On October 23, 2014, the Federal Government of Canada introduced Bill C-43, which included the Extractive Sector Transparency Measures Act. The Act will require disclosure by entities in the extractive sector of payments made to government entities through a number of new annual reporting requirements, although, payments made to Aboriginal governments in Canada will not be subject to the Act until two years after the legislation comes into force. The Act has only passed Second Reading but the Government intends to bring the Act into effect by April 1, 2015.
Companies in the extractive resource sector should familiarize themselves with the Act and promptly raise any concerns regarding the Act. In addition, such entities should begin evaluating the policies and procedures that will be required in order to comply with the legislation as well as any legal, regulatory or contractual commitments that may create difficulties in complying with these new Canadian reporting requirements.
The Resource Revenue Transparency Working Group, a group of Canadian exploration and mining associations as well as civil society organizations, released a series of recommendations in January 2014 aimed at developing transparency initiatives for publicly-traded companies in the extractive sector in Canada. The Act reflects these efforts and also aims to harmonize Canadian legislation with reporting standards in other G8 countries. The Act’s purpose overtly refers to Canada’s commitment to participate in the global fight against corruption.
The Act will apply to any entity that:
- is listed on a stock exchange in Canada;
- has a place of business, does business, or has assets in Canada and, for at least one of the most recent two fiscal years, meets two of the following thresholds:
- has at least $20 million in assets;
- has generated at least $40 million in revenue;
- employs an average of at least 250 employees; or
- is prescribed by legislation.
An “entity” is defined as a corporation, trust, partnership or other unincorporated organization that:
- is engaged in the commercial development of oil, gas or minerals in Canada or elsewhere; or
- controls (directly or indirectly, in any manner) a corporation, trust, partnership or unincorporated organization that is engaged in such activities in Canada or elsewhere.
The Act does not provide any guidance as to how entities should determine whether or not their activities amount to “doing business” or “having assets” in Canada. The Act is unclear as to whether the thresholds are restricted to Canadian jurisdictions and may be open to the interpretation that an entity’s world-wide operations and revenue must be used when determining whether the thresholds are met. As a result, a foreign company that meets two of the above thresholds, despite having non-significant business operations or assets in Canada, may still be required to comply with the reporting requirements under the Act.
Note that commercial development includes exploration or extraction, as well as a right to or the acquisition of a permit, licence, lease or any other authorization to explore or extract oil, gas or minerals. The Act does not appear to cover the Government’s intention to include refining and transporting, as had been previously announced in the Government's April 2014 Consultation Paper.
Entities subject to the Act will be required to annually report monetary or in-kind payments made to any domestic or foreign government in relation to the commercial development of oil, gas or minerals under certain circumstances, a summary of which is described below. In addition, entities will also be required to disclose payments made to a body established by two or more governments or to any trust, board, commission, corporation, body or authority that is established to exercise a government function. Payments made to government employees or holders of public office are deemed to be payments made to government entities. As previously mentioned, payments made to Aboriginal governments in Canada will not be subject to the reporting obligations under the Act until two years after the legislation comes into force.
The Act outlines specific categories of payments that must be publicly disclosed if payments in that category are made to the same payee in excess of (i) the amount prescribed by regulation, or (ii) if no amount is prescribed, $100,000. The payment categories include:
- taxes, other than consumption taxes and personal income taxes;
- fees, including rental fees, entry fees and regulatory charges as well as fees or other consideration for licences, permits or concessions;
- production entitlements;
- bonuses, including signature, discovery and production bonuses;
- dividends other than dividends paid as ordinary shareholders;
- infrastructure improvement payments; or
- any other prescribed category of payment.
Reports of such payments will be required to be filed with the Minister within 150 days of the entity’s financial year end. A director or officer of the entity or an independent auditor or accountant must attest that the information included in the report is true, accurate and complete. While the form of the report is not prescribed, it is anticipated that the Minister will require disclosure of payments on a project-by-project basis as indicated in the Government’s April 2014 Consultation Paper. Note that reports provided to the Minister by an entity would satisfy the reporting requirements of its wholly owned subsidiary that would otherwise be subject to the same reporting requirements, provided that:
- the parent entity provides the Minister with a report that also contains information with respect to the payments made by the subsidiary during the applicable financial year;
- not later than 150 days after the end of its financial year, the subsidiary notifies the Minister in writing that the parent entity is providing the report; and
- the subsidiary provides the Minister with a report with respect to payments it has made during the applicable financial year that is not covered by the report provided by the parent entity.
It is also expected that entities will be required to issue an associated press release regarding its compliance with the reporting requirements as the Act will require the information to be made publicly available in the manner specified by the Minister.
The Government continues to work with the United States and the European Union to develop a common reporting template to reduce the administrative compliance burden. In the event that a common reporting template is not achieved, the proposed legislation allows for an entity to provide reports utilized in other jurisdictions to the applicable Minister, provided the requirements are equivalent to Canadian reporting standards.
Compliance with the Act
The Minister will have the authority to order an entity to provide any information and documentation in order to verify compliance, and provides expansive investigate powers to the Minister. The Minister will also be permitted to order an entity to take any corrective measures that he or she considers necessary to comply with the reporting requirements under the Act. In the event of non-compliance, the Act prescribes a fine of up to $250,000 for every person or entity that:
- fails to comply with the reporting requirements of the Act;
- knowingly makes a false or misleading statement or knowingly provides false or misleading information; or
- structures any payments, either monetary or in kind, with the intention of avoiding the reporting requirements of the Act.
An entity that structures payments to avoid the reporting requirements of the Act will be guilty of an offence punishable on summary conviction. A single event could constitute multiple offences, particularly given the fact that for each day an offence is committed or continued, such offence will be considered a separate offence. As a result, entities may face significant liability as fines may increase by up to $250,000 on a daily basis.
Section 25 of the Act explicitly establishes liability for directors, officers or agents of extraction sector entities. Individuals who direct, authorize, assent to, acquiesce in or participate in the commission of an offence will be liable under the Act, regardless of whether the entity has been prosecuted or convicted of the offence.
Exemptions from the Act
The Government had previously acknowledged that situations may arise whereby disclosure of the required information is prohibited by contractual obligations or another jurisdiction’s privacy or confidentiality laws. Nonetheless, the proposed Act does not provide for any exemptions and aligns Canadian legislation with that of the EU. However, the lack of an exemption may put companies into a precarious situation whereby they are forced to breach either Canadian reporting requirements or foreign legal, regulatory or contractual requirements.
The US rules for extractive reporting issuers similarly did not provide for exemptions. The District Court for the District of Columbia deemed this to be a “serious error” and in vacating these rules, referred to the Securities and Exchange Commission’s decision to deny such exemptions as “arbitrary and capricious.” The SEC will be responding with new rules in March 2015 and it remains to be seen whether the new rules will result in similar revisions to the proposed reporting requirements under the Act.
When Does the Act Take Effect?
As mentioned above, the Government intends for this new legislation to be in force by April 1, 2015. The Act will require companies to issue reports beginning in the financial year following its enactment. Assuming the legislation comes into force April 1, 2015, the new reporting obligations will begin to impact companies with fiscal years ending in April 2015. Changes to the legislation may occur prior to its enactment, as the Act has only passed Second Reading and has yet to undergo review by the Standing Senate Committee which has been authorized to examine the Bill in advance of it going before the Senate.
The contributions of Jonathan Sherman, articling student, in the preparation of this article are gratefully acknowledged.