Options for Operationalising Transparency in Commodity Trading Transactions

3. Self-regulatory approaches: The role of free zones, commodity exchanges and industry associations

Regardless of the adoption of specific corporate reporting requirements on commodity trading transparency by home governments of buying companies or by trading hubs, there is an opportunity for free economic zones, commodity exchanges and industry associations to take steps to encourage corporate disclosure of payments to governments for the purchase of publicly-owned commodities.

Free economic zones (also termed free zones or free ports) are specially designated areas that are set up to encourage economic activity – often through the use of tax incentives. Authorities in those free zones, such as the Dubai Multi Commodities Centre Authority, may enact specific regulations or rules to govern the operations of companies that are based in those jurisdictions. Where relevant, these regulations or rules could be extended to require companies to disclose payments to governments for the purchase of publicly-owned commodities.

Reporting requirements on payment disclosure can also be introduced by commodity exchanges and industry associations and apply to companies seeking to buy and sell on an exchange or that are members of an industry association.

These self-regulatory approaches could act to increase transparency in commodity trading on a hybrid basis. While registration or membership in a free zone, commodity exchange or industry association is voluntary, once a company has registered or joined, it would then be subject to binding reporting requirements. In this scenario, the incentives offered by registration or membership would need to outweigh any industry concerns about corporate disclosure of payments to governments for the purchase of publicly-owned commodities. For example, these concerns may include: the disclosure of commercially sensitive information, the risk of breaching anti-trust laws, and the possibility of competitors inferring current or future pricing or volume information.

The implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD Due Diligence Guidance) by free zones, commodity exchanges and industry associations provides an interesting model to build on for how to operationalise transparency requirements in order to improve transparency in commodity trading.

The implementation of the OECD Due Diligence Guidance shows how the ability of industry associations and commodities exchanges to restrict market access to non-complaint companies provides a powerful incentive for companies to comply with applicable transparency requirements. For example, in 2011, the Dubai Multi-Commodities Centre (DMCC) introduced its responsible sourcing guidelines – Practical Guidance for Market Participants in the Gold and Precious Metals Industry – that was closely modelled on, and intended to operationalise, the OECD Due Diligence Guidance.

Implementation challenges associated with self-regulatory approaches

The implementation of international standards through self-regulatory approaches by free zones, commodity exchanges and industry associations may give rise to several challenges with respect to putting these standards into practice.

Firstly, there is a need for an international standard or common benchmark enjoying broad multi-stakeholder ownership and legitimacy. It is important that there is one clear international standard for free zones, commodity exchanges and industry associations to operationalise, as opposed to competing international standards that all seek to address the same challenge.

Further challenges can arise even where a robust international standard or benchmark exists, as misalignment between the standard and industry-led implementing programmes may occur, as selective or less stringent requirements may be incorporated.

For example, in 2016-18, the OECD undertook an evaluation of the extent to which several industry programmes1 align with the detailed recommendations of the OECD Due Diligence Guidance. This alignment assessment2 found significant gaps between industry programmes and the recommendations of the OECD Guidance. These gaps at a standards level had an impact on implementation, and on average, only about half of the core overarching due diligence principles were being implemented by the participating programmes (OECD, 2018[32]).

A misalignment between the international standard and the implementing guidelines can have the effect of watering down the original intent of the standard and create potential loopholes (OECD, 2018[32]). Furthermore, the multiplication of deviations from the international standard may cause difficulties with companies that are operating across different free zones, commodity exchanges and industry associations, as this would likely increase the compliance burden if companies were subject to different reporting requirements across jurisdictions.

However, in the year following the initial 2016 assessment, the participating programmes were given time to make changes to their standards to better align their requirements with the recommendations of the OECD Guidance. Programmes’ standards were re-assessed in early 2018. Following these changes, most of the programmes’ standards now are in, or close to, full alignment with the recommendations of the OECD Guidance.

The role of industry associations in promoting compliance with international standards

Industry associations can play an important role in the uptake and implementation of international standards due to the nature of their membership and the powerful tools they are able to deploy to promote compliance and penalise non-complaint industry players. These tools can include the ability to revoke a company’s accreditation or membership, which may have significant economic implications for that company’s market access.

The experience of the London Bullion Market Association (LBMA) in implementing the OECD Due Diligence Guidance illustrates how self-regulatory approaches can act to increase transparency in commodity trading given the importance of LBMA membership to companies operating in the gold sector.

In 2012, the LBMA introduced its Responsible Gold Guidance, which is designed to implement the OECD Due Diligence Guidance at the refiner level. This is a significant step for the uptake of the OECD Due Diligence Guidance as the LBMA has a global membership, including the majority of the central banks that hold gold, private sector investors, mining companies, producers, refiners and fabricators, and has oversight of the London gold market. The London Good Delivery refiners who must now comply with the LBMA’s guidance represent approximately 85-90% of global refined gold production (OECD, 2016[33]).

Industry associations that implement international standards can then deploy a number of tools to ensure that their members comply with those requirements. For example, the LBMA may initiate special audits if it is not satisfied with the reports provided by the refiner in order to confirm the refiner’s compliance with its responsible sourcing programme. These audits may be triggered by country of origin data reported confidentially to the LBMA, media allegations, whistleblowing, or as part of an incident review process. In 2018, the LBMA required three refiners to undergo special audits (LBMA, 2020[34]).

The LBMA also has the prerogative to revoke a company’s accreditation status. For example, the LBMA will give refiners a reasonable opportunity to raise their standards to the required level if they are found to be applying the responsible sourcing programme in good faith generally, but have failed to comply with some aspects of the programme. If such failures cannot be remediated or if attempts at remediation have been significantly poor, the LBMA may revoke a refiner’s accreditation status. As of 2020, three refiners have lost their accreditation due to failure to meet responsible sourcing requirements (LBMA, 2020[34]).

The loss of a refiner’s accreditation status will have serious commercial consequences for that company and will affect its ability to continue operating. The LBMA maintains that compliance with its responsible sourcing programme is a commercial necessity for any major refiner, as it allows access to the largest marketplace in the world for precious metals (LBMA, 2020[34]).

Commodities exchanges: A precedent for operationalising corporate disclosures of payments to governments for the purchase of publicly-owned commodities

The recent experience of commodities exchanges with the implementation of international standards may offer lessons for how disclosures of payments to governments for the purchase of publicly-owned commodities could be operationalised.

In October 2019, the London Metal Exchange (LME) announced that it would introduce responsible sourcing requirements for all brands listed for good delivery on the LME, and that these new requirements will be underpinned by the OECD Due Diligence Guidance (LME, 2020[35]). However, in addition to reflecting the framework of the OECD Due Diligence Guidance, the LME’s new requirements go further by requiring that companies disclose information in respect of payments made to governments under the EITI Standard on a per-country basis – in order to address financial crimes and corruption risks arising from large-scale mining. (LME, 2019[36]).

In that regard, the LME’s Red Flag Assessment template (that LME-listed brands are required to complete) includes the requirement to confirm whether companies have disclosed payments made to governments under the EITI Standard, whether the source country of the minerals is an EITI member country, and, if so, whether the producer, its suppliers and/or other upstream companies are in compliance with the EITI reporting requirements of that country. If the country is not an EITI member country, there is a requirement to confirm whether the producer, its suppliers and/or other upstream companies undertake other steps to provide transparency on payments and other matters in line with the aims of EITI (LME, 2019[36]).

In recognition of the compliance costs for the adherence to a new standard and the potential changes that companies may need to make to their systems and processes, a phased approach to the implementation of a new standard can increase the likelihood of widespread uptake and compliance.

For example, the LME has stipulated that its new requirements will not apply immediately, as they will be implemented in a phased manner. All LME listed brands were required to undertake a Red Flag Assessment, based on the OECD Due Diligence Guidance (and therefore incorporating the relevant EITI criteria and principles), by the end of 2020. If this assessment demonstrates potential responsible sourcing red flags, then that brand will be classified as a Higher-Focus Brand and will also need to be audited as compliant with an OECD-aligned standard by the end of 2022 (LME, 2020[35]).

While developing its responsible sourcing requirements, the LME has recognised that the implementation of international standards through self-regulatory approaches may give rise to a risk of misalignment between the standard and the implementing guidelines.

In that regard, the LME has undertaken to monitor the implementation of its standards, to ensure that the resulting transparency meets globally accepted requirements (i.e. the underlying international standard). In the event that the LME does not believe that company reporting under its responsible sourcing requirements meets these globally-accepted requirements, the LME reserves the right to increase its expectations in respect of such transparency (LME, 2019[37]).

Notes

← 1.  The Dubai Multi Commodities Centre (DMCC), the London Bullion Market Association (LBMA), the Responsible Jewellery Council (RJC), the Responsible Minerals Initiative (RMI), and the International Tin Supply Chain Initiative (ITSCI).

← 2.  For more information on the Alignment assessment of industry programmes with the OECD minerals guidance, please see: http://mneguidelines.oecd.org/industry-initiatives-alignment-assessment-minerals.htm.