On October 23, 2014, the Government of Canada introduced its long-awaited legislation to mandate disclosure of public payments made by mining and oil & gas companies for the commercial development of oil, gas and minerals. The Extractive Sector Transparency Measures Act (the “Act”) follows over a year of industry consultations and an industry and civil society-led roundtable, both of which Davis LLP has covered extensively (see our previous bulletins from November 13, 2013,January 17, 2014 and March 3, 2014). With the introduction of the Act, a number of key details for the payment reporting scheme have been clarified, which are reviewed in this bulletin.
The Basic Payment Reporting Obligation
The Act applies to any entity engaged in, or controlling other entities engaged in, the commercial development of oil, gas or minerals anywhere in the world so long as the entity:
- is publicly listed in Canada; or
- 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:
- $20 million in assets;
- $40 million in revenue; and/or
- 250 employees.
Entities covered under the Act must provide the Canadian government with an annual report (a “Report”) detailing the payments it has made directly or indirectly to a public body – whether monetary or in-kind – to develop oil, gas or minerals if the total amount of such payments during the previous financial year is at least $100,000 (or such other amount if prescribed by regulation). The categories of payments include taxes (other than consumption or personal income taxes), royalties, fees, production entitlements, bonuses, dividends (other than to ordinary shareholders), infrastructure improvements and other payments as may be prescribed by regulation.
Key Details in the Proposed Act
As mentioned above, the Act clarifies a number of aspects of the payment reporting scheme that were heavily debated and discussed during various industry consultations and roundtables. Highlighted below are the top five most important provisions of the Act that have been clarified:
- Verification. The Report will be required to include an attestation made by a director or officer of the entity or an independent auditor or accountant, that the report is true, accurate and complete. This is a significantly relaxed verification standard from earlier discussions where the government had indicated that it was seeking verification solely from independent auditors, akin to accounting standards for annual financial statements. It is expected that verification by a director or officer should lower compliance costs for covered entities.
- Substitution. Given that the United States is already seeking its own payment reporting framework under the 2010 Dodd-Frank Act (with revised rules expected in the Spring of 2015) and the European Union has already adopted a similar framework through revisions to the EU Transparency Directive, cross-listed entities should be happy to know that Canada will likely accept reports required under other jurisdictions as a substitute, rather than mandate different reports by the same entities. Similarly, wholly-owned subsidiaries within a group of companies will be able to provide a consolidated report rather than individual reports for each entity that meets the reporting threshold.
- Enforcement. Under the Act, the Minister can order any covered entity to provide an independent audit of how it has reported payments in compliance with the Act. Further, the Minister has reserved the power to designate the administration and enforcement of the Act, which may be a responsibility intended for a future national securities regulator. In any event, the designated body will have broad investigative powers to audit compliance.
- Punishment. The consequences of failing to publish a Report, knowingly making false or misleading statements in the Report or trying to structure any payments to avoid having to include them in the Report (such as characterizing them as “gifts”) is a summary conviction and fine of up to $250,000. Further, any director or officer who authorizes, assents, acquiesces or participates in the commission of one of these offenses is also party to and guilty of the offence.
- Aboriginal Payments. As was announced last month, Canada will delay reporting of payments to aboriginal groups for two years from when the Act is proclaimed into law. Canada is unique in the US-EU nexus of being the only country including aboriginal payment disclosure. This two-year window, now enshrined in the Act, will allow for further consultation with aboriginal groups but could also raise future issues around the availability of substitute reports from other jurisdictions.
Areas to Watch Closely
The Act will have to work its way through the legislative process, which is likely to include a form of committee hearings, before being proclaimed into law. The Act does not indicate when it will be proclaimed, but the government has previously announced its goal to pass the law by April 2015 and have it apply to any fiscal years ending after June 30, 2015. As the Act works through the legislative process, there are a number of areas that covered entities and their counsel should watch for closely:
- Coverage of non-Canadian listed entities. While the original stated intention of the Government during the consultation process was to cover large privately-held companies operating in Canada, the application of the Act to any large company that has “a place of business, does business or has assets in Canada” is considerably broader than just non-listed companies operating here. It is unclear whether this definition was intended to capture, for example, large foreign multinationals or if this definition will be revised before the Act is proclaimed.
- Publication of the Reports. The Act does not specify how or where covered entities will publish their Reports to make them available to the public. During the consultations, the government indicated a preference to allow publication on corporate websites. Whether this will be enacted in future regulations or the government will mandate filings on SEDAR (at least for publicly-listed entities) will have to be determined.
- Future exemptions. While there are no specific reporting exemptions listed in the Act, the Act does reserve the power to grant exemptions by regulation and it will be interesting to see whether any exemptive relief is granted. This may, in part, depend on how the US and EU legislation is implemented and the extent to which industry and aboriginal groups raise concerns about the Act’s implementation.
- Enforcement body. The enforcement body for payment reporting is not yet determined, presumably due to a lack of a national securities regulator at this time. Whether the government designates an interim body or holds out for the national regulator will be a key issue for the initial enforcement and compliance with the Act.