The Long Arm of US Law Hits Asia

Section 1502 of the Dodd-Frank Act, known as the ‘conflict minerals rule’, requires listed companies using materials designated as conflict minerals – tin, tantalum, tungsten and gold (3T+G) – to file annual reports with the US Securities & Exchange Commission (SEC) disclosing whether their materials are sourced from the Democratic Republic of the Congo (DRC) or neighbouring countries.

The initial reporting deadline on 2013 activity is set for 2 June 2014. The implication is that a company manufacturing hard drives, online game consoles, parts for mobile phones or a multitude of other device and components could well be asked by their US clients to provide detailed information to show whether any of their materials come from DRC, in order to comply with Dodd-Frank.

Section 1502 is just one of a number of US regulations that may have been below the radar screen and that are now affecting financial and non-financial firms alike in Asia.

Last year, local banks in Asia went through a series of changes to help US banks comply with Section 1073 of Dodd-Frank, which requires US banks to provide senders of remittances with information including the amount to be given to the recipient, fees, the exchange rate and the promised date of delivery. Any bank that expected to receive remittances from the US had to enhance their software to comply with the Act.

This year, financial institutions in a multitude of countries are taking steps to implement requirements related to the US Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions (FFI) to provide information on US persons invested in accounts outside the US. Over the past several months, governments in Australia, Hong Kong and Singapore announced that they had signed Intergovernmental Agreements (IGA) with the US Treasury that enable foreign financial institutions (FFIs) to register under the IGA, and agreements with other countries are under discussion. While the IGA format may make reporting by FFIs somewhat easier, it still requires extra work and systems enhancements.

Another upcoming change is related to derivatives reform. KPMG said that global banks that operate in the Asia Pacific region have found that they need to supplement their global Dodd-Frank compliance programs with more localised projects that address specific requirements of local regulations. For example, requiring centralised clearing of OTC derivatives and more stringent capital requirements will have “important implications for commodity traders” in Asia Pacific, McKinsey said, and it may affect other industries as well.

Yet another section of Dodd-Frank, Section 1504, requires US-listed companies engaged in the development of oil, gas and minerals to publish a detailed account of what they pay US and foreign governments, country-by-country and project-by-project. As the Revenue Watch Institute said, “Over half of the world’s total value of extractive industry market capitalisation is found on US exchanges, and a large share of international oil, gas and mining companies are registered with the SEC.” Initial reporting begins in 2014 and full-year reporting is required from 2015.

For Asian banks, the Collins Amendment, Section 171 of the Dodd Frank Act, states that bank holding companies need to be regulated for capital and leverage as strictly as banks from 1 July 2015, and it sets a minimum floor for capital. While the size requirements in terms of the minimum level of assets to which this section of the Act applies means that it may affect few Asian banks at this point, some non-US banks have restructured their operations to comply with the rule and others are still studying the impacts.

While there are undoubtedly more parts of the Dodd-Frank Act and other regulations that will affect banks, manufacturers, miners and a variety of other corporates in Asia, these examples give of flavour of what companies need to do. While the task of compliance may sound daunting, a first step is a comprehensive risk assessment, leveraging internal staff as well as potentially external experts. From smaller companies in specialised manufacturing or mining to giant multinationals, only when the assessment is done and compliance has begun will they begin to be able to sleep easier, in the knowledge that they are closer to compliance with the US regulations that could have a major effect on their organisations.

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