Examining Canada's Commodity Trading Hubs

LONDON—The Swiss parliament today passed a new law forcing Swiss extractive corporations to disclose payments made to governments around the world. The law governs payments made for the right to explore and extract oil, gas, and minerals.

The new law is consistent with regulations already in place in Canada, the European Union, Norway, and the UK.

Since 2015, these rules have required the disclosure of more than USD 900 billion in taxes, royalties, and other payments made to governments around the world. The United States likewise has an extractives payment transparency law in place, but its implementation has been hampered by legislative and legal issues for nearly a decade.

The laws are intended to assist citizens in asking that their governments use public monies to combat poverty and contribute to long-term economic growth, rather than losing critical income due to corruption or mismanagement. Investors also use disclosures to mitigate risk.

Switzerland is an important commodity trading hub. The new law, which is part of a larger package of revisions to Swiss business law, includes an essential phrase that delegated authority to the Federal Council, the country's administration, to apply the new transparency standards to Swiss commodities dealers purchasing oil, gas, and minerals overseas. The council has the authority to activate this provision of the law as part of an international process in which authorities in other key trading hubs would take a similar action.

According to Joseph Williams, advocacy manager at NRGI

"While Switzerland has chosen not to include commodity trading payments directly in this new law, it has thrown the gauntlet down to other major trading hubs such as the Netherlands, Singapore, the United Kingdom, and the United States." Switzerland has issued a critical signal today, and it is time for worldwide action to bring the large payments made by trading to governments subject to citizen review."

Williams added, "There is no time to spend. With resource-rich countries' economies under enormous strain due to the coronavirus epidemic, decreasing oil prices, and the task of transitioning to a low-carbon future, open control of every dollar earned from the exploitation or sale of natural resources is critical."

Commodity traders such as Vitol and Trafigura, as well as trading divisions of international oil companies such as BP and Shell, make significant payments to government-controlled national oil companies (NOCs), which can be a government's largest source of revenue in countries such as Angola, Iraq, Libya, and Nigeria. According to recent NRGI research on ten NOCs, oil and gas sales accounted for more than 70% of their entire income in 2018, totaling more than USD 860 billion.

At the same time, these transactions have significant corruption concerns, which can result in citizens losing money. In 2019, it was reported that the United States Department of Justice was investigating an oil trader working for Brazil's national oil company, Petrobras, who had been charged in Brazil with "taking part in a corruption scheme involving commodity traders Vitol, Glencore, and Trafigura." Traders frequently provide credit to resource-rich countries in exchange for oil, gas, or minerals in the form of resource-backed loans. Some of these arrangements have been questioned and warrant closer examination, especially considering the debt issues that resource-dependent countries are experiencing during the pandemic.

To have a real impact, the Swiss should activate the extension of the law to include commodities trading payments swiftly, according to Williams

"Without this, the current restrictions on upstream payments will only include a few more corporations than those already reporting in other countries. Similarly, the world's other major commodity trading hubs must ensure that enterprises under their authority record payments to state authorities. Only three trading entities have willingly revealed relevant transactions to date, which is completely inadequate."

Other agencies have taken efforts to increase transparency in commodity trade payments. Last year, the United Kingdom agreed to "establishing and implementing a common global reporting standard" for payments made to countries for the sale of oil, gas, and minerals. The Securities and Exchange Commission has acknowledged the significance of these payments and may include them in final guidelines for its own transparency statute, which is coming later this year. The European Commission is now assessing its own payment transparency framework, and it has already pledged to improving company reporting in this regard. Next week, the Organisation for Economic Cooperation and Development will hold a meeting to discuss the role of trading hubs and commodities trading businesses in mitigating corruption risks in commodity transactions. Finally, the Extractive Industries Transparency Initiative, which has obliged member governments to report oil, gas, and mineral transactions for several years, is presently developing recommendations for resource-purchasing corporations to strengthen their own voluntary disclosures.

"The architecture is ready for action; all that is required now is political will. "Switzerland's new law should now provide the impetus for rapid progress," Williams stated.