Last July, the Dodd-Frank act provided in its section 1504 that all companies operating in the extractive industries that must report to the U.S. Securities and Exchange Commission (SEC) would have to publish all payments they make to the U.S. government or any foreign government on a project basis. Since then, the French and British governments have supported similar EU legislation. Many international companies worldwide, and not only the U.S. companies, will be covered by the upcoming SEC regulations which implement section 1504.
The argument against such a provision—being a threat to competitiveness—was utilized widely even before Dodd-Frank was enacted, but we now hear another argument: forcing listed companies to publish their fiscal payments in each country would go against the sovereignty of those countries.
This argument is extremely interesting because of the use of the concept of sovereignty. The companies that effectively disclose their local payments, as shown in our Promoting Revenue Transparency 2011 report, do not appear to threaten the sovereignty of the countries in which they operate. Otherwise, they would probably have left these countries long ago.
Targeting Stock Exchanges is Key in Civil Society’s Push for Country-by-Country Reporting, writes François Valérian
Today, Transparency International and the Revenue Watch Institute have published the Promoting Revenue Transparency 2011 Report on Oil and Gas Companies. This report evaluates corporate reporting performance on anti-corruption programmes, on subsidiaries and partners, as well as on country-level financial results and technical data.
The report shows a concerning reporting gap. Most companies score significantly better in reporting on anti-corruption programmes than in country-level reporting of relevant financial and technical data. This gap further illustrates the major focus of corporate communication, at least for listed companies, which is to satisfy the global capital markets. What those markets want has to be communicated; what they don’t want or want less is given lower priority.
Civil society organisations have been successful in increasing the visibility of the fight against corruption, ensuring that the anti-corruption issue has reached the investor community, and more and more companies are now reporting on what they do in the area. Investors do not always perceive country-level information as relevant since they prefer financial data be broken down by global industry segments or by large regions, when it comes to geography. The political territory is rarely perceived as an economically relevant space.
Seventy-Seven Years After the Pecora Commission Released It’s Report on the Stock Market Crash of 1929, the U.S. Government Publishes a Familiar Document
The National Commission on the Causes of the Financial and Economic Crisis in the United States has recently published its report on the Financial Crisis. The more than 600 pages of this report are a must-read for all people concerned with the last crisis and the ways to avoid a future one.
I will not pretend here that I read the entirety of the document, only the conclusions, – and I did one additional reading…
The good thing with the conclusions of the report is that they contain the essential advocacy messages of civil society organisations around the financial crisis: lack of transparency, uncontrolled greed, conflicts of interest, poor supervision, or deceptive financial accounts.
The bad thing is that those conclusions share some similarities with the conclusions of an older report, the one published in 1934 by the US Senate Committee on Banking and Currency about Stock Exchange Practices. The 1934 report (PDF) drew the conclusions from the hearings organized by the Pecora Commission, which then offered the model for the commission formed in 2009.
A certain number of tools have been developed over the past two decades to enhance corporate or governmental transparency. Anticorruption prevention tools, integrity pacts, and good reporting or disclosure practices were adopted by a certain number of corporations, governments or public institutions, those being individual players in the global economy. Yet the 2008 crisis has shown that many individual commitments or right behaviors were not enough when a few uncontrolled players could put the entire system at considerable risk and threaten economic development for several years.
The issue of stolen assets and their management, or lack of adequate management, by the global financial system is a component of the broader issue of illicit money and how it flows through the financial system to be transformed into licit, “usable” money. This physical process, often referred to as money laundering – a sort of modern alchemy, it is important for anyone to understand who is genuinely concerned with the fight against political or business corruption.
In order to be successful at fighting corrupt practices, we need to know what these practices are and which ones work and which do not for moving one’s illicit income within the current financial system.
Most modern banks now have, or try to have, systems which are known as “Know Your Customers”, “Anti Money Laundering” or “Anti-Terrorist Financing”. They are also supposed to exercise increased scrutiny on “Politically Exposed Persons”. Banks and financial institutions now have to pay attention (“exercise due diligence” is probably too strong a word) to who their clients are, who their partner institutions are, and in what form they receive the money from their clients. I will not delve further into the complexities of those systems; I just want to note that it has become more difficult now for corrupt individuals.
BERLIN—On Friday and Saturday this week (October 22d-23th), the G20 Finance Ministers and Central Bank governors are due to meet in South Korea. The G20 had raised big expectations at a time when it promised the end of bank secrecy (London, April 2009). At that time, capital markets were reaching their lowest point over several years. Since then, they have partially recovered and the G20 tone has considerably softened. Would we have a correlation between Dow Jones levels and G20 softness? Without going that far, we can only reaffirm that transparency and the fight against corruption still have to be mainstreamed into the recovery agenda. Fiscal stimulus has played an important role in the recovery of several big economies, but reporting has been uneven on disbursement and spending. Central bank reporting is far from being a common rule, and we do not know yet where we stand in the peer review assessment through the Financial Sector Assessment Programme (FSAP), which should review risks in the various country financial sectors following the June Toronto summit.
The recommendations of the Financial Stability Board on the “too big to fail” institutions are yet to be seen, and they should be submitted to the upcoming Seoul summit of G20 heads of state in November. If they fail to include significant enhancement in risk disclosure to clients and investors, they will probably have missed what is most urgently needed to prevent future crises. The multilateral financial institutions also have to mainstream transparency requirements in their dealings with governments or private entities. The recently reformed IMF safety nets, whether flexible or precautionary credit lines, have to be managed in a way that will bring about concrete changes in the framework put in place to fight corruption and the misuse of funds locally.
On Wednesday, October 6th in Washington D.C., the Revenue Watch Index was co-launched by Revenue Watch Institute and Transparency International.
This is an important step in the Promoting Revenue Transparency project, an important project advocating, among other things, country-by-country reporting of all extractive corporations, and not only those active on Wall Street.
It is good to take a step back and know what this whole project is about. Why are we interested in the extractive industries? When there is money, there is a corruption risk, when there is big money, there is a big corruption risk, and oil and gas or mining deposits are equitable to large US dollar underground deposits for which a lot of entities or individuals are competing. Not only is this enormous wealth concentrated in deposits, but it is regulated for historic and environmental reasons, which allows civil servants and political leaders to participate in the competition.
Terminology is essential to any serious action against secrecy jurisdictions. The term of secrecy jurisdiction is relatively recent and we owe it to Tax Justice Network and others, which have demonstrated the important secrecy component of a certain number of jurisdictions. The term tends to replace “offshore centres”, a more descriptive and a bit misleading expression which does not refer to offshore islands but tries to depict the role of the centre as a financial intermediary in a trade conducted elsewhere, with most assets and most liabilities being invested or held abroad. The advocacy value of the term “secrecy jurisdiction” is clear, since it points out the use and abuse of secrecy by several financial centres, which hurts the transparency agenda.
It is true that several financial centres sell secrecy to their clients, but their offering is more diverse, and this needs to be understood in order to tackle them efficiently. International corporations which elect to register a subsidiary in the British Virgin Islands do so for tax optimization and administrative simplicity purposes. If those corporations are listed in a major stock exchange, which is most often the case, they are transparent on their use of offshore centres in their annual reports to the stock exchange supervisory body, as illustrated, among many other examples, in the oil and gas sector by Conoco Phillips, 2009 Form 10-K, Exhibit 21 or in the banking sector by Societe Generale Group, 2010 registration document, note 45, pp. 315-326. Corporate practice seems uneven with that respect and some corporations may have a policy to limit, or reject, use of offshore centres, as suggested by Statoil 2009 statutory report, note 13, pp. 126-127.
Does legal corruption exist? Unfortunately yes, and it poses a major challenge to the anti-corruption fight. Friendship is hardly banned by law, but friendship between political leaders and business people can hurt credibility or legitimacy of the decisions of the former, when the latter make them friendly gifts or donations.
The claim for transparency is also a claim for true accountability of the decision makers, whether in the political or in the business world. Informal and opaque networks often advance their financial interests by using the discrepancy between what is formally condemned by law and what would shock every honest citizen if he or she was to find it in the press.
Networks of nice and supposedly honest people created the financial bubble that exploded in 2008, because all of them wanted to be wealthier and as a result, none of them was adequately assessing risks or asking for their transparent disclosure. Most of those people had done nothing illicit, but they were contributing to a highly corrupt economy, an economy which is still to a large extent ours in spite of all G20 commitments.
A Wall Street Journal article and a BBC program have recently discussed the potential merits of corruption[1]. This seemingly provocative topic is indeed thought-provoking, but not exactly along the lines that the publishers or contributors intended.
If we try to sum up the arguments that were developed, they are several. Corruption may be a way to circumvent bureaucratic inefficiencies, and to set a business or export goods more quickly, if not to simply survive like in the former USSR. The networks between government and business, with their unavoidable conflicts of interest and corruption risks, also produce business success. There are several cases of notoriously corrupt economies which are or were also fast-growing economies, when corruption is somehow centralized and predictable, like in Suharto’s Indonesia where the Suharto family’s financial demands were simply factored in by businesses as transaction costs, while Suharto made sure the economy was growing so that his own wealth was also growing. Lastly, those systems of centralized and predictable corruption, when destroyed by a change in power or political upheaval, may be replaced by decentralized corruption, the costs of which are significantly higher.
Transparency has been at the forefront of public debate since the beginning of the global crisis in October 2008. One of the indirect outcomes of the crisis has probably been the rise of the G20 as the forum where global governance was discussed, with a strong stance towards transparency in the first summits that dealt with the crisis.
General assessment of G20 performance in transparency-related matters is probably mixed. Whereas strong language is extremely welcome against corruption, enhanced regulation and increased disclosure lag behind with respect to financial markets or disbursement of public funds, not to mention domestic implementation in each of the 19 G20 countries, which is extremely uneven and difficult to monitor by civil society. The attached letter takes stock of progress made but still urges the G20 to take swift and comprehensive action in order to avoid repetition of crises and bring about a more transparent global economy.
If we believe Plutarch, Solo abolished debt or reduced debt interests in Athens in the 6th century BC, but having informed three friends of his project, he had the discontent to find out that those friends had borrowed to purchase vast amounts of land shortly before the new law was enacted. Insider trading, fraud in finance, dissymmetry of information, lack of transparency have probably always been components of money dealings. They did not emerge in 2008, and ethics has never formed the golden rule of finance; nor has immorality, since finance is what human beings make it.
What emerged in 2008 is that the greed of a relatively small number of individuals could bring about a massive, sudden and global economic crisis. That was new, even if we compare it with the Great Depression, caused by a long-lasting and global speculation on all financial markets. It is now clear that greed has to leave the driver’s seat that it used to have in several institutions, and that the markets have to be protected from those institutions which would still be badly managed.
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