European Union adds legislative weight to the promotion of transparency in the extractive industries

by King & Spalding

Under new EU legislation large and listed companies in the extractive industries will be required to disclose details of any significant payments they make to governments and authorities of the countries in which they operate.

On 20 July 2013, a new Accounting Directive adopted by the European Parliament took effect. The principal objectives of Directive 2013/34/EU (the Directive) were to consolidate EU accounting requirements and to simplify financial reporting requirements for small and medium companies. However, the Directive also introduced new obligations upon large companies operating in the extractive (oil, gas and mining) and logging industries to report details of all material payments they make to host governments in connection with projects in those sectors.

EU directives do not have direct effect in Member States and must be given effect through the implementation of national legislation. Member States have two years (until 20 July 2015) to give effect to the Directive.

The Directive requires that any "large undertaking" or "public-interest entity", as defined in the Directive, operating in the oil, gas and mining (extractive) industries and forestry companies undertaking primary forest logging activities must disclose all payments over €100,000 made by them to local governments and authorities in the host countries of their projects.

A large undertaking is any public or private company which has:

  • 250 employees; and
  • a turnover exceeding €40,000,000; and/or
  • a balance sheet total exceeding €20,000,000.

Public-interest entities are companies registered in the EU that are listed on a regulated market within the European Economic Area, as well as credit institutions, insurance undertakings or other companies designated as such by a Member State by virtue of their business, size or number of employees.

The payment disclosure reports, which will be publicly available, must be made on a project by project basis, detailing payments made in relation to production entitlements, taxation, royalties, dividends, signature, discovery and production bonuses, licences, investments in infrastructure and any similar payments. A key principle underpinning the Directive is that payments will be reportable on the basis of their substance and effect, not their form, meaning that clever structuring of payments, or the re-characterisation of the activities they relate to, will not circumvent the reporting requirements.

Secrecy laws applicable in the recipient country of payments will not operate as a bar to reporting and no exemptions are provided in the Directive. This aspect is a deliberate function of the Directive: to endorse the transparency of the extractive industries to local populations in host countries and to promote governmental accountability for the proper application of proceeds from extractive industry projects in-country. So, whilst the new measures will be welcomed by populations disaffected by their government's application of the revenues it receives from private sector investment in the exploitation and development of national mineral wealth, the new reporting requirements will impose upon undertakings subject to the Directive an additional administrative burden and cost and will create a legal headache where the Directive requires reporting of a payment made in a jurisdiction where such disclosures are illegal under national law.

In addition, those undertakings' in-country subsidiaries and their employees, as well as officers of the parent undertaking who visit the host country, could face legal repercussions for breach of local secrecy laws. The issue of the potential conflicts of laws will need to be addressed and Member States may try to deal with it upon implementing the Directive into their national law, though caution will be required to ensure that the objectives of the Directive are nevertheless met.

The Directive adds legislative support to the Extractive Industries Transparency Initiative (EITI). EITI is a statement of principles laid down in 2003 between a group of governments, companies and civil organisations to increase transparency over payments and revenues in the extractive industries. The EITI Principles are voluntary terms which a country may elect to implement and in doing so must commit to a minimum level of transparency across its extractive industries by:

  • disclosing details of government revenues and company payments arising out of the country's extractive industries
  • establishing a multi-stakeholder group (comprising government, industry and civil society representatives) to oversee the proper implementation of the EITI Principles; and
  • communicating to the local population details of the contribution of the country's extractive industries to its economy, details of how the revenues generated by them are applied, and an explanation of the governing legal framework and fiscal regime.

The Directive will add important support to implementation of the EITI Principles in those countries where companies subject to the new transparency obligations operate. In the U.S., the Dodd-Frank Wall Street Reform Act already contains requirements on companies in the extractive industries sector (applying to all "resource extraction issuers") which are Securities and Exchange Commission registered to disclose how much they pay to governments in the country in which they operate. The Hong Kong Stock Exchange also has comparative reporting obligations.

Once implemented by EU Member States, the Directive will significantly increase the number of companies in the oil, gas and mining sectors which are obliged to disclose details of payments to host governments. However, a number of the world's largest and most profitable companies in the extractive industries are resident in jurisdictions such as China, Russia and India and do not have listings on a U.S., European or Hong Kong exchange, so are not subject to any equivalent reporting obligations unless they are investors in a country which has elected to adopt and implement the EITI Principles, in which case the company would be required to disclose payments made to the government of that country.

Whilst there remain jurisdictions that have not implemented legislation requiring transparency amongst investors into the extractive industries and countries that have not implemented the EITI Principles, there will continue to be opacity over the size and extent of payments to host governments and scope for concern as to the manner in which those revenues are applied.

The Directive is available at:

The EITI Principles can be found at:


Written by:

King & Spalding

King & Spalding on:

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