Transparency of payments in the commodities sector: an analysis of the Berne Declaration

Frequently asked questions on the transparency of payments in the commodities sector What is the problem?

Two-thirds all of mineral and energy resources come from developing countries. These riches represent enormous development potential. In one study, UNESCO reached the following conclusion: Taxed on the basis of international standards, revenues derived from commodities could generate 20% additional income, which would be enough to educate more than half of the 30 million children in Sub-Saharan Africa. Today, these children are unable to attend school because sufficient public funds are lacking. Despite being commodity-rich, a large number of countries remain stuck in what is known as the “resource curse� – the paradox that countries and regions with an abundance of minerals and hydrocarbons tend to have more corruption, longer conflicts, and worse development outcomes than countries with fewer natural resources. More than 300 million people live today in resource-rich countries on less than 2 dollars a day1.

What effect could transparency have?

Transparency is a far stretch from being the complete solution to solve the resource curse problem. But it is a precondition to the improvement of the situation. Moreover, the measures needed to implement transparency would be relatively inexpensive. Publication of the public revenues reaped from commodities would allow local civil society (where necessary with international support) to put critical questions to their governments, and to hold those governments to account for the redistributions of the rents derived from commodities. Transparency can therefore be of assistance in establishing conditions for autonomous development. It is also an excellent means of creating a relationship of confidence between citizens and their governments, and of preventing the embezzlement of public assets. This is why Publish What You Pay (PWYP), a network of over 600 civil society organizations, is campaigning globally for greater transparency in the natural resources business.

What measures are being taken at the international level?

In the last few years, the international community, through the creation of several instruments, has been working towards a global standard of transparency that sets out specific responsibilities for Host States (i.e. states in which commodities are found) and Home States (i.e. states where companies active in the commodity sector are headquartered) (see also the graphic on the following page): 1

Brookings Institution, 13.9.12

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Host States: The Extractive Industry Transparency Initiative (EITI) brings together commodity-producing states willing to work towards greater transparency. A multistakeholder committee (states, companies and NGOs) defines the rules at the international level (the type of payments to be made public, the level of detail etc.).

The EITI members are countries (and not companies2), which undertake two commitments3: (1) to publish payments made to them by commodity companies; and (2) to require companies working in their countries also to publish these payments. Publication of these two figures therefore makes it possible to compare data and to spot any divergences and any cases of suspected embezzlements. Given that Switzerland is not a commodity producing country, it cannot become a member of EITI. Nevertheless, it is an “EITI Supporting Country” – as such it makes financial contributions and currently has a representative on the committee. The EITI is an important initiative, but alone it is not enough. In reality, particularly opaque states (such as Angola) simply refuse to become EITI members. Weak states also lack the ability to exercise control. Apart from the exclusion of a member state from participating in the initiative, EITI has no means of enforcing its provisions.

Home States: more and more states where commodity companies are headquartered are contributing to enhancing transparency as a means to combat the gaps in the EITI, with the USA having taken the lead. As home to a large number of mining companies, the USA requires such companies to publish their payments to governments, regardless of whether or not these are made to EITI member states. As a result, all countries in which a company operates are identified. Data is collected to a uniform standard, thereby making it comparable. Within the EU, the Council, the Commission and the European Parliament agreed in April on an effective

Companies can become “supporting companies”, although this does not give them any additional publication requirements. In EITI countries, companies must disclose their payments (like every other company), but not in non-member states. The EITI is therefore not a “voluntary initiative on the part of the companies”, but an initiative taken up by states in which companies and NGOs participate.

3 Article 11, EITI Requirements: “The government is required to ensure that al relevant companies and government entities report.”

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solution, which was formally adopted in mid-June. The UK, Germany, France, Italy, Sweden, Denmark and Finland have publicly committed to early transposition of the EU Directives into national law. Norway is on track to introduce a mandatory project-by-project reporting rule with no country exemptions by January 2014, and Canada is moving quickly to introduce comparable legislation.

How far do the US and European transparency rules catch Swiss commodity companies?

The Swiss commodity sector is extremely concentrated. A small group of companies effectively shares a major part of the market. The activities of this group in terms of the extraction of commodities (rather than the trading of commodities4) are seemingly covered by the US regulations and certainly by the European ones, as shown by the table below (US criteria: listing on US stock exchange; EU criteria: listing on an EU stock exchange or EU-registered parent company [including letterbox holding company]5).

Company

Schweiz-Bezug

Covered by…

Because…

Vitol

Main sales department in Geneva (Vitol S. A., Vitol Holding S.à.r.l)

EU AD

Glencore Xstrata

Principal headquarters in Baar (Glencore Xstrata plc) Major branches (principal sales and administrative departments) in Geneva and Lucerne

EU TD

Vitol Holding BV (parent company) registered in the Netherlands. Only 6 employees in 2011.

Listing on London stock exchange (LSE) Trafigura Beheer B.V. (parent company) registered in the Netherlands. Only 34 employees in 2012.

Mercuria

Principal administrative and sales departments in Geneva

EU AD

Gunvor

Branch (principal sales EU AD department for LNG and natural gas) and subsidiary (principal sales department for petrol and coal) in Geneva 6 Important branch in Saint-Prex DF 1504 Listed on a US stock Extraction and export (VD) exchange (NYSE) activities These companies are principally traders and producers of agricultural commodities. The US and EU regulations only relate to non-renewable commodities such as petrol. The extractive activities of the ABCD group are limited, which is why only a few of their activities are subject to the US and EU norms.

Listed on the Swiss stock DF 1504 Listed on a US stock Extraction activities exchange exchange (NYSE) Listed on the Swiss stock DF 1504 Listed on a US stock Exploration activities exchange exchange (NYSE)

Trafigura

Vale Cargill, Louis Dreyfus, Bunge, ADM Transocean Weatherford

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EU AD

Payments to governments made in relation to…

Extraction activities (but not payments made in relation to trading activities)

Mercuria Energy Group Ltd (parent company) registered in Cyprus.

Gunvor International B.V. (parent company) registered in the Netherlands. Only 2 employees in 2010.

The EU regulations do not include trading activities. The US rules [due to a court judgement currently under review at the SEC] do to a certain extent (processing, export), but they do not affect Swiss commodity traders except if trading takes place on a US stock exchange.

5 EU Accounting Directive (EU AD), Article 42(1): “Member States shall require large undertaking and all public interest entities active in the extractive industry or the logging of primary forests to prepare and make public a report on payments made to governments [...] Article 44 (1): A parent undertaking is considered to be active in the extractive industry or the logging of primary forests if any of its subsidiary undertakings are active in the extractive industry or the logging of primary forests.” The EU Transparency Directive (EU TD) [to be formally adopted in October 2013] extends those requirements to companies listed on EU regulated stock markets even if they are not registered in the EU/EEA and are incorporated in other countries.

6 see footnote 4

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Which deficiencies persist?

As demonstrated above, the majority of mining activities carried out by Swiss companies should seemingly be covered by European regulation. If Switzerland were to copy the EU regulation exactly to the letter, the danger is that it would only serve as a token gesture without delivering any additional benefit for the people in resource-rich developing countries. To provide a real benefit, the Swiss law would need to go further (see next section).

The Swiss commodity sector principally comprises commodity trading, although the majority of trading companies also carry out a part of their activities in the extractive domain. According to a study by the Financial Times, the profits made by these commodity trading companies in the last decade surpass that of the five largest automobile companies7. Switzerland holds an exceptional position at the international level in terms of commodity traders, as is highlighted by the latest data (see graphic).

Source: Financial Times 26.3.2013 (Metals and minerals: non-ferrous)

Which approach for Switzerland?

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Financial Times, 15.4.13, Traders reap $250bn harvest from boom in commodities

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Were Switzerland not to make the whole commodity sector more transparent, not only would it be irresponsible, it would also be a great missed opportunity. It is now up to Switzerland to combine “the best of both worlds” with regard to American and European regulation (see table below) and to develop an approach which takes account of Switzerland’s importance as the world’s principal commodity trading hub.

Overview of regulatory approaches Comprises not only extractive activities, but also trading activities USA Partially (export) EU x Appropriate for √ Switzerland

Comprises not only listed companies, but also large unlisted companies x √ √

What's the state of play in Switzerland? 

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Last autumn, the widely supported motion (French only) “Transparency of payments made by commodities companies” was placed before the National Council. In its response on the 10.11.12, the Federal Council “welcome[d] the objective of the motion to increase transparency” but nevertheless expressed its preference to wait and see how other countries intend to handle transparency and rejected the motion.

End of March 2013 the Swiss government published the “Background Report: Commodities” as a reaction to the vigorous public debate since 2011. In recommendation 8 the report went a little bit further: “The consequences of a potential introduction of transparency requirements – similar to those of the USA and the EU – for the Swiss commodity sector should be examined – and the drafting of a consultation draft should be considered”.

On the 29 April 2013, the Foreign Affairs Committee of the National Council proposed with 17 votes to 6 in favour of a motion which requires the Federal Council to examine a draft transparency law including the whole Swiss commodity sector (both listed and non-listed companies, extractive and trading activities) and to examine how Switzerland could support a global transparency standard.

Parliament passed this motion on 11 June 2013 with 93 to 77 votes. The responsible department is in the process of executing this mandate.

Why is it so important to include commodity trading in any development of transparency requirements?  … because Switzerland would otherwise give the impression that it shies away from its responsibility as a global leader in trading activities.  … because the United States and the EU have already regulated their biggest players in the commodity sector (mining and oil companies8).

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More than 80% of the world’s largest mineral extraction and oil exploitation companies are listed in the USA, with many of them also being listed elsewhere or having their headquarters in the EU.

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 … because given that all extractive activities of virtually all big Swiss commodity companies are already covered through the EU regulation (see table above), any additional Swiss regulation should bring an added value by extending to activities that are not covered by EU regulation (such as trading).  … because the current international trend is to increase transparency along the entire length of the value chain (from extraction through to distribution). The EITI transparency initiative adopted new rules in May 2013 that intend from now to cover commercial deals between state enterprises and commodity traders (rule 4.1c.).  … because greater transparency in commodity trading is particularly important for countries in West and Central Africa. In contrast to other big oil producers, countries like the Republic of Congo, Angola or Gabon rarely sell these natural assets themselves, but almost exclusively go through (usually Swiss) commodity traders. The profits from these sales are highly relevant: combined with other commodity receipts (such as tax), they generate more than 60% of public receipts in these states (see graphic opposite). At the same time, the resource curse in such countries is particularly marked.

Source: World Bank, Africa Pulse No. 6, October 2012 Despite the magnitude of these riches, poverty is actually increasing in the last three above-mentioned states.  … because even representatives from the sector say themselves that they expect to be submitted to the US legislation (GTSA9) or even personally welcome the publication of financial flows in commodity trading (Martin Fasser, ZCA10).  … because it would be contradictory if on the one hand the government explains that “the Swiss commodities industry is dominated mainly by merchanting [i.e. trading] companies, with a few prominent exceptions.”, while on the other hand, it limited itself in relation to transparency matters only to the alleged11 exceptions.  …because Switzerland can only really wait a couple more years until the pressure to regulate for transparency becomes too great. In the meantime, the much-needed income for the people in resource-rich developing countries, lost through a lack of transparency, will remain lost. Each barrel of oil and each ton of ore can only be sold once. This is why Switzerland must act quickly.

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According to newspaper Le Temps, 17.01.13, “Geneva trading faced with American transparency,” Stéphane Graber, general secretary to the Geneva Trading and Shipping Association (GTSA), expects that the Geneva commodity companies will in large part be subjected to DF 1504 (which differs significantly from our assessment but shows that the industry could accommodate itself well with payment transparency) and explicitly welcomes transparency regulation: “in any case, many local commodity trading companies are affected by these rules because they are listed in the United States, because they have a branch there or because their counterparties are there,” says Stéphane Graber. […]

“The sector is in reality very favourable towards transparency initiatives,” assures Stéphane Graber. His main concern is to make sure “Switzerland ensures reciprocity, so that a company subject to the American regulation is not made the subject of double controls and additional fees here.”

10 Martin Fasser, Zug Commodity Association, underlined in several public debates (15.11.12 HSG St. Gallen, 21.03.13 Kantonsschule Küsnacht) that from his point of view the publication of payments in the commodity sector would cause no problems and should be done, if it could bring something. In summer 2012, he took a more critical position in the Neue Zürcher Zeitung (24.08.12) towards the US regulations: “He considers that only a global solution that also takes non-listed companies into account can be effective”.

11 Citation taken from "Background Report: Commodities" (p.11). Swiss commodity companies carrying out extractive activities are not at all the exceptions (practically all major companies invest into extraction, some more than others). But these activities are practically all covered by the EU regulation (see above).

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“The revelation of traders’ profitability will heighten calls for greater transparency from an industry that, although central to the global economy, is little understood and largely unregulated.”

Financial Times, 15.4.13

“I want this G8 to drive greater transparency around the globe so that revenues from oil, gas and mining can help developing countries to forge a path to sustainable growth, instead of fuelling conflict and corruption.”

David Cameron, letter to NGO network Publish What You Pay (PWYP), 26.2.2013

7 «I welcome that Switzerland is considering similarly high transparency standards. Switzerland is an important trading hub and a crucial jurisdiction in creating a level playing field for these companies [...].» [20.11.12] «The new law will cover mean that over 70% of the world's extractive industries are covered by transparency rules. There can be no doubt that the EU has played a key role in setting a new global standard for transparency. We now hope that other countries, such as Australia, Switzerland, Canada and China will follow our lead.» [22.10.13] MEP Arlene McCarthy, Rapporteur EU Transparency Directive

“When local communities know how much business is paying to extract oil, gas, or minerals, they are in a better position to demand a fair share of the revenue. In this way, oil, gas, and mining projects bring more benefits to local communities. (...) By covering more and more extractive companies, recent US legislation and new European rules move the world closer to a global standard on transparency. ‘Other countries, such as Canada, China, and Switzerland must now adopt these standards,’ Mr Annan said.”

Africa Progress Panel, 16.4.13