In order to make governments accountable for the use of these resources and promote good governance, the proposal will require the disclosure of payments to governments in country-by-country and project-by-project reporting. Companies will be required to report payments if:
- they have publicly-traded securities in the European Union (EU)
- they meet two of the three following criteria:
- their balance sheet total is €20 million or more
- their net turnover is €40 million or more
- their average number of employees during the financial year is 250 or more.
This proposal is comparable to provisions of the US Dodd-Frank Act, adopted in July 2010, which require extractive-industry companies (oil, gas and mining companies) registered with the Securities and Exchange Commission (SEC) to publicly report payments to governments on a country- and project-specific basis.
Report on payments to governments
Member states of the EU shall require companies active in the extractive industry or logging of primary forest industry to report on payments made to governments on an annual basis. The report shall be made public six months after the end of each financial year at the latest, and shall remain publicly available for at least five years.
For each country where they operate, companies shall disclose the payments they make to governments in each financial year, where the amount is material to the recipient government. Where payments have been attributed to a project, payments for each project will also need to be disclosed.
Content of the report
When material to the recipient government, the report shall specify:
- the total amount per type of payment made to each government within a financial year, including payments in kind
- where payments have been attributed to a specific project: the amount per type of payment, including payments in kind, made for each such project within a financial year, and the total amount of payments for each project.
The following types of payments are required to be reported:
- production entitlements
- taxes on profits
- signature, discovery and production bonuses
- licence fees, rental fees, entry fees and other considerations for licences
- other direct benefits to the government concerned.
Where payments in kind are made to a government, they shall be reported in value or in volume. Where they are reported in terms of value, supporting notes shall be provided to explain how their value has been determined.
Things to think about
- How will you monitor and track all of your company’s payments, project by project, country by country?
- Can you engage and motivate a company-wide programme to realise and appreciate the new EU directives?
- Will you have the relevant resources available to collate and monitor this information?
- Have these requirements been raised with your company’s senior management, and do you have their support in ensuring your company is compliant?
Compliance personnel will welcome this legislation as it means that they can now build their compliance programmes in accordance with a concrete set of criteria from both EU and United States transparency legislation. A multinational company would be best placed to have a compliance programme that allows compliance and ethics officers an overview of contracted government projects. Having this information captured in a database, the compliance officer may be able to make an assessment on two common criteria:
- Countries placing on the transparency corruption index
- Revenue generated by the project.
Assessment on these two parameters would be useful to prioritise where to focus compliance time and resources.
This new legislation gives a fresh opportunity to engage the broader business in compliance procedures and best practice. It has been shown that the Foreign Corrupt Practices Act, UK Bribery Act and many other legislative directives have changed the way business is conducted with government and state-owned entities. For example, there is now a widespread trend of companies concentrating on monitoring of business interaction involving hospitality. Similarly, this new EU directive will trigger a shift toward companies having to devote various resources to ensuring that their reporting of government payments in the extractive and logging industries is of an exemplary standard. Early preparation as to how the company intends to handle these legislative requirements is the key to having a strategic advantage in avoiding serious scrutiny from regulatory authorities. Companies should be proactive in instilling this process within the business, and, first and foremost, should be ensuring that all levels of an organisation understand the importance of complying as such.