On October 23, 2014, the Government of Canada tabled an omnibus Bill C-43[1] introducing or amending dozens of laws. Within all these changes and new measures is a proposed new law setting out rules regarding disclosure of payments to foreign and domestic governments. These rules comprise the Extractive Sector Transparency Measures Act (the “Act”). The Act is a game changer for the industry and presents some serious compliance challenges.

Background

In April 2014, the Government of Canada issued a Consultation Paper detailing proposals for the introduction of mandatory reporting rules for extractive industry companies (the “Consultation Paper”). The thrust of these proposed rules was to impose requirements on entities involved in the extractive sector to report on payments made to foreign and domestic governments. The rules were the subject of a Dentons bulletin, and subsequent update, produced earlier this year.

As highlighted in our previous bulletins, the Government of Canada initially hoped that the Provincial Securities Regulators would assume responsibility for implementing the rules. However, with little sign of visible progress, the Government of Canada has stepped in to introduce Federal legislation in the form of the Act.

This bulletin summarizes key aspects of the Act as set out in Bill C-43. It is important to note, however, that the Bill has only undergone its First Reading, and it has not yet been subjected to review by Parliamentary Committee, or debate in the House of Commons. As such, the content of the Act remains subject to change as it makes its way through the legislative process.

1. To whom will the Act apply?

Section 8 of the Act provides that reporting obligations will apply to:

  1. Any entity that is listed on a stock exchange in Canada;
  2. Any entity that has an office in Canada, does business in Canada, or has assets in Canada and that, based on consolidated financial statements, meets at least two of the following criteria:
    1. CA$20 million in assets;
    2. CA$40 million in revenue;
    3. 250 employees; and,
  3. Any other prescribed entity.

The Act defines an "entity" as a corporation, trust, partnership or other unincorporated organization that is engaged in the commercial development of oil, natural gas or minerals in Canada or elsewhere. Taken together, these provisions appear to require foreign companies with Canadian assets or operations to report on their worldwide operations. The consequences of this requirement could be far-reaching, and could conceivably have an impact on decisions of foreign companies to invest, or even to continue operations, in Canada. The broad scope of the Act runs contrary to Canada’s traditional reluctance to adopt extra-territorial measures and raises difficult questions. Notably, how would the rules be enforced against foreign entities, especially in relation to disclosures (or nondisclosures) that do not concern their Canadian operations? This particular aspect will likely be the subject of comment at the Parliamentary Committee stage, as well as in subsequent debate.

Another point worth noting is that the reporting obligation applies to entities “engaged in the commercial development of oil, gas and minerals”, which as defined in the Act, captures “exploration and extraction” activities only. In its Consultation Paper, the Government had indicated an intention to capture activities such as refining and transportation of natural resources, but this does not appear to have been translated into the Act. However, Section 23 of the Act specifically provides for the Minister responsible for the Act (the “Minister”) to make regulations regarding the definition of “exploration” and “extraction”, so it is possible that definitions may be prescribed in due course that extend the scope beyond a straightforward interpretation of those terms.

2. What must be reported?

All entities (as defined) must report particular types of payments to a “payee” (defined below) which exceed a specified threshold amount. The types, or “categories” of payments that must be reported are as follows:

  1. Taxes, other than consumption taxes or personal income taxes;
  2. Royalties;
  3. Fees, including rental fees, entry fees and regulatory charges as well as fees or other   consideration for licenses, permits or concessions;
  4. Production entitlements;
  5. Bonuses, including signature, discovery and production bonuses;
  6. Dividends other than dividends paid as ordinary shareholders;
  7. Infrastructure improvement payments; or,
  8. Any other prescribed category of payment (although no specific additional categories are mentioned in the Act).

The threshold amount for reporting purposes is CA$100,000 per category of payment per financial year, unless a different threshold has been set for specific categories by the Minister. If aggregate payments within a given category do not exceed the threshold amount, then such payments do not need to be reported.

The term “payee” is defined in the Act to include any foreign or domestic government, as well as anystate-owned enterprise or other authority that is established to exercise a power, duty or function on behalf of a government. Furthermore, the Act specifically states that any payment made to an employee or public office holder of a government (including relevant state-owned enterprises) will be deemed to have been made to a government, and must be reported accordingly.

The breadth of the definition of payee, and in particular the inclusion of state-owned enterprises is likely to give rise to practical challenges. Many state-owned enterprises have aspects of their business that are essentially commercial investments (particularly outside of their home country), and which cannot be said to have a regulatory dimension. Entities that participate in ventures with such state-owned enterprises will be faced with a difficult judgment call in terms of whether to report payments made in the course of their commercial dealings (such as dividends, royalties or production shares). The consequences of contravening the rules (described below) are likely to cause companies to err on the side of caution, even if that means greater administrative burden and expense.

As indicated in its Consultation Paper, the Government of Canada intends to require reporting to extend to payments made to Aboriginal governmental entities. However, in accordance with the announcement made by Natural Resources Minister Greg Rickford in August, the application of the Act to payments to Aboriginal governmental authorities will not take effect until two years after the coming into force of the Act. The stated purpose is to allow time for further consultation and engagement with Aboriginal communities. This transitional aspect is addressed in Section 29 of the Act. 

3. How will the reporting work?

An entity must report all payments subject to the Act that it has made during the course of its financial year, within 150 days of the end of that year. The report must be accompanied by an attestation made by a director or officer of the entity or by an independent auditor, certifying that the report is true, accurate and complete. Under Section 12 of the Act, the report must also be made available to the public (unless regulations are passed under Section 23 varying the scope of such public disclosure).

The form of the Report is to be prescribed by the Minister. The template is yet to be established, although the Consultation Paper indicated that payments will need to be broken down by category, on a project-by-project basis.

Section 10 of the Act provides that the Minister may determine that equivalent reporting requirements imposed by another jurisdiction are an acceptable substitute for a report under the Act. This provision may be significant for foreign companies that are, or will be, subject to similar reporting regimes in their home jurisdiction. In particular, the Member States of the European Union, including the UK, will be introducing extractive sector transparency rules by the end of 2015, and the US is expected to follow suit. As such, companies registered in the EU and US, or listed on European or US exchanges should pay close attention to the development of similar rules in those jurisdictions.

4. What if disclosures of payments to certain parties are prohibited by foreign law or by contract?

In its Consultation Paper, the Government of Canada indicated that it did not intend to allow companies to withhold information from its reports, even where disclosures were restricted by foreign law or by existing contractual obligations.

Despite alarm raised in some quarters about the potential for conflicting legal obligations, the Government has not altered its course, and the Act does not contain any exemptions based on foreign law or contractual restrictions. This position is consistent with the stance taken by the EU in its proposals but may leave some companies in the distressing position of having to choose between breaching Canadian law or breaching conflicting foreign legal requirements.

It is also worth noting that similar transparency rules introduced by the US Securities and Exchange Commission (“SEC”) were struck down in 2013 by a US Court, which was highly critical of the absence of any exemption to address foreign law restrictions on disclosure. Following that decision, the SEC went back to the drawing board and is in the process of producing revised rules. It will be interesting to see how the SEC deals with the issue in its revised rules and whether the SEC’s revised approach might provide Canada with a model for providing flexibility where companies are faced with conflicting legal obligations.   

5. What are the consequences of non-compliance?

Section 24 of the Act contains a number of offences, including (perhaps most importantly) an offence under Section 24(1) for a failing to comply with the obligation to fully disclose all relevant payments in a filed report.  All offences under the Act are punishable on summary conviction, with a maximum fine of CA$250,000. At first glance, that penalty may seem relatively small in comparison to other anti-corruption legislation, but Section 24(4) provides that for every day that the offending conduct continues, a new offence is committed, with the corresponding liability for a fine. Entities that fail to make accurate reports could therefore find liability compounding on a daily basis, and could face potentially vast cumulative penalties.

Section 24 also provides that any officer, director, or agent who directed, authorized, assented to, acquiesced in, or participated in the commission of the offence is also guilty of an offence, and liable for the same fine. This provision, taken in conjunction with the requirement for attestation by a director or officer of the company (assuming one cannot find a willing auditor), creates very real direct risks for senior management of extractive sector companies.

The Act confers wide-ranging powers on the Minister and the designated enforcement authority to demand access to company records for the purposes of verifying compliance. Section 26 of the Act provides, among other things, a right of entry onto premises and a right to examine electronic or paper records held by a person or entity. These provisions provide a framework for the aggressive enforcement of the Act, and underscore the importance of strict compliance by companies.

6. Are there any defences?

Section 26(b) provides that “no person or entity is to be found guilty of [an offence under section 24(1) the Act] if they establish that they exercised due diligence to prevent its commission”. This “due diligence” defence under Section 24(1) is potentially highly significant, and may provide a powerful incentive for extractive companies to ensure that they have the necessary policies and procedures to detect and record payments to foreign and domestic governments, and to ensure their employees understand the importance of compliance with the Act.

7. Why is the Government introducing the Act?

The Act specifically states that its purpose is to implement measures that enhance transparency among participants in the extractive industry, as part of Canada’s international commitments to participate in the fight against corruption. In short, the Government clearly sees the Act as an anti-corruption measure, and as an adjunct to its increased enforcement under the Corruption of Foreign Public Officials Act.

8. What steps should companies take at this stage?

The Act has not yet moved beyond first reading and it is quite possible that changes or refinements may be made as it passes through the Parliamentary Committee stage and undergoes debate. However, the passage of the legislation will likely be swift, given that the Government of Canada has repeatedly promised to adopt reporting requirements by April 2015. In addition, the fact that the Act is part of a much larger omnibus legislative package means that it may not receive the level of scrutiny it might otherwise receive if it had been tabled as a stand-alone Bill.

Aside from raising specific concerns in the hope they are addressed at the Committee stage, extractive-sector companies should be taking immediate steps to assess their ability to comply with the Act. These steps should include assessing the processes and procedures they have in place to record payments to governments, as well as evaluating the effectiveness of such processes and procedures. Companies should also evaluate whether they are subject to foreign restrictions (regulatory or contractual) limiting their ability to disclose certain payments to public entities.