The Canadian government has introduced for first reading in the House of Commons the Extractive Sector Transparency Measures Act (ESTMA), as part of an omnibus legislative package referred to as Bill C-43. The ESTMA contains broad reporting obligations with respect to payments to governments made by oil and gas and mining companies and is intended to supplement anti-corruption measures enshrined in the Criminal Code and the Corruption of Foreign Public Officials Act (CFPOA). Companies in the extractive sectors should be reviewing this legislation closely because non-compliance attracts significant penalties for firms and their directors, officers and agents.
Canada's intention to implement a government payment disclosure regime was officially announced by Prime Minister Stephen Harper on June 12, 2013 (see Canada Announces New Initiative for Disclosure of Payments to Governments. Shortly thereafter, the Resource Revenue Transparency Working Group, a joint working group comprising industry and NGO participants, made recommendations on what such a payment disclosure regime for the mining industry ought to include (see Recommendations Issued for Canada's Mandatory Payment Disclosure Regime).
In April of this year, the Canadian government conducted public consultations, seeking input from public interest and industry groups (see Canadian Government Launches Consultations on Mandatory Payment Disclosure Rules). The Canadian government has noted that the purpose of these new standards is to improve transparency within the industry and to achieve alignment with similar measures set out in the EU Transparency Directive and the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act.
Who Must Report?
The new reporting obligations apply very broadly and include not only entities listed on a Canadian stock exchange but also certain private companies. Section 8 of the ESTMA sets out the organizations that are caught by the new obligations:
(a) an entity that is listed on a stock exchange in Canada;
(b) 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; and
(c) any other prescribed entity.
The ESTMA defines "entity" as follows:
"entity" means a corporation or a trust, partnership or other unincorporated organization
(a) that is engaged in the commercial development of oil, gas or minerals in Canada or elsewhere; or
(b) that 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.
Any company that either is Canadian or maintains operations or assets in Canada will be subject to these requirements, even with respect to its non-Canadian operations.
The ESTMA defines "commercial development of oil, gas or minerals" 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. The definition also explicitly contemplates the prescription of other activities in relation to oil, gas or mineral extraction, and for this reason it will be important to closely monitor the regulations made pursuant to the ESTMA.
It is also important to note that, for the purposes of the ESTMA (including part (b) of the definition of "entity"), control can be established directly or indirectly, in any manner. One detail that should be followed closely is the scope of "indirect control," and the potential for non-traditional extractive entities (such as institutional financial investors) to be caught within the scope of the ESTMA. The definition of "control" will likely be a subject for examination while the legislation is in committee. The definition of "control" is also subject to the regulations, and any such regulations must be closely monitored.
These broad criteria are roughly analogous to those applied in the similar U.S. and EU regimes, with the exception of their application to private companies, and are also identical to those which the government set out for comment in April 2014. This expanded jurisdiction also corresponds with the new expansive jurisdiction incorporated into the recent amendments to the CFPOA (See Changes to the Canadian Anti-Corruption Regime Are Now in Force).
The Reporting Obligation
Under the ESTMA, all "payments" made to "payees" must be reported annually so long as the aggregate of all payments in a particular category of payment to a particular payee exceeds a de minimis threshold of $100,000 per financial year.
The specific "categories" of payments include taxes, royalties, bonuses, dividends and infrastructure improvement payments. The term "payee" is also expansive and includes any government (either in Canada or in a foreign state), any body of two or more governments, or other similar bodies conducting the functions of a government. State-owned enterprises are considered payees for the purpose of determining reporting obligations. Notably, the ESTMA does not apply to payments made to Aboriginal governments in Canada for the first two years during which the legislation is in force.
The reports are due within 150 days of the end of the financial year and must be accompanied by an attestation by a director or officer of the entity. The form of the report is to be prescribed by the Minister in writing, and can be prescribed on a project-by-project basis. However, the aggregate thresholds will not be segregated by project. These requirements, and the reports themselves, will be public unless the regulations provide otherwise.
If the entity retains an independent auditor, the auditor may certify that the report is true, accurate and complete in place of the attestation.
Penalties: Exposure for Companies, Directors and Officers
A compliance failure is punishable upon summary conviction with a fine of $250,000. This fine applies to any entity that fails to comply with the reporting requirements or orders issued by the Minister under the power of the ESTMA. The fine applies to every 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. Notably, under the ESTMA, each day that passes prior to a non-compliant report being corrected forms a new offence; therefore, a payment that goes unreported for a year could result in over $9 million in total liability.
The ESTMA also applies to all officers, directors and agents of the offending entity who directed, authorized, assented to, acquiesced in or participated in the commission of the violation. Companies may consider retaining independent auditors to verify their financial reports because this could help minimize the possibility for any personal liability.
Due Diligence Defence
The ESTMA includes a broad due diligence defence against liability. Section 26(b) creates a defence to liability if the person or entity can establish that it "exercised due diligence to prevent" the commission of the offence. This also provides a strong incentive for companies to adopt rigorous compliance regimes with the input of external counsel and the oversight of independent auditors.
While the ESTMA provides for a due diligence defence, it makes no provision for any exemptions or exceptions where, many thought, one would be absolutely necessary: in regard to actions required by local law or contract. This position is similar to that taken by the United States and the European Union under their reporting regimes and represents further evidence that the ESTMA is another attempt to harmonize Canadian anti-corruption legislation with that of our close trading partners. However, it may create serious conflicts for many companies, particularly multinational entities, where conflict exists between reporting obligations under Canadian law and confidentiality obligations in a foreign jurisdiction.
The ESTMA is currently at the second reading stage in the House of Commons. It is expected to be referred to committee this month for further consideration. Bill C-43 has already been referred to several Senate standing committees for further discussion. This is a critical period for any stakeholders that wish to provide comment or have an impact on the final text of the ESTMA, since after the completion of the committee hearings it is unlikely any further amendment will be possible.
We will continue to follow the progress of Bill C-43 and provide updates on further developments. McCarthy Tétrault's International Trade and Investment Law Group has extensive experience in dealing with international anti-corruption enforcement and compliance matters.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.