Disclosure provisions in the extractive industries

Publication | May 2013

The EU Perspective


On 25th October 2011 the European Commission (‘the Commission’) adopted a legislative proposal1 for the revision of the Accounting2 and Transparency Directives3. The proposals aimed at introducing mandatory country-by-country and project-by-project reporting for multinationals in the extractive (oil, gas and mining) and forestry industries of payments made to governments. The proposals in substance mirror the guidelines developed by the Extractive Industry Transparency Initiative (‘EITI’), which were strongly advocated under President Barroso’s leadership.

Following almost two years of negotiation, on 9th April 2013 EU Parliament and Council legislators agreed on the final ambit of the revised Directive. The precise wording of the Directive is still in flux, but certain details have emerged from those involved in its drafting.

Who has to disclose?

All EU listed and large privately owned extractive and forestry companies will be required to disclose. The revised Accounting Directive defines a large company as one which exceeds two of the three following criteria:

  1. A turnover of at least €40 million;
  2. Total assets of at least €20 million;
  3. At least 250 employees.

The existing Accounting Directive regulates the information provided in the financial statements of all limited liability companies registered in the EEA. It is expected that an agreement will soon follow on the incorporation of the disclosure proposals into the revised Transparency Directive. This will extend the disclosure requirement to include all companies listed on EU regulated markets (e.g. London Stock Exchange), even if they are not registered in the EEA and are incorporated in a third country.

What has to be disclosed? And, when does it have to be disclosed?

The Directive sets a materiality threshold of €100,000. This means that any payments made by companies in the extractive and forestry industries over €100,000 to governments, regional and local authorities will have to be disclosed. Examples of such payments may include: taxes on profits; royalties; dividends; bonuses; and licence fees.

These payments will have to be disclosed annually on a country-by-country and project-by-project basis. In the latter case, this means that disclosure will be made where payments have been attributed to a specific project.

What are the penalties for non-disclosure?

As the wording of the Directive has not been finalised we are unable to comment on the precise nature of the sanction that could be imposed. However given the strong standard that the Directive appears to adopt, it is likely that any sanction will be punitive.

What impact will the revised Accounting Directive have?

The impact of the revised Directive will be twofold:

  1. The requirement to disclose payments to governments will increase transparency in the operations of multinational companies in the extractive and forestry industries by allowing access to information which was not previously available; and
  2. The duty to disclose will be strict. During the negotiations on the ambit of the Directive, a number of oil companies had campaigned that there were countries which forbid, as a matter of criminal law, the disclosure of payments to governments. However in the final revised Directive, EU lawmakers have decided to adopt a strong standard and as such it will contain no exemptions.

The Directive will now go forward to be formally agreed by member states and the European Parliament, with a vote scheduled in its plenary session in June 2013. Although the Directive follows the guidance from the EITI, once enacted, its contents will have the binding effect of EU law. This will put the EU on an equal footing with the US which also adopted disclosure requirements in July 2010 through enacting Section 1504 of the Dodd-Frank Act.

The Directive also requires that in 2015 the Commission should review the possibility of extending the disclosure requirements to other sectors such as banking, construction and telecommunications.

The US Perspective


On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or “the Act”) which called for broad financial and other regulatory reforms. Section 1504 of the Act imposed reporting requirements on members of the extractive industry (oil, gas and mining companies) to disclose all payments made to governments.

On August 22, 2012, the SEC adopted its final rules implementing section 1504. Specifically, new rule 13q-1 (“Rule 13q-1”) under the Securities and Exchange Act of 1934 (the “Exchange Act”) implements the section 1504 disclosure requirements. The final rules are currently being challenged in a suit filed by a number of industry groups, with other groups and members of Congress having intervened or filed amicus briefs in support of the rules. The SEC has declined to stay the effective date of the final rules.

§1504/Rule 13q-1

According to the SEC’s adopting release (the “Adopting Release”), section 1504 was enacted “to increase the transparency of payments made by oil, natural gas, and mining companies to governments for the purpose of the commercial development of their oil, natural gas, and minerals”4. The “primary goal” of the increased transparency is to “help empower citizens of those resource-rich countries to hold their governments accountable for the wealth generated by those resources”.5

Section 1504 and 13q-1 are generally held to be consistent with the EITI. Whereas the EITI focuses on payments made in connection with exploration and production of oil, gas, and minerals, 13q-1 also includes processing and exporting (see paragraph below).

Who has to disclose?

Rule 13q-1 applies to all companies required to file annual reports with the SEC that are involved in the commercial development of oil, natural gas, or minerals (defined as “Resource Extraction Issuers”).

The term “Commercial Development” is defined all inclusively as “exploration, extraction, processing, and export of oil, natural gas, or minerals, or the acquisition of a license for any such activity”.

What has to be disclosed, how, and when?

Resource Extraction Issuers are required to disclose annually payments of $100,000 or greater as a single payment or series of related smaller payments made directly to the U.S. Federal Government or to a foreign government by the Resource Extraction Issuer, or by a subsidiary or other entity under control of the Resource Extraction Issuer for the purpose of the commercial development of oil, natural gas, or minerals.

The term “Foreign Government” includes a foreign government, a department, agency or instrumentality of a foreign government, or a company majority-owned by a foreign government, including state-owned oil companies.

Payments that require disclosure include taxes, royalties, fees (including concession fees), bonuses, infrastructure improvements, and production entitlements.

Subject companies must comply with 13q-1 within 150 days after the end of the issuer’s most recent fiscal year, beginning with fiscal years ending after September 30, 2013. All payment activity after October 1, 2013 must be reported. Reporting must be done on a project by project basis. The SEC left the term “project” undefined. Reporting must be done with electronic tags that identify:

  • Total amounts of the payments, by category;
  • Currency used to make payments6;
  • Financial period in which payments were made;
  • Business segment that made the payments;
  • Government that receive the payments and country in which the government is located; and
  • Project to which payment relates.

What are the penalties for non-disclosure?

While penalties are not specifically addressed in 13q-1, the SEC could suspend or revoke a company’s registration for failure to make required periodic filings with the SEC, under Section 13 of the Exchange Act. Further, a “false or misleading” statement in the disclosure filing could subject the issuer to liability under Section 18 of the Exchange Act.

What impact will these legislative measures have?

Transparency of payments to foreign governments and the resulting ability of a nation’s citizenry to hold governments accountable for those payments is the stated goal of the disclosure requirements. However, from a practical standpoint, the internal impact on the applicable industries will be multifaceted and will be administrative as well as operational.

On the administrative end, companies subject to the requirements will have to assess and most probably modify current accounting procedures or systems to efficiently and effectively comply with the reporting requirements.

Operationally those companies subject to the provisions will have to:

  • Determine which aspects of their business are subject to the reporting requirements;
  • Determine how to define “project” in all affected areas of the company and be consistent in the definition for tracking payments;
  • Determine which payments within those segments are reportable; and
  • Determine whether they need to report all of an amount where that amount includes some payments not subject to the reporting requirement. They will also need to consider the accurate identification of third party payments that fall within the requirements.

To be in a position to comply with these legislative provisions, companies in the applicable industries should have an initiative in place, led by a team that includes members from legal/compliance, audit, accounting, IT, and operations.

This article was co-authored by Marsha Gerber (Partner) and Cristina Lunders (Senior Associate) of Fulbright & Jaworski LLP.

  1. IP/11/1238
  2. 78/660/EC and 83/349/EEC
  3. 2004/109/EC.
  4. SEC Release No. 34-67717
  5. Id.(citing statement by Senator Richard Lugar, 156 Cong. Rec. S3816 (May 17, 2010).
  6. Payment must be reported in U.S. dollars or the issuer’s currency, thus conversion may be necessary.  Rule 13q-1 sets out three methodologies for conversion, the issuer must state which method is used.



Sam Eastwood

Sam Eastwood

London Nordic region
Ruth Cowley

Ruth Cowley