This alert also was published as a bylined article on Corporate Compliance Insights on July 12, 2016.

On June 27, 2016, the U.S. Securities and Exchange Commission (SEC) announced that it had adopted final rules requiring public disclosure, among other things, of certain payments made to foreign governments by resource extraction issuers in connection with the commercial development of oil, gas and mineral rights. These new SEC disclosure requirements are expected to raise Foreign Corrupt Practices Act (FCPA) enforcement concerns for energy companies, as both the SEC and the U.S. Department of Justice (DOJ) will scrutinize the new payment information for cause to open parallel investigations and potentially pursue issuers for alleged FCPA violations.

While the new rules are intended to reflect U.S. foreign policy interests in supporting global efforts to improve transparency in the extractive industries, they also raise potential FCPA concerns for both U.S. and foreign energy company issuers. Indeed, as FCPA enforcement remains a top priority for the U.S. government, the DOJ and SEC will actively review resource extraction issuers’ annual reports for information regarding payments to foreign government and use such information to identify and investigate energy companies that may have engaged in improper payments or that failed to properly account for them in violation of the FCPA.

Tackling Foreign Corruption through Mandatory Disclosure

The SEC’s new rules implement Section 13(q) of the Securities Exchange Act of 1934 (Exchange Act), as amended by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Dodd-Frank Act amended the Exchange Act by directing the SEC to adopt rules requiring every SEC-registered public oil, natural gas and mining company to submit an annual report, disclosing, among other things, information about payments made to foreign government for developing hydrocarbons or minerals. The SEC initially adopted implementing regulations for Section 13(q) in 2012, but the U.S. District Court for the District of Columbia vacated these rules in 2013 after industry groups and trade associations successfully challenged the SEC’s interpretation of its statutory mandate under the Dodd-Frank Act.

The new SEC rules require the disclosure, in annual reports filed after September 30, 2018, of certain types of payments made to “foreign governments” by issuers engaged in the “commercial development of oil, natural gas, or minerals” (i.e., the exploration, extraction, processing and export of such materials). The rules define “foreign government” broadly to include governmental departments, agencies and instrumentalities, as well as any corporation in which a foreign government has a greater than 50% ownership interest. Furthermore, covered payments are broadly defined to include all payments of $100,000 or more in a given fiscal year in furtherance of mineral and resource extraction, including “taxes, royalties, fees (including license fees), production entitlements, and bonuses, as well as community and social responsibility payments … and payments for infrastructure improvement.”

In addition, under the new SEC rules, a resource extraction issuer is required to disclose payments made by its subsidiaries and other entities under its control if those entities’ financial information must be consolidated or proportionately consolidated under the accounting principles applicable to the issuer’s financial statements included in its SEC reports. Finally, the new SEC rules provide that resource extraction issuers are required to comply with the foregoing disclosure requirements starting in the fiscal year ending on or after September 30, 2018, by publicly disclosing the required information with the SEC annually on Form SD no later than 150 days after the end of the issuer’s fiscal year.

Integrating SEC Payment Disclosure and FCPA Compliance Programs

The FCPA currently requires that all issuers, including resource extraction companies, maintain accurate books and records and internal controls to prevent improper payments to foreign government officials. Therefore, the DOJ and SEC are expected to use the new disclosure rules as a basis for launching investigations and potentially commencing prosecutions or bringing enforcement actions under the FCPA. Thus, although the new disclosure requirements do not go into effect until 2018, SEC-registered energy companies should consider incorporating payment disclosure procedures into their own FCPA and anti-corruption processes and compliance framework, as well as those of their subsidiaries and controlled entities.

What this means at a practical level is that subject issuers should adopt and implement generally accepted compliance best practices. In particular, SEC-registered energy companies should:

  • Engage legal counsel along with compliance and accounting staff to analyze existing SEC rules to determine the applicability of the new SEC disclosure requirements to the company, its subsidiaries or any controlled entity;
  • Implement effective tracking mechanisms among all affected business units for the purpose of identifying and collecting payment information required to comply with the SEC disclosure requirements; and
  • Implement internal monitoring protocols and compliance training to instruct compliance personnel on the new SEC disclosure requirements.

While such compliance procedures will help prepare issuers for the new SEC disclosure requirements, issuers should also analyze how increased government scrutiny on payments to foreign governments by both the DOJ and the SEC may affect their worldwide operations from an FCPA enforcement perspective.

Download: New SEC Payment Disclosure Rules Raise FCPA Concerns for Energy Companies 

These and any accompanying materials are not legal advice, are not a complete summary of the subject matter, and are subject to the terms of use found at: https://www.pillsburylaw.com/en/terms-of-use.html. We recommend that you obtain separate legal advice.