The Cardin-Lugar amendment, or “Section 1504” of the Dodd-Frank Financial Reform Act, could have been a milestone in terms of transparency and government accountability. However, it has yet to be implemented by the SEC.
Basically, Section 1504 requires all firms listed on US stock exchanges to publicly disclose their resource extraction payments. The idea behind that is to stop the illicit flow of natural resource revenue. Therefore, Section 1504 requires affected companies to include any payment made to a foreign government for the purpose of the commercial development of natural gas, oil, or minerals in their annual report.
The goals are to make it harder for international corporations to pursue exploitative practices, stop corruption and cut off terrorist organizations from one of their major financing sources. Additionally, investors get more detailed information about the company they invest in and the operating environment for American businesses will become less risky.
Failure of Regulation in Regards to Conflict Minerals from Congo Raised Concerns about Section 1504
At the fifth anniversary of Dodd-Frank, Section 1504 has yet to be implemented by the Security and Exchange Commission (SEC). The US wanted to take the global lead when it comes to transparent government with this regulation, but now they may be falling behind.
One reason are legal actions taken by big players. The American Petroleum Institute; which is funded by Shell ($RDS.A), Exxon Mobil (XOM) , and Chevron (CVX) ; sued the SEC in 2013 and blocked the implementation process. Meanwhile, other oil companies such as Tullow Oil (TUWLF) or Kosmos Energy (KOS) have already started to disclose information about resource extraction payments voluntarily.
Another reason may be the intense criticism that followed the implementation of Section 1502, which is in regards to the use of conflict minerals. Companies have to disclose whether they are receiving tantalum, tungsten, tin, or gold from Congo or adjoining countries and whether those minerals are connected to sites of the ongoing conflict in the region.
Several academics, researchers and journalists criticized Section 1502 in an open letter, because it “contributes to, rather than alleviating the conflicts it sets out to address.” They suggest that the relationship between mining and conflict in Congo is not as clear-cut as Dodd-Frank backers say. According to them, forcing western companies to boycott the mines will push thousands of people into poverty.
Europe is Adopting the Idea of Section 1504 and Tries to Issue its Own Regulation
Meanwhile, the European Union is in the process of implementing a rule regarding resource extraction. In May 2015, the EU Parliament ratified a law that forces importers to get certified by an external auditor. The European version includes all conflicted regions worldwide, but it will not be implemented before 2016.
If implemented, it will affect more than 880,000 companies, mainly in the automobile, mechanical engineering, and jewelry industries. Companies criticize the regulation as unrealistic. Considering the depth of international supply chains, it is nearly impossible to say where all supplies come from, they say. Moreover, importers and manufacturers expect much more bureaucracy and therefore higher costs.
Critics point at Congo and state that the implementation of Section 1502 has done more harm than good. It didn't make the life of poor people in development countries easier, costs were high and expectations were unrealistic. Therefore, European lawmakers will face significant headwinds, just as the SEC.
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