Maximizing Anti-Corruption through Disclosures about Payments in Extractive Industries
By Somin Lee, Senior Editor
Bribery and corruption have long been a part of doing business in the energy industry. To combat this trend, the U.S. along with other countries and international organizations have worked for years to increase transparency and curb corruption. The U.S. joined the Extractive Industries Transparency Initiative (“EITI”), and Congress enacted a version of the Publish What You Pay (“PWYP”) rule in § 1504 of the Dodd-Frank Act.
The Trump administration, however, has taken a step back from the EITI, and the Republican-led Congress has repealed § 1504. A much-debated question now is whether these actions remove the U.S. from the anti-corruption track that it has long touted.
This blog first explains some of the reasons why extractive industries are more susceptible to Foreign Corrupt Practices Act (“FCPA”) investigations and enforcement actions in the U.S. It then discusses the purpose and intent of the EITI and the Cardin-Luger Amendment that was enacted in § 1504 of the Dodd-Frank Act. Finally, by looking at several case studies in the extractive industry, it considers at what point the global EITI standard or the U.S. rule would have triggered disclosures, and whether these disclosures would have made a difference to the FCPA investigation and action.
Pervasiveness of FCPA Violations in the Energy Industry
Violations of the FCPA are widespread in the energy industry, particularly in extractive sectors such as oil, gas, and mining. The FCPA is a U.S. federal law that criminalizes the bribery of foreign officials by companies based in the U.S. or listed on the U.S. stock exchanges. In 2016, of the seventy-five listed companies under FCPA investigation related to bribing foreign officials, twenty-two were in the extractive industry. The history of FCPA enforcement actions paints a similar picture. As of 2013, of the total 173 FCPA actions, forty-six were against companies involved in the production of oil and gas, twenty-one were against oil and gas refiners, and thirty-four were against other types of energy companies. Furthermore, eleven of the twenty largest FCPA settlements involved energy companies.
These enforcement figures suggest not only that extractive companies frequently violate the FCPA, but also that the Department of Justice (“DOJ”) and the Securities Exchange Commission (“SEC”) tend to prioritize their enforcement activity against those companies. Over the last few years, the DOJ and SEC have increased FCPA enforcement, which has had a dramatic impact on the energy industry.
Many factors explain the extractive industry’s particular vulnerability to bribery and corruption. First, extractive ventures are often located in developing countries, which typically have emerging markets, cash-based economies, and less stable governments. These traits raise the likelihood of corrupt actions by firms and government-related personnel. Countries whose economies rely heavily on raw materials such as oil, gas, diamonds, and other natural resources are often afflicted with the “resource curse,” also known as the paradox of plenty. The paradox arises from the “failure of many resource-rich countries to benefit fully from their natural resource wealth, and [of] governments in these countries to respond effectively to public welfare needs.” These countries tend to have higher rates of conflict, authoritarian governments, and lower rates of economic growth. Firms are pressured to explore and set up ventures in these countries, but these businesses are exposed to higher-than-average risks because of the unstable governments and changing political situations, the lack of infrastructure, as well as the absence of adequate monitors and controls to curb corruption.
A second reason why extractive industries are susceptible to corrupt practices is that they regularly deal with the foreign government officials. In many countries with emerging markets, there is a great deal of bureaucracy. Throughout the whole process, which includes tendering a bid, submitting a bid, procuring a contract, receiving relevant licenses and permits, arranging customs, and putting in place monitors, the extractive companies are in constant communication and interaction with foreign government officials. Because those officials have relatively low salaries, they are often tempted to solicit and take bribes, especially when the extractive companies work in such close proximity with the government at all levels of the project. Furthermore, because the oil and gas sectors are often wholly or partially state-owned, it is highly likely that their employees fall under the FCPA’s definition of “foreign officials.” Under the FCPA, a foreign official includes “any officer, or employee of a foreign government or any department, agency, or instrumentality thereof . . . or any person acting in an official capacity for or on behalf of any such government, department, agency, or instrumentality.” Because the term “foreign official” is quite broadly defined (in part due to the extensiveness of the term “instrumentality”), the employees of the state-owned oil and gas companies fall easily under this umbrella definition. Thus, companies making payments to any of the defined individuals are subject to the FCPA.
Third, the extractive industries rely on third parties at different levels of the project, which gives rise to opportunities for FCPA violations. When it comes to oil, gas, or mining ventures, the transactions are complex, involve multiple parties, and occur in high risk locations with cultures and customs that are unfamiliar to the companies’ employees. Therefore, companies often use third-party agents—via consulting or service agreements—to gain access to local expertise. Yet, many of the third-party agreements that provide consulting or other services are vague and do not provide clear indication of the services that the third party performs. These vague agreements sometimes serve as conduits to pay bribes to foreign officials.
Background on the EITI and Section 1504 of the Dodd-Frank Act
Over the past few years, the U.S. has taken a leading role in promoting transparency and honest international business practices. In 2002, the U.K. Prime Minister Tony Blair and several other leaders, activists, and scholars helped create an international body called the Extractive Industries Transparency Initiative (“EITI”). EITI is a global standard that encourages transparency and accountable management of extractive energy resources. The EITI board, composed of civil society advocates, political leaders, and executives of extractive companies works to combat corruption and develop a global standard. The fifty-one countries that follow the EITI standard must agree to report all money they receive from extractive industries and how they spend it; the extractive companies operating inside those countries must declare what they pay to the government at the project level. Despite U.S. efforts since 2012 to comply with the EITI standard, that work has come to a standstill after Trump assumed office.
In the spirit of furthering the EITI, the Cardin-Lugar Amendment was included in the Dodd-Frank Act. Codified in § 1504, the amendment requires oil, gas, and mining companies listed on the U.S. stock exchange that engage in the commercial development of natural resources to disclose certain payment or series of payments (of at least $100,000) made to the host foreign government or the U.S. government. This is the U.S. version of Publish What You Pay (“PWYP”) rule. The types of payments that must be disclosed include taxes, royalties, fees, production entitlements, bonuses, dividends, and infrastructure improvements. The Cardin-Lugar Amendment also added § 13(q) to the Securities Exchange Act, requiring the Commission to mandate resource extraction companies to submit to the SEC an annual report disclosing certain payments made to a foreign government for the purpose of the commercial development of oil, natural gas, and minerals. The EITI and § 1504 were both intended to avoid the resource curse, help ensure that the wealth from natural resources in resource-rich countries will trickle down to regular people, and prevent governments from skimming off the payments from drillers and miners.
FCPA is closely related to the EITI and the disclosure requirements set out in § 1504. Whereas the FCPA covers payments to government officials, the EITI and § 1504 are applicable payments to governments. Despite the subtle difference, § 1504 of the Dodd-Frank Act defines “government” to encompass “foreign government, a department, agency, or instrumentality of a foreign government, or a company owned by a foreign government.” As such, in spite of the difference at a cursory glance, there is in fact significant overlap between the “government officials” under the FCPA and “government” under § 1504. Because of this overlap, some critics believe the EITI standard is duplicative of the FCPA.
Yet, that view cannot be further from the truth. EITI and § 1504 require extractive companies to disclose payments to the government. Increased disclosure requirements are meant to discourage bribery payments, heighten public awareness, and prevent FCPA violations. Therefore, the EITI standard and the recently repealed § 1504 would have simultaneously served as a prophylactic complement to the FCPA. Even if the companies make bribes in spite of the EITI and § 1504 disclosure requirements, these early disclosures could lead to reduced sentences in cases of enforcement actions for cooperating with the DOJ and the SEC.
Current Status of EITI and Section 1504 of the Dodd–Frank Act
Oil, gas, and mining companies have long opposed the level of disclosures set by the EITI and required by § 1504. Many U.S.-based extractive companies were particularly disgruntled about the voluntary disclosure of tax payments. In February, Congress and Trump used the Congressional Review Act to void § 1504 of the Dodd-Frank Act that complemented the EITI standard. By eliminating the U.S. version of the PWYP rule, the extractive companies are no longer required to make public the money they pay to foreign governments for the commercial development of natural resources.
In addition to repealing the PWYP rule, many are speculating whether the U.S. will continue to play any role in the EITI. Recent actions taken by the Trump administration suggest that the U.S. may withdraw from the EITI altogether. For instance, U.S. Department of the Interior officials cancelled scheduled meetings with industry groups related to the EITI due to excessive time and financial commitment; they also cancelled the weekly subcommittee phone meetings. According to Daniel Kaufmann, an EITI board member and a scholar of the economics of corruption, “[t]he U.S. has not formally left the EITI[, but] it is impossible to ignore the recent lack of initiatives on these matters from the super power.” Although the U.S. has not yet left the EITI, its recent actions signal a clear departure from its prior anti-corruption efforts, which sets a stark tone for the international community.
At the same time, commenters, extractive companies, and the oil and gas industry lobbying group, American Petroleum Institute (“API”), criticized § 1504 for requiring disclosures that are at odds with the EITI standard and disadvantage American companies operating in resource-rich countries. Moreover, API argued that the rule should only require disclosures of aggregate payments at the “political subdivision” level rather than at “project-level.” However, these limited disclosures would not address actual needs and interests of users. Moreover, looking at the purpose and intent of § 1504, it is evident that Congress wanted the U.S. rule to reflect the EITI standard because Congress was “[u]nsatisfied with the EITI regime alone.”
In addition, API’s conflicting interpretations of “political subdivision” and “project-level” are unreasonable in light of the plain meaning and legislative intent of the statute. The plain text calls for disclosing information including “the type and total amount of such payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas, or minerals” and electronically tagging those payments with information such as “the project of the resource extraction issuer to which the payments relate.” Therefore, it is clear that the project level payments do not refer to the API’s interpretation of payments to a “political subdivision.” As for legislative intent, Congress passed § 1504 to promote honest business practices and to protect investors from the risks that accompany secret payments to foreign governments. Because project level payment disclosures increase transparency, reveal discrepancies, protect investors, and help combat corruption, the Trump administration’s recent actions contrary to such goals have generated widespread criticism that the U.S. is abandoning its efforts to combat corruption.
Extractive Industry FCPA Case Studies
Given the recent repeal of § 1504 and the stalled progress towards being EITI compliant, questions remain as to whether the disclosure requirements would have made a difference and whether they would have been effective complements to the FCPA. To help answer these questions, this blog looks at two FCPA enforcement actions: United States. v. Total S.A. and United States v. Statoil, ASA and considers when these disclosures would have been triggered and whether they would have been effective deterrents or self-monitors.
United States v. Total S.A.
In United States v. Total, a French oil and gas company (Total) sought to obtain contracts with the National Iranian Oil Company (“NIOC”) to develop gas fields in Iran in 1995. Total entered into consulting agreements with an Iranian government official, under which Total would pay an intermediary designated by the Iranian official; during the course of three years, Total paid about $16 million in bribes pursuant to this agreement. In another scheme, in 1997 Total entered into a second purported consulting agreement with a different intermediary to negotiate a contract with the NIOC; under that agreement, in the following seven years, Total paid $44 million in bribes. Between 1995 and 2004, Total made unlawful bribery payments totaling approximately $60 million under the direction of the Iranian official via two intermediaries; in return, the government official leveraged the official’s connections and influence to provide Total with lucrative rights to oil and gas fields in Iran. Total mischaracterized those payments as “business development expenses” in its financial records. In 2013, Total agreed to pay a penalty of $245.2 million as part of the deferred prosecution agreement (“DPA”) with the DOJ—one of the largest penalties in the history of FCPA enforcement. Total also spent $398 million to settle the SEC charges, and it paid disgorgement of $153 million.
The FCPA enforcement action took place nearly a decade after Total had made corrupt payments. Therefore, much of this investigation happened before the U.S. started aggressively prosecuting FCPA violations, before the EITI standard, and before the enactment of § 1504.
Counterfactually, if the EITI and § 1504 were applicable back in the 1990s, then Total’s payments to the Iranian government official would have been reportable. Because the payments occurred under two distinct projects pursuant to two consulting contracts, the disclosures would have been made separately. Furthermore, the disclosures would have identified the payment amounts at each project level rather than one aggregated lump sum at the “political subdivision” level, which is API’s preferred method. Total could have tried to evade the reporting requirement by arguing that it did not cover payments to intermediaries—i.e., non-governmental entities. This line of reasoning would likely be unpersuasive, however, because the intermediary would be an “agent” under the definition of the foreign “government” in § 1504. Therefore, even under the guise of the consulting agreements, the disclosure obligation would be triggered.
United States v. Statoil, ASA
In U.S. v. Statoil, the Norwegian oil company paid $15 million in bribes to an Iranian official in 2001 and 2002 to procure a contract to develop oil and gas rights in Iran. Statoil and the Iranian Official negotiated the terms of a Consulting Contract through which Statoil paid bribes to the Iranian Official. The “consulting company” invoiced Statoil to pay $200,000 in June 2002, $5 million in December 2002, and ten subsequent annual payments of $1 million each. Statoil’s internal audit department discovered the bribe payments in March 2003 and informed senior management, the chairman, and the CEO, but no appropriate measures were taken. Ultimately, the Consulting Contract between Statoil and the Iranian Official was disclosed in the Norwegian press in September 2003. In 2006 Statoil entered into a three-year DPA with the DOJ, acknowledged its FCPA violations, and agreed to pay $10.5 million penalty as well as disgorgement of an additional $10.5 million to the SEC.
Like Total’s bribes, Statoil’s payments occurred before the enactment of § 1504 of the Dodd-Frank Act and before the U.S. was accepted as a EITI candidate in 2014. Yet, had these disclosure rules been in place, Statoil would have had to report the payments. As in Total, Statoil made bribe payments through the consulting company. The facts are only superficially different in that the consulting company was not designated as “Intermediary One” or “Intermediary Two” so it could be seen that there was no intermediary agent as in Total to peddle the payments from the oil company to the foreign official. Even though, in Statoil, the Iranian official who indirectly controlled the oil fields negotiated the Consulting Contract and was the consultant under the contract, he also functioned as an “intermediary” for the purpose of § 1504.
As for the timing of the hypothetical disclosures under EITI or § 1504, Statoil would have made the disclosures after each payment. Some commenters may argue that if Statoil had broken down the payments to the Iranian Official into smaller amounts, Statoil could have avoided the reporting requirements and detection. Yet, this is an inaccurate interpretation; § 1504 mandates disclosure of a single payment or a series of payments totaling at least $100,000. Because Statoil’s payments add up to $15 million—far above the $100,000 threshold—Statoil would have had to report the unlawful series of payments.
However, Iran is not a country implementing the EITI standard. Thus, the Iranian government would not be obligated to make public the payments it received from Statoil. As a result, comparing the payments made to the government versus the payments received by the government would be more difficult and the public would not have the opportunity to see how the Iranian government allocated or used the accepted payments from Statoil.
Nonetheless, if Statoil had to report the payments, arguably it would have been deterred from further violating the FCPA. On the other hand, Statoil could have sought other avenues to pay the Iranian official to secure rights to develop the oil field. Unfortunately, the disclosure requirements may have been an ineffective deterrent, considering that the CEO of Statoil ignored the warning by the internal auditing department when it discovered the irregular payments to a non-existing company and the security group prompted remedial action. This type of willful ignorance on the part of Statoil’s management suggests that even if the EITI standard and § 1504 were in full force, Statoil would have engaged in the same corruption to advance its oil and gas businesses in Iran.
Based on the facts and the DPA from United States v. Total and United States v. Statoil, it is unclear whether the reporting requirements set out by the EITI global standard or the now repealed § 1504 of the Dodd-Frank Act would have caused Total and Statoil to make different decisions had they been in place at the time. In both cases, Total and Statoil’s payments would have triggered disclosures, and the payments would have been subject to a reporting requirement at the project level. Both Total and Statoil’s payments went through a consulting agreement so that the foreign official did not directly accept payments from the extractive companies; instead, the bribe payment was a step removed and made to look like there were services being performed in consideration of the payments. As such, these cases are less transparent and more complicated when it comes to following the trail of payments.
Regardless of the potential effectiveness of the EITI and § 1504 that codified the U.S. version of the PWYP rule, the U.S.’ initiatives did have the potential to bring transparency by increasing access to information about the extractive industries, publicizing how foreign governments spend money paid by extractive industries, and revealing whether those funds are being skimmed by the government officials or being put to use for the benefit of the public. It may impossible to determine whether the disclosures would have made a difference, but the demonstrated intent of the mandated disclosures would could have led to less corrupt practices in the extractive sectors in the long run, thus serving the purposes of the FCPA.
 15 U.S.C. § 78m.
 15 U.S.C. § 78dd-1.
 Max George-Wagner, Oil, Gas, Mining Remain Major Focus for FCOA Investigations, Natural Resource Governance Institute, (Oct. 18, 2016), https://resourcegovernance.org/blog/oil-gas-mining-remain-major-focus-fcpa-investigations.
 Will White, Oil, Corruption, and the Department of Justice: FCPA Enforcement and the Energy Industry, 10 Tex. J. Oil Gas & Energy L. 181, 189 (2013-2014).
 Id. The eleven companies were KBR, Total, ENI, Technip, JGC, Pride International, Marubeni, Baker Hughes, Willbros, Chevron, and Tital.
 See id; Amy Deen Westbrook, Enthusiastic Enforcement, Informal Legislation: The Unruly Expansion of the Foreign Corrupt Practices Act, 45 Ga. L. Rev. 489, 512 (2011).
 These enforcements significantly impacted investigations related to the United Nations Oil for Food Program and the Brazil Operation Carwash. See, e.g., United States v. Weatherford Services, Ltd., 13-CR-734 (S.D. Tex. 2013); United States v. Total, S.A., 1:13-CR-239 (E.D. Va. 2013); United States v. Flowserve Pompes Sas, 08-CR-035-RJL (D.C. 2008) (listing examples of FCPA actions connected to Iraq’s “Oil for Food” scandal). See also United States v. Odebrecht S.A., 16-CR-643 (E.D.N.Y. 2016) (listing examples of FCPA investigations related to Brazil “Carwash” scandal).
 See DLA Piper, FCPA Enforcement: Trends Facing Energy Companies, (Jun. 3, 2015), https://www.dlapiper.com/~/media/Files/Insights/Events/2015/06/June3FCPAPowerpoint.pdf.
 Adam Davidson, Did the U.S. Just Pull Out of a Global Anti-Corruption Group?, The New Yorker, (Apr. 2, 2017), http://www.newyorker.com/business/adam-davidson/did-the-u-s-just-pull-out-of-a-global-anti-corruption-group.
 The Resource Curse: The Political and Economic Challenges of Natural Resource Wealth, Natural Resource Governance Institute, NRGI Reader, Mar. 2015. See also Escaping the Resource Curse, 34-35 (Macartan Humphreys, et al. eds., 2007).
 See Managing bribery and corruption risks in the oil and gas industry, EY, 5 (2011); DLA Piper, FCPA Enforcement: Trends Facing Energy Companies, (Jun. 3, 2015), https://www.dlapiper.com/~/media/Files/Insights/Events/2015/06/June3FCPAPowerpoint.pdf.
 See id.
 See id.
 See id.
 15 U.S.C. § 78dd-1(f)(1)(A).
 See The Foreign Corrupt Practices Act: Focus on the Mining and Oil & Gas Industries, Bryan Cave, (Feb. 15, 2012), http://root.bryancavemedia.com/docs/021512_focus_mining_oil_gas.pdf.
 See Daniel Chow and Thomas Schoenbaum, International Business Transactions: Problems, Cases, and Materials, 527 (3d. Ed. 2015).
 See Davidson, supra note 11.
 Philip Urofsky, Hee Won (Marina) Moon, and Jennifer Rimm, How Should We Measure the Effectiveness of the Foreign Corrupt Practices Act? Don’t Break What Isn’t Broken – The Fallacies of Reform, 73:5 Ohio St. L. J. 1145, 1162 (2012).
 See Davidson, supra note 11.
 See id.
 15 U.S.C. § 78m(q); Tom DiChristopher, Trump and GOP killed an energy anti-corruption rule for no good reason, advocates say, CNBC, (Feb. 14, 2017 3:16 P.M.), http://www.cnbc.com/2017/02/14/trump-and-gop-killed-energy-corruption-rule-for-no-good-reason-advocates-say.html; Administration Sounds Death Knell for Transparency Initiative, EITI, (Mar. 20, 2017), https://www.earthworksaction.org/media/detail/administration_sounds_death_knell_for_transparency_initiative#.WRp4nhPyvBI.
 15 U.S.C. § 78m(q); Fact Sheet: Disclosing Payments by Issuers Engaged in Resource Extraction, SEC, (Feb. 6, 2017), https://www.sec.gov/opa/Article/press-release-2012-164—related-material.html (last visited May 12, 2017).
 Cf. Letter from Global Witness to SEC, Mar. 8, 2016 (urging the SEC to finalize the proposed Rule 13q-1 implementing § 13(q).).
 See DiChristopher, supra note 24.
 15 U.S.C. § 78dd-1.
 EITI Requirement 4, The EITI Standard 2016, 22; 15 U.S.C. § 78m(q)(1)(B).
 15 U.S.C. § 78m(q)(1)(B).
 See DiChristopher, supra note 24.
 See id.
 See Davidson, supra note 11.
 API v. SEC, Civil Action No. 12-1668 (D.D.C. 2013).
 See Global Witness 2; Letter from Exxon (Feb. 16, 2016), at 7; Letter from API (Feb. 16, 2016), at 7, 35.
 See 156 Cong. Rec. S3816 (May 17, 2010) (quoting Senator Lugar as saying § 1504 “domestic action will complement multilateral transparency efforts such as the EITI”).
 15 U.S.C. 78mq(2)(A) (emphasis added).
 15 U.S.C. 78mq(2)(D)(ii)(VI) (emphasis added).
 See 156 Cong. Reg. S3316 (May 6, 2010). See also Letters from Senators Richard G. Lugar, Carl Levin and Christopher J. Dodd (Feb. 4, 2016); Letters from Senators Benjamin L. Cardin, Patrick Leahy, Richard J. Durbin, Sherrod Brown, Elizabeth Warren, Tammy Baldwin, Edward J. Marke, Christopher A. Coons, Jeanne Shaheen, Sheldon Whitehouse, Robert Menendez and Jeffery A. Merkley (Feb. 5, 2016).
 Press Release, SEC, SEC Charges Total S.A. for Illegal Payments to Iranian Official (May. 29, 2013); United States v. Total, S.A., No. 1:13CR 239, Deferred Prosecution Agreement (E.D. Va. 2013).
 See Press Release, Dep’t of Justice, French Oil and Gas Company, Total S.A., Charged in the United States and France in Connection with an International Bribery Scheme (May. 29, 2013).
 United States v. Total, S.A., No. 1:13CR 239, Deferred Prosecution Agreement, at A-5, 7 (E.D. Va. 2013) (Statement of the Facts).
 Press Release, Dep’t of Justice, French Oil and Gas Company, Total S.A., Charged in the United States and France in Connection with an International Bribery Scheme (May. 29, 2013).
 The first project is located in Sirri A and E oil fields, and the second project is located in South Pars gas field. These projects are pursuant to the Consulting Services Request umbrella agreement with Intermediary One as well as Consulting Services Request umbrella agreement with Intermediary Two. Id. at A-5, 6.
 United States v. Statoil, ASA, No. 06-960, Deferred Prosecution Agreement (S.D.N.Y. Oct. 13, 2006); Press Release, Dep’t of Justice, U.S. Resolves Probe Against Oil Company that Bribed Iranian Official, (Oct. 16, 2016).
 United States v. Statoil, ASA, No. 06-960, Deferred Prosecution Agreement (S.D.N.Y. Oct. 13, 2006), App. A, at 1, 3.
Id., Deferred Prosecution Agreement, at 3-4.
 See id., Deferred Prosecution Agreement App. A, at 5.
 Id., Deferred Prosecution Agreement, at 1-3.
 In spite of Statoil’s security group’s troubling report in June 2003 that Statoil may have violated Norwegian and U.S. anti-bribery laws, Statoil’s senior management failed to take appropriate action to address the Consulting Contract and Statoil’s relationship with the Iranian official. Statoil’s then-Chairman of the Board, instead of taking up the matter, told the security group to raise the issue with the CEO. Upon the security group’s recommendation of ceasing payments under the Consulting Contract and terminating the Contract, the CEO agreed to suspend payment but refused to terminate the Contract or to address the principal concerns of the security group. See United States v. Statoil, ASA, No. 06-960, Deferred Prosecution Agreement Appendix A, at 4 (S.D.N.Y. Oct. 13, 2006).