Options for Operationalising Transparency in Commodity Trading Transactions

5. Making payment disclosure by buying companies work in practice

Usability of the data generated from corporate payment disclosures

Corporate disclosure of payments to governments for the purchase of oil, gas and minerals would result in the generation of a significant amount of information that would then need to be aggregated and disclosed. Home governments, trading hubs, or other organisations such as free zones, commodity exchanges and industry associations will need to consider the practicalities related to the usability of these disclosures in order for them to contribute meaningfully to effective accountability in commodity trading.

Format of the disclosures

Consideration should be given to ensuring that the information is disclosed in a format that is comparable and usable by both governments and third parties – such as journalists, citizen watchdog groups and other civil society organisations. Examples of existing disclosure regulations in the upstream extractive sector show that companies compile reports in many different ways and that this reduces the ability for stakeholders to locate the information they require. For example, there is no specific requirement in the EU Accounting and Transparency Directives in respect of the format of the information that is published. In the first round of reporting, many extractive companies in EU Member States (other than the United Kingdom) made their reports available on their websites in PDF format rather than a machine-readable format (European Commission, 2018[17]). The importance of digital usability was identified in a review of the Accounting and Transparency Directives by the European Commission in 2021 where it was noted that in the absence of machine-readable documents, users found it difficult to exploit data reported on a large and recurring scale (European Commission, 2021[20]).

Furthermore, the rules of publication of the reports are not harmonised across different EU jurisdictions. Transparency International EU has noted that the effectiveness of payments to governments reporting could be improved by requiring companies to publish payments reports directly to a central online repository, hosted and maintained by the European Commission and freely accessible to the public (Transparency International EU, 2018[21]).

Regulations requiring the disclosure of data on payments to governments for the rights to explore for and extract publicly-owned oil, gas and minerals has resulted in the generation and disclosure of a significant amount of data across several different jurisdictions, including Canada, the European Union, Norway, Switzerland and the United States. Given that each of these different jurisdictions has a different procedure for companies to disclose their payments to governments, it is difficult for civil society groups and oversight actors in resource-rich countries to access and interpret the payments to governments’ data relevant to them.

In response to this lack of harmonisation, civil society groups have had to build their own tools to enable the comparison of payment data across different jurisdictions. The NRGI’s Resource Projects database brings these disclosures together where they can be easily compared and analysed (NRGI, 2015[15]).

In order to improve the usability of the data, Resource Projects collects reports of all identified payments to governments, and then standardises the currency, project name and government entity name data, making them easier to use for comparison and analysis. In order to improve access to the data, Resource Projects enables users to search the data by country, project, recipient government agency, company, year and payment type (NRGI, 2015[15]).

If new requirements are introduced by home governments (including trading hubs), free zones, commodity exchanges, industry associations, host governments or SOEs for the disclosure of payments to governments for the purchase of publicly-owned oil, gas and minerals, the creation of a common repository for disclosing information would be recommended.

Implementation guidelines to ensure consistent interpretation of disclosure requirements

Experience from reporting under the EU Accounting and Transparency Directives demonstrates the complications that can arise where there is a lack of implementation guidelines. In this context, extractive companies reporting under EU Directives have adopted different interpretations of key reporting requirements – for example, the reporting of the payments of joint ventures – some companies report only payments when they are the controlling party while other companies report the payments even when they are not the controlling party. As a consequence, these discrepancies have resulted in a lack of comparability across reports (European Commission, 2018[17]).

Constraints for host governments and SOEs

Host governments and SOEs that introduce general disclosure policies and that include specific disclosure obligations in commodity sales contracts, will need to consider the practicalities associated with these disclosure requirements. Similarly to the considerations set out above for home governments and trading hubs, host governments and SOEs will need to consider the scope of the information to be disclosed, the frequency of the disclosures, and to whom such disclosures should be made.

However, host governments and SOEs will also need to consider the practicalities of the introduction of disclosure requirements in a developing country context. For example, infrastructure and resources will be necessary in order to collect the data generated through the disclosures made by buying companies. Consideration will need to be given to whether the governments or SOE has the capacity and knowledge to meaningfully analyse and interpret the data contained in the disclosures, and whether additional capacity building is required.

Host governments and SOEs will also need to be properly resourced to address any aspects of non-compliance by buying companies with disclosure requirements, provided that penalties or follow-up mechanisms to sanction non-compliance are set out in the SOEs commodity sales contracts or any other relevant legislative instrument.

Implications for buying companies

Buying companies themselves may need to adjust their internal processes to meet any new disclosure requirements. Existing industry systems are often built in a certain way for a specific purpose and it may be difficult to modify these systems in order to extract new or aggregated data. Many large trading companies have well-developed commodity trading risk management systems in place and heavily invest in the development of IT infrastructure. A commodity trading risk management system enables basic tasks related to physical trading such as deal capturing and valuation, contract and invoice generation, inventory management, credit management, position reporting and analysis (Engebretsen, forthcoming[44]).

Buying companies would likely need time and resources in order for their systems to be modified to the extent that they are able to capture the information specified by any new requirements (OECD Development Centre, 2019[14]).

Use of technology to facilitate disclosures

Recent advancements in technology could be harnessed to facilitate the disclosure of commodity trading data. Home and host governments, as well as trading hubs, free zones and commodity exchanges can consider the adoption of technological tools, in particular blockchain, to increase transparency in commodity trading.

Blockchain is a distributed ledger technology that could be utilised to make trading commodities more transparent. Blockchain works by recording transaction data in a permanent way on a single, secure digital ledger shared by trusted counterparties. It creates a system where parties can connect directly with each other, without the need for intermediaries like banks, brokers or utilities (S&P Global, 2018[45]).

Blockchain allows the authenticity of documents to be guaranteed, as any subsequent changes to the transaction history are not possible. All parties involved in a blockchain transaction are able to reconcile and verify individual details (for example, payments, location, status) in real time (Federal Council, 2018[46]). Blockchain-based records make it substantially difficult to alter the quantity and quality specifications provided by a party to a transaction (for example, a SOE and trading company), as a decentralised system such as blockchain cannot be controlled by a single party, but are cross-verified by all parties on the relevant network. Once a transaction is validated, it is synchronised across all ledgers in the network – in other words, it becomes a permanent record. Since there is no single control in the network and the parties are dispersed, consensus provides protocol for its operation (Jiang, 2019[47]).

The use of blockchain technology can be beneficial in sectors where there are multiple parties in a system, where establishing trust in the system is difficult, where the system is susceptible to corruption, and where eliminating information asymmetry and improving transparency is key to the successful functioning of the system (Jiang, 2019[47]).

Although the emergence of blockchain technology is fairly recent, discussions have already begun on whether blockchain technologies could be utilised in the commodity trading sector. However, those discussions have largely been confined to whether blockchain can be used to increase efficiencies in trading operations, rather than for specific transparency and anti-corruption purposes (Jiang, 2019[47]).

For example, in the oil industry, three commercial consortia have been testing the opportunity to trade crude oil using blockchain technologies. Participants in these three consortia include major independent commodity trading companies and integrated oil companies, namely: BP, Freepoint, ENI, Gazprom, Gunvor, Koch, Mercuria, MGN Energie, Petroineos Shell, Statoil, Total, Trafigura and Wattenfall (NRGI, 2020[48]).

Beyond the use of blockchain for increasing efficiencies in trading operations, there is potential for blockchain regarding the transparency of international trading processes (Federal Council, 2018[46]). The use of blockchain technology in commodity trading disclosures could offer an opportunity to reduce corruption through the generation of permanently stored data, and would make it easier for regulatory authorities to oversee reporting from buying companies and to ensure compliance (Jiang, 2019[47]).

The commodity trading sector’s widespread use and reliance on physical paperwork can increase opportunities for corruption throughout the value chain. Blockchain technologies with standardisation and digitisation of documents on a centralised platform can reduce this risk by improving the transparency of the value chain. Blockchain can allow for all relevant parties in the transaction to be able to reconcile individual details (e.g. payments, location, status) in real time (Federal Council, 2018[46]).

Home and host governments, trading hubs, free zones and commodity exchanges that introduce requirements that blockchain technologies be used for the disclosure of payments to governments for the purchase of oil, gas and minerals may decide to extend the availability of that information to NGOs, citizen watchdog groups and other oversight bodies. Within an inclusive public framework that integrates all relevant stakeholders, including governments, SOEs, buying companies, and civil society watchdog groups, the disclosure of payments to governments for the purchase of oil, gas and minerals supported by blockchain could act as a deterrent for hiding resources and associated revenues, altering numbers, and trade misinvoicing (Brooks, 2018[49]).