andy miller ryan pratt - ey · answer - they don't. pervasive ... started in 2002 with the...

Disclosure of payments to governments

Andy Miller

Ryan Pratt

Americas Mining & Metals Forum – September 2013

Americas Mining & Metals Forum 2013

Agenda

► Overview and rationale for the disclosure of payments to governments

► Extractive Industries Transparency Initiative (EITI)

► Wall Street Reform and Consumer Protection Act (Dodd-Frank Act):

Section 1504

► European Union: Accounting and Transparency Directives

► Canadian recommendations on payments to governments disclosures

► Collecting, analyzing and reporting government payment information


Overview and rationale for the disclosure of payments to governments

► More than 3.5 billion people live in countries with extensive oil, natural

gas and mineral resources

► Long-term sustainable development of natural resources

► Improve quality of life of the people in these countries

► Enhance economic growth

► Reduce poverty and related social issues

► Transparency in natural resource development as a means to assure

proper development

"Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light

the most efficient policeman.”

Justice Louise D. Brandeis

- The key for DF 1504 is why

does the SEC care about all of

this?

Answer - They don't. Pervasive

belief is that the SEC is only

acting on behalf of Congress

and that this is not really in the

SEC's purview.

- May also want to add a bullet

about finding other avenues to

identify FCPA violatons, as

some believe that this is the

goal of DF 1504.


Extractive Industries Transparency Initiative (EITI)

► Started in 2002 with the goal of enhancing good governance of

natural resource development through improving transparency and

accountability in the extractive industries

► EITI Association is an organization comprising sponsoring countries, natural

resource extractive companies, other NGOs

► Companies publish (disclose) what they pay to governments, and

governments publish what they receive in an EITI report

► Multi-stakeholder group of governments, companies and civil society oversee the

disclosure process

► Adoption of the EITI standard is discretionary, and implementation is

the responsibility of individual countries

► Process to become an EITI-compliant country

► EITI framework and disclosure requirements must be adopted into individual

country law, therefore impacting extractive industry companies that operate within

the country

► Payment reports to be on the basis of counts that have been audited to

international standards


Extractive Industries Transparency Initiative (EITI)

► Current status of EITI – as available on EITI website:

► 23 countries are EITI compliant

► 16 countries are EITI “candidate” countries

► 34 countries have produced EITI reports

► US$1,051 billion in government revenue has been reported

► The United States has been making an effort to become

EITI compliant


Dodd-Frank Act: Section 1504

► Adds Section 13(q) to the Securities Exchange Act

► The SEC has mandated issuers engaged in the commercial development

of oil, gas or minerals to disclose the amount of payments by type, project

and government, annually

► SEC issued its final rule adopting Section 1504 in August 2012. The

rule covers the following aspects:

► The type and amount of payments by project and by government for all

payments that equal or exceed US$100,000 individually or in aggregate are to

be disclosed

► US federal and foreign governments (not state or local in the US)

► Includes department, agency or instrumentality of a foreign government or a

company owned by a foreign government

► Form SD that will be due 150 days after the issuer’s fiscal year-end (in

XBRL format)

► Disclosures must be made for fiscal years ending after 30 September

2013


Dodd-Frank Act: Section 1504 Litigation

► U. S. Chamber of Commerce, American Petroleum

Institute (API), Independent Petroleum Association of

America (IPAA) and the National Foreign Trade Council

filed suit in US court to:

► Declare Section 1504 of the Dodd-Frank Act “null, void, and with

no force or effect”

► Inform that the SEC failed to fully consider the competitive effects

of the regulation

► Inform that disclosure of payments that may be contrary to either

local law or by contract will lead to a loss of business for US

companies’ bidding on resources in countries where such

disclosures are barred


Dodd-Frank Act: Section 1504 Litigation

► On 2 July 2013, a US district court issued a decision,

vacating SEC final rule implementing Section 1504 by

► Suggesting the SEC’s interpretation of two key provisions in the

law as “arbitrary and capricious”

► Remanding the rule to the SEC to:

► Re-draft the rule and take into account the district court’s decision

regarding the disclosure of payments that may be barred by local law

► Re-issue the existing rule but with better justification for the

requirement for public disclosure of all payments to governments

► Make the effective date presently null and void

► What to do now …


Section 1504: considerations

► API Litigation ► The API successfully challenged Section 1504; however, it is unlikely that 1504 will go away

► Timing ► 150 days following the end of each fiscal year; implementation delayed

► Type of filing ► To be “filed” with the SEC rather than “furnished;” accordingly, any materially “false or

misleading statement” in the disclosure will be subject to liability under Section 18 of the

Exchange Act

► Separate from a company’s Form 10-K or 20-F; it will not be covered by those forms’ CEO and

CFO certifications

► Confidentiality provisions of other countries/contracts ► SEC declined to allow companies to exclude reporting payments that may not be disclosed

pursuant to foreign law or a confidentiality agreement

► This is the crux of the API argument and the part of the law struck down

► Audit ► Unlike Conflict Minerals, there is no independent audit requirement, but companies will likely

look to internal audit or a third party to verify reports

► Affects of Section 1504 on companies’ anti-bribery and corruption programs


European Union: Accounting and Transparency Directives

► In June 2013, the European Parliament enacted a new Accounting

Directive that repealed the Fourth and Seventh Accounting Directives

on Annual and Consolidated Accounts and introduced the new

obligation for large extractive and logging companies to report the

payments they make to governments

► Also known as country-by-country reporting (or CBCR)

► The new disclosure requirement affects the following:

► All companies active in the extractive and logging industries and listed on

EU stock markets

► Large, unlisted companies registered in the EU that are active in the

extractive and logging industries

► EU-listed or large unlisted parent companies in any sector with

subsidiaries active in the extractive or logging industries

► Small and medium-sized unlisted companies that have EU-listed

subsidiaries active in the extractive and logging industries



► Companies are to publish payments made to governments for the

exploration, prospection, discovery, development and extraction of

mineral, oil and natural gas deposits.

► Forestry companies will need to disclose payments that arise from the

logging of primary forests

► Payments required to be disclosed

► Taxes on income, production and profits

► Royalties

► Fees, including license and rental fees

► Bonuses, including production and signature bonuses

► Production entitlements

► Dividends

► Payments for infrastructure improvements



► The disclosure requirement is equivalent to (and in some cases

exceeds) the disclosure requirements of SEC Rule 13q-1, which has

been vacated by the US district court

► “Equivalence clause” reporting is included in the EU directive so that

undertakings that are required to report payments in other jurisdictions

will satisfy the reporting requirement

► The EU Commission to adopt such equivalence criteria on the basis of

specific criteria concerning, for example, the content and frequency of the

reporting obligation

► The SEC final rule would presumably meet the criteria, however a re-

written rule may or may not be allowed

► Effective date: EU Members States have 24 months to transpose the

new directives into national law

► Companies will publish the information annually in a report, with the first disclosures

expected to be published in 2015 or 2016


Canadian recommendations on payments to governments disclosures

► Working group formed to develop a framework for the

disclosure of payments to governments by Canadian

extractive industries companies

► Framework is aligned with the US and EU disclosures

requirements

► Canadian extractive industries include many exploration and junior

mining companies, so the disclosure threshold is lower than that in

the EU and the US

► Two separate thresholds are recommended: one threshold for issuers

listed on the TSX set at $100,000, to be aligned with the US and EU

rules, and a second threshold for venture issuers set at $10,000.


Collecting, analyzing and reporting government payment information


Common “themes” in disclosure requirements

► Types of payments:

► Taxes on income, production and profits

► Royalties

► Fees, including license and rental fees

► Bonuses, including production and signature bonuses

► Production entitlements

► Dividends

► Payments for infrastructure improvements

► Include payments “in kind”

► Governments

► Federal or national, regional or local authority

► Department, agency or undertaking controlled by that authority

► Includes state-owned enterprises

► Who or what activities are subject to the reporting requirement?


Complying with the disclosure requirement

► Five-step process:


Technology approach to Dodd-Frank 1504 compliance

Structured data

Unstructured data

Survey data

Survey platform Reporting

dashboards Data Repository

Secure web-based review tool

(accessed via the web): dynamic and

real-time reporting and analytics to

assist in categorizing payments

Intelligent reporting – in addition to

XBRL Reporting (accessed via free

reader): real-time analytics using a

snapshot of the data source

Data gathering: data from a

variety of sources can be

imported into the EY Data

Repository for analysis and

review


EY reporting dashboards

ABC Company

Section 1504 Payment Summary

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About EY’s Global Mining & Metals Center

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© 2013 EYGM Limited.

All Rights Reserved.

EYG no. ER0094

ED None

This material has been prepared for general informational purposes only and is not intended to

be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for

specific advice.

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