In a last-ditch effort to scuttle a U.S. federal rule aimed at fighting corruption, a coalition of oil, gas and mining companies told an appeals court panel Friday that the new rule–which forces them to publicly disclose payments to foreign governments in countries where they operate–would violate the companies First Amendment right to free speech.
The disclosures, part of the Dodd-Frank financial reform law, are meant to hamstring corruption in the notoriously opaque extractive industries. The new rule forces companies to inform investors and citizens of resource-rich countries about payments their governments collect for natural resources.
The rule came into effect as part of the Dodd-Frank financial reform law passed in 2010. Under the S.E.C. regulation, companies working in extractive industriesâ€”largely oil, gas and minerals–must disclose details of each individual deal they strike with foreign governments. Before the law passed, companies were not required to reveal any information about payments to foreign governments..
A group of industry organizations including the American Petroleum Institute and the U.S. Chamber of Commerce is suing the S.E.C., because members don’t want to disclose details of the deals companies strike with countries.
Eugene Scalia of Gibson Dunn & Crutcher LLP, an attorney for the American Petroleum Institute and the son of U.S. Supreme Court Justice Antonin Scalia, argued that, “This rule should be vacated.” He said that it forces companies to engage in speechâ€”financial disclosures–designed to influence politics in other nations.
HE said that the rule would cost oil companies “potentially billions of dollars,” predicting it would force them to pull out of countries that might bar such disclosures of payments.
But S.E.C. attorney William Shirey dismissed Scalia’s argument as baseless.
“It’s simply factual data,” Shirey told the judges. He added that government demands for disclosureâ€”which cover everything from tax returns to corporate filings to pledges of compliance with federal regulations–have “never been subject to First Amendment scrutiny.”
And supporters of the heightened disclosure rules said there is no evidence that any countries would spurn contracts with companies on such grounds.
The American Petroleum Institute has also argued that the S.E.C. failed to conduct a thorough cost-benefit analysis on the rule. The S.E.C. argues that Congress had already taken cost into consideration when in drafted the law.
Human rights and transparency advocates say the rule, known as Section 1504 of the Dodd—Frank Wall Street Reform and Consumer Protection Act, is a critical step in stemming corruption in resource-rich countries.
Tutu Alicante, the executive director of EG Justice, a group dedicated to human rights in West African nation of Equatorial Guinea, said if companies’ payments to governments were transparent, citizens in resource-rich nations would be better equipped to hold their governments accountable.
“The only way we’re going to combat the type of corruption and the type of mismanagement of funds that is keeping Equatorial Guinea poor is by laws like 1504.”
Shirey told the panel of judges that the U.S. government stood to gain from the rule because it would hamper corruption that could be used to fund terrorism. “It’s a foreign policy objective to require transparency in resource-rich countries,” he said.
But Judge David Tatel questioned his line of reasoning. “Do you really want to argue as strongly as you are, given that your stronger argument is that it will disclose information to investors?” the judge asked.
Jonathan Kaufman, counsel for Oxfam America, said he was not surprised to hear Tatel focusing on the benefits of disclosure for U.S. investors, many of whom have supported the rule because the payment information from oil and gas companies helps them advise clients.
“Investor protection is the bread and butter of the S.E.C. So it’s really easy to see why the S.E.C. should be regulating in this field if it’s a matter of information that investors want,” Kaufman said.
Oxfam America intervened on behalf of the S.E.C. to get the case kicked to a lower court. Doing so would likely delay a ruling in the United States. In that case, companies would face equally stringent disclosure rules coming into effect in Europe.
The statute, Kaufman said, “is clear and the judges were clear that there is no jurisdiction in this court.”
Delaying the case much longer could be sticky for extractive industries. Isabel Munilla, spokesperson for the Publish What You Pay organization, which supports tougher disclosure requirements, said the U.S. law is part of a global movement, with the European Union and the London Stock Exchange on the cusp of adopting similar rules. Companies that are cross-listed on European exchanges would have to comply with those regulations, even if the court struck down the rule.
“The train has left the station on this one,” she said.
The court is expected to decide sometime over the next three months.
The court could decide to overturn the law, a decision that would be subject to appeal. The court could also ask for certain parts of the law to be rewritten, while allowing the remainder to stay in effect, or order the S.E.C. to redraft the entire rule. .
If the court decides it doesn’t have jurisdiction over the case, that decision would likely come sooner. The case would then fall to the U.S. District Court for the District of Columbia, a move that could delay the case for months.