The United Kingdom made good on its commitment to be on the forefront of new transparency rules for oil, mining and other extractive companies, with newly required annual reports of country by country payments entering into force at the start of 2015.
The reporting requirements, contained in the European Union’s Accounting Directive of 2013, were implemented ahead of the 20 July deadline for Member States. The U.K. government said that portion of the accounting directive was implemented first because of Prime Minister David Cameron’s 2013 pledge to implement early “in order to demonstrate the U.K.’s commitment to the global company transparency agenda.”
Under the new rule, companies involved in extractives sectors like oil and mining and the primary forest logging sector will have to report payments to governments on a country by country basis, preparing the disclosure annually and making it public by the latest six months after the end of the financial year. The rule applies to listed undertakings in which the U.K. is the home state and which are subject to U.K. disclosure and transparency rules. It also will apply to listed companies and issuers of securitized derivatives that are required to comply with DTR4, according to the Financial Conduct Authority. Exemptions are available for subsidiaries whose parent companies must file the government payment disclosure in another Member State or in a third-party state with equivalent rules.
The rule applies to financial years beginning on or after 1 January 2015.
Failure to comply triggers criminal penalties, with possible jail terms and fines for directors of companies that do not file the required reports or anyone found to be filing false reports. The criminal penalties were opted for by the U.K., which modeled the penalty regime after other corporate offenses, but was not mandated by the EU directive. The EU directive called for “a penalty regime that is effective, proportionate, and dissuasive,” according to government documents.
Martin Ewan, oil and gas partner with London law firm Pinsent Masons, told the Financial Times last week that it remains to be seen whether the new rules will be effective or just be another “box ticking” reporting requirement for companies. “The fact that the regulation is backed by the most severe of penalties would suggest the new rules will have teeth,” Ewan told FT.
The goal of the requirement is to lift the veil on corporate payments to resource rich, economically poor countries in a bid to cut down on corruption and enable those living in host countries to hold their governments accountable for payments for natural resources. Boosted by efforts such as the Extractive Industries Transparency Initiative (EITI), the U.K. and 47 other nations have agreed to tougher rules. Major gas and mining companies, including BP, Alcoa, and Statoil, also are working with the EITI.
Most of the feedback received during the U.K.’s consultation phase revolved around technical requirements for the reporting format, rather than objections to the rules themselves, the FCA said. An impact assessment said the typical cost to comply initially will be around £12 million, with annual costs around £6 million in subsequent years. The assessment said extractives companies and investors are likely to reap intangible benefits from the new rules, including a better operating environment and reduced risk for the companies, and increased transparency for investors.