The Dodd-Frank Wall Street Reform and Consumer Protection Act, the most sweeping financial law enacted since the Great Depression, is supposed to protect investors and shield the economy from bubbles and speculation.
Its promise is hard to judge; many detailed rules are still being drafted. What can be said with confidence is that Dodd- Frank has been a boon for lobbyists, Bloomberg Businessweek reports in its May 14 issue.
This spring a scrum of them is grappling over a relatively obscure provision known as Section 1504. Bill Gates, George Soros, Secretary of State Hillary Clinton, and Republican Senator Richard Lugar have endorsed the proviso. Big Oil and mining corporations are determined to undo it.
At issue is a problem not typically associated with Wall Street reform: how to help citizens in poor countries stop their leaders from stealing money earned from oil and mineral sales.
Dodd-Frank would use Securities and Exchange Commission rules to require resource companies listed on U.S. stock exchanges to make timely, detailed disclosures of the tax and royalty payments they make to governments worldwide.
Anti-poverty groups such as Oxfam and Publish What You Pay have long argued that such transparency can help reduce corruption in oil-rich, thievery-plagued places such as Nigeria and Iraq by giving local media and civil society the hard data they need to ask where their country’s cash is going.
Large oil and mining companies already participate in a voluntary regime, the Extractive Industries Transparency Initiative.
Executives at Exxon Mobil Corp. (XOM), the world’s biggest oil company, have sat on the Initiative’s board. Reformers have been frustrated by the slow and incomplete nature of the disclosures required by EITI; Dodd-Frank is a chance to push through tougher rules.
Lobbyists are now urging the SEC to delay action or to narrow the kinds of disclosures that would be required. The American Petroleum Institute, the industry’s Washington arm, is leading the push, but all major oil and mining companies have joined in on their own. (Newmont Mining Corp. (NEM) is the only major exception; it has expressed support for the 1504 rules.)
The companies argue that the proposed rules would be “excessively burdensome,” in the words of Patrick Mulva, Exxon Mobil’s vice president and controller. Big Oil’s “greater concern,” as Mulva wrote in a letter to the commission, is that 1504 would have a “detrimental effect” on the “global competitiveness of U.S. companies.”
The fear is that Chinese, Russian, Brazilian and Indian oil and mining companies, lacking qualms and unburdened by Dodd- Frank rules, would exploit the financial disclosures made by their Western competitors to outbid them--and potentially persuade leaders of resource-rich countries in the developing world to stay away from U.S. companies altogether.
The SEC has been slow to vote on the new rules. Chairman Mary Schapiro and a second commissioner have recused themselves because of past ties to resource or energy corporations. A 2 to 1 Democratic majority on the SEC remains in place, and Secretary of State Clinton recently urged the commissioners to “go as far as they can” with detailed rules to achieve Dodd-Frank’s original intent.
To its supporters, Section 1504 is an opportunity to help poor countries break the “resource curse”--the tendency of governments endowed with oil or minerals to squander their bounty through theft and distorted development. By that standard, the question is less whether Dodd-Frank imposes unfair burdens on Big Oil than whether it goes far enough.
Unable to Deliver
Since the transparency movement began in the 1990s, changing the corrupt ways of oil-engorged dictators by shaming them through financial disclosures hasn’t proved easy, and the movement’s achievements are hard to tally.
As Western oil corporations have entered poor and troubled countries in Africa and elsewhere, they have pledged time and again to use their influence to improve local governance and the welfare of the very poor people who live beside their mines and oil fields. But even where the companies have acted in good faith, they’ve been unable to deliver change.
The story of oil-led development in Chad, a landlocked country in central Africa, is perhaps the most striking example of such promises betrayed. Chad’s population of 11 million has suffered under a succession of dictators. The latest, Idriss Deby, moved to develop the country’s long-neglected oil reserves. He persuaded the World Bank to bless a pipeline to the Atlantic Ocean by pledging under contract that Chad would use its oil wealth for education, health, and social development.
Exxon Mobil arrived to pump out the oil. As the project started, Rex Tillerson, now the oil company’s chairman, described Chad as a “clean sheet of paper” where it would be possible to “put things in place perhaps the way you’d like to see them carried out from the very beginning.” The World Bank, too, trumpeted Chad’s experiment in oil revenue transparency as a potential model for poor countries worldwide.
When the money flowed, however, Deby diverted cash to buy weapons. He used tax revenue from Exxon Mobil to buy his way out of the World Bank social spending covenants, while keeping his countrymen and political foes in the dark about how large Chad’s newfound riches were, according to Department of State cables disclosed by WikiLeaks and through a Freedom of Information Act request.
Because of higher oil prices, Deby’s regime received a windfall during 2006 and 2007 totaling tens of millions of dollars, providing him with the means to pay down loans and wriggle free of earlier commitments to the World Bank and the Bush administration--but only Exxon Mobil and Deby knew the details about how much Exxon Mobil had been required to pay to the government when the fate of Chad’s promised development spending was being argued.
Had the rules contemplated by Dodd-Frank been in place, they might not by themselves have stopped Deby, but they would have given his domestic opponents a better chance to challenge him.
Chad today is a poster child for the resource curse. In 2000, it ranked 167th out of 174 nations assessed by the United Nations Human Development Index, a table of quality of life indicators; average life expectancy was 47 years.
Last year, despite billions of dollars in oil exports and plenty of profits earned by Exxon Mobil and its consortium partners, Chevron Corp. (CVX) and Petroliam Nasional Bhd., Chad ranked 183rd out of 187 countries, and life expectancy had barely advanced.
Companies like Exxon Mobil recognize that expectations for how corporations handle their wealth and power in such impoverished countries are changing in the Internet Age, but they understandably resist any suggestion that they become nation-builders. “We’re not the Red Cross,” an Exxon Mobil executive once said about the Chad experiment.
At the same time, the company and its Big Oil peers have embraced the value of revenue transparency in principle through their participation in the voluntary program through which they disclose aggregated data country by country.
Presumably the companies aren’t doing so only for favorable publicity, but because they accept that such information sharing can improve governance. The question, then, is not one of principle but whether, in comparison to current, voluntary practices, Dodd-Frank would do harm to the competitiveness of American businesses.
That’s unlikely. A generation ago, Congress insisted when it passed the Foreign Corrupt Practices Act that U.S.- headquartered multinationals would be held to a special standard, forgoing bribery even where it was commonplace abroad, and would have to learn how to compete with unscrupulous Russian, Chinese, or French companies.
Not only did American business survive and thrive after the law was passed, but forward-thinking American executives learned to use the law to fob off outstretched hands and avoid unsavory rents they wouldn’t have wished to pay in the first place.
When it comes to Big Oil’s foreign entanglements, tougher rules on transparency would also benefit national security. Four years ago, Senator Lugar commissioned from GOP congressional staff The Petroleum and Poverty Paradox, one of the most thorough studies of the resource curse and its impact on U.S. foreign policy. Lugar argues that American national interests are at stake because oil-linked corruption and instability in Africa and elsewhere create a “seedbed for terrorism” and contribute to rising and volatile energy prices, damaging the world economy.
Revenue transparency probably isn’t the cure-all that Lugar and anti-poverty campaigners hope. The Chad example illustrates the limits of dealing with corrupt and myopic foreign leaders.
It’s hard to identify a case where disclosure has yet made a direct improvement in the lives of poor people ruled by thieves; at best, voluntary disclosures have had an indirect impact by encouraging media reporting in more open but corrupt societies such as Nigeria.
Perhaps the stricter rules contemplated in Section 1504 will lead to new breakthroughs, but anti-poverty campaigners should be honest about the evidence so far and the uncertainties, and they should be ready to change course if Dodd-Frank’s assumptions don’t pan out.
Section 1504 may only be a start toward breaking the resource curse. But it’s a start all the same. Dodd-Frank is the law of the land; it’s past time for the SEC to transform the intent of Congress into change.