September 3, 2010
My name is Mike Koehler, I am an Assistant Professor of Business Law at Butler University. I run the FCPA Professor Blog and my scholarship focuses on the FCPA and other anti-corruption laws and initiatives. Prior to academia, I was a lawyer in private practice focusing on the FCPA.
I respectfully submit the below comments in relating to Section 1504 "Disclosure of Payments by Resource Extraction Issuers" - a provision that was inserted into the financial reform bill at the last minute, and a provision that was not subject to any meaningful debate or analysis prior to enactment. In fact, Section 1504 is substantively similar to S. 1700, a bill introduced in the Senate in September 2009, but a bill that never made it "out of committee."
Bribery and corruption are bad, but that does not mean that every attempt to curtail bribery and corruption, however well-intentioned, is good or that it represents sound public policy.
Case in point is Section 1504 - a provision that is akin to "swatting a fly with a bazooka."
In short, Section 1504 will substantially increase compliance costs for numerous companies that already have in place extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments.
At this point, very little about Section 1504 is clear and therein lies the problem.
The key term "Resource Extraction Issuer" means an issuer that is engaged "in the commercial development of oil, natural gas, or minerals" and this later phrase is further defined to include "exploration, extraction, processing, export and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity, as determined by the SEC."
While in many cases, it will be clear whether a company is a "Resource Extraction Issuer" and thus have a significant disclosure obligation under Section 1504, in most cases, application of these terms will leave most companies wondering whether there is a disclosure obligation under Section 1504.
For instance, is selling equipment to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a "significant action relating to oil, natural gas, or minerals?" Is selling exploration software to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a "significant action relating to oil, natural gas, or minerals?"
It is one thing to perhaps require Resource Extraction Issuers to disclose royalties paid to a foreign government, however Section 1504 would currently require the disclosure of many other payments.
For instance, the term "foreign government" is defined in Section 1504 to include "a department, agency, or instrumentality of a foreign government, or a company owned by a foreign government."
The FCPA contains a similar, but not identical, definition of foreign official and under the FCPA, the SEC (as well as the DOJ) take the position, a position that has never been subjected to judicial scrutiny, that commercial enterprises that have publicly traded shares and that do business around the world are nevertheless foreign government "instrumentalties" if the foreign state has a majority ownership interest in the company (and in some cases even if the foreign government has less than a majority ownership interest).
In certain countries, notably China, there are likely to be (accepting this interpretation) hundreds of companies for which disclosure obligations may be triggered even though the Resource Extraction Issuer's interaction with such a company bears all the resemblances of a private business transaction.
Not only are Section 1504's definitions of "Resource Extraction Issuer" and "foreign government" incredibly broad and difficult to decipher, an additional troubling feature of Section 1504 is that it requires all payments (meeting the Section's definitions) to be disclosed, including perfectly legitimate and legal payments.
On this issue, I offer the following historical perspective.
The original versions of what became the FCPA (such as the "Foreign Payments Disclosure Act" and other similar bills) started out with disclosure provisions substantively similar to Section 1504 in that these early versions of the statute required all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.
Unlike Section 1504's provisions, the above disclosure provisions were the subject of numerous congressional hearings and debate. Congress sensibly was concerned that such disclosure provisions were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate.
Senator Proxmire (D-WI - a congressional leader on what would become the FCPA) said during congressional hearings: "I would think they the corporations subject to the disclosure requirements want some certainty. They want to know what they have to report and what they don't have to report. They don't want to guess and then find themselves in deep trouble because they guessed wrong."
The final House Report on what would become the FCPA (see Report No. 95-640 - Sept. 1977) is even more clear. It states (when discussing the various disclosure provisions that were debated, but rejected):
"Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements."
The words of the late Senator Proxmire and the sensible conclusion reflected in the House Report are equally applicable to Section 1504.