Information and recommendations of the Independent Administrator

Information and recommendations from the implementation of a system-based approach to payment reconciliation

The EITI Standard 2019 demands comprehensive publication of all material payment flows from the national extractive sector to government agencies. This information on payment flows must satisfy requirements in respect of reliability, understandability and public availability (cf. EITI requirements 4.1 and 4.9). In the first and second German EITI reports, the reliability of the published payment flows was, among other processes, ensured by the previous “standard procedure” of a direct reconciliation of the payment flows reported by the participating companies with the payments received by the government agencies (“payment reconciliation”). These did not produce any noteworthy differences between payments made and payments received between companies and government agencies.

In agreement with the international EITI secretariat, the 3rd German EITI report for the 2018 reporting period was the first to start with the development and implementation of an alternative quality assurance procedure for the payment flows to the government agencies reported by the extractive industry which has also been used for this 6th D-EITI report. This procedure replaces the test of details for payment flows from participating companies with a multi-stage system-based approach of obtaining information and analysing processes and controls relevant for EITI, in particular on the part of government agencies.

The aim is to put the MSGs in a position where they can provide a well-founded assessment of whether or not there are risks to indicate that payment flows to government agencies related to natural resources are not being properly processed during the respective reporting period. Regardless of the result of this risk assessment, the process used for assessing the participating companies’ reported payments will then be carried out. Where risks are identified to indicate that (payment) processes or controls relevant for EITI are not entirely correct, further investigations of the payment flows concerned will initially be carried out and, ultimately, a return to payment reconciliation will also be considered. Where, however, no corresponding risks are identified, the actual assessment of payment flows is made on the basis of plausibility assessments.

With the implementation of the system-based approach, the tasks of members of the MSG and of the Independent Administrator have changed, when compared to the previous standard procedure of payment reconciliation. The risk assessment process is based, among other things, on a comprehensive collection and evaluation of information that could be relevant for assessing whether payments from companies to public authorities are being correctly processed. This includes analysing reports from the responsible local and supra-local audits and the audit offices. The same applies to information from associations or clubs on findings that may be relevant to the risk assessment or reports in relevant media. We recommend that MSG members be more closely involved in this assessment process, in such a way that publicly available information and evidence from MSG members’ professional environments that is potentially relevant to the risk assessment is captured in the form of a “regular process” in cooperation with the EITI Secretariat. If no relevant findings are made in the reporting year, a negative report would have to be submitted to the EITI Secretariat.

Recommendations in connection with the implementation of the requirements of the EU Sustainability Reporting Directive

Furthermore, we recommend the MSG to deal with the content of the “Corporate Sustainability Reporting Directive – CSRD”(Directive (EU) 2022/2464), i.e. the directive on corporate sustainability reporting. On 22 December 2023, the Delegated Regulation (EU) 2023/2772 was published in the Official Journal of the European Union, which contains twelve standards for corporate sustainability reporting (European Sustainability Reporting Standards, ESRS). Furthermore, in February 2023, the European Financial Reporting Advisory Group (EFRAG), which is responsible for the development of reporting standards, published a working paper in preparation for a European Sustainability Reporting Standard (ESRS) on “Mining, Quarrying and Coal” . This first working paper on a sector-specific reporting standard makes explicit reference to the quality assurance mechanisms of the EITI and derives reporting obligations for companies in the extractive sector from this. Work on this sector-specific reporting standard is ongoing.

The companies that are subject to the Directive are invited to assess which disclosures are to be regarded as “relevant” in the sense of “material” for their own reporting. From the companies’ perspective, it is important to gain an appropriate overview of the aspects that the various stakeholders consider relevant in the context of sustainability reporting. As a central element of the respective EITI implementation, the MSG can be seen as an important stakeholder across all countries.

Against the background of the objective pursued with EITI requirements 4.1 and 4.9 (ensuring data quality and the regularity of payment processing), ESRS G1-3 (Prevention and detection of corruption/bribery) and G 1-5 (Political influence and lobbying activities) could be considered particular relevant aspects in the context of sustainability reporting from an EITI perspective. For the further development of the pilot procedure, we recommend that the MSG address these requirements and develop a view as to whether, and if so, under what conditions, the MSG would consider sustainability reporting by companies to be material.

¹ EFRAG (2023): Mining, Quarrying and Coal; URL: https://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FMeeting%20Documents%2F2212281050436715%2F04-02-%20SRB%20230227%20Mining%2C%20Quarrying%20and%20Coal.pdf&AspxAutoDetectCookieSupport=1 (Accessed on 15 January 2024).