Oil, natural gas, and mining companies can expect greater scrutiny under the Foreign Corrupt Practices Act now that they are required to reveal more about the payments they make to governments for the rights to extract resources in the countries in which they operate. Now would be a good time for U.S. energy companies to brush up on their anti-corruption compliance practices.

As Compliance Week previously reported, the final rule adopted by the U.S. Securities and Exchange Commission mandates the disclosure, in annual reports filed after Sept. 30, 2018, of payments made to the U.S. federal government or a “foreign government” by “resource extraction issuers” that engage in the “commercial development of oil, natural gas, or minerals,” which broadly refers to the exploration, extraction, processing, export of such materials, or the acquisition of a license for any such activity.

The rule broadly defines a “foreign government” to mean a department, agency, or instrumentality of a foreign government, or any company in which a foreign government has a greater than 50 percent ownership interest. Thus, unlike the FCPA that requires all issuers to maintain accurate books and records and internal controls to prevent improper payments to foreign government officials, the SEC’s disclosure rule, in comparison, applies only to payment disclosures made to foreign governments—not individuals.

The overall intent of the SEC’s disclosure requirements, however, is to understand by virtue of how disclosures are made whether government officials may have personally benefitted from the transaction, potentially spurring more FCPA investigations and enforcement actions against energy companies that make improper payments, says William Sullivan, a partner at law firm Pillsbury and co-leader of the firm’s corporate investigations and white-collar defense team. “This is just another effort on the part of government regulators to tackle foreign corruption,” he says.

The disclosure requirements seek data at such a granular level that they provide enforcement agencies with a wealth of potential enforcement leads: Any transaction that equals or exceeds $100,000 in a given fiscal year must be disclosed, whether made through a single transaction or a series of related transactions. Among the payments that must be disclosed include taxes, royalties, fees, production entitlements, bonuses, payments for infrastructure improvements and, if required by law or contract, community and social responsibility (CSR) payments.

In requiring the disclosure of CSR payments, the SEC specifically cited instances in which oil companies operating in Equatorial Guinea diverted payments—that should have been paid to the government—to other accounts for potentially corrupt purposes, such as paying the educational expenses of the government officials’ relatives. “By requiring the public disclosure of the identity of the resource extraction issuers who are making payments, we believe this may help to deter their willingness to participate in any such diversions of government revenues or to enter into any contracts that have suspect payment terms,” the SEC stated.

To proactively identify FCPA risks in this new enforcement environment, extractive issuers should consider incorporating payment disclosure practices into their anti-corruption processes and compliance framework, as well as those of their subsidiaries and controlled entities. “These disclosures are going to mandate from the perspective of a publicly traded extractive issuer much more careful scrutiny of their own internal compliance programs, internal controls, and activities of employees and third parties,” Sullivan says.

“This is just another effort on the part of government regulators to tackle foreign corruption.”
William Sullivan, Partner, Pillsbury

Anti-evasion provision. In the context of FCPA risk, the rule also includes an “anti-evasion” provision requiring disclosures of activities or payments that, although not within one of the payment categories, are designed to evade a required disclosure. According to the final rule, this provision is intended to emphasize “substance over form or characterization and to capture any and all payments made for the purpose of evasion.”

The “anti-evasion” provision effectively includes transactions routed through third-party intermediaries—a familiar sore spot in the context of FCPA investigations and enforcement actions. According to data compiled by Stanford Law School and law firm Sullivan & Cromwell, 185 of 201 total bribery schemes occurring between 1971 and 2015 relied on third-party intermediaries such as agents, consultants, or contractors.

Under the final rule, resource extraction must also disclose payments made by its subsidiaries and other entities under its control that are consolidated—or its proportionate amount of the payments made by entities or operations that are proportionately consolidated—in its consolidated financial statements as determined by applicable accounting principles. Thus, implementing disclosures protocols for subsidiaries and controlled entities will also be an essential component of reducing FCPA risks posed by third-party intermediaries.

“Compliance is going to have to be on the lookout for possible circumvention of the rule because of the anti-evasion provision,” says Lara Covington, a partner with law firm Holland & Knight. “Making sure you understand how the reports are being prepared, what information is being looked at, and that nothing is being overlooked or omitted is going to be really important.”

From a practical perspective, compliance will have to rely on the individual business units in the countries in which they operate to collect all this information. Most multinational companies, however, should already have the necessary internal controls in place to achieve this.

Furthermore, compliance is going to have to determine where in the business payments to governments are being made, and then assess the best way to collect that information, Covington says. Once that information is collected, she says, compliance should verify the completeness and accuracy of the data collected, whether using internal or external resources. 


Section 13(q) reflects the U.S. foreign policy interest in supporting global efforts to improve the transparency of payments made in the extractive industries in order to help combat global corruption and promote accountability. We formulated the proposed rules with the purpose of furthering these interests, and federal agencies with specific expertise in this area submitted comments affirming that the proposed rules would accomplish that purpose. Notably, the U.S. Department of State expressed the view that, if adopted, the proposed rule would be a “strong tool to increase transparency and combat corruption” and stated that it would advance “the United States’ strong foreign policy interests in promoting transparency and combating corruption globally.”
In addition, the U.S. Agency for International Development (USAID) stated that the proposed rule, if adopted, would be “a significant step toward greater energy and mineral industry transparency and, correspondingly, strengthened governance and civil society anti-corruption efforts.” According to USAID, “enforcement of the proposed rule would contribute towards U.S. government foreign policy goals of supporting stable and democratic governments, and in particular towards USAID’s goal of providing assistance to resource-rich countries in support of economic growth, good governance, transparency, and building civil society.
Source: SEC final rule: Disclosure of Payments by Resource Extraction Issuers

In either case, compliance should review third-party relationships related to the projects involving payments to governments and investigate any red flags that may indicate potential deviation techniques, Covington adds.

A client alert published by Pillsbury further recommends that resource extraction issuers “should audit existing compliance policies and procedures, from both a programmatic and implementation perspective.” Additionally, they should review “existing internal controls, with an emphasis on areas of concern from an anti-corruption perspective, such as signature authorities and spending limits,” the client alert states.

In addition to auditing and monitoring controls, all compliance heads should be properly trained on the new SEC disclosure requirements.

M&A transactions. The payment disclosure requirements may additionally give the SEC clearer insight into due diligence practices in M&A transactions. Under the rule, an issuer that has acquired another issuer whose resource extraction payments must be disclosed is exempt from reporting payment information for the acquired company until the SEC’s Form SD filing for the fiscal year following the effective date of the acquisition.

“The acquirer needs to have a solid understanding of what the previous history of the acquired company was for purposes of future compliance,” Sullivan says. Thus, resource extraction issuers should conduct FCPA due diligence during the acquisition and promptly implement anti-corruption policies and procedures to prevent any post-acquisition improper payments, he says.

According to law firm Pillsbury, resource extraction issuers engaging in a merger or acquisition with another energy company should:

Submit a questionnaire to key personnel of the target energy company, interview select persons knowledgeable about the target’s overall operations, sales, and marketing activities, as well as its accounting procedures and financials;

Review the target energy company’s Code of Conduct, anti-corruption policies and procedures, trainings, background check procedures, and reporting hotline;

Sample the target company’s contracts with third parties, agents, and distributors;

Analyze profit and loss statements, financials, general ledgers, and expense and reimbursement data, including accounts payable procedures; and

Scrutinize information about government agencies and foreign officials with which the target company regularly does business or makes payments to, including a list of governmental permits and approvals that allow the target company to do business in the country or region.

“As resource extraction issuers’ payments to foreign governments and state-controlled entities are going to be carefully examined by the Department of Justice and the SEC, it is paramount that SEC-registered energy companies implement all the necessary compliance policies, procedures, trainings, and internal controls to prevent and promptly detect FCPA violations,” the Pillsbury client alert stated.

U.S. vs. EU disclosures. The SEC’s disclosure rule by itself is not revolutionary. It complements similar disclosure requirements already in existence—such as in the European Union and Canada.

The enforcement focus of U.S. regulators, however, is what U.S. issuers need to be thinking about. “The SEC’s interest is in enhancing information specific to the U.S. FCPA, while the European disclosure requirements are little bit more generalized,” Sullivan says.

Similar standards also have been issued by the Extractive Industries Transparency Initiative (EITI), a voluntary coalition made up of companies, foreign governments, investor groups, and organizations to promote a global standard of revenue transparency in the extractive industries. Specifically, EITI standards require full disclosure of taxes, royalties, and other fees paid to host countries from the oil, gas, and mining sectors.

The intent of the EITI initiative, officially developed in 2003, is to combat corruption and ensure transparent management of natural resources. Under EITI, extractive companies disclose what they pay to governments, and governments disclose any payments they receive from the sector.

Over 90 of the world’s largest oil, gas, and mining companies have chosen to become EITI supporting companies. Many are U.S.-member companies, including Alcoa, Hess, Marathon Oil, Newmont Mining, and Noble Energy.

“Once resource extraction issuers get used to complying, and they get familiar with the reports, it will just become another piece of the compliance process,” Covington says. “In those initial reports, it will be really important for compliance to have their hands around how the information is gathered and that nothing is being left out.”