The Government of Canada recently introduced proposed legislation creating mandatory public reporting of payments to governments and government officials by the extractive sector. The proposed act, entitled the Extractive Sector Transparency Measures Act (ESTMA), is designed to further Canada’s fight against corruption by enacting reporting obligations with respect to payments made to foreign and domestic governments (and government officials), eventually including aboriginal governments.
These proposed mandatory reporting requirements are in line with other countries implementing similar requirements, including the European Union and the United States. The EU has implemented a Transparency Directive, which contains provisions similar to the proposed ESTMA. The U.S. had initially implemented reporting standards through the Dodd-Frank Wall Street Reform and Consumer Protection Act, however, such provisions were struck down by the U.S. courts in 2013. The U.S. is anticipated to propose new legislation in early 2015, which is expected to be largely consistent with ESTMA.
This bulletin addresses the key elements and concepts of the proposed ESTMA.
ENTITIES SUBJECT TO REPORTING REQUIREMENTS
The reporting obligations in ESTMA will apply to companies that are engaged in the commercial development of oil, gas or minerals in Canada or abroad and either (a) are listed on a stock exchange in Canada or (b) have a place of business in Canada, do business in Canada or have assets in Canada and meet at least two of the following size thresholds:
- C$20 million in assets
- C$40 million in revenue
- Employ an average of at least 250 employees.
ESTMA is not restricted to Canadian-headquartered companies. Foreign companies can potentially be caught within the ambit of ESTMA where they have a place of business, do business or have assets in Canada and meet the size threshold. Where such foreign companies, either directly or indirectly through subsidiaries, engage in the commercial development of oil, gas or minerals anywhere in the world, they will likely be subject to Canadian reporting requirements.
The reporting requirements also encompass payments made by a foreign company that is controlled by a company listed in Canada or that has a place of business, does business or has assets in Canada and meets the size threshold. The notion of control is broadly defined to include direct or indirect control by any means.
Where an entity is required to disclose payments under ESTMA, it will be required to provide the minister with, and make available to the general public, a report in a form to be prescribed indicating all payments made to a “payee” during a fiscal year in the following categories:
- Taxes, other than consumption and personal income taxes
- Fees, including rentals, entry fees, regulatory charges and any other consideration for licensees, permits or concessions
- Production entitlements
- Dividends, other than dividends paid to ordinary shareholders
- Infrastructure improvement payments
- Any other category of payment that is prescribed by regulation.
Payments are required to be reported only where the aggregate amount to the same payee is greater than C$100,000, however, the minister is at liberty to alter the threshold amount for any particular category of payment by regulation.
The report is also to include an attestation made by a director, officer, independent auditor or accountant that the information contained in the report is true, accurate and complete.
The concept of a “payee” in ESTMA is broadly stated to apply to all types of government entities, including (a) any government in Canada or in a foreign state; (b) a body that is established by two or more governments (which is a similar concept to public international organizations in anti-corruption laws); and (c) any corporation or other body established to exercise or perform, or that exercises or performs, a power, duty or function of government.
Given the breadth of the definition of a “payee,” ESTMA will also apply to payments to certain aboriginal bands, subject to a two-year transitional period for aboriginal bands in Canada.
Notably, and in furtherance of ESTMA’s objective of detecting and deterring corruption, a payment that is made to an employee or public office holder of a government body is deemed to have been made to that government body, and must also be reported. Accordingly, ESTMA will require public disclosure of not only lawful payments to governments, but also payments that could potentially violate anti-corruption legislation such as Canada’s Corruption of Foreign Public Officials Act (CFPOA).
ESTMA will require each entity to keep records of its payments made in a financial year for a period of seven years from the date that the entity provides the report to the minister or such other period as may be prescribed by regulations. This records retention obligation should be read in conjunction with section 4 of the CFPOA, which creates an offence for destroying accounting records earlier than permitted by law for the purpose of concealing bribery. Accordingly, non-compliance with record-keeping obligations under ESTMA may also be punishable by criminal sanction under the CFPOA if done for a bribery-related purpose.
The minister has broad information-gathering powers under ESTMA, including audit powers to compel any entity to provide information or documents. Additionally, the minister or his or her designate can access an entity’s premises, inspect documents, require reports to be prepared and access IT systems to verify compliance with ESTMA. There is also a statutory obligation of cooperation imposed on the company and its employees. Notably, this could expand the ability of Canadian authorities to collect information about improper payments, as to date enforcement of Canadian anti-corruption legislation has been left to traditional criminal law information-gathering mechanisms such as search warrants.
OFFENCES AND PUNISHMENT
ESTMA creates an offence for non-compliance with several of its provisions. Additionally, there is a general anti-avoidance provision making it an offence to structure any payment, or other financial obligation or gift, to avoid reporting requirements. These offences are subject to a maximum fine of C$250,000 for each day that the offence continues.
DIRECTOR AND OFFICER LIABILITY
Where an entity commits an offence under ESTMA, any officer, director or agent who directed, authorized, assented to, acquiesced in or participated in its commission is also guilty of the offence. This would be subject to a defence of due diligence, where it would be open for the entity, or its directors and officers, to show that all reasonably prudent measures were implemented, which would typically include considerations such as:
- Established policies and procedures
- Adequate training
- Monitoring to ensure effectiveness of policies and procedures
- A system of internal controls to ensure accurate books and records
- Audits of payment records.
In order to avoid the burden of dual-reporting requirements, ESTMA contains an equivalency provision that allows the minister to deem another jurisdiction’s reporting standards as an acceptable substitute. In these circumstances, an entity could comply with ESTMA by complying with the other jurisdiction’s reporting requirements and providing the minister with a copy of such reporting.
COMING INTO FORCE
The government has stated that the mandatory reporting standards are expected to be in place by June 2015.
As the government moves to implement ESTMA in mid-2015, extractive sector companies that will be subject to ESTMA should consider whether any internal changes are necessary to ensure that record keeping and compliance systems are adequate to track and report payments, as will be required.