As to the SEC’s purported defense that its rules implementing Section 1504 were required by law, the plaintiffs allege that the SEC “grossly misinterpreted its statutory mandate” and paid “lip service” to the requirement that SEC rules factor in a cost-benefit analysis.

The complaint cites the SEC’s own estimate that Section 1504 will “cost U.S. public companies at least $1 billion in initial compliance costs and $200 to $400 million in ongoing compliance costs” and that it “could add billion of dollars of [additional] costs” through the loss of trade secrets and business opportunities. All this, the complaint states, for the purported benefit that Section 1504 “may result in social benefits” that “cannot be readily quantified with any precision” (citing to the SEC).

The SEC has experienced rough waters of late in the D.C. Circuit and that court is where several SEC rules have found their final resting place. The plaintiff’s attorney in many of those cases has been Eugene Scalia (Gibson Dunn – here). (See here for a recent Wall Street Journal article about Scalia and here for a recent Wall Street Journal op-ed by Scalia). Scalia is representing the Section 1504 plaintiffs and this judicial challenge will be interesting to follow.

Deep Within Its Section 1504 Final Rules, The SEC Adopts An FCPA Reform Proposal Advanced By The Chamber And Contradicts An Enforcement Theory At Issue In Several Of Its Prior FCPA Actions

Thursday, September 6th, 2012

In late August, the SEC adopted final rules implementing Section 1504 of Dodd-Frank, the so-called Resource Extraction Disclosure Provisions. A future post will discuss the final rules as to this provision which was tacked to the end of the massive financial regulation bill at the last minute as a “miscellaneous provision” (see here for a prior post).

This post highlights that deep within the 232 pages of Section 1504 SEC final rules, the SEC adopted an FCPA reform proposal advanced by the Chamber of Commerce as well as contradicts an enforcement theory at issue in several of its prior FCPA actions.

First a bit of background.

In “Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act” (here), the Chamber proposed to clarify the definition of “foreign official.” In Congressional testimony, former Attorney General Michael Mukasey, testifying on behalf of the Chamber, stated as follows. “The FCPA therefore should be amended to clarify the meaning of ‘foreign official,’ indicate the percentage of ownership by a foreign government that would qualify the entity as an instrumentality. We think majority ownership is the most plausible threshold.” (See here for the hearing transcript).

In the aftermath of the House hearing, and in response to questions from Capital Hill, SEC Chairman Mary Schaprio stated that the FCPA “sufficiently defines the term foreign official” and further stated as follows. “Given the various forms of government found around the world, it would be impractical to articulate each of the myriad of ways that one could use to identify a foreign official in particular countries or cultures.” (See here for the prior post).

Back to Section 1504. It defines “foreign government” to mean a “department, agency or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission.” On page 101 of its recently issued final rules (here), the SEC states as follows. “[T]he final rules clarify that a company owned by a foreign government is a company that is at least majority-owned by a foreign government.”

By so concluding, not only did the SEC quietly adopt an FCPA reform proposal advanced by the Chamber, but it also contradicted an enforcement theory at issue in several of its prior FCPA actions.

For instance, in the several Bonny Island, Nigeria enforcement actions (see here for a summary) the SEC alleged that employees of Nigeria LNG Limited (“NLNG”) were “foreign officials” despite the fact that NLNG was owned 51% by a consortium of private multinational oil companies.

In the Alcatel-Lucent enforcement action, the SEC alleged that employees of Telekom Malaysia Berhad were ”foreign officials” in that the entity was a state-owned and controlled company even though the Malaysian Ministry of Finance owned only 43% of the company’s shares. (See here for the prior post).

The Comverse enforcement action focused on Hellenic Telecommunications Organization (“OTE”) and allegations that the Greek Government was OTE’s largest shareholder and controlled the company. The SEC suggested that employees of OTE were “foreign officials” even though, during the relevant time period, the Greek Government held only 33% – 38% of the company’s shares. (See here for the prior post).

With the SEC’s conclusion in its Section 1504 final rules that a company owned by a foreign government is a company that is at least majority-owned by a foreign government, the SEC will be hard pressed to allege in future FCPA enforcement actions that an entity with less than 50% foreign government ownership or control is an instrumentality of a foreign government and that its employees are “foreign officials” under the FCPA. This is assuming of course that the SEC cares about intellectual honesty and consistency.

As noted in previous posts, Section 1504 of course also demonstrates that when Congress wants to, it knows how to pass a bill that captures state-owned or state-controlled enterprises (SOEs). Congress is presumed not to use redundant or superfluous language in enacting statutes. If instrumentality include SOEs (as the enforcement agencies maintain), then Congress violated this legislative maxim by using redundant or superfluous language in Section 1504. Congress did not violate this maxim in Section 1504 because instrumentality does not include SOEs and there is no support in the voluminous FCPA legislative history to support such a claim. (See here for my foreign official declaration).

In its 11th Circuit “foreign official” response brief (here) the DOJ merely states, in a footnote, the following as to Section 1504. “[Section 1504's] definition of “foreign government,” enacted more than 30 years after the FCPA and in a very specific and unrelated context, has no bearing on the meaning of instrumentality in the FCPA.”

Friday Roundup

Friday, July 6th, 2012

Out with the tide, a former DOJ Fraud Section Chief speaks on voluntary disclosure, guidance issues, will candy fall from the pinata, schooled in the FCPA, a Section 1504 development, and “Minegolia.”

Tidewater Derivative Complaint Dismissed

As highlighted in this previous post, in November 2010 Tidewater Inc. was one of several companies to resolve a ”CustomsGate” case. The conduct at issue focused on Azeri tax officials and Nigerian temporary import permits and the company resolved DOJ and SEC enforcement actions by agreeing to pay $15.7 million in fines and penalties.

As if on cue in this new era of FCPA enforcement, along came the private plaintiff firms representing shareholders who filed a derivative complaint alleging that officers and members of the Board of Directors of Tidewater breached their fiduciary duties “in that they: (1) knew or recklessly disregarded the fact that employees, representatives, agents and/or contractors were paying, had paid and/or had offered to pay bribes to Azerbaijani and Nigerian government officials to obtain favorable treatment for Tidewater; (2) caused Tidewater to pay bribes and to disguise the bribe payments as legitimate expenses in Tidewater’s books and financial disclosures; and (3) failed to maintain adequate internal controls to ensure compliance with the FCPA and Exchange Act.”

Earlier this week, the case was swept out with the tide as U.S. District Court Judge Jane Triche Milazzo dismissed the complaint – see here for the decision. In short, Judge Milazzo found that “Plaintiff did not adequately plead demand futility.” Judge Milazzo utilized various tests in reaching her decision such as director interest and independence and whether the board could impartially consider the merits of the demand without being influenced by improper considerations.

As to interest, Judge Milazzo stated as follows.

“This Court finds that the Complaint is completely devoid of any allegations of an interested director. There is no allegation that any director appeared on both sides of a transaction or expected to derive a personal financial benefit from it. Nowhere in the Complaint can it be found that any one of the directors, much the less a majority of them, benefitted from the bribes themselves, benefitted from failing to establish and maintain adequate internal controls, benefitted from enforcing policies and programs designed to prevent violations, benefitted from improperly recorded payment of bribes in Tidewater’s books and records or benefitted from inadequately training their employees, agents, representatives and/or contractors with respect to compliance with the FCPA.”

As to alleged director participation or knowledge , Judge Milazzo stated that the ”Complaint falls woefully short of pleading facts that are sufficient to show that there was any knowledge or conscious disregard on behalf of the directors.”

As to whether the directors exhibited bad faith sufficient to overcome business judgment rule presumptions, Judge Milazzo stated as follows. “While Plaintiff’s allegations are sufficient to show that Tidewater was evidently violating both the FCPA and the Exchange Act, nowhere in the Complaint do Plaintiff’s allegations meet the specificity to show that the Individual Defendants were acting with the intent to violate these laws. ‘[T]he mere fact that a violation occurred does not demonstrate that the board acted in bad faith. Alleging that ‘upon information and belief’ the ‘Headquarters’ made the decision to avoid tax assessments in violation of the FCPA falls woefully short of the pleading requirements. Nowhere can this Court find who made this decision, how this decision was made or that there was an intent to violate any law. Moreover, the Court finds it significant that Tidewater’s directors voted and voluntarily initiated an FCPA investigation and advised the federal government of their violations before the government even suspected any violations.”

Tyrell on Voluntary Disclosure

You know the talking points. The DOJ wants companies to voluntarily disclose, not ifs, ands or buts about it. It’s interesting though how this becomes less of a black and white issues when individuals leave the DOJ.

In this recent Q&A in The Metropolitan Corporate Counsel, Steven Tyrell (a former DOJ Fraud Section Chief and current partner at Weil Gotshal – here) was asked the following question – “what is the role of voluntary reporting in establishing a good relationship with the regulatory and enforcement authorities?”

He stated as follows.

“In the first instance, if a company has a legal obligation to disclose – for example, government contractors are obliged to disclose fraud – then the analysis begins and ends there. Assuming there is no legal obligation that compels disclosure or no imminent threat of disclosure by an outside party, such as a newspaper, then I typically advise clients to take credible allegations of wrongdoing seriously, look into those allegations in a manner that is appropriate under the circumstances, and assess the nature and extent of the company’s exposure and the pros and cons of disclosure. Then, and only then, should a disclosure be made if it is in the best interest of the company – or, for a public company, if the securities laws require it. Of course, it often will not be in a company’s best interest to disclose if, for example, the allegations prove not to be credible or if it is unclear whether the conduct even amounts to a violation of law. Under those circumstances, a disclosure could unnecessarily embroil the company in a lengthy and costly government investigation and result in other repercussions such as triggering civil litigation and harm to a company’s reputation that could otherwise be avoided. It’s a challenging calculus. I can tell you from past experience that there are companies that have strong reputations for compliance with regulators and others that do not. However, the fact that a company doesn’t disclose a problem that ultimately comes to DOJ’s attention is not necessarily going to damage the company’s credibility with DOJ. Regulators recognize that not every allegation should be of interest to them – and, frankly, having counsel that knows when they’ll be interested and when they won’t is really important.”

Guidance Issues

As highlighted in this previous post, soon after Assistant Attorney General Lanny Breuer announced in November 2011 that FCPA guidance would be forthcoming in 2012, Senator Grassley sought guidance on the guidance and asked Attorney General Holder several follow-up questions for the record. For a copy of Holder’s responses, see here.

In this previous post, among others, I commented that non-binding DOJ guidance is not the best way to accomplish real and meaningful FCPA reform.

Thus, I completely agree with former DOJ Deputy Attorney General George Terwilliger and former DOJ attorney and Senate counsel Matthew Miner (both currently at White & Case, see here and here) when they state as follows in this article.

“The fact that the Justice Department recognizes the need for such guidance underscores the existence of blurry lines and fuzzy standards surrounding the FCPA. US businesses trying to compete successfully in the international commercial arena deserve better. Justice Department ‘guidance’ is neither enough, nor is it properly the role of prosecutors to be definitive interpreters of ambiguities in criminal laws. Congress writes the laws and, as the US Supreme Court has firmly established, has a responsibility to set clear standards for what is permissible and what is not. It should not stand aside in deference to the Justice Department’s plan to craft guidance, especially when that guidance will have no effect in court.”

Yara Fertilizer

It has been said before that anytime a foreign company is the subject of a corruption probe, the U.S. enforcement agencies are like children at a birthday party waiting for some candy to fall from the pinata. Think what you will of the analogy.

The Wall Street Journal recently reported (here) that “Norwegian fertilizer producer Yara International ASA’s chief executive, Jorgen Ole Haslestad, apologized Friday to the company’s employees after an investigation uncovered millions of dollars in ‘unacceptable’ payments in India and Switzerland, as well as ‘unacceptable offers of payments’ in Libya.” According to the article, the “unacceptable offers of payments” in Libya involve “a consultant related to the establishment of the company Libyan Norwegian Fertilizer Co., or Lifeco, in Libya, a joint venture with the Libyan National Oil Corp. and the Libyan Investment Authority.”

As noted on the company’s website here, Yara ”has a sponsored Level 1 ADR program for American Depositary Receipts (ADRs), which represent ownership in shares of foreign (non-US) companies that trade on US financial markets.” Whether foreign companies, including those with Level 1 ADR’s can become subject to the FCPA, see this excellent piece “When Does an ADR Program Give U.S. Authorities FCPA Jurisdiction Over a Foreign Issuer?”

Time will tell if the candy falls.

Checking in on Wynn Resorts

Previous posts here, here and here focused on the Wynn-Okada dispute including Wynn’s $135 million charitable contribution to the University of Macau. On that topic, this recent Wall Street Journal article focused on the “web of political ties” between a Macau company paid by Wynn and government officials. Regarding Wynn’s FCPA compliance in expanding in Macau, company CEO Steve Wynn stated as follows. “This whole business of the Foreign Corrupt Practices Act—we were schooled in this.”

Final grade is pending.

Section 1504 Development

Several prior posts, see here for example, discussed Section 1504 of Dodd-Frank, the so-called Resource Extraction Disclosure Provisions and the long delay in SEC final rules. As noted in this Corruption Current post by Samuel Rubenfeld, the SEC recently announced here that on August 22nd, “the Commission will consider whether to adopt rules regarding disclosure and reporting obligations with respect to payments to governments made by resource extraction issuers to implement the requirements of Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Minegolia”

There has been only one FCPA enforcement concerning, at least in part, business conduct in Mongolia (see here for the 2009 UTStarcom action). This is hardly surprising, as few companies subject to the FCPA have traditionally engaged in business in the country. However, as noted in this recent Al Jazerra article, Mongolia or “Minegolia” as the country is sometimes called, “is undergoing a rapid transformation, due to its incredible resource wealth in minerals such as coal, copper, and gold.” At the same time, the article notes that “Transparency International placed Mongolia 120th out of 183 nations on its corruption perception index” and that “90 percent of Mongolians believe politicians are benefitting from ‘special arrangements’ with foreign enterprises over mining rights.”

*****

A good weekend to all.

Friday Roundup

Friday, June 29th, 2012

Credit when credit is due, no fear despite fear based marketing, a further Section 1504 development, and individual prosecutions in Canada, it’s all here in the Friday roundup.

Credit When Credit is Due

In this previous February 2012 post, I called out the DOJ for its deficient and misleading FCPA website in that the website did not inform the public of the DOJ’s setbacks in the Africa Sting cases, the O’Shea case, the Wooh case and the Lindsey Manufacturing cases. I ended the post by saying that the DOJ’s FCPA website ought to be improved and ought to keep citizens informed of all FCPA developments – not just those that cast the DOJ in a favorable light.

I am happy to dole out credit when credit is due and can now report that Wooh’s entry (here), O’Shea’s entry (here), the Lindsey related entry (here) and the numerous Africa Sting related entries have all been updated to reflect the final disposition of those cases.

Few Companies Concerned About the U.K. Bribery Act

Despite marketing campaigns that were often based on fear and overblown rhetoric, one year into the U.K. Bribery Act few companies have changed their compliance programs as a result and even fewer are concerned about an enforcement action being brought against their organization, according to this recent poll by Deloitte Financial Advisory Services. Specifically 24% of respondents answered “yes” to the following question - ”in July 2012, one year after the UK Bribery Act enforcement began, will your company have changed its anti-corruption program to comply” and 9% answered “yes” to the following question – “one year after UK Bribery Act enforcement began, is your company concerned about a UK action being brought against your organization.”

That is pretty much what I predicted in this January 3, 2011 post that states as follows – “I don’t see how companies already subject to the FCPA and already thinking about compliance in a pro-active manner, have much to worry about when it comes to the U.K. Bribery Act …”.

Even so, the silly marketing continues as evidenced by this post “Don’t Be Lulled by a Dearth of UK Bribery Act Convictions” which begins as follows. “Be warned that the UK Bribery Act is considered to be the world’s most restrictive and far-reaching anti-corruption law to date. This measure differs in many key aspects from the US Foreign Corrupt Practices Act.”

A Further Section 1504 Development

This recent post provided an update on Section 1504 of Dodd-Frank, the so-called Resource Extraction Issuer Disclosure Provisions, an ill-conceived “miscellaneous provision” tucked into Dodd-Frank at the last minute that 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.

In a further update, last week several House members wrote to SEC Chairman Mary Schapiro “regarding the status of the long-delayed final rule making.” In the letter, the House members state that the Commission “has had more than enough time to consider and respond to all of the substantive comments from industry, civil society, investors and others” and that the “issue is too serious to allow further delay.”

Canada Prosecutions

Recent media articles (see here from the Globe and Mail and here from the Canadian Press) report that “two former executives of SNC-Lavalin Group Inc. have been charged with corrupting foreign officials” under Canada’s FCPA-like law, the Corruption of Foreign Public Officials Act. Ramesh Shah (a former Vice President) and Mohammad Ismail (a former Director of International Projects) allegedly ”offered payment to secure contracts for supervision and construction of the Padma Bridge and an elevated expressway in Dhaka, Bangladesh.”

*****

A good weekend to all.

An Update On Section 1504

Monday, June 4th, 2012

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?