Canada: "Publish What You Pay" Alert: ESTMA Guidance And Reporting Requirements For Mining, Oil And Gas Firms Now Finalized

Natural Resources Canada ("NRCan") recently released its finalized implementation tools for reporting payments to governments and government officials by mining and oil and gas companies under the Extractive Sector Transparency Measures Act. These new "publish what you pay" requirements are intended to supplement the anti-corruption measures contained in the Criminal Code and the Corruption of Foreign Public Officials Act ("CFPOA"). The Canadian government has noted that the purpose of the new regime is to improve transparency within the industry and to achieve alignment with similar measures set out in the EU Transparency Directive and the US Dodd-Frank Wall Street Reform and Consumer Protection Act.

All companies involved in the extractive sector, including financial and private equity firms with controlling interests in extractive sector companies, should carefully review the final version of the guidance and specifications to ensure that they comply with the new mandatory payment disclosure requirements. The following is a general overview of the new regime and highlights the key differences between the draft and final versions of the implementation tools.

ESTMA Background

The Extractive Sector Transparency Measures Act ("ESTMA") came into force on June 1, 2015. As discussed in our August 19, 2015 client alert, Canada Seeking Consultation on Guidance and Reporting Requirements Under the Extractive Sector Transparency Measures Act, NRCan had previously issued a draft of the ESTMA implementation tools and sought public input on three separate documents (collectively, the "Guidance"). These are now available in final form as follows:

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:

These requirements are independent of one another, and if an entity falls within any of (a) to (c), it will be considered a Reporting 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

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. The Guidance also provides two points of clarification. First, in order to be covered, the company must be subject to Canadian law. Second, the ESTMA does not apply to parent companies not subject to Canadian law who have subsidiaries operating in Canada.

There are four business forms that are considered entities under the ESTMA: corporations, trusts, partnerships and other unincorporated organizations. The Guidance clarifies that these categories are intended to be interpreted broadly and apply to similar forms of business organizations, including but not limited to unlimited liability corporations, limited partnerships, royal trusts, crown corporations or state-owned enterprises. However, sole proprietors and individuals are not considered entities under 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 or private equity 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. However, the Guidance has stipulated that, at a minimum, if an entity controls another under the appropriate accounting standards (e.g. IFRS, US GAAP, etc.), it will generally be considered to control that entity for purposes of the ESTMA.

The Guidance provides the following approaches for determining the size of an entity under paragraph 8(b) of the ESTMA:

• Financial statements: the $20 million asset and $40 million revenue figures are obtained from the company's financial statements in the two previous years; it need only meet the thresholds in one of the years to be considered a Reporting Entity.
• Gross assets: assets should be calculated on a gross basis, not net.
• Total global assets and revenues: assets and revenues should be calculated on global revenues and assets from all business areas, not just commercial development of oil, natural gas or minerals.
• Exclude parent entities: global assets and revenues do not include the assets or revenues of a parent company.
• Currency: all non-Canadian currency financial statements should be converted to Canadian currency for the purpose of these tests using:
  
  
  • the exchange rate as of the entity's financial year-end; or
  • the entity's method of translating the currency of assets or revenues in its financial statements.
• Employee Test: the test for 250 employees should be calculated using the average of all employees of the entity over the two most recent financial years; employees include full-time, part-time or temporary employees; independent contractors do not constitute employees.

"Commercial development of oil, gas, or minerals" is also exhaustively defined under the ESTMA 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.

The Guidance contains an explanation of what is meant by "commercial development". According to the Guidance, commercial development includes activities conducted in foreign jurisdictions. The definition of commercial development also applies to temporary periods of inactivity. This is especially important to note for entities with seasonal exploration programs – such programs would be subject to reporting obligations regardless of whether they were in an active or inactive season.

However, it is also important to note that commercial development is not meant to extend to ancillary or preparatory activities or to post-extraction activities. Likewise, commercial development is not intended to include businesses that provide goods or services associated with or related to commercial development. Companies must still be vigilant about activities that technically fall outside the scope of "commercial development" as they are frequently intertwined with exploration or extraction activities and, as such, are subject to the reporting requirements.

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 payee that is a state-owned entity ("SOE"), are deemed to be made to the payee and therefore such payments must be reported under the regime.

Who Are "Payees"?

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. SOEs are considered payees for the purpose of determining reporting obligations.

The Guidance clarifies that all payments made to a single "payee" should be totaled for the year to determine whether they meet the definition of a payment under section 2 of the ESTMA. Payments made by a Reporting Entity to the same "payee" that meet the $100,000 threshold in one category of payment must be disclosed. To determine if payment was made to the "same payee", the entity must group together departments, ministries, trusts, boards, commissions, corporations, bodies or other authorities that are established to perform a power, duty or function on behalf of a particular level.

In addition, the ESTMA deems all payments made to all employees and public office holders of a "payee" to be made to that same payee. This is especially significant in the context of paying expenses or other monies to government officials or employees. In some jurisdictions it is legal and expected that private entities pay a per diem or other expenses of government inspectors or agents. While any individual may accrue only small per diem payments, the aggregate amount of all such payments made to the officials of a particular deemed "payee" may be significant.

This provides an additional concern for companies in regards to anti-corruption compliance and controls. Payments that are otherwise legal under the CFPOA, or for which corrupt intent would be difficult to prove, are likely to be reportable. Failure to report payments could become a tool used by Canadian authorities to seek penalties even if a corruption charge could not fully be made out.

Finally, the ESTMA does not apply to payments made to Aboriginal governments in Canada until June 1, 2017. Aboriginal governments are intended to be within the scope of "payee" under the ESTMA, and will be included after this deferral period.

What Payments Are Covered?

Payments that fall outside of the seven categories provided in section 2 of the ESTMA do not need to be reported. The Guidance clarifies that the substance of the payment and not the form should be considered when categorizing a payment.

A Reporting Entity must report all payments made:

• by the Reporting Entity; and,
• by the entity controlled by the Reporting Entity.

The Guidance provides further clarification on the following categories of payments, of which we have summarized below:

• Taxes: Taxes are intended to capture income, profit, and production tax payments in relation to commercial development of oil, gas or minerals. The term tax means any type of government charge that is enforceable by law. Withholding taxes need not be reported. Consumption taxes, even if related to the commercial development of oil, gas or minerals do not need to be reported. Examples of taxes that need to be reported include:
  • Income and profit taxes
  • Capital gains taxes
  • Capital Taxes
  • Mining taxes
  • Windfall profits taxes
  • Resource Surcharges
  • Petroleum revenue taxes
• Royalties: The Guidance suggests that royalties should be defined by their common meaning. Furthermore, it clarifies that in-kind royalties should be treated the same as other in-kind payments.
• Fees: It does not matter whether a payment, cash or in-kind, is characterized as a fee. If it accomplishes the same purpose in substance as a fee, it should be reported. This category is not meant to capture amounts paid in the normal course of commercial transactions in exchange for services provided by the government or their entities.
• Production Entitlements: A payee's share of oil, gas or mineral production extracted as part of a commercial development under a production sharing agreement or similar contractual or legislated arrangement should be categorized as a production entitlement. In-kind entitlements should be reported in their equivalent cash value. Volumes of production entitlements paid do not have to be reported.
• Bonuses: Payments which are in substance, regardless of their label, signing, discovery, production and any other type of bonuses paid to a payee in relation to the commercial development of oil, gas or minerals must be reported.
• Dividends: Dividends paid to a payee who is a normal shareholder of the entity need not be reported so long as the payee acquired the shares on the same terms available to others in the market and the dividend is paid to the payee on the same terms as other shareholders.
• Infrastructure Improvements: Whether they are cash or in-kind payments, and whether they are payments made pursuant to a contract or not, they must be reported. The purpose is not to capture infrastructure improvement payments that relate primarily to the operational purposes of the Reporting Entity.

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 and Their Officers and Directors

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 without 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 controls 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 US and EU also have no such exception. 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.

Substitution Determinations and the Global Trend Towards Transparency

The Canadian government's recent commitment to mandatory reporting builds on a global trend towards increased disclosure by extractive sector companies in hopes of reducing corruption related to resource development. The EU has established transparency rules for extractive industries (including the forestry sector) through its Transparency Directive.¹ Similarly, the Securities and Exchange Commission ("SEC") re-proposed rules last year under the Dodd-Frank Wall Street Reform and Consumer Protection Act to require that "resource extraction issuers" file annual reports disclosing the payments that they have made to domestic and foreign governments in relation to the commercial development of oil, natural gas, and minerals.²

The Canadian government has already made an effort to align its legislative requirements with those of the EU. As of July 31, 2015, reports submitted to EU and European Economic Area member-states that have implemented the EU Transparency Directive at a national level may be submitted to the Minister of Natural Resources as a substitute for a report prepared under the ESTMA. In order to use the substitution determination, a reporting entity must include an attestation statement in its report and specify which jurisdiction the substituted report was originally filed. It must also file within the timeline prescribed by the other jurisdiction. If the filing deadline in the other jurisdiction extends beyond 150 days after the end of a reporting entity's financial year, the reporting entity must inform NRCan within the deadline under the Act.³

If the payment disclosure rules that have been endorsed by the SEC are enacted in the US, it is anticipated that NRCan will similarly issue a substitution determination in an effort to ease regulatory burdens and harmonize Canadian anti-corruption and transparency legislation with that of its close trading partners.

What's New? Key Amendments to the Guidance

The recent finalization of the Guidance introduces some significant changes to Canada's publish what you pay regime.

Requirement to Enrol – NRCan Contact Form

NRCan now requires companies to enrol as an "ESTMA Reporting Entity." Each reporting entity must complete and submit a separate Contact Form to NRCan in order to enrol. This Contact Form contains information such as the reporting entity's legal name, operating name, business number, address and dates of its financial year, as well as the names and contact information for its primary and alternate contacts. A reporting entity must enrol before submitting a report under the ESTMA. NRCan encourages enrolment before June 30, 2016.⁴

Upon receipt of the Contact Form, a unique ESTMA ID Number is assigned to a reporting entity by email. The ESTMA ID Number must be referenced in all future correspondence between NRCan and that reporting entity, including as part of the submission of all future ESTMA reports by the reporting entity.

Payments Made to Indigenous Governments – Information Sheet

NRCan has also released an information sheet which answers common questions regarding the requirement for extractive companies to report payments to Indigenous governments in Canada under the ESTMA. Extractive companies need not report payments made to aboriginal groups in Canada until June 1, 2017. NRCan will continue its engagement with Indigenous peoples on implementation of the ESTMA during this deferral period.

The information sheet indicates that extractive companies are not required to disclose impact and benefit statements, although payments made under this agreement may be reportable. Moreover, the ESTMA does not change existing procedures for calculating Canada's transfer payments to Indigenous communities. Extractive industry reports on payments to Indigenous governments will not be used as a basis to determine federal funding levels.

Payments Made to State-Owned Enterprises – Further Guidance

In the final version of the Guidance, NRCan has provided further clarification on whether payments made to SOEs are reportable under the ESTMA. The Guidance states that all payments made to a single "payee" should be totaled for the year to determine whether they meet the definition of a payment under section 2 of the ESTMA.

Payees include governments at any level, including national, regional, state/provincial or local/municipal levels. Payees also include Crown corporations and other SOEs that are exercising or performing a power, duty or function of government. The facts and circumstances of payments made to SOEs will have to be examined in order to assess whether they may constitute a reportable payment.

An important factor in making this determination will be whether the SOE is engaging in commercial activity or is exercising or performing a power, duty, or function of government. The Guidance notes that it is less likely that an SOE operating outside its home jurisdiction would be exercising or performing a power, duty or function of government and levy payments on reporting entities.

Conclusion

Since the ESTMA is now in force, companies involved in the extractive sector should take the time to familiarize themselves with the finalized Guidance so that they may effectively comply with Canada's new publish what you pay regime. It is recommended that a reporting entity enrol with NRCan prior to June 30, 2016 in order to receive important updates from NRCan regarding the mandatory payment disclosure requirements.

McCarthy Tétrault's International Trade and Investment Law Group has extensive experience in dealing with international anti-corruption enforcement and compliance matters and is available to assist with any issues or concerns with respect to your ESTMA obligations.

Footnotes

^{1 Transparency Directive.}

^{2 SEC Proposes Rules for Resource Extraction Issuers Under Dodd-Frank Act.}

^{3 ESTMA, at subsection 10(1) authorizing Extractive Sector Transparency Measures Act – Substitution Determination, July 31, 2015.}

^{4 Tools for Extractive Businesses.}

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