Although the Dodd-Frank Wall Street Reform and Consumer Protection Act is best known for regulating banks, Congress slipped in two novel sections that use informational regulation to deter U.S. companies from fueling war and corruption overseas. Section 1502 forces certain industries (including phone makers and retailers) to identify Congolese conflict minerals in their supply chain. Section 1504 forces oil, gas and mining firms to publicly report the payments they make to dodgy governments around the world.
Like the iPhone 5, both rules encountered early glitches, then fulfilled their innovative potential before being surpassed by improved versions. The iPhone 6 replaced the iPhone 5; more sweeping policies in Europe surpassed Dodd-Frank. That may turn out to be lucky for the transparency movement, because Dodd-Frank now faces a hostile Congress and U.S. Securities and Exchange Commission.
"I think there's a better than 50 percent chance that both [Dodd-Frank] rules will go away," says Michael Littenberg, who anchors a group of 20 corporate responsibility and compliance attorneys at Ropes & Gray.
The rule on conflict minerals has already been pared back. In National Association of Manufacturers v. SEC (2015), the U.S. Court of Appeals for the D.C. Circuit shot down its labeling requirement on the unlikely tenet of corporate free speech. "Products and minerals do not fight conflicts," it wrote. "The label '[not] conflict free' is a metaphor that conveys moral responsibility for the Congo war ... [An issuer] may disagree with that assessment of its moral responsibility." It seems the court cares more about the sensitivities of a firm feeding the conflict than a basic tool of informational regulation.
Nonetheless, the U.S. mandate of supply chain due diligence remained in place, and it has worked well for three years. Moreover, the EU agreed on its own conflict minerals regime in June of this year. The EU regulation will list "responsible importers" of tin, tungsten, tantalum and gold. Unlike Dodd-Frank, it will apply to conflict zones worldwide.
"Leading companies have already indicated that they will continue their traceability efforts," says Littenberg. "If the rule goes away, the electronics, auto and retail industries may pivot toward voluntary compliance sector by sector."
The U.S. rule on payment transparency was delayed rather than hobbled by industry. In American Petroleum Institute v. SEC (2013), a D.C. federal court threw out the bold initial rule as inadequately justified. Uncomfortable straying outside the capital markets, the SEC dallied until Oxfam America Inc. sued to compel action. On June 28, the Section 1504 rule finally emerged with a fuller rationale. One of the few things on which the dueling litigants agree is that the new rule is just as bold as the one the court threw out. Simon Taylor of the UK-based advocacy group Global Witness, who is also cofounder of the "Publish What You Pay" NGO coalition, issued a rare euphoric statement: "This is historic! This rule will go a long way to help end injustice from shady deals between companies and kleptocrats. Today's U.S. rule has real teeth."
Perhaps the transparency campaigners flew too close to the sun. With the election of Donald Trump, Section 1504 will be a cinch to roll back through a congressional repeal of rules issued near the end of the Obama administration.
And yet, it's not clear that industry would care. In 2013, the EU revised its Transparency Directive to require natural resource companies to "Publish What You Pay." Canada, which is also a natural resources sector hub, passed a similar law for oil, gas and mining companies in 2014. (Only the EU imposes the same mandate on loggers). Meanwhile, industry helped to draft similar rules in the voluntary code published by the Extractive Industries Transparency Initiative, a multistakeholder group of states, NGOs and firms that includes all the oil super majors.
"The reality is multinationals are subject to similar reporting requirements anyway," says Littenberg. "If either or both rules go away, NGOs can bring shareholder proposals, target companies through social media, and lobby at the state level." Littenberg predicts that most companies will continue to comply: "The only difference would be no SEC filing."
So can international transparency survive a period of national opacity? The Global Lawyer concludes, yes. In our next column, we will pose the same question for anticorruption and the Foreign Corrupt Practices Act.
Michael D. Goldhaber