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At a basic level, governance is about disclosure, access and transparency. First stage governance features standards that are created using methodologies that are universal and data that is readily validated.  A government enacts an anti-bribery law and makes it publicly available.  It achieves first level governance compliance for anti-bribery.

The relative ease to effectuate compliance with governance at a first stage level is a catalyst for participation by governments and stakeholders. Through use of widely known sustainability or governance indexes they earn public and peer recognition of their formative governance accomplishments and gain access to IMF loans, stock exchange compliance and institutional investment fund acceptance. For the evaluator the documentation produced creates new baselines, evidences omissions and invites critical comparisons. Second stage governance is more granular in disclosure and mandates verification of data based upon increasingly higher, though disparate, audit standards[1]. The methodologies, internal controls and audit standards ultimately are more rigorous. Compliance is qualitatively and quantitatively differentiated, as complexity, cost and resistance by governments and stakeholders increase.

At the 2011 5th Global Conference of the Extractive Industry Transparency Initiative (“EITI”) migration to EITF+ evidenced more ambivalence from G20 based corporate stakeholders, despite accelerated first stage compliance by extractive resource host countries[2]. Divergent views about compliance with the Cardin-Lugar transparency provision of the U.S.’ so-called Dodd-Frank law surfaced along resource sectors[3].  Royal Dutch Shell, representative of the oil sector, opposed the provision as an infringement on host country sovereignty, while Newmont Mining, representative of the mineral extractive sector, thought compliance should be globally applied within the EITI. Both Newmont Mining and Royal Dutch Shell are U.S. public companies and would have to comply with Cardin-Lugar when the delayed rules are promulgated. It is asymmetry in compliance that complicates the matter for Royal Dutch Shell and some in the oil sector. Many of the largest international extractive resource companies are domiciled in China, Russia and India, and would not have to comply with Dodd-Frank. EU companies, that are not U.S. public companies, would also not have to comply. This may change. European Commission President Barroso has proposed tabling similar legislation in October, 2011 having received general G8 support, from members such as France and England.[4]

As governance moves beyond superficial first stage compliance, the governance model is questioned. The U.S. and Europe believe that the developing extractive host countries need aid and good governance. China and its supporters believe they need investment and infrastructure. Aid is tied to diplomacy. Good governance is the host country’s prerogative as a sovereign state. The host country plays each against the other.

Effective May 1, 2011  China amended its anti-corruption laws to make it illegal to give “property to any foreign public official or official of an international public organization” to “seeking illegitimate commercial benefit”[5].  Law and practice differ in China, as they do in many countries where relationships are central. Accordingly, it is likely too early to consider this Amendment a revision of its investment banker outlook in its “Go Global” Policy. It may be a maturation or alteration of its “governance” model. Alternatively, it may be a facial acquiescence to international standards, which will be selectively applied in its best interest.

The digression of reality from law in China is illustrated in the recent decision by the Final Court of Appeal of the Hong Kong Special Administrative Region, in Democratic Republic of the Congo and Ors vs. FG Hemisphere Associates LLC. Here the appellate court in a civil enforcement case supported PRC’s position that absolute sovereign immunity was the rule in Hong Kong, as it was in China[6]. It reached this result notwithstanding that Hong Kong’s rule was restrictive sovereign immunity prior to handover to the PRC and that China was a signatory to the United Nations Convention on Jurisdictional Immunities of States (“UNCSI”), which applies restrictive sovereign immunity[7].

The law of sovereign immunity as applied to state owned enterprises is unsettled. Absolute sovereign immunity denies both jurisdictional and enforcement rights against a country and its property. Restrictive sovereign immunity, which applies under UNCSI, allows action and to a lesser degree enforcement against “independent” [8]commercial enterprises of countries through state owned enterprises. Practically the jurisdiction governing the lawsuit will follow its laws as respects sovereign immunity, but in terms obtaining evidence or enforcement of a judgment or an award, the domestic law of the state owned enterprise can be effectively compelling.  The issue is clearer when criminal acts or proceedings are taken by or against a state owned enterprise. Here absolute immunity is the de facto rule[9].

In the context of governance and anti-bribery, countries that invest abroad through state owned enterprises are effectively carved out of anti-bribery enforcement. This is a metric not always considered from a governance standpoint, notwithstanding facial adoption of UNCAC like bribery laws. Ambivalence of some private corporations to Cardin-Lugar, based on an unlevel planning field, has superficial plausibility in this context. Corporations were on the same field before Cardin-Lugar[10]. The purpose of anti-bribery laws in the context of governance and development is implicitly raised in the objection. Even under its own anti-bribery law, the developing host country may not bring the extraterritorial action. It does not benefit from the fines recovered by extra-territorial application of the home country’s anti-bribery law.  If a state owned corporation is immune from prosecution because of absolute sovereign immunity, is there another way for private corporations to begin to level the governance playing field and provide effective development aid on a national and sub-national basis.

The common ground between the Western and Chinese model of governance may lie in a metric disclosing “project in kind” payments. This is not the same as the problematic “payment in kind”, where the producing company pays royalties or fees through return of the extractive product to the host country or its representatives.  “Project in kind” (PIK) is roughly equivalent to “tied aid” and is practiced, but is not often a separate transparent metric.  PIK should be openly contemporaneously disclosed and reported in a RFP for all bidders and the public.  PIK proposals and awards in respect of negotiated project(s) development should also be timely, completely and openly disclosed and reported to all bidders and the public. Host country procurement law, rules and practices would be part of governance standards.  By isolating non-extractive exploration, development and production payments and having extractive companies manage the non-extractive development project(s), subject to their home country’s anti-bribery laws, corruption can begin to be diminished, and revenue transparency can be approximated. Regional aid, other loan or credit enhancements and trade policy initiatives are not foreclosed. PIK reporting could provide a governance standard that aligns both the Western and Chinese models. It might also spark joint or bilateral cooperative development effort outside of regional or global development institutions.

Cooperation is important, because the Western governance model cannot be exploited in the BRICI (BRIC plus Indonesia) nations.  There is no leverage, particularly with China.

The European Commission, as part of the Raw Materials Initiative, in 2010 prepared a list of 14 critical mineral raw materials.[11] Most are concentrated in China. Save for a temporary curtailment in the export of Rare Earths, the Chinese have not limited supply. Accordingly, they have been relatively inexpensive. As China’s economy continues to mature, their own demand may limit supply for export.  Internal extraction will not be subject to external governance standards that have not been adopted and applied. Cooperation will be necessary in order to develop a common ground for governance and sustainability, consistent with mutual self interest. EU trade policy is incorporating the Raw Materials Initiative.[12] There are other minerals that are of material economic importance, but as they are concentrated in more countries, they are not presently subject to the same supply risk.[13] Concentration is not necessarily equivalent with import for each country or region. China produces 91% of Antimony and Brazil 2%, but the EU imports 77% of it from Bolivia and 15% from China[14]. Reporting information is also geographic and does not reflect actual ownership of the extractive or upstream companies. Transparency in governance of the supply risk is deficient in this regard.

Transparency in reserves and resource reporting through standardized protocols is ongoing through UNECE, CRIRSCO and various national reporting organizations[15]. This is a dual edge sword as it promotes more financial clarity and risk hedging, but risks increased financial speculation in derivative markets and reduced credit availability.

The challenge for governance evaluators, even at the first and second tier levels, is to keep the documentation flowing from an expansive pool of governments and stakeholders. With local feedback and offered collaboration with all affected players and ostensible beneficiaries, more informed, operable critical analysis will evolve.

 

[1] There are varied audit standards and guidelines, including International Standards of Supreme Audit Institutions (INTOSAI Good Governance Internal Control Standards 9100-9299 and ISSAI Guidelines for Compliance and Performance Audit); GAAS based on AICPA Standards; ISA Standards; ISO Standards; GAGAS, IMF Guide on Resource Revenue Transparency; OBI; and the World Bank through governance indicators and its GII. EITI like OECD recognizes flexibility, permitting aggregation or disaggregation; national and/or sub-national; IFRS standards, “principles” or other approaches.

[2] Eleven of the 35 countries implementing were EITI compliant: Azerbaijan, Central African Republic, Ghana, Kyrgyzstan, Liberia, Mongolia, Niger, Nigeria, Norway, Timor Leste and Yemen. Twenty of the 35 countries had undertaken validation and 27 of the implementing countries had produced EITI Reports.

[3] Section 1504 of the “Dodd-Frank” Act requires energy and mining companies registered with the SEC to report by country, on “project” basis, payments to foreign governments for the right to extract minerals, oil and gas.

[4] This would implement the Africa-EU Joint Strategy 2011-2013 agreed at Addis Ababa in June, 2010.

[5] Eighth Amendment to Article 164 of China’s Criminal Law.  Bribing PRC officials was already illegal under Article 164, as were bribes for purchasing or selling products and services within China, under Article 8 of their Anti-Unfair Competition Law. How this Amendment will be interpreted and enforced is still subject to conjecture, as is the limitation to “illegitimate commercial benefit”. “Illegitimate benefits” has been interpreted domestically to include seeking an advantage in violation of law as well as requiring another to assist, or facilitate, violation of law or industry codes. Unlike domestic bribery, foreign bribery is limited to a commercial benefit. The amendment will apply to businesses organized under Chinese law, including joint ventures, wholly owned foreign enterprises in China and perhaps representative offices. Whether Article 7 of China’s Criminal Law, will qualify the treatment of Chinese domestic entities under Article 164 remains to be seen. Article 7 applies their Criminal Code to Chinese “citizens” who commit crimes outside of China. China is a signatory to the UN Convention against Corruption (UNCAC) and this Amendment would implement it. As under UNCAC and the US’s FCPA, bribery of a state owned entity would be bribery of a foreign public official.

[6] Final judgment will actually be rendered by Standing Committee of the National People’s Congress which will determine whether Hong Kong is required to follow the PRC’s absolute sovereign immunity position, before and after Hong Kong’s handover.

[7] 28 States signed the treaty during the period it was open for signature and 8 States have ratified or acceded to the Convention (Austria, Iran, Kazakhstan, Lebanon, Norway, Portugal, Romania and Sweden). Japan gave up absolute immunity and signed the treaty in 2007. Some countries have enacted laws incorporating the restrictive sovereign immunity. Russia under Article 127 of the Civil Code of Procedure permitted enactment of a provision adopting restrictive sovereign immunity, if a law is enacted.

[8] Under ECSI independence is determined by the enterprise being operated separately from the state and having the authority to sue and be sued. The U.K. and most civil law states follow the ECSI in this regard. The U.S. under the Foreign Sovereign Immunities Act looks to majority ownership by the government, to determine if the agency or enterprise is state property. For the purpose of determination of restrictive sovereign immunity the primary issue is whether the act itself is commercial or governmental, and the structure of the entity is secondary.

[9] Violations of anti-trust laws and tax laws are distinct from the treatment of other criminal laws.

[10] The FG Hemisphere case is a cautionary tale for vulture funds that take an assignment of sovereign debt in the hope of attaching development revenues through state owned and private industries. The Congo benefited, but FG learned that state owned enterprises of countries that apply absolute sovereign immunity, will unlike their private counterparts, have an immune revenue stream.

[11] Memo/ 10/ 263, Brussels, 17 June 2010. See following map. Platinum Group Metals include platinum, palladium, iridium, rhodium, ruthenium and osmium. Rare Earths include yttrium, scandium, lanthanum, and the lanthanides. The 14 critical minerals for the EU are Antimony, Beryllium, Cobalt, Fluorspar, Gallium, Germanium, Graphite, Indium, Magnesium, Niobium, Platinum Group Metals, Rare Earths, Tantalum and Tungsten. Emerging technologies are likely to expand the demand for Gallium, Indium and Germanium.

[12] See European Commission COM (2011) 25 Final, Brussels, 2.2.2011. Communication from the European Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. “Tackling the Challenges in Commodity Markets and on Raw Materials.” Section 5.2.2.

[13] Rhenium, Tellurium, Bauxite, Magnesite, Molybdenum, Iron, Aluminum, Chromium, Nickel, Zinc, Vanadium and Manganese.

[14]Ibid. European Commission COM (2011) at Annex.

[15] See Committee for Mineral Reserves International Reporting Standards (CRIRSCO). www.crirsco.com. The International Council of Mining and Minerals has a MOU with CRIRSCO through 2012. It is trying to develop standards for hydrocarbons. National Reporting standards must conform to CRIRSCO Principles. CRIRSCO is working with Russia, but China is still an outlier.

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