Canada: Updates To Extractive Sector Transparency Measures Act Guidance

After reviewing the reports submitted under the Extractive Sector Transparency Measures Act (ESTMA) and consulting with stakeholders, Natural Resources Canada (NRCan) recently updated its implementation tools that assist entities in understanding ESTMA. ESTMA was implemented on June 1, 2015, as Canada's contribution towards a global effort to "increase transparency and deter corruption in the extractive sector." Under ESTMA, entities active in Canada may be required to publicly disclose certain payments made to governments, in Canada or abroad, on an annual basis. See our previous blogs for more information on ESTMA and its application.

The Revised ESTMA Documents

The updates include a revised guidance document ("the Guidance"), reporting templates, and checklists. NRCan's revisions to the Guidance attempts to clarify parts of the document (and ESTMA) that have been subject to varying interpretation leading to confusion. In addition, NRCan has created a new reporting template for subject entities, updated the ESTMA Validation Checklist, and produced an information sheet for payments to Indigenous payees in Canada.

Control Under ESTMA

ESTMA defines an entity to include a corporation or a trust, partnership or other unincorporated organization that is engaged in, or 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.  However, ESTMA does not define control. The revised Guidance clarifies that control should be interpreted broadly while considering the substance over form.

As such, an entity that is indirectly engaged in the commercial development of oil, gas or minerals may still be required to report annually if they "control" an entity that is so involved in commercial development. Therefore, control under ESTMA is not limited to direct control, as an entity could be controlled indirectly through an organizational chain of entities.

Only entities that meet the definition of "Reporting Entity", as defined in the Act, are required to report payments that exceed the payment threshold.

Payments to the Government

The revised Validation Checklist and Guidance clarify reporting requirements for entities subject to ESTMA. Reporting Entities must "identify and aggregate all of the payments made within one of the payment categories to a single payee, and if that amount meets or exceeds CAD$100,000, it must be included in an ESTMA report." Reporting Entities must group together departments, ministries, trusts, boards, commissions, corporations, bodies or authorities that are established to perform a power or duty on behalf of the government.

While commercial transactions between extraction entities and the government undertaken in the ordinary course of business are generally outside the scope of the Act, the revised implementation tools provide that Reporting Entities may be required to report payee (governments or government-owned entities) overcharges or fees. These amounts are calculated on a fair market value basis, and it is the duty of the Reporting Entity to determine the market value of the services rendered in relation to the commercial development of oil, gas or minerals. Reporting Entities are encouraged to use the notes column in their ESTMA report to clarify the services procured, thus providing greater transparency.

Payments to Indigenous Payees in Canada

Upon coming into force, the ESTMA included a two-year deferral period for reporting payments to Indigenous payees in Canada, which concluded on June 1, 2017. With the reporting requirements now in effect, NRCan has provided an information sheet and revisions to the Guidance relating to Indigenous payees.

Examples of Indigenous payees include:

  • any Indigenous group or organization exercising the power, duty, or function of government;
  • an Aboriginal body established by two or more governments; and
  • any trust, board, commission, corporation, or body performing a power, duty, or function of government.

Reporting Entities should use the same analysis to determine reporting as they would with any other government in Canada or abroad. NRCan continues to emphasize that an impact benefit agreement or such similar agreements are not reportable; however, certain payments made under such agreements may be.

Indirect Payments and Joint Operations

The Guidance further clarifies the rules regarding attribution of payments. A Reporting Entity must report on all ESTMA caught payments, including those that are made by any business that is not a Reporting Entity in its own right, but that is:

  • controlled by the Reporting Entity;
  • made for, or on behalf of, the Reporting Entity; and
  • made to a payee indirectly.

Similarly, where two or more companies have engaged in an operating agreement or conduct business as a joint venture, the parties must coordinate to ensure that one of the entities satisfies the reporting requirements. If both parties in a joint venture qualify as Reporting Entities, they may submit their own ESTMA reports.

Social Payments

Perhaps one of the most significant additions to the Guidance is the clarification that social payments in contemplation of commercial development may be reportable (similar to the now defunct U.S. Securities and Exchange Commission regarding resource payments rules directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act).

When determining whether a social payment needs to be included in their report, Reporting Entities should consider whether the extraction activity would be allowed to proceed had the social payment not been made. If the extraction activity would not have been allowed, it likely indicates that the payment was for the development of oil, gas and minerals and should be reported. Additionally, if a social payment advances the position of the extraction company, such as a quid pro quo transaction, the payment is also likely to be included.

Conclusion

Controlling entities and entities involved in the extraction of oil, gas and minerals determine whether they are Reporting Entities under ESTMA and if they are meeting their ESTMA obligations. Reporting Entities will need to familiarize themselves, and ensure their respective finance, community, governance, and procure departments are familiar with both ESTMA and the legally binding form of reporting found in the Technical Reporting Specifications.

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.

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