Guest Post: The U.S. Retreat from Extractive Industry Transparency–What Next?

Zorka Milin, Senior Legal Advisor at Global Witness, contributes today’s guest post:

The US Department of the Interior recently took steps to halt its work on implementing a global transparency initiative for the resource sector, known as the Extractive Industries Transparency Initiative (EITI). This announcement came on the heels of the Congressional action repealing a related rule, adopted by the SEC pursuant to Section 1504 of the Dodd-Frank Act, that required oil, gas and mining companies to publish their payments to governments. The two issues are related but distinct. First, 1504 rule required US-listed companies to report payments they make to governments around the world. In contrast, the Extractive Industries Transparency Initiative (EITI) applies in those countries whose governments choose to join the initiative (including the US) and requires payments to be disclosed both by the recipient government as well as by all extractives companies that operate in that country. These differences in scope make the two transparency measures necessary complements to each other. EITI produces valuable information from governments about the payments they receive for their natural resources, whereas mandatory legal rules like 1504 are necessary to ensure meaningful and broad reporting from companies, including in those resource-rich countries such as Equatorial Guinea and Angola that are not part of EITI but are in desperate need of more transparency. Indeed, the US EITI experience shows that even in those countries that do commit to implementing EITI, EITI alone might not be enough to compel all companies to report, if it is not backed by domestic legislation.

Officials at Interior appear to be retreating from their ill-advised decision to effectively withdraw from EITI, but these mixed signals, especially when viewed together with the Congressional action, send a troubling message about the US government’s changing stance on anticorruption, and set back a long history of US leadership on these issues. Nonetheless, while these recent US developments are a setback from a US anticorruption perspective, the rest of the world is powering ahead with this much needed transparency.

Thirty other countries, including key jurisdictions such as the EU’s 28 member countries (including the United Kingdom), along with Canada, and Norway, have already implemented laws that are equivalent to the recently repealed 1504 rule, and companies have been complying without any problems whatsoever. And last month, the EITI, boasting 51 member countries, joined this global movement by finally agreeing to implement its disclosure requirements on a project-by-project basis, after years of delay due to the uncertainly, caused by the US oil companies, around 1504 implementation.  Contrary to concerns that this level of detail would place companies at a competitive disadvantage or reveal commercially sensitive information, such disclosures have been included in EITI reports from several countries, without ill effect.

More generally, some skeptics of extractive transparency, including on this blog, have questioned whether the EITI is a success story at all. The extent of the EITI’s success depends on how it’s measured. The EITI has been the most successful in institutionalizing transparency as a global norm; it has also been largely successful in operationalizing robust reporting and auditing standards, according to a recent meta-study. On the question of whether the EITI makes a difference to developmental and economic outcomes, the research to date is less clear, and it may simply be too early to tell. That said, two studies (Londono 2013 and  Schmaljohann 2013) showed that countries joining the EITI have increased inflows of foreign direct investment (FDI), because investors view the EITI commitment as a trustworthy signal of a country’s willingness to increase the transparency and accountability in the extractive sector, and this finding was is corroborated by a more recent study that found strong evidence that EITI participation was associated not only with an increase in FDI but also with an increase in domestic investment and an increase in sovereign bonds ratings (Claussen 2016).

As for whether the EITI can reduce corruption, the answer likely depends on factors like the active involvement of civil society in a country’s EITI process. This was the finding of at least one study that compared the EITI experiences of Peru and Mali (Etter 2012). Recognizing the central role of civil society in translating transparency into meaningful anticorruption action, in 2015 EITI adopted a groundbreaking international protocol to protect the active participation of civil society in the EITI process. As a result, oppressive and corrupt regimes like Azerbaijan can no longer benefit from the positive signalling of their EITI participation while continuing to silence their critics. Indeed, Azerbaijan was recently suspended from EITI for failing to improve its treatment of civil society groups.

On March 9, Azerbaijan responded to this decision by completely withdrawing from EITI, coincidentally on the same day that officials from the US Department of Interior announced that the US would be halting its work on producing its next report and therefore effectively signalling a withdrawal from the initiative. But even as the US appears to walk away from its key commitments on extractives transparency, EITI as a global institution has momentum and will go forward, with or without US involvement. Nor is this the end of the story on 1504: as Professor Stephenson explained, the Securities and Exchange Commission remains under a legal mandate to implement the law by February 2018. Certainly, those who support EITI realize that it is not a panacea, but rather an important part of a bigger puzzle that must also include key pieces such as the free and active engagement from civil society groups, access to open and interactive data, and corresponding legal measures to compel companies to report, and the anticorruption advocacy community must continue to push on all of these fronts.

3 thoughts on “Guest Post: The U.S. Retreat from Extractive Industry Transparency–What Next?

  1. Yes, I am skeptical about EITI’s efficacy. But my bigger concern is that it has been emphasized at the expense of another measure that a priori is at least as likely to make a difference on the corruption front: requiring companies with resource concessions to have meaningful anticorruption compliance programs in place. Assuming such programs are not simply “get-out-of-jail-free” cards, they can be a valuable adjunct both to government enforcement efforts and to EITI. Who knows? Perhaps EITI plus a compliance program requirement would produce a measurable difference in the short-run in resource corruption.

    • Mr. Messick, just to clarify, which entity should be responsible for requiring companies with resource concessions to have anticorruption compliance programs? The home country of the corporation? The host country? Or should terms be added to bilateral investment treaties and regional trade agreements? Lastly, do you have a story to tell about money/time that was spent on EITI that could have been redirected towards your alternative measure?

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