As part of Canada’s 2013 G8 commitment to establish reporting standards for the extractive sector by 2015, the Government of Canada introduced in the Extractive Sector Transparency Measures Act as part of Bill C-43, Economic Action Plan 2014 Act, No. 2 in October, 2014. The proposal will likely become law, with reporting to begin, in the first half of 2015.
The proposed legislation contains broad reporting obligations to require extractive companies, both public and in certain circumstances private, to publicly report on payments relating to the commercial development of oil, natural gas and minerals made to all governments, in Canada and abroad. Payments of $100,000 or more in specific payment categories would need to be reported. This initiative is aligned with global efforts to deter corruption through increased transparency in the extractive sector. As the proposed reporting obligations are relatively broad and penalties significant, directors and management of entities in the extractive sector should take note and prepare accordingly.
The new reporting obligations apply to any corporation or a trust, partnership or other unincorporated organization that: (a) is engaged in the commercial development of oil, gas or minerals in Canada or elsewhere; or (b) controls a corporation or a trust, partnership or other unincorporated organization that is engaged in the commercial development of oil, gas or minerals in Canada or elsewhere and that otherwise: (c) is an entity that is listed on a stock exchange in Canada; or (d) is an entity that has a place of business in Canada, does business in Canada or has assets in Canada and that, based on consolidated financial statements, meets at least two of the following conditions for at least one of its two most recent financial years: (i) it has at least $20 million in assets, (ii) it has generated at least $40 million in revenue,(iii) it employs an average of at least 250 employees. Other entities may be prescribed by regulation. Any such entity, whether Canadian or which otherwise maintains operations or assets in Canada, will be subject to these requirements, including with respect to its non-Canadian operations.
“Commercial development of oil, gas or minerals” is defined to mean the exploration and extraction of oil, gas or minerals and the acquisition or holding of a permit, lease or other authorization to carry out any such activities although the definition also contemplates other extractive activities that may be prescribed by regulation.
The legislation provides an exception from reporting for a wholly owned entity if its reportable payments are captured in a report filed by its parent company. The legislation also permits that the Minister may determine that complying with the requirements of another jurisdiction is an acceptable substitute for Canadian reporting purposes if the reporting entity: (a) files the required payment disclosure report in the other jurisdiction; (b) provides a copy of that report to the Minister within the time permitted by the other jurisdiction; and otherwise (c) meets any other conditions imposed by the Minister.
Reporting entities are required to disclose any payment, whether monetary or in kind, that is made to a any government in Canada or in a foreign state; a body that is established by two or more governments; any trust, board, commission, corporation, body, or authority that exercises or performs a power, duty, or function of government on behalf of one of the above entities; or any other payee prescribed by regulation in relation to the commercial development of oil, gas, or minerals and that falls within any of the following categories of payments:
taxes, other than consumption taxes and personal income taxes;
fees, including rental fees, entry fees and regulatory charges as well as fees or other consideration for licences, permits or concessions;
bonuses, including signature, discovery, and production bonuses;
dividends other than dividends paid as ordinary shareholders;
infrastructure improvement payments; or
any other category of payment prescribed by regulation.
that are made to the same payee where the total amount of such payments exceeds either the amount set by regulation for any particular category of payment or, where no such amount is prescribed by regulations, CAD$100,000.
The report must include confirmation from a director or officer of the company or an independent auditor or independent accountant that the information is true, accurate and complete. Though third party confirmation is not always required, the government may require a company to obtain an audit and provide the results and all supporting documents.
Reporting entities must keep records of its payments made in a financial year for the period prescribed by regulation or, where no such period is prescribed by regulation, seven years - beginning on the day that the entity files its report with the Minister.
To verify compliance, the Government of Canada may require the provision of any information and documents, including:
a list of projects for the commercial development of oil, gas or minerals in which the entity has an interest and the nature of that interest;
an explanation of how the entity has treated the payment in its report;
a statement of any policies that the entity has implemented for the purpose of complying with the proposed legislation; and
the results of an audit of its report performed by an independent auditor in accordance with generally accepted auditing standards.
Persons designated by the Government of Canada will also be permitted to enter any place reasonably believed to contain anything to which the proposed legislation applies or any document relating to its administration. If the Minister concludes that an entity is not in compliance with the Act, it may order corrective measures.
Any entity (and all officers, directors and agents of the offending entity who directed, authorized, assented to, acquiesced in or participated in the commission of the violation) that fails to comply with the reporting requirements for any payment or orders issued by the Minister, as well as any person or entity that structures any payments or any other financial obligations or gifts with the intention of avoiding the requirements to report those payments, can be subject to summary conviction with a fine of $250,000. Note as well that the proposed legislation provides that for each day that passes prior to a non-compliant report being corrected forms a new offence and is subject to an additional fine – potentially resulting in very significant liability.
The proposed legislation includes a broad due diligence defence against liability if the person or entity can establish that it “exercised due diligence to prevent” the commission of the offence. This should indeed provide a strong incentive for companies to adopt appropriate accounting and reporting regimes, in consultation with external counsel and independent auditors, in an effort to mitigate potential liability.
A number of issues, raised during the consultation stage or otherwise yet to be clarified through regulation, are yet to be finally resolved including:
The application to payments made to Aboriginal entities. A two-year transitional period has been established in the interim which provides that that the reporting obligations will not apply to any payments made to (a) an Aboriginal government in Canada; (b) a body established by two or more Aboriginal governments in Canada; and (c) any trust, board, commission, corporation, body, or authority that exercises or performs a power, duty, or function of government for one of the foregoing entities during the two-year period following its coming into force.
Reporting at the project level (for example, an oil field, individual well or mining site). For this purpose, a project is defined as an operational activity performed by an extractive entity, the parameters of which are defined by the entity according to its particular industry and business context. The proposed legislation did not specify project-level reporting. Instead, it indicated that the government may specify in writing the way in which payments are to be organized or broken down, including on a project basis, and the form and manner in which a report is to be provided.
Exemptions or exceptions in regard to actions required by local law or contract. Serious conflicts may exist for many entities between reporting obligations under Canadian law and confidentiality obligations in a foreign jurisdiction. The proposed legislation allows the regulations to describe circumstances in which the Act will not apply to specific entities, payments, or payees and future regulations may clarify this issue.
Reports to be available to the public. The proposed legislation does not indicate how reporting entities are to make their reports public, but the original 2014 consultation paper proposed that companies would post reports annually on their corporate websites in eXtensible Business Reporting Language (XBRL) which would permit reporting entities to provide context for their reports. Again, it is expected that future regulations or administrative guidance will clarify this issue.
Potential reporting entities should prepare for the implementation of the Extractive Sector Transparency Measures Act and developments as it passes through the Parliament on its way to becoming law. Auditors should be engaged early and legal counsel should be consulted to ensure compliance and reporting systems are implemented when and where necessary to avoid violation of the proposed legislation and the significant liability that would follow.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.