Hearing of the House Financial Services Committee - H.R. 6066, The Extractive Industries Transparency Disclosure Act
Statement
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I appreciate the opportunity to have an exchange and become dialogical with our panel today. I'm just in the beginning stages of a new book called "Banana Republic." It's very interesting, and while the banana industry is not an extractive industry, I think the parallels are very similar.
I didn't know, for example, that bananas are not indigenous to South America. They were brought in, and exploitive corporations actually put governments in place to help the banana industry. And so they became, you know, known as "banana republics."
And they're essentially just major corporations, some are still in existence -- I won't call their names now -- just came in and just kind of ripped off the people in that country planting these vast banana plantations all over South America. And that same kind of thing is happening here with extractive industries.
And I was very, very interested in and conversant with the panel that appeared here back in October. It was, I think, a very interesting meeting because we found out, I think, that to some degree exploitation and exploration are parallel in resource-rich countries like Nigeria and like Tanzania, where I have family members.
And when you look at the enormous wealth generated in those countries and the enormous poverty that exists in those countries, something seems to have gone awry. The worst deal is that we end up in seeing that in many of these countries there's greater armed conflict, mass murder, corruption, weakened economic development.
And my concern is the devastating impact of these conflicts and the resulting chronic underinvestment in the national economies and the health and education investments of the citizens of those countries. I think the United States is -- can be better than we have been. We could become a shining light.
I do have one disagreement with the legislation. The legislation does not put in place criminal or civil penalties. I'm concerned that corporations may/may not think twice about ignoring this act if in fact it is put in place. I agree with everything in the legislation except that part of it. I'm having some difficulty with that, but I'd like to have an exchange with you about that.
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Ms. Stevelman, you're -- I was reading in your prepared remarks on page seven, I though we were closing in as real good friends with regard to -- when you began to address the enforcement mechanisms.
If there is no penalty provision, why should corporations comply?
MS. STEVELMAN: Thank you for that question. I think I may have overstated that there is no punitive provision. I meant to emphasize that this would not create a basis for private investor litigation, because I know that there is significant popular sentiment against private investor suits.
I also do agree with you that it would be the exception for there to be highly aggressive enforcement by the SEC. What usually happens is that the SEC allows companies a little bit of time to adjust to these new disclosure provisions, it puts out some interpretive releases, it brings an injunctive action where it slaps a company on the wrist, maybe another one of those.
Then the penalties start to escalate gradually. The initial fine in federal court that it might win would be consistent with that small $50,000 amount.
But if a company was found to be culpable of repeat violations or if subsequent companies made the same mistakes that had already come to light in an earlier enforcement action, at that point the penalties do rise significantly.
So for example, there is a famous case of MD&A non-reporting by the Caterpillar Company where I believe the result was just a civil injunction, a slap on the wrist that says, "Don't do this again."
But a year later, there was an MD&A enforcement action, I forget the company, but the fine at that point went up to $1 million.
So there is the possibility for a gradual escalation in civil monetary fines that would be brought by the SEC and awarded this a result of process in the federal courts.
REP. CLEAVER: Thank you.
Mr. Detheridge, as a former executive with Shell, if -- and listening to Ms. Stevelman's comments, do you believe that major corporations would comply to the law in an attempt to escape a private cause of action?
MR. DETHERIDGE: Thank you for the question, Mr. Cleaver. I -- my personal belief is that certainly all U.S. companies would comply with this legislation and all European companies would comply with this legislation.
And I think other companies would do as well, because the reputational damage that would fall out from not complying with this legislation would far outweigh any advantage, I think, that would be gained by them.
Companies list on stock exchanges to raise capital. And not complying with the regulations imposed by those exchanges is a very serious matter which I'm sure would, Mr. Jenkins could comment on this, would be looked at very seriously by the investing community.
REP. CLEAVER: Of course, the company out at China is not going to be publicly traded in all likelihood. You are right. Publicly traded companies here and in the U.S., London, in the EU, they would.
But if you look at what's going on right now in Darfur, where China is deeply involved in extractive -- in an extractive industry.
We can't even count on China to try to discourage the genocide that's taking place there. I am -- it's a little frustrating to me because I don't -- I just simply do not believe that we would have worldwide compliance. And in the case of the Sudan, China is the 800 pound gorilla in that it is -- China is the industry in that country.
I don't know what the answer is, you know. We need a professor in law, like Ms. Stevelman, to come up with the solution.
MS. STEVELMAN: Can I make one remark relevant to what you said?
REP. GUTIERREZ: Very quickly please.
MS. STEVELMAN: There are pieces of these Chinese enterprises that are listed, and therefore would be accessible to U.S. law enforcement.
REP. CLEAVER: Thank you.
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