United States: SEC Rules For Resource Extraction Issuers Could Lead To Increased FCPA Scrutiny, Disclosures

Lara Covington is a Partner in our Washington D.C. office and Lisa Prager is a Partner in our New York office


  • New rules issued by the U.S. Securities and Exchange Commission (SEC) require resource extraction issuers to disclose payments made to U.S. and foreign governments for the commercial development of oil, natural gas or minerals.
  • An immediate effect of the rules will be to create a mandatory disclosure requirement for certain payments – namely, those made to governments that are intended to benefit individual foreign government officials – that have traditionally fallen under the Foreign Corrupt Practices Act (FCPA) and have not been subject to a mandatory disclosure requirement. Another related corollary is a likely increase in voluntary FCPA disclosures and FCPA investigations.
  • The rules go into effect on Sept. 26, 2016, and must be complied with for fiscal years ending on or after Sept. 30, 2018.

New rules issued by the U.S. Securities and Exchange Commission (SEC) that require resource extraction issuers to disclose payments made to U.S. and foreign governments for the commercial development of oil, natural gas or minerals will go into effect on Sept. 26, 2016. The rules are intended to advance the U.S. foreign policy objective of combatting global corruption, promoting accountability and improving governance in resource-rich countries around the world. One immediate effect of the rules, however, will be to create a mandatory disclosure requirement for certain payments – namely, those made to governments that are intended to benefit individual foreign government officials – that have traditionally fallen under the Foreign Corrupt Practices Act (FCPA) and have not been subject to a mandatory disclosure requirement. Another related corollary is a likely increase in voluntary FCPA disclosures and FCPA investigations.


Section 13(q), which was added in 2010 to the Securities Exchange Act of 1934 (Exchange Act) by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), directs the SEC to issue rules requiring resource extraction issuers to include information relating to any payment made by the issuer or its affiliates to the U.S. and foreign governments for the purpose of commercial development of oil, natural gas, or minerals in an annual report. The rules were intended to increase the transparency of payments made by oil, natural gas, and mining companies, which would help deter those companies from entering into suspicious or corrupt transactions, combat global corruption, and empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.

The SEC initially adopted Rule 13q-1 in August 2012, but re-proposed the rules on Dec. 11, 2015.2 On June 27, 2016, the SEC published notice of the final rules and amendments to Form SD (Rule 13q-1 or the rules), which must be complied with for fiscal years ending on or after Sept. 30, 2018.3

Notably, in recent years, the European Union (EU Accounting Directive and EU Transparency Directive), Canada (the Extractive Sector Transparency Measure Act) and the Extractive Industries Transparency Initiative (EITI)4 adopted initiatives similar to the rules the SEC adopted.

Types of Payments Subject to Disclosure

Rule 13q-1 requires resource extraction issuers to disclose payments made to any government and file annual reports on Form SD with the SEC under the Exchange Act. "Resource extraction issuers" includes all U.S. and foreign companies that are required to file annual reports pursuant to Section 13 or 15(d) of the Exchange Act and are engaged in the commercial development of oil, natural gas or minerals. Such "commercial development" is defined as exploration, extraction, processing and export, or the acquisition of a license for any such activity.

The reporting requirements extend to payments made by any subsidiary or affiliate entity included in a reporting company's consolidated financial filings. The term "payment" includes taxes; royalties; fees, including licensing fees; production entitlements; bonuses; dividends; payments for infrastructure improvements; in-kind payments; and if required by law or contract, community and corporate social responsibility payments. "Not de minimis" is defined as any payment, whether a single payment or a series of related payments, that equals or exceeds $100,000 during the same fiscal year.

Rule 13q-1 also includes an anti-evasion provision that requires disclosure for payments that are not within one of the payment categories but are related to the commercial development of oil, natural gas or minerals, or are payments made by a resource extraction issuer to a government for the purpose of such commercial development.

Information Required to be Disclosed and Exemptions

The rules require the following information about the payments to governments:

  • the type and total amount of payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas or minerals
  • the type and total amount of such payments for all projects made to each government
  • the total amounts of the payments by category
  • the currency used to make the payments
  • the fiscal year in which the payments were made
  • the business segment of the resource extraction issuer that made the payments
  • the government that received the payments and the country in which the government is located
  • the project of the resource extraction issuer to which the payments relate
  • the particular resource of the commercial development
  • the subnational geographic location of the project

"Project" is defined as operational activities that are governed by a single contract, license, lease, concession or similar legal agreement that forms the basis for payment liabilities with a government.

Rule 13q-1 includes two exemptions: The first allows an issuer that acquired a company, which was not previously subject to the final rules, to delay reporting payment information for the acquired company until the first fiscal year following the acquisition, and the second provides a one-year delay in reporting payments related to exploratory activities. Furthermore, the final rules permit the SEC to provide relief from the requirements of the rules on a case-by-case basis.

The Impact of Rule 13q-1

Mandatory Disclosure for Certain Payments Subject to FCPA

Rule 13q-1's anti-evasion provision, in effect, creates a mandatory disclosure requirement for certain payments traditionally within the ambit of the FCPA – i.e., payments to governments that also provide a benefit to individual foreign government officials. The FCPA prohibits corrupt payments to foreign officials and political parties for the purpose of obtaining or retaining business, securing an improper business advantage, or influencing or inducing an official act by the official or political party.5 The FCPA is targeted at corrupt payments to individuals, not governments, and does not include a mandatory disclosure provision.

The anti-evasion provision at Rule 13q-1(b) requires disclosure of activities or payments that, although not within the categories included in the proposed rules, are part of a plan or scheme to evade the disclosure requirements.6 Payments to the government that are routed through third parties are thus covered. Additionally, the SEC explicitly stated that certain payments that could "reasonably raise corruption concerns" – such as "payments for government expenses, providing jobs or tuition to persons related to government officials, [and] investing in companies created by officials or related persons" – would be covered by the anti-evasion provision if made to further the commercial development of oil, natural gas or minerals.7 In doing so, the SEC cited to a U.S. Senate Subcommittee investigation of six oil companies active in oil exploration and development efforts in Equatorial Guinea (EG), which found, among other things, that the companies made payments to the EG Government for "student training expenses."8 The expenses consisted in many cases of paying tuition and living expenses for the children of EG officials either directly to a bank account controlled by the EG Government or directly to universities.

Payments to governments made in furtherance of the commercial development of oil, natural gas or minerals that benefit individual government officials meet the requirements of prohibited payments under the FCPA provided such payments are made with the intent to influence the officials. Assuming such payments are made (whether directly or through third parties), the anti-evasion provision of Rule 13q-1 requires disclosure for this subcategory of payments that would otherwise not be subject to a mandatory disclosure requirement under the FCPA. Failure to disclose the payments would subject resource extraction issuers to penalties for violating Section 18(a) of the Exchange Act and other provisions.

Increase in Voluntary FCPA Disclosures

Complying with Rule 13q-1 may also compel more companies to voluntarily disclose FCPA violations. This phenomenon is not new; other U.S. regulatory regimes have had the effect of compelling companies to voluntarily disclose potential FCPA violations. For example, several FCPA actions have involved Part 130 of the International Traffic in Arms Regulations (ITAR), which requires the disclosure of fees and commissions related to brokering the sale of defense materials. The failure to disclose these fees, to the extent they are also part of a corrupt scheme, can lead to criminal penalties and possibly a loss of export privileges. With such steep consequences and the likelihood that disclosure of the fee could lead to detection, companies are compelled to disclose not only the fee but the related corruption. For example, in 2015, FLIR Systems Inc. (FLIR) settled with the SEC for providing gifts and hospitality to Saudi officials to retain business with the Saudi Arabia Ministry of Interior (MOI).9 The case involved third party agents, who were paid a commission on the sales to the MOI. After a dispute over the amount of commissions due, the agents submitted a claim to the company, which triggered an internal investigation. Ultimately, the company discovered that the commissions had not previously been reported as required under ITAR Part 130, and, consequently, disclosed both the commissions and the related FCPA issues. FLIR settled with the SEC for $9,504,584 in disgorgement and prejudgment interest, and a civil money penalty.

Increase in FCPA Investigations

Rule 13q-1 may not only trigger internal FCPA investigations that lead to voluntary or mandatory disclosure by the reporting companies, but it may also lead to external parties, such as FCPA enforcement agencies, using the disclosures to investigate possible corruption.

Rule 13q-1, like its sister regulation for conflict minerals at Rule 13(p), is aimed at detecting and preventing corruption, and is thus a natural source of evidence for FCPA enforcement agencies. Last year, the FBI's International Corruption Unit apparently indicated that it sees linkages between conflict mineral reporting compliance and the FCPA, presumably because both involve issues of corruption and are seen in "low integrity countries."10 Similarly, the oil, gas and mining industry has historically involved a high level of corruption. Indeed, in issuing Rule 13q-1, the SEC noted that the U.S. Senate Subcommittee Investigation reported instances in which, "both at the direction of government officials of Equatorial Guinea and pursuant to suspect terms of the underlying contracts with the government, resources extraction companies diverted payments that should have been paid to the government to other accounts and to persons connected with E.G. government officials."11 The Rule 13q-1 disclosures, therefore, could provide substantive leads to U.S. enforcement authorities, many of which have been increasing their prosecutorial and investigative resources. Of course, increased scrutiny was an intended consequence. In issuing Rule 13q-1 and defending the decision to require project-level reporting, the SEC explained that such data could help "citizens, civil society groups, and others to identify payment discrepancies that reflect potential corruption and other inappropriate financial discounts" (emphasis added).12

For Royal Dutch Shell, the first company to report under The Reports on Payments to Governments Regulations 2014 in the United Kingdom, a civil society group has already raised questions about the contents of its report.13 A review of the Royal Dutch Shell report by the organization Publish What You Pay revealed that the value of an in-kind production entitlement payment to the Nigerian government for the SPDC East project ($20.89 per barrel) was less than half of the average values for other Nigerian payments in kind ($51.59 per barrel). There are likely many legitimate explanations for this discrepancy, but for a zealous investigator, it might be just enough to launch an inquiry into how the in-kind payment got valued and whether the official in charge of the SPDC East project was improperly influenced to accept a lower value.

Payments made through third parties, particularly corporate and social responsibility (CSR) payments, are also likely to be examined. Since 2010, every bribery scheme that resulted in an FCPA settlement has included a third-party intermediary; as a result, third-party payments are regularly investigated by U.S. enforcement agencies.14 CSR payments, in particular, are often made through third parties, such as foundations or charities. In some instances, though they are required by contract or law, the CSR payments are simply "a mechanism for the corrupt or suspicious diversion of payment revenues to government officials for their personal use."15 To the extent there is corruption involved with a project, the disclosure of these payments will provide investigators with information that could lead to the detection of such corruption.

Increase in Anti-Corruption Compliance

Anytime a company is subject to increased regulatory scrutiny, increased compliance is likely to follow. As the SEC noted in issuing Rule 13q-1, reporting project-level data related to payments to governments "may also discourage companies from either entering into agreements that contain suspect payment provisions or following government officials' suspect payment instructions."16 Indeed, it will also encourage companies to scrutinize payments to third parties that may need to be reported under the anti-evasion provision. To the extent Rule 13q-1 goes into effect, therefore, resource extraction issuers would be wise to shore up existing corruption compliance policies and procedures, including auditing the projects involving payments to governments, reviewing any third-party relationships related to those projects and investigating any other red flags raised during the report preparation.


1 Special thanks to Libby Bloxom for her assistance with this alert.

2 In July 2013, the U.S. District Court for the District of Colombia vacated the rules after industry groups and the U.S. Chamber of Commerce challenged them. Following a suit by Oxfam America Inc. filed in 2014, the U.S. District Court for the District of Massachusetts ordered the SEC to file an expedited schedule for the adoption of the final rule. The SEC re-proposed the rules and form amendments on Dec. 11, 2015. See Disclosure of Payments by Resource Extraction Issuers, 80 Fed. Reg. 80057(proposed Dec. 11, 2015) (to be codified at 17 C.F.R. Parts 240 and 249b).

3 See Disclosure of Payments by Resource Extraction Issuers, 81 Fed. Reg. 49359 (June 27, 2016) (to be codified at 17 C.F.R. Parts 240 and 249b).

4 The Extractive Industries Transparency Initiative is a voluntary coalition of oil, natural gas and mining companies; foreign governments; investor groups; and other international organizations dedicated to improving transparency and accountability in resource-rich countries.

5 See 15 U.S.C. §§78dd-1, 78dd-2, 78dd-3, 78m, 78ff (1998).

6 Disclosure of Payments by Resource Extraction Issuers, 81 Fed. Reg. at 49,375.

7 Id. at 49,374.

8 Id. at 49,274 n.213.

9 See In the Matter of FLIR Systems, Inc., File No. 3-16478 (SEC, Apr. 8, 2015).

10 See Elm Sustainability Partners LLC, Three More Letters to Add to Your Conflict Minerals Lexicon – FBI(Oct. 2, 2015).

11 Disclosure of Payments by Resource Extraction Issuers, 81 Fed. Reg. at 49,379 n.281.

12 Id. at 49,379.

13 See Miles Litvinoff, Shell reports 2015 payments to governments using open data(June 3, 2016).

14 See Foreign Corrupt Practice Act Clearinghouse, Statistics & Analytics – Charts & Graphics – Intermediaries.

15 Disclosure of Payments by Resource Extraction Issuers, 81 Fed. Reg. at 49,373 n.207.

16 Disclosure of Payments by Resource Extraction Issuers, 81 Fed. Reg. at 49,379.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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