European companies in the oil, gas, mining, and logging industries will soon be required to reveal more about the payments they make to governments for the rights to extract resources in the countries in which they operate, significantly expanding the scope of similar efforts already underway in the United States.

Last month the European Union reached a preliminary agreement that would require companies in extraction businesses to disclose in their annual reports payments totaling more than €100,000 ($131,000) they have made to governments on a country-by-country and project-by-project basis.

The agreement will bring “a new era of transparency to an industry which is far too often shrouded in secrecy,” said Michel Barnier, European commissioner for the internal market. The new law also will “help fight tax evasion and corruption, as well as create the framework so both companies and governments can be held to account on the use of revenues from natural resources,” he said.

Specifically, the EU directive applies to:

All companies listed on EU stock markets that are active in the extractive and logging industries;

Large, unlisted companies registered in the EU that are active in the extractive and logging industries;

EU-listed or large unlisted parent companies in any sector with subsidiaries active in the extractive or logging industries; and

Small- and medium-sized unlisted companies that have EU-listed subsidiaries active in the extractive and logging industries. 

The EU directive follows a final rule issued by the Securities and Exchange Commission in August, as mandated under the Dodd-Frank Act, but with some significant differences. For one, the U.S. regulation applies only to listed companies, whereas the EU directive sweeps in large, unlisted companies registered in the EU. The EU directive defines a “large company” as one which exceeds two of the three following criteria: revenue of €40 million ($52 million); total assets €20 million ($26 million); and more than 250 employees.

Another major difference is that the EU initiative also sweeps in the forestry industry, whereas the Dodd-Frank requirement applies only to oil, gas, and mining companies. According to Transparency International, the combined scope of the EU and U.S. rules will cover 90 percent of the world's major international extractive companies.


“With the U.S. law covering the vast majority of internationally operating oil companies and the world's largest mining companies along with the European rules covering even more companies, the transparency net will be cast far and wide,” said Ian Gary, senior policy manager of Oxfam America's oil, gas and mining program, a longtime advocate for such disclosures.

For companies subject to both the U.S. and EU rules, “the issue is going to be how to ensure compliance with two different regimes,” says Bruno Cova, partner of the law firm Paul Hastings and co-chair of its Milan office.

“This legislation will help create a new global benchmark for transparency in the natural resource sector,” said Jana Mittermaier, director of the Transparency International EU Office. “With this information, citizens of mineral-rich countries can ask hard questions of both companies and governments about the deals that they make.”

The requirements on disclosure of payments to governments could further be extended to the banking, telecommunications, and construction industries in 2015, when the EU plans to revisit the directive. Companies in these industries should also be monitoring these developments, “so they can learn beforehand how to better prepare themselves,” says John Zadkovich, a member of the London office of law firm Vinson & Elkins.

Broader Implications

Both the U.S. and EU disclosure requirements indicate a growing global trend toward greater transparency in the extractive industry.  “The big picture is that this is a direction that a lot of countries and regions are moving toward,” says Rachel Speight, a partner in the London office of law firm Mayer Brown.

Legal experts are quick to point out that the EU directive by itself is not revolutionary. It's designed to complement similar disclosure requirements that already exist in the EU under the Extractive Industries Transparency Initiative (EITI), a coalition that promotes a global standard of revenue transparency in the extractive industries.

“With this information, citizens of mineral-rich countries can ask hard questions of both companies and governments about the deals that they make.”

—Jana Mittermaier,


Transparency International EU Office

Through the EITI, 70 of the world's largest oil, gas, and mining companies already report their revenues on a project-by-project basis.  Thus, for companies that already are complying with the disclosure rules under Dodd-Frank and the EITI, the EU directive “may not be a wholesale change in what they're doing already,” says Speight.

For companies that are not used to such disclosure requirements—such as those in the logging sector or smaller private companies that may now fall under the EU directive—the ramifications could be significant.

Some companies are concerned about the cost of complying with the new disclosure requirements. “A large listed EU company with international operations and numerous projects is likely to face significant costs,” Zadkovich says. Some companies project compliance costs for all extraction payments disclosure requirements to be in the tens of millions of dollars.

Disclosing payments at a project level effectively means looking at not just taxes, but also royalties, license fees, production entitlements, bonuses, dividends, and infrastructure improvements.It requires a different type of reporting than what many companies may currently be used to. “It's much more granular,” says Speight. “You really have to dig into a lot more detail.”

“It's going to be an additional requirement,” says Cova. It's a matter of coding each payment in a way that allows companies to identify and self-disclose, he says.

Small- to mid-size companies may be particularly affected, “because they may not have the teams of people already in place who can easily process this sort of information and produce this sort of reporting,” says Speight.

Zadkovich advises that companies review their existing accounting and internal controls, including their current software applications, to ensure they have the ability to discern costs and payments to governments on a country-by-country and project-by-project level. It will also be prudent to train employees on the effects of these new disclosure requirements, particularly in the accounting department, he says.

Other companies have expressed concern that competition in the industry could also be affected by having to disclose potentially sensitive information, restricting the ability to compete against companies not subject to such disclosure requirements. The concern is that “other companies will be able to see what their competitors are already paying in that country and might give them some competitive advantage,” says Speight.

While this argument has some merit, “it's not very strong,” says Zadkovich. The directive would not require any insight into such confidential information as revenue, profits, and cost. Additionally, many companies in the extractive industry already disclose payments to governments under EITI.

Practical Measures

One important decision companies will have to weigh under the directive is whether to continue with certain projects in jurisdictions where legal or contractual restrictions prohibit them from disclosing such information. “In those instances, the companies need to evaluate the projects and consider the risk versus the reward,” says Zadkovich.


Below is an excerpt from the European Commission's Transparency Directive regarding the reporting of payments made to governments.

The Commission has publicly expressed support for the Extractive Industry Transparency Initiative (EITI), and envisaged willingness to present legislation mandating disclosure requirements for extractive industry companies. A similar pledge was made in the concluding Declaration of the G8 Summit in Deauville of May 2011, where the G8 governments committed “to setting in place transparency laws and regulations or to promoting voluntary standards that require or encourage oil, gas, and mining companies to disclose the payments they make to governments.” Furthermore, the European Parliament has presented a resolution reiterating its support for country-by-country reporting requirements, in particular for the extractive industries.

EU legislation does not currently require issuers to disclose, on a country basis, payments to governments made in countries where they operate. Therefore such payments made to governments in a specific country are normally not disclosed, even though such payments by the extractive industry (oil, gas, and mining) or loggers of primary forests can represent a significant proportion of a country's revenues, especially in third countries that are rich in natural resources. In order to make governments accountable for the use of these resources and promote good governance, it is proposed to require the disclosure of payments to governments at the individual or consolidated level of a company. The Transparency Directive requires issuers to disclose payments to governments by referring to the relevant provisions of Directive 2011/../EU Council on the annual financial statements, consolidated financial statements, and related reports of certain types of undertakings which provides for the detailed requirements in this respect.

This proposal is comparable to the U.S. Dodd-Frank Act, which was adopted in July 2010, and requires 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. The SEC's implementing rules are scheduled to be adopted by the end of 2011.

Source: European Union Single Market.

For example, EU companies have to adhere to the disclosure requirements even for projects undertaken in jurisdictions where disclosure of payments to the government is prohibited by national law. “There may be certain jurisdictions where you have to go directly to the government and get actual consent in order to publish this sort of information,” says Speight. “It adds another layer of complexity."

If the government refuses to give consent, the only course of action would be for the company to withdraw from the project or face local criminal or civil sanctions for breach of national laws. Examples of countries that prohibit such disclosures include China, Angola, and Qatar.

Another situation companies need to assess is where they've entered into any contractual provisions that prohibit them from disclosing information. In this case, the company will need to reassess whether it will be in breach of the contract, and, if so, whether it needs to withdraw from that contract or seek to amend the terms of the contract, says Zadkovich.

For companies that aren't already ahead of these new disclosure rules, “you need to reconsider the way you do business now,” says Cova.  

The initiative now awaits final approval by the European Commission and the European Parliament and is expected to be formally adopted in June of this year and become binding by July 2014.

For the time being, Zadkovich recommends that companies look at the EITI principles as well as the Dodd-Frank transparency provisions “to get a flavor of what is going to be required.” But keep in mind, he says, that while EITI and Dodd-Frank are useful, “they are by no means definitive.”