* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
Sam Eastwood is a partner and Adam Smith a business ethics researcher at British-based law firm Norton Rose
President Obama signed into law the much-anticipated Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Financial Reform Act”) on July 21 this year. While much of the focus has surrounded the measures it has introduced to regulate Wall Street and protect against future economic crises, the Act is also significant in the continued fight against corruption.
Section 922 of the Act finally authorised the widely-debated whistleblower protections. It also introduced two sections within its Miscellaneous Provisions, sections 1502 and 1504, which surround payments made by extraction and mining industries, and the sourcing of so-called “conflict minerals”.
Whistleblower protection
Under section 922 of the Financial Reform Act, individuals providing original information to the SEC resulting in the successful enforcement of a judicial, administrative or related action, which leads to monetary sanction exceeding $1 million, are entitled to an award of 10 percent to 30 percent of the monetary sanction collected.
The amount awarded is subject to the SEC’s discretion and their consideration of a number of factors. These include the significance of the information provided to the success of the action, the degree of assistance provided by the whistleblower and their legal representatives, the SEC’s interest in deterring similar violations, and any additional relevant factors the SEC may establish by rule or regulation. Among the exceptions to those eligible, anyone convicted of a criminal violation related to the action for which they have provided information cannot receive an award.
The provisions encourage employees to inform regulators rather than using traditional internal procedures, providing protection from retaliatory action such as sacking or discriminating against whistleblowers. With recent corruption investigations resulting in fines of hundreds of millions of dollars, whistleblowers stand to receive significant financial packages for their efforts. Section 922 highlights the SEC’s heightened appetite for anti-corruption enforcement.
Direct reporting has been encouraged outside the United States - for instance, in Britain the FSA introduced its own whistleblowing hotline in 2002 and the SFO has recently encouraged direct reporting by whistleblowers, albeit without raising the prospect of reward to date.
New requirements for “resource extraction issuers”
In an effort to promote transparency within a sector traditionally susceptible to corrupt practices, section 1504 requires all SEC-registered companies operating in the oil, gas and mining industries, referred to as “resource extraction issuers”, to disclose all tax and revenue payments made by the company, a subsidiary of the company, or an agent, to either the U.S. government or any foreign government (including any department, agency or company owned by the government).
The Act defines payments as any that are not de minimis and are made to “further the commercial development of oil, natural gas, or minerals”. They may include taxes, royalties, fees, production entitlements, bonuses and other material benefits.
The “commercial development of oil, natural gas and minerals” is widely defined, and could reasonably include even those exporting or processing the extracted resources. While it is clear that major energy and mining companies fall under the remit of the Act, it is less certain whether companies providing parts and labour are subject to its provisions.
Greater transparency will leave companies open to closer scrutiny from consumers, media, politicians and NGOs. Companies will face questions surrounding their payments to governments, which will further encourage them to rethink the manner in which they do business. Companies must consider the wider impact of their commercial activities, even where their operations are entirely legal.
Provisions on conflict minerals
Section 1502 marks a shift towards ethical policy focused on particular issues of corruption and conflict. It reflects specific U.S. concerns that the exploitation and trade of conflict minerals is helping to finance conflict characterised by extreme levels of violence, particularly sexual and gender-based violence, in the eastern regions of the Democratic Republic of Congo - a war which has claimed almost 6 million lives. Conflict minerals include gold, tungsten, tin and tantalum.
The new law promotes transparency within product supply chains in industries using gold, tin, tungsten and tantalum. It requires U.S. companies that need such minerals for the functionality or production of their products to disclose in an annual report to the SEC the steps they are taking to ensure that their products do not contain conflict minerals. They must describe the steps they are taking to trace the minerals’ origins and ensure their purchases do not fund armed groups responsible for atrocities in the east of the Democratic Republic of Congo.
While the provision is narrow in focus, it is broad in reach and impact. It applies not only to electronics companies, which rely on Congolese tantalum to enable almost all electronic devices to function, but also to any publicly traded U.S. firms using tin or gold. This effectively covers a significant proportion of the U.S. manufacturing sector.
Section 1502 exposes such companies to the scrutiny of consumers, many of whom may shun companies that are seen to source supplies from those with no consideration for human rights. Disclosures must be made publicly on company websites, promoting the self-regulation of organisations eager to avoid association with the Congolese conflict. As with the “associated persons” provisions of the UK Bribery Act, section 1502 effectively encourages the self-regulation of operations throughout the supply chain.
Practical issues
The trade in conflict minerals has been likened to the blood diamond trade of the 1990s. This led to the Kimberley Process Certification Scheme, designed to certify and trace diamonds to ensure they were sourced from conflict-free zones. While a similar process has been suggested for conflict minerals, there are some key discrepancies that make this difficult. Most significantly, diamonds are not melted down and there are therefore fewer processes through which they pass. It can be difficult to distinguish Congolese minerals from those of “non-conflict” neighbours such as Uganda, Rwanda and Zambia. Minerals are often smuggled into neighbouring countries and shipped abroad where they are mixed with other products.
The approach of the U.S. government in attempting to cut commercial revenue streams to Congolese militant groups is likely to be echoed in future when tackling other humanitarian issues such as child labour. Section 1502 reflects a change in emphasis from aiding victims of humanitarian crises to targeting their perpetrators, effectively tackling problems at source.
Impact of legislation
Following the UK Bribery Act’s provisions on “associated persons”, the corruption-related provisions of the Financial Reform Act indicate a growing trend in the development of legal instruments that promote accountability to employees and consumers.
The U.S. Financial Reform Act offers further emphasis on promoting self-regulation and scrutiny of internal processes. It makes companies more accountable to the consumers they rely on for commercial success and highlights the increasingly prevalent perception that, in the field of ethics and corruption, encouraging practices that meet high moral standards is far more effective than strictly enforcing legal sanctions.
U.S. legislative initiatives are often adopted elsewhere, and it is likely that other nations who share U.S. principles will look to introduce similar laws in future.
