Canada's new regime for the mandatory reporting of payments to government, the Extractive Sector Transparency Measures Act (ESTMA), came into force on June 1, 2015.
Companies must begin reporting under the ESTMA in their first full financial year after June 1, 2015.The ESTMA contains broad reporting obligations with respect to payments to governments and state-owned entities, including employees and public office holders, made by oil, gas and mining companies. It is intended to supplement anti-corruption measures enshrined in the Corruption of Foreign Public Officials Act (CFPOA) and the Criminal Code. The Canadian government has also 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.
Companies in the extractive sectors should be reviewing this legislation closely in light of the significant penalties for non-compliance by firms and their directors, officers and agents and its broader impact on compliance and enforcement under the CFPOA, the US Foreign Corrupt Practices Act and other anti-corruption regimes.
Who Must Report?
The new reporting obligations apply broadly to 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 provides an explicit and exhaustive definition of "entity". Under the ESTMA, an "entity" is defined to mean 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 is either Canadian or maintains operations or assets in Canada will be subject to these requirements, even with respect to its non-Canadian operations.
"Commercial development of oil, gas, or minerals" is also exhaustively defined under the ESTMA. 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. In addition, the definition explicitly contemplates the prescription of other activities in relation to oil, gas or mineral extraction. For this reason it will be important to closely monitor any 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 carefully considered 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" is also subject to future regulations, so this should 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.
What Must Be Reported?
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 ESTMA also mandates that payments made to an employee or public office holder of a payee, including a state-owned entity, are deemed to be made to the payee and therefore such payments must be reported under the regime.
The specific "categories" of payments include taxes, royalties, fees, bonuses, dividends and infrastructure improvement payments. The term "payee" is 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. Aboriginal governments are intended to be within the scope of "payee" under the ESTMA, and will be included after this two year period.
Reports under the ESTMA 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. If the entity retains an independent auditor, the auditor may certify that the report is true, accurate and complete in place of the attestation.
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.
Penalties: Exposure for Companies, Directors and Officers
A compliance failure is punishable upon summary conviction with a fine of up to $250,000. This fine applies to any entity that fails to comply with the reporting requirements or orders issued by the Minister. The fine also 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 as this could help minimize the possibility for any personal liability.
Due Diligence Defence
The ESTMA includes a broad due diligence defence against liability. Paragraph 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 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. The reporting regimes of both the United States and the European Union also have no such exception. This represents further evidence that the ESTMA is another attempt to harmonize Canadian anti-corruption legislation with that of our close trading partners. This may create serious conflicts for many companies, particularly multinational entities, where conflict exists between reporting obligations under Canadian law and confidentiality or privacy obligations in a foreign jurisdiction.
Natural Resources Canada is currently working on implementation tools for the ESTMA, including guidelines for the industry and a reporting template. These are expected to be released sometime this summer, with a public consultation in the near future. When released, they will be available in the Canada Gazette Part I and through the Treasury Board Secretariat Open Government portal.
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.