Preparing for compliance with the Extractive Sector Transparency Measures Act

In line with the global trend of promoting transparency reporting for extractive industries, Canada’s Prime Minister announced nearly two years ago his government’s intention to implement a mandatory reporting regime for payments to foreign and domestic governments by Canadian companies in the extractive sector. 

This initiative is aiming to align Canadian reporting requirements with those of the United States (Dodd-Fran Act) and European Union (Transparency and Accounting Directives) in order to eliminate duplicate reporting to multiple jurisdictions and reduce administrative burden on companies, and, at the same time, further strengthen Canada’s reputation as a leader in transparency, accountability and good governance in the extractive sector.¹

To implement its commitment, on Oct. 23, 2014, the Government of Canada introduced for the first reading in the House of Commons the Extractive Sector Transparency Measures Act.² The Act received royal assent on Dec. 16, 2014. Although it is not certain when the Act would come into force, the Government has indicated its intention to proclaim the Act into law by April, 2015.³ As the deadline is approaching, we have highlighted below the key provisions of the Act and certain suggestive measures in preparation for compliance.

Key Provisions

The purpose of the Act is to fight against corruption through the implementation of measures that enhance transparency and impose reporting obligations with respect to payments made by entities engaged in the commercial development of oil, gas or minerals in Canada or elsewhere.⁴ Those measures are designed to deter and detect corruption through bribes, in any form prescribed by the Act, made by entities in the extractive sector to domestic or foreign governments or other governmental authorities.

The Act applies to any entity in the extractive sector that is listed on a stock exchange in Canada.  In addition, those entities having a place of business in Canada, doing business in Canada or having assets in Canada are also subject to the Act, if they meet at least two of the following conditions for at least one of their two most recent financial years: (i) own at least $20 million in assets; (ii) generate at least $40 million in revenue; (iii) employ an average of at least 250 employees.⁵

The Act requires every entity to report, not later than 150 days after the end of their financial years, the payments of same category that it has made during that year to the same payee, whether the payee is domestic or foreign government, or trust, board, commission, corporation, body or authority established to exercise governmental power, duty or function, or other prescribed payee, if the aggregate amounts of such category of payments exceed $100,000 or other amounts prescribed by regulation.⁶

To further clarify the reporting obligation, the Act provides that a “payment” includes any payment, whether monetary or in kind, made in relation to the commercial development of oil, gas or minerals.  The payments are divided into the following categories: taxes (except consumption taxes and personal income taxes); royalties; fees, consideration for licences, permits or concessions; production entitlements; bonuses, including signature, discovery and production bonuses; dividends (dividends paid as ordinary shareholders); infrastructure improvement payments; or any other prescribed category of payment.⁷

In addition to the report, an attestation from a director or officer of the entity, or an independent auditor or accountant is needed to demonstrate the accuracy and completeness of the report.⁸ Also, the entity must keep records of its payments made for a period of seven years, or for the period otherwise prescribed,⁹ and make the report and information available to the public in the manner prescribed by the Government and for a period of five years, or for the period otherwise prescribed.¹⁰

Failing to comply with the reporting obligations, or an order from the Government to take corrective measures can trigger substantial penalties. The entity, who knowingly makes any false or misleading statement, provides any false or misleading information, or structures any payments with the intention of avoiding the reporting obligation will be found guilty of an offence punishable on summary conviction and liable to a fine of not more than $250,000.¹¹

Preparing to Comply with the Act¹²

The Government has announced its intention to proclaim the Act into law by April 2015 and establish mandatory reporting standards by June 2015.¹³ A transition period is provided in the Act; more specifically, the Act does not apply to the financial year in progress on the day when the reporting obligation comes into force, and for any previous financial year.¹⁴ In addition, for payments made to aboriginal groups, the Act provides a two-year delay following the coming into force of the reporting obligations.¹⁵ Despite this transition period, entities subject to the Act should consider the following practices in preparation for the Act:

• Tracking and recording relevant payments made to any domestic or foreign government, or trust, board, commission, corporation, body or authority established to exercise governmental power, duty or function, or any prescribed payee;
• Auditing payment records to ensure accuracy and completeness; Although the report is not required to be verified by independent auditors, which may lower compliance costs, it is suggested that accounting standards are maintained to lower the risk of penalties;
• Updating policies and procedures to reflect the threshold for the reporting obligation ($100,000); For instance, it might be necessary to revise the provisions of a shareholders’ agreement or by-laws with respect to the power of directors to make payments without shareholders’ consent;
• Abiding by the reporting requirements of other jurisdictions; The Act allows for the substitution of the Government’s payment reporting requirements with those of another jurisdiction which has adopted similar standards, provided that other conditions imposed by the Government are also met;¹⁶ 
• Following closely the regulations promulgated by the Government with respect to the Act as the Government is endowed with numerous opportunities to specify the reporting obligations through regulation;¹⁷
• Following the development of provincial securities regulators, as the Government considers that the preferred scenario would be to implement mandatory reporting standards through the provincial securities regulators;¹⁸
• Implementing all reasonably prudent measures so that the entities subject to the Act may invoke the due diligence defence provided therein in the event that they are prosecuted for an offence under the Act.¹⁹