On June 1, 2015, the Extractive Sector Transparency Measures Act came into force, creating stringent reporting standards for Canadian oil, gas and mining companies. The Act applies to any entity engaged in the oil, gas, or mining sector that:
- is listed on a stock exchange in Canada; or
- has a place of business in Canada, does business in Canada or has assets in Canada and meets at least two of the following conditions for at least one of its two most recent financial years:
- has at least $20 million in assets;
- has generated at least $40 million in revenue; and/or
- employs an average of at least 250 employees.
Any entity that meets the above criteria is required to file, within 150 days of their financial year-end, reports of payments made to any government in Canada or in a foreign state, or to a body that performs or is established to perform a government power, duty or function. All reports must be publically posted and Canadian parent companies are responsible for filing reports on behalf of their subsidiaries.
Non-compliance with the reporting, public accessibility, or record-keeping provisions of the Act are criminal offences punishable on summary conviction with fines of up to $250,000. An offence of non-compliance continued or committed on more than one day constitutes a separate offence for each day on which the offence is committed or continued, which creates the possibility of significant monetary penalties. The Act also provides significant enforcement powers including audit powers by an independent auditor, and search warrant powers.
The company, as well as its officers, directors, or agents or mandataries, are all potentially criminally liable for non-compliance. The Act, however, does offer a due diligence defence. Therefore, if an organization fails to comply with the Act, the existence of a robust compliance program may provide a full defence to any charges. The Act thus highlights the need for resource companies to ensure that adequate compliance measures are in place.
Beginning with their next fiscal year, resource companies will need to internally track payments to governments and report these payments within 150 days from their fiscal year-end. For example, a company with a December 31, 2015 year-end will need to internally track all government payments made starting on January 1, 2016 and report 2016 payments that are above the reporting thresholds by no later than May 30, 2017. Reporting of payments to Aboriginal governments has been delayed for two years, as consultations are ongoing.
The extent of payments required to be reported is very broad, and includes:
- licence and other fees;
- production entitlements;
- bonuses, including signature, discovery and production bonuses;
- dividends, other than dividends paid as ordinary shareholders;
- infrastructure improvement payments; or
- as otherwise prescribed.
The threshold amount for each category of payments to be reported will be set out in regulations, which have yet to be published. In the absence of such regulations, the threshold amount will be a total of $100,000 to any single payee over the course of the financial year. The reports must be certified as true, accurate and complete by a company’s director, officer or external auditor. Further, the reports must be made available to the public for a period prescribed by regulation or, where no period is prescribed, for a period of five years.
The reporting obligations will assist in the detection of potentially improper payments and will provide law enforcement agencies, concerned citizens, and non-governmental organizations with the ability to scrutinize the activities of global resource players.
The Act is a key part of Canada's efforts to more fully implement its international commitments in the fight against domestic and foreign corruption. The implementation of the Act fulfils the Canadian Government’s earlier vow to adopt the G8’s “Publish What You Pay” initiative, and is consistent with regimes recently instituted in the EU and UK. Similar regulations are expected to be instituted in the U.S., possibly this year.
Canadian resource companies must adopt, implement, and monitor the effectiveness of their compliance policies to ensure that the Act’s reporting requirements are strictly followed. Such policies should work in concert with existing corporate accounting, audit, and IT policies as well as policies designed to ensure compliance with Canada’s Corruption of Foreign Public Officials Act and other applicable anti-bribery laws.
The firm is recognized as a leader in this area, with extensive on-the-ground experience creating and implementing business integrity programs for the resource sector, including disclosure and reporting policies, internal investigations and regulatory defence. Contact our White Collar Defence and Investigations or Energy groups for practical advice on compliance with these important measures.