Slick Moves

The SEC could help tackle corruption in resource-rich countries around the world -- but the oil industry is getting in the way.

Angola, Africa's second-largest oil producer, is regarded as one of the most corrupt countries in the world. And American oil lobbyists are only making the situation worse: They are exploiting Angola by seeking to delay and weaken the implementation of a crucial U.S. transparency law.

That law, Section 1504 of the Dodd-Frank Act, also known as the Cardin-Lugar amendment, promises a breakthrough in preventing dirty deals and illicit payments being made for natural resources around the world, similar to the shady transaction recently uncovered by Foreign Policy. If implemented fully, the law would make U.S. oil and mining companies disclose the payments they make to governments across the world, including in Angola. However, oil lobbyists have been making misguided arguments that laws in Angola and three other countries prevent the required disclosures.

Angolan officials secretly profiting from the country's oil riches is not a surprise. It is only the latest episode in a sad history that goes back for decades. Global Witness, where we work, began exposing the complicity of the international oil and banking industries in the plundering of state assets during Angola's 40-year civil war in our 1999 report A Crude Awakening. This was followed by our 2002 report All the Presidents' Men, which called on the oil companies operating in Angola to "Publish What You Pay" (PWYP). Under this rallying call, Global Witness co-launched the PWYP campaign, which is now an international coalition of more than 790 civil society organizations in over 60 countries, including Angola, advocating for transparency laws such as Section 1504.

These efforts are intended to prevent scandals similar to the Trafigura deal covered in Foreign Policy, which provide a glimpse of the endemic corruption in Angola's oil industry. Only a few days before Foreign Policy published its story, media reports about leaked documents relating to other corruption claims caused the share price of SBM Offshore, a Dutch oil services company operating in Angola, to plummet 17.9 percent when markets opened. SBM released a statement challenging the validity of the leaked documents, saying that they are partial, taken out of context, contain outdated information, and are not representative of the facts. SBM had also already disclosed to its investors that it was conducting an internal investigation into questionable payments in Angola. However, the dramatic stock drop suggests that SBM investors had not anticipated the scale of the corruption risk exposure.

Another oil services company active in Angola, Weatherford International, which is listed on the New York Stock Exchange and headquartered in Switzerland, has recently pleaded guilty to violations of the U.S. Foreign Corrupt Practices Act (FCPA), including bribery of the executives of Sonangol, Angola's state oil company. It has agreed to pay fines of $253 million to settle the case, one of the largest FCPA settlements ever.

These cases illustrate the urgent need for transparency in Angola's oil sector. The successful implementation of Section 1504 would have a particularly transformative impact in Angola, where almost all active international oil companies are listed or registered in the United States or European Union. As a result, these companies would be required to report payments made to the Angolan government under Section 1504 or the similar EU Accounting and Transparency Directives (passed in June 2013).

Both these U.S. and EU laws require oil, gas, and mining companies to publish their payments to governments, such as taxes, royalties, and license fees, broken down by country and by project so that citizens in resource-rich states can track payments and ensure they are used for public benefit. Without this detailed information, investors are limited when trying to understand and evaluate the risk of their investments. This is why investors representing $5.6 trillion in assets -- including the leading sustainable investment firm (Calvert), the largest U.S. pension fund (CalPERS), and the world's largest private wealth manager (UBS) -- are supporting a strong implementation rule for Section 1504.

But elements of the oil industry, represented by the American Petroleum Institute, are fighting to weaken Section 1504 and other laws. In particular, they would like to be exempt from reporting payments made to the Angolan government, claiming that such disclosures are banned under Angolan law.

This argument, however, is contradicted by clauses in the standard Angolan oil contract (used in the country for over three decades) that allow for such disclosures when required by law, including by a securities regulatory authority. And in fact, Norway's major oil company, Statoil, is already publishing similar information about its payments in Angola without suffering any repercussions. Nonetheless, the oil industry used unfounded claims about conflicting laws in Angola and three other countries (Cameroon, China, and Qatar) to persuade a federal judge to set aside the implementing rule for Section 1504 on July 2, 2013. The Securities and Exchange Commission (SEC) now has to revisit the rule, which should happen this year.

Put simply, allowing legal exemptions within the final rule for any country would be terrible policy. It would perversely encourage corrupt tyrants to pass laws in their own countries banning disclosure -- thus over-riding Section 1504, rendering the principled law little better than what we have called a "dictator's charter."  In effect, then, exemptions would hide payments in places like Angola, where transparency is arguably most essential.

While the SEC prepares to revisit the rule, oil lobbyists are also trying to limit the information disclosed under Section 1504 in any country, anonymizing and aggregating the data so that payments are neither linked to individual companies nor to specific contracts and projects. This would strip the required disclosure of the critical information needed to protect investors and prevent corruption.

The implementation of Section 1504 must ensure that payments are given by project and company, without any exemptions. Anything less would in effect aid and abet the continuation of illicit payments.

A weakened U.S. law would fall fatally behind the emerging global standard for revenue transparency. Inspired by Section 1504, strong legislation has been passed in the European Union and in Norway, and Canada is also considering equivalents. The recently agreed-upon rules of the voluntary Extractive Industry Transparency Initiative (EITI), moreover, include payment disclosures that match EU laws and Section 1504; they will apply to over 25 member countries.

It is imperative that the SEC now match the emerging global transparency standard that the United States itself kick-started. The SEC must re-issue a robust 1504 rule in order to protect the interests of investors, avoid creating double standards, and help end corruption in countries like Angola.

This corruption is not just a domestic problem, and so solutions cannot be located exclusively inside Angola (or any other country). As Foreign Policy reported, efforts by investigative journalist Rafael Marques de Morais to expose corruption in the country have been met by the Angolan government with unspecified criminal charges, violence, and death threats. It is not reasonable to expect that corruption exposure will come from locals who risk their safety and livelihood. U.S. regulators and companies must also assume their role as leaders on transparency, rather than being part of the problem.



Honoring Neither the Letter nor the Law

In 1994, Ukraine and Russia made a deal: Nukes for sovereignty. Moscow took Kiev’s 1,900 nuclear weapons. Now, 20 years later, it wants to take its sovereignty.

Against the backdrop of the crisis caused by Russia's military occupation of Crimea, Tuesday's flight-test of a Topol intercontinental ballistic missile (ICBM) was, to say the least, badly timed.

It also served as a good reminder that Ukraine, not so long ago, had the world's third largest fleet of ICBMs -- as well as the third largest nuclear arsenal. In 1994, Kiev agreed to hand over its nuclear stockpile to Russia for dismantlement in return for certain commitments, including to respect the former Soviet state's sovereignty. This agreement became known as the Budapest Memorandum of Security Assurances. And today, Moscow's actions in Crimea are in flagrant violation of those commitments.

When the Soviet Union collapsed in 1991, Ukraine housed 130 SS-19 ICBMs -- each capable of carrying six nuclear warheads -- in underground silos. A single SS-19 warhead had an estimated nuclear yield more than 20 times that of the bomb that leveled Hiroshima in 1945. In addition, 46 SS-24 ICBMs, individually capable of carrying 10 nuclear warheads, were deployed in central Ukraine, giving the country a total of 176 ICBMs. The newly independent country also inherited 44 Tu-95 Bear-H and Tu-160 Blackjack strategic bombers, as well as hundreds of Kh-55 nuclear air-launched cruise missiles to arm those aircraft.

Immediately upon its split from the Soviet Union in 1991, Ukraine had 1,900 strategic nuclear warheads -- a larger arsenal than those of Britain, France, and China combined.

In 1992, Kiev agreed to dismantle its strategic delivery systems, transfer the nuclear warheads to Russia for elimination, and accede to the Nuclear Non-Proliferation Treaty as a non-nuclear weapon state. The Ukrainians insisted, however, on certain conditions, including compensation, assistance for eliminating missiles and bombers, and security assurances. U.S. diplomats worked with their Ukrainian and Russian counterparts to broker a trilateral statement, signed by U.S. President Bill Clinton, Ukrainian President Leonid Kravchuk, and Russian President Boris Yeltsin in January 1994. It specified the commitments that the United States and Russia would undertake to address Ukraine's conditions.

The Ukrainian government attached particular importance to three concerns. First, Kiev insisted on compensation for the commercial value of the highly-enriched uranium in the nuclear warheads. Thus, the statement ensured that Russia would provide Ukraine with the equivalent amount of low-enriched uranium in fuel rods for the country's nuclear power plants, which generated 50 percent of Ukraine's electricity at the time.

Second, Ukraine lacked the resources to dismantle the missiles, bombers, and missile silos on its territory. The United States agreed to provide the Nunn-Lugar Cooperative Threat Reduction Program assistance to cover those costs.

Third, Ukraine asked for security assurances. The statement provided that, once Ukraine acceded to the Non-Proliferation Treaty as a non-nuclear weapon state, the United States, Russia, and Britain would undertake certain commitments for the independent Ukrainian state.

In December 1994, Clinton, Ukrainian President Leonid Kuchma (who succeeded Kravchuk), Yeltsin, and British Prime Minister John Major signed the Budapest memorandum, which committed the United States, Russia, and Britain "to respect the independence and sovereignty and the existing borders of Ukraine" and "to refrain from the threat or use of force against the territorial integrity or political independence of Ukraine." The agreement noted that "none of their [U.S., Russian, and British] weapons will ever be used against Ukraine except in self-defense or otherwise in accordance with the Charter of the United Nations."

The Budapest memorandum is a politically-binding agreement rather than a legally-binding treaty. Nevertheless, former Ukrainian officials in office at the time described it as crucial to Kiev's decision to give up nuclear arms.

When the four parties signed the memorandum in 1994, they agreed to meet should a nation feel that any of the commitments had been violated. For Ukraine, the violating country is, of course, Russia. And for the first time since the agreement was signed, Kiev has requested a meeting of the four nations.

Over the past week, Russian military forces have occupied Crimea, which Russia previously recognized as part of Ukraine. On Tuesday, March 4, Russian President Vladimir Putin denied that Russian forces have taken over the peninsula, asserting that "local militias" are manning checkpoints, blockading Ukrainian military bases and controlling Crimea's main points of entry. That claim defies credibility. Putin explained that the militias wore Russian-style combat fatigues because they could be purchased in army stores in post-Soviet states. (The reporters did not think to ask whether the Russian army jeeps and armored personnel carriers seen all around Crimea also could be purchased in those army stores.)

Russia has long based elements of the Black Sea Fleet and associated units in Crimea -- with Ukrainian agreement. Kiev has made no threats against those bases, and Ukrainian military forces on the peninsula have exercised great restraint. Moscow has no basis to claim self-defense and indeed has not invoked the right of self-defense. The Russian government, which normally insists that military action other than self-defense can be undertaken only with the approval of the U.N. Security Council, has not sought such approval. Instead, the Russian U.N. representative has been castigated by his counterparts for Russia's seizure of Crimea.

Given the violation of the Budapest memorandum, the Ukrainians invoked the commitment to consult. On Wednesday, March 5, U.S. Secretary of State John Kerry, British Foreign Minister William Hague and Acting Ukrainian Foreign Minister Andriy Deshchitsya met in Paris. Russian Foreign Minister Sergei Lavrov, although in Paris, chose not to attend.

Russian officials offered a novel defense for not carrying out the commitment to consult. They said that they had not signed the Budapest memorandum with the current government in Kiev. But the agreement is among the United States, Russia, Ukraine, and Britain -- not particular governments. Were this bizarre diplomatic logic applied more generally, states would have to again sign every agreement they have with another state when the latter changed its government.

The United States must live up to its Budapest commitments, if for no other reason than this is part of the price that Washington agreed to pay in 1994 to eliminate 1,900 strategic nuclear warheads and some 220 ICBMs and bombers that were designed to attack America. In the first instance, that means providing political support to Kiev and working with the International Monetary Fund and European Union on financial credits for Ukraine. Second, it means consulting with Kiev and the European Union to find a negotiating path to resolve the crisis. And third, it means coordinating with European and other countries to penalize Russia until it alters its behavior.

This is not just a question of living up to past U.S. commitments; it is a question of protecting the value of security assurances as leverage for resolving future proliferation challenges. It is possible, for example, that U.S. security assurances of some kind to Iran might play a role in finding a permanent settlement to the Iranian nuclear issue. But security assurances in the future will have little credibility unless the United States fulfills those that it undertook in Budapest.