Country-by-Country Reporting Requirements: The United States should follow Hong Kong’s lead
June 3rd, 2010
Collin Swan analyzes the groundbreaking, new reporting requirements at the Hong Kong Stock Exchange and examines the implications they will have on the proposed Energy Security Through Transparency (ESTT) Act in the United States.
Today, the Hong Kong Stock Exchange (HKEX) is enacting a clear and comprehensive set of listing requirements for mineral companies that are in line with international standards and encourages greater disclosure and transparency. Under the new Chapter 18 of the HKEX Listing Rules, mineral companies applying for a listing on HKEX will be required to disclose important information about their exploration and extraction activities, including payments made to host governments. Revenue Watch has heralded these new rules as a “significant step forward in the global campaign to establish greater transparency and accountability in the extractive industries.” While these new rules are far from perfect and do not require country-by-country reporting on an annual basis, they are still a step in the right direction. After today, the HKEX will become the first stock exchange in the world to require any kind of country-by-country reporting by companies operating in extractive industries.
The new Chapter 18 will apply to any “new applicant whose Major Activity (whether directly or through its subsidiaries) is the exploration for and/or extraction of Natural Resources [including both minerals and/or Petroleum].” Therefore, a company that has more than 25 percent of its total assets in natural resources will have to comply with Chapter 18 when applying for a listing. To accommodate the increasing interest of foreign mineral companies to list in HKEX, the exchange is ultimately trying to establish itself as a creditable place for mineral companies to raise capital while providing investors with enough information to feel secure in their investments. And for that, HKEX should be applauded.
As part of its listing application, a mineral company will be required to disclose any “relevant and material” information concerning a number of different categories, including environmental, social, health and safety issues and the company’s historical experience with host country laws and practices. These progressive rules require new mineral companies to disclose in their listing application all “payments made to host country governments in respect of tax, royalties and other significant payments on a country by country basis.”
However, Chapter 18 does have its limitations, and the HKEX ultimately fails to take this country-by-country reporting requirement far enough. The new rules only apply to mineral companies applying for a listing on HKEX, and do not dramatically affect the obligations of companies already listed. Listed companies would be required to make similar disclosures only if they were to conduct a major acquisition or disposal of mineral or petroleum assets (i.e. the acquired or disposed assets were at least 25 percent of the company’s total assets). Perhaps most significantly, mineral companies subject to Chapter 18 are only required to disclose their country-by-country payments during the listing application process and would not be required to update this data annually.
This is where the United States can take the reins and make country-by-country reporting a meaningful disclosure. The U.S. Senate is currently considering the Energy Security Through Transparency Act (ESTT), which would require all mineral companies registered with the Securities and Exchange Commission (SEC) to disclose payments made to governments on a country-by-country basis in their annual reports. A similar bill is expected to be introduced in the House of Representatives soon.
The steps Hong Kong has taken reaffirms that country-by-country reporting standards are not only positive but essential for investor security and risk analysis. They provide investors with a deeper look into a mineral company’s allocation of resources on a global basis and enable them to make more accurate risk assessments.
Now is the time for Congress to step up to the plate. Hong Kong’s new rules already demonstrate the formal recognition of a growing international standard in support of country-by-country reporting. Transparency is good for both investors and companies, and it helps to ensure that mineral-rich countries actually obtain the profits they deserve from their resources.