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S. 1700 … A Bad Bill

[Warning – this post may cause your head to spin]

Bribery and corruption are bad.

That does not mean, however, that every attempt to curtail bribery and corruption is good.

Case in point – “The Energy Security Through Transparency Act of 2009” (S. 1700)(the “Act”) introduced in the Senate on September 23, 2009 by Richard Lugar (R-IN) and co-sponsored by several other senators – both Democrats and Republicans. (see here and here).

S-1700 seeks to amend Section 13 of the Securities Exchange Act of 1934 (15 USC 78m) (“Periodical and Other Reports”) by adding a new section (m) “Disclosure of Payment by Resource Extraction Issuers.”

Under this proposed new section, no later than 270 days after enactment of the Act, the SEC shall issue final rules that would require:

• a “Resource Extraction Issuer”( a defined term which means an issuer that:(i) is required to file an annual report with the Commission; and (ii) engages in the commercial development of oil, natural gas, or minerals”)

• to include in its annual report

• “information relating to any payment”

• made by the issuer, “a subsidiary or partner” of the issuer, “or any entity under the control of the issuer”

• to a “foreign government” (a defined term which means a “foreign government, an officer or employee of a foreign government, an agent of a foreign government, a company owned by a foreign government, or a person who will provide a personal benefit to an officer of a government if that person receives a payment, as determined by the [SEC].”

• for “the purpose of the commercial development of oil, natural gas, or minerals.”

The final rules to be issued by the SEC would require that the annual report include: (i) the type and total amount of such payments made for each project” of the issuer “relating to the commercial development of oil, natural gas, or minerals;” and (ii) “the type and total amount of such payments made to each foreign government.”

Thereafter, the Act requires that “to the extent practicable, the [SEC] shall make available online, to the public, a compilation of the information required to be submitted” under the above rules.

Wow, there is a lot here, so let me try to break this down a bit – to the extent I am able.

First, this much is clear. The disclosure/reporting requirement would apply to more than just U.S. “Resource Extraction Issuers” and, in this way, is really no different than the FCPA’s books and records and internal control provisions which apply to all issuers – not just U.S. issuers.

According to one analysis (see here), of the thirty largest internationally operating oil and gas companies, twenty-seven of the companies (including those in Europe, Canada, Russia, China and Brazil) would be covered by the Act based on their issuer status.

Thus, a concern one often hears expressed with the FCPA … that it puts U.S. companies at a disadvantage … would not seem credible if made in connection with this Act. (Of course, because the FCPA – including both its anti-bribery provisions and books and records and internal control provisions – apply to more than just U.S. companies, that argument is not credible in the FCPA context either; but that is an issue for another day).

Beyond the fact that the Act will apply to more than just U.S. “Resource Extraction Issuers,” not much else about the Act is clear.

Therein lies the problem.

Not sure, if your company is a “Resource Extraction Issuer” because you are unclear what “commercial development of oil, natural gas, or minerals” means?

No problem, as the Act provides this crystal clear definition – “the term ‘commercial development of oil, natural gas, or minerals’ includes the acquisition of a license, exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, as determined by the [SEC].

In other words, if you are an issuer, and you engage in “significant actions relating to oil, natural gas, or minerals” you just may have some huge, new reporting / disclosure requirements imposed on you!

Still confused? Join the club.

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?”

What is a payment? That’s an easy one and the Act provides this crystal clear definition – the term payment means:

(i) a payment that is (I) made to further commercial development of oil, natural gas, or minerals; and (II) not de minimis; and

(ii) includes taxes, royalties, fees, licenses, production entitlements, bonuses, and other material benefits, as determined by the [SEC].”

Ignoring for the moment the imperfect and imprecise definition of “Resource Extraction Issuer,” it is one thing to perhaps require such issuers to disclose royalties paid to a foreign government, and if that is viewed as providing transparency and eliminating bribery and corruption (however dubious that view may be), well then perhaps the Act is a good piece of legislation.

But the Act seeks disclosure and reporting of much, much more and could conceivably require disclosure of every single dollar a “Resource Extraction Issuer” makes to, well, just about anybody in connection with the “commercial development of oil, natural gas, or minerals” if the money ultimately makes its way to a foreign government, an officer or employee of a foreign government, a company owed by a foreign government, or any person who will provide a personal benefit to an officer of a government.

What’s the knowledge requirement in the Act?

There isn’t one!

So if a “Resource Extraction Issuer” makes a payment to person who then unbeknownst to the “Resource Extraction Issuer” makes a payment to a person “who will provide a personal benefit to an officer of a government” there is a disclosure obligation.

But how the heck is the “Resource Extraction Issuer” supposed to disclose something it doesn’t know about?

Here is the real kicker though. The Act requires all payments (meeting the above definitions – if indeed you can figure out what those definitions are) to be disclosed, including perfectly legitimate and legal payments!

Here is another mind bender. Say you are one of those foreign “Resource Extraction Issuers” such as Petrobras (Brazil) that also doubles as a so-called “company owned by a foreign government.” Under this Act, because the SEC already considers all Petrobras employees to be “foreign officials,” such companies would presumably be required to disclose the salaries and benefits provided to all of its employees.

How silly is that?

To those who support this Act, I’ve got this to say – “we’ve been down this road before.”

It’s called the FCPA (and the various versions of the statute before it was enacted). Years of congressional hearings were had as to this very same disclosure issue and we don’t need to repeat this exercise.

Here is some background.

The FCPA, of course, as enacted, contained (and still contains) an outright prohibition on improper payments (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.

The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) however, started out with disclosure provisions, including provisions requiring 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.

As to these disclosure provisions, many people, including, most notably Senator Proxmire (D-WI – a Congressional leader on the “FCPA” issue), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate.

Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would 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 (see here) on what would become the “FCPA” is even more clear. It states (when discussing the various disclosure provisions previously 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 reasoned conclusion reflected in the House Report are equally applicable here.

The Act (while however noble its intended purpose) is akin to “swatting a fly with a bazooka.”

The FCPA already criminalizes improper payments made to the “foreign government” recipients targeted in the Act to the extent those payments are made to “obtain or retain business.” Do we really now need a law that requires “Resource Extraction Issuers” to disclose ALL such payments, even perfectly legitimate and legal payments?

For the record, S-1700 has been referred to the Senate Banking, Housing, and Urban Affairs Committee.

For the record, similar legislation was introduced in Congress in 2008, but no action was taken on the bills.

For the record, this post has left me dizzy just thinking through the ramifications. I can’t imagine being a corporate counsel actually tasked with ensuring compliance with this Act.

If H.R. 2152 Were to Be Enacted …

There is little in terms of substantive FCPA case law. Yet this much is clear – there is no private right of action under the FCPA – enforcement of the law is in the hands of the DOJ and the SEC (as to issuers).

However, Representative Ed Perlmutter (D-CO) would like to change that (at least a bit). In April, 2009, Perlumutter introduced H.R. 2152 – the Foreign Business Bribery Prohibition Act of 2009 (see here).

Big picture, under the proposed law, any “foreign concern” (defined to mean any person other than an issuer, domestic concern or U.S. person) that violates the FCPA’s anti-bribery provisions would be liable to any issuer, domestic concern or U.S. person for damages caused by the FCPA violation. Under the proposed law, a plaintiff would need to prove that: (i) the “foreign concern” violated the FCPA’s anti-bribery provisions; and (ii) the violation prevented the plaintiff from obtaining or retaining business and assisted the foreign concern in obtaining or retaining business.

In other words, if a U.S. company can prove that it lost business because a “foreign concern” gained that same business by violating the FCPA, the U.S. company could bring a lawsuit seeking damages. Under the proposed law, the damages would be the higher of the total amount of the contract or agreement that the “foreign concern” gained in obtaining or retaining the business or the total amount of the contract or agreement that the plaintiff failed to gain. To sweeten the pot, the proposed law requires treble damages along with attorneys fees and costs.

Certainly, lots to think about here.

But alas, with two foreign wars, government bailouts and debates about financial regulation, and now, the health care debate, H.R. 2152 remains buried in Congress. The last reported activity is from June 12, 2009 when the bill was reported to the House Subcommittee on Crime, Terrorism, and Homeland Security.

It’s been a few months since I thought about H.R. 2152.

But I was reminded of the law and its potential application last night while reading an interesting front-page article in the New York Times titled “China Spreads Aid in Africa, With a Catch for Recipients” (see here).

The article talks about business activity by Chinese companies around the globe, and how, according to quoted sources, Chinese companies may be securing contracts through improper payments, kickbacks and the like.

A good portion of the article is about Nuctech Company Ltd. (a Beijing-based scanner company) and its questionable activity in Namibia. The article quotes the Vice President of Nuctech’s “American rival, Rapiscan Systems.”

I trust you are now thinking about the potential application of H.R. 2152 as well?

Let’s go through the elements – “foreign concern” check, potential violation of the FCPA check, a domestic concern damaged by the “foreign concern’s” violation check.

Before FCPA lawyers start dusting off their copy of the rules of civil procedure and daydreaming about H.R. 2152’s promise of treble damages and attorney fees, H.R. 2152 needs to at least get “out of committee.”

In any event, for those in favor of H.R. 2152, the article would seem to present a poster-child of sorts.

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