Bonnie J. Palifka, Assistant Professor of Economics at Mexico’s Tecnológico de Monterrey (ITESM) contributes today’s guest post:

Last Friday, following the U.S. House of Representatives, the Senate voted to repeal a Securities and Exchange Commission (SEC) regulation that required oil, gas, and minerals companies to make public (on interactive websites) their payments to foreign governments, including taxes, royalties, and “other” payments. The rule was mandated by Section 1504 of the 2010 Dodd-Frank Act, but had only been finalized last year. President Trump’s expected signature of the congressional resolution repealing the rule will represent a major blow to anticorruption efforts, and a demonstration of just how little corruption matters to his administration and to Congressional Republicans.

The extractive industry had lobbied against this rule, arguing that having to report such payments is costly to firms and puts them at an international disadvantage. Some commentators have supported their efforts, arguing, for example, that the Section 1504 rules are unnecessary because the Foreign Corrupt Practices Act (FCPA) already prohibits firms under SEC jurisdiction—including extractive industry firms—from paying bribes abroad. This argument misses the mark: The extractive sector poses especially acute and distinctive corruption risks, which the FCPA alone is unlikely to remedy if not accompanied by greater transparency.

The extractive sector is especially prone to corruption because there are potentially enormous rents available for sharing. Of the corruption cases ending in conviction or settlement in OECD countries between 1999 and 2013, 19% of them were in the extractive sector; bribes in this sector are also larger than in other industries, representing 21% of the transaction value. One-half of firms debarred or conditionally non-debarred by the World Bank in more than one country operate in oil & gas, mining, or both. Firms in the extractive sector share the characteristics identified by Jacob Svensson as increasing the propensity to bribe: they have high profits, exit (that is, moving to another country) is difficult, they use public services, and they import or export their products. It is thus unsurprising that many resource-exporting countries suffer the “Nigerian curse”—a wealth of natural resources that does not translate into greater well-being for the majority of citizens. Especially when access to the resource is controlled by the state, this position may be exploited to extort funds from would-be investors. For example, Saddam Hussein reportedly underpriced oil in exchange for kickbacks in the UN-sponsored oil-for-food program. The Petrobras scandal in Brazil includes kickbacks and bid-rigging involving several companies—most prominently Odebrecht, which has also admitted to bribing officials in Mexico’s parastatal oil company, Pemex. Lest you think that such corruption occurs only in less-developed oil-rich countries, Jens Christopher Andvig documents such practices among UK and Norwegian firms operating in the North Sea; he highlights the manipulation of the bid process via illicit access to confidential information. Companies often compete to gain access to geographically-limited resources through bribery and other types of influence.

Publish-what-you-pay (PWYP) rules like those mandated by Section 1504 (and the Extractive Industries Transparency Initiative, which the US joined in 2014) help fight this corruption in several ways:

• First, disclosing total payments associated with particular extractive projects makes it easier to detect bribe, extortion, or kickback payments, which are often disguised as “consulting fees” or something similar. So even though extractive firms are still subject to the FCPA (for now), applying the FCPA is more difficult when firms fail to report their foreign payments.
• Second, citizens of the host countries have a right to know how much money their governments receive in exchange for the right to exploit national resources. After all, the corruption risk in this area is not only bribery paid by the foreign firm to host country officials, but—perhaps more significantly—to embezzlement or misappropriation of money paid to the host country government. (These points are linked, in that an extractive sector company may know, or at least suspect, that the money it pays for resource concessions are being pocketed by the officials or head of state; the failure to disclose enables firms to hide corrupt payments that prevent citizens from sharing in the benefits derived from their country’s natural resources.)
• Third, PWYP empowers anticorruption agencies in those foreign countries. Even when both the firm and the receiving government are operating honestly, individual employees may embezzle funds. PWYP gives auditors the ability to compare the amount paid by firms to the amount received by the government entity. Any gap may be a justification to authorize an investigation, which may lead to prosecution.
• Fourth, much corruption is ultimately prosecuted under money laundering laws because many bribe payments are laundered through shell companies and intermediaries. Public disclosure of payment recipients provides at least the first link of the money trail that may ultimately lead to politically-exposed persons (PEPs).
• Fifth, PWYP promotes fair competition. By publishing this information, all competing firms are able to discover what the going price is when applying for licenses, contracts, imports, etc. and to identify when they are being fleeced. It is, thus, in the best interest of honest firms to PWYP.

Right now, the needed transparency in the extractive sector is sorely lacking: according to a 2014 Transparency International report that ranks companies by the transparency of their reporting, the average score for country-by-country reporting for the 19 companies from the oil and gas sector covered in the report was 10 out of 100—with a high of 66 for Norway’s Statoil and a zero for six companies from Russia, China, Brazil, and France. The average for US oil and gas companies? 5.25. Even with the disclosure requirement, firms and employees have faced incentives to engage in corruption and hide it, but disclosure makes deception more difficult.

The most pressing concern here, however, is the long-term implication of repealing the Section 1504 rule. The repeal of the rule is most likely the first in a series of such moves to dissect and annihilate the Dodd-Frank Act, as Trump has promised to do. The repeal of the disclosure rule for the extractive industry on the basis that compliance is too costly sets a dangerous precedent, one that commercial and investment banks (among others) will be all too eager to seize upon. When they do, it seems that Trump, his Goldman Sachs cabinet, and the Republican legislature will be ready to accommodate.

When business pushed back against the FCPA, the US responded by lobbying to raise global standards, rather than sink back down to them. The world responded with a series of regional anticorruption agreements, culminating in the UN Convention Against Corruption. Likewise, PWYP and country-by-country transparency are relatively new practices that should not be abandoned just because others have not yet caught up. Indeed, the SEC rule has already inspired many other countries.  From its inception, the United States has been built on “do it better,” not “everybody else does it”—the United States has been, and should continue to be, a trailblazer for a higher standard.