On June 1, 2015, the Extractive Sector Transparency Measures Act was proclaimed into force by the Federal Government of Canada. The Act requires entities in the extractive sector to disclose payments made to government entities through a number of new annual reporting requirements. This includes payments made to Aboriginal governments. Resource companies will be required to file a report for their first financial year beginning after June 1, 2015, while payments made to Aboriginal governments in Canada are not subject to reporting obligations until June 1, 2017. Regulations in respect of the Act are expected to be published in the near future.
Companies in the extractive resource sector should familiarize themselves with the Act and understand the policies and procedures that are required to comply with the legislation. Companies should also ensure they are aware of any legal, regulatory or contractual commitments they have that may create difficulties in complying with the new reporting requirements.
The Act applies to:
- an entity that is listed on a stock exchange in Canada;
- an entity that has a place of
business in Canada, does business in Canada, or has assets in
Canada and that, based on its consolidated financial statements,
meets at least two of the following conditions for at least one of
its two most recent financial years:
a. it has at least $20 million in assets;
b. it has generated at least $40 million in revenue;
c. it employs an average of at least 250 employees; and
- any other prescribed entity.
An "entity" is defined in the Act as a corporation, 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 (directly or indirectly, in any manner) a corporation, trust, partnership or unincorporated organization that is engaged in such activities in Canada or elsewhere.
The Act does not provide any guidance as to how entities should determine whether or not their activities amount to "doing business" or "having assets" in Canada. The Act is clear, however, that the thresholds relate to consolidated financial statements, which suggests that an entity's world-wide operations and revenue may be used when determining whether the thresholds are met. As a result, a foreign company that meets two of the above thresholds, despite having non-significant business operations or assets in Canada, will still be required to comply with the reporting requirements under the Act.
Note that commercial development includes exploration or extraction as well as a right to, or the acquisition of, a permit, licence, lease or any other authorization to explore or extract oil, gas or minerals. The Act does not cover the Government's intention to include refining and transporting, as had been previously announced in the Government's April 2014 Consultation Paper.
Entities subject to the Act are required to annually report monetary or in-kind payments made to any domestic or foreign government in relation to the commercial development of oil, gas or minerals under certain circumstances, a summary of which is described below. In addition, entities are required to disclose payments made to a body established by two or more governments or to any trust, board, commission, corporation, body or authority that is established to exercise a government function and any other prescribed payee. Payments made to government employees or holders of public office are deemed to be payments made to government entities. As mentioned previously, while reporting obligations come into effect for a company's first financial year beginning after June 1, 2015, payments made to Aboriginal governments in Canada are not subject to the reporting obligations under the Act until June 1, 2017.
The Act outlines specific categories of payments that must be publicly disclosed if payments in that category are made to the same payee in excess of (i) the amount prescribed by regulation, or (ii) if no amount is prescribed, $100,000. The payment categories include:
- 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;
- production entitlements;
- bonuses, including signature, discovery and production bonuses;
- dividends other than dividends paid as ordinary shareholders;
- infrastructure improvement payments; or
- any other prescribed category of payment.
Reports of such payments are required to be filed with the Minister of Natural Resources within 150 days of the entity's financial year end. A director or officer of the entity (or an independent auditor or accountant) must attest that the information included in the report is true, accurate and complete. The form of the report is not prescribed in the Act, but it is anticipated that the Minister will require disclosure of payments on a project-by-project basis as indicated in the Government's April 2014 Consultation Paper. Note that reports provided to the Minister by an entity satisfy the reporting requirements of its wholly owned subsidiary that would otherwise be subject to the same reporting requirements, provided that:
- the parent entity provides the Minister with a report that also contains information with respect to the payments made by the subsidiary during the applicable financial year;
- not later than 150 days after the end of its financial year, the subsidiary notifies the Minister in writing that the parent entity is providing the report; and
- the subsidiary provides the Minister with a report with respect to payments it has made during the applicable financial year that is not covered by the report provided by the parent entity.
The Act requires the payment information to be made publicly available in the manner specified by the Minister, and for the period specified by the Minister. If no period is specified, the information must be available for a period of five years.
While the regulations have yet to be published, they are expected to provide more information about the reporting process as the Government continues to work with the United States and the European Union to develop a common reporting template to reduce the administrative compliance burden. In the event that a common reporting template is not achieved, the Act allows for an entity to provide reports utilized in other jurisdictions to the applicable Minister, provided the requirements of the other jurisdiction achieve the purposes of the Canadian reporting standards. The assessment of reporting standards in other jurisdictions is currently in progress.
Compliance with the Act
The Minister has expansive investigative powers under the Act and is able to order an entity to provide any information or documentation in order to verify compliance. The Minister is also permitted to order an entity to take any corrective measures that he or she considers necessary to comply with the reporting requirements under the Act. In the event of non-compliance, the Act prescribes a fine of up to $250,000 for every person or entity that:
- fails to comply with the reporting requirements of the Act;
- knowingly makes a false or misleading statement or knowingly provides false or misleading information; or
- structures any payments, either monetary or in kind, with the intention of avoiding the reporting requirements of the Act.
An entity that fails to comply with the Act may be found guilty of an offence punishable on summary conviction. A single event could constitute multiple offences, particularly given the fact that for each day an offence is committed or continued, such offence will be considered a separate offence. As a result, entities may face significant liability as fines may increase by up to $250,000 on a daily basis.
Section 25 of the Act explicitly establishes liability for directors, officers or agents of extraction sector entities. Individuals who direct, authorize, assent to, acquiesce in or participate in the commission of an offence are liable under the Act, regardless of whether the entity has been prosecuted or convicted of the offence.
The Act explicitly provides a due diligence defence to non-compliance with the Act. Accordingly, it is imperative that resource companies put in place robust compliance procedures to ensure that neither the entity nor its directors, officers and agents contravene the provisions of the Act.
Exemptions from the Act
The Government had previously acknowledged that situations may arise whereby disclosure of the required information is prohibited by contractual obligations or another jurisdiction's privacy or confidentiality laws. Nonetheless, the Act does not provide for any exemptions and aligns Canadian legislation with that of the EU. However, the lack of an exemption may put companies into a precarious situation whereby they are forced to breach either Canadian reporting requirements or foreign legal, regulatory or contractual requirements.
The US rules for extractive reporting issuers similarly did not provide for exemptions. The District Court for the District of Columbia deemed this to be a "serious error" and in vacating these rules, referred to the Securities and Exchange Commission's decision to deny such exemptions as "arbitrary and capricious." The SEC is expected to be responding with new rules in 2016 and it remains to be seen whether the new rules will result in similar revisions to the proposed reporting requirements under the Act.
The Act will require companies to issue reports pursuant to the Act for each financial year beginning after June 1, 2015. This gives companies in the extractive sector time to understand the reporting requirements and put both internal and external processes in place to comply with the Act. In implementing these processes, the following should be considered:
- Resource companies should implement a framework to ensure that government payments are consistently monitored and can be disclosed to both the Minister and the public in a way that satisfies the requirements of the Act.
- Companies should review any potential conflicts that the Act could cause, keeping in mind that there is no exemption for cases where disclosure may result in a breach of the companies' contractual confidentiality obligations.
- Directors and officers should take special measures to ensure compliance with the Act. While any director, officer or agent is liable for directing, authorizing, assenting to, acquiescing or participating in any offence under the act, due diligence may provide a full defence.
- In the context of an acquisition, acquiring companies should be aware in their due diligence of target companies that proceedings under the Act could be instituted within five (5) years of any alleged offence.
The contributions of Samuel Massie, articling student, in the preparation of this article are gratefully acknowledged.
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.