Canada's Extractive Sector Transparency Measures Act - Corporate and Company Law

Introduction

On October 23, 2014, the Canadian Government introduced Bill C-43, the Extractive Sector Transparency Measures Act (the "Act"). The purpose of the Act is to implement Canada's international commitments to participate in the fight against corruption through the implementation of measures applicable to the extractive sector, including measures that enhance transparency and measures that impose reporting obligations with respect to payments made by entities involved in the extractive sector. The reporting requirements of the Act were designed to closely mirror those of its EU and US¹counterparts in order to reduce the administrative expense incurred by entities operating in multiple jurisdictions.

There are some obvious differences between the requirements of the Act and its US counterpart. Unlike in the US, the Act will apply to: (i) private entities that meet certain tests (discussed further below); and (ii) payments made to aboriginal governments (in Canada). However, due to a lack of consultation by the federal government, and a variety of other concerns expressed by aboriginal communities and others, the requirement to report payments to aboriginal governments in Canada will be delayed for two years after the coming into force of the Act to allow for further discussion. ²Details of these reporting requirements are expected to be announced in 2015.

The Act received Royal Assent on December 16, 2014 and is expected to come into force by June 2015. Draft regulations under the Act are expected to be introduced in early 2015. Once in force, no entity subject to the Act will be required to comply with the reporting obligations, public disclosure obligations or record keeping obligations of the Act with respect to: (i) the financial year in progress on the day the Act comes into force; and (ii) for any previous financial year.

Who is subject to the Act?

The Act's reporting obligations apply very broadly and include entities listed on a Canadian stock exchange and private entities (of a certain size) with a Canadian business or assets in Canada, irrespective of their jurisdiction of incorporation or formation, and in respect of their world-wide operations as well. Specifically, the Act applies to:

any corporation or trust, partnership or unincorporated organization that is engaged in, or controls any corporation or trust, partnership or unincorporated organization that is engaged in;

the commercial development of oil, gas or minerals in Canada or elsewhere, which the Act defines as (i) the exploration or extraction of oil, gas or minerals, (ii) the acquisition or holding of a permit, license, lease or any other authorization to carry out the exploration or extraction of oil, gas or minerals, or (iii) any other prescribed activities in relation to oil, gas or minerals; and
who satisfy one of the following requirements:
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, based on its consolidated financial statements, meets at least two of the following conditions in one of its two most recent financial years:
- 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 an entity that is prescribed by regulation as being subject to the Act.

Although the Act does not define "exploration" or "extraction", definitions of those and other terms may be provided in the forthcoming regulations. As such, whether a particular entity is engaged in the commercial development of oil, gas or minerals is somewhat ambiguous at this time, particularly in the case of service companies providing services to "exploration" companies. However, we do not believe that the Act is intended to capture activities that are ancillary or preparatory to such commercial development. This view is consistent with certain guidance published by UK and US authorities on their legislation.³Given the objective of achieving symmetry between the Act and its foreign counterparts of our largest trading partners, this is some indication that service companies will not face reporting requirements under the Act.

However, as noted above, it remains open for the Minister to extend the Act's reporting requirements through regulation to: (i) other entities; and/or (ii) any activity conducted in relation to oil, gas or minerals. Although we consider it unlikely that the forthcoming regulations will make service companies subject to the Act or go beyond upstream activities, we will not know for certain until they are introduced. When those regulations are introduced, service companies will need to determine:

whether their services are limited to services only (i.e., that there is no ownership and development of oil and gas properties by the service company or acquisition or holding by the service company of a permit, license, lease or any other authorization to carry out the exploration or extraction of oil and gas); and
the extent to which they are making "payments" to a government on behalf of entities who are subject to the Act. If they are making such payments on behalf of their clients, then such service companies will likely need to track such payments to facilitate their customers' reporting obligations under the Act. Suppliers other than extractive service companies (e.g., law firms) will also need to mindful of the need to track payments made to governments on behalf of their clients who are subject to the Act.

What must be disclosed?

The Act requires disclosure:

of payments, whether monetary or in-kind,⁴ made by, or on behalf of, an entity subject to the Act;⁵
to:
- any government in Canada or in a foreign state;
- a body that is established by two or more governments;
- any trust, board, commission, corporation or body or authority that is established to exercise or perform, or that exercises or performs, a power, duty or function of government for any government in Canada or in a foreign state or a body that is established by two or more governments;⁶or
- any other payee prescribed by regulations (collectively, a "payee" for the purposes of the Act); ⁷

in relation to the commercial development of oil, gas or minerals;
that falls within any of the following categories of payment: o taxes, other than consumption taxes and personal income taxes;
- royalties;
- 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 (e.g., building roads on Crown lands); or
- any other category of payment prescribed by regulation; and

to the extent the total amount of payments within a category of payment made to the same payee during the financial year is at least the amount prescribed by regulation for the category of payment, or, if no amount is prescribed by category, $100,000.

How must it be disclosed?

The disclosure must be contained in a report provided to the responsible Minister. The form of report to be provided to the Minister is not specified by the Act. However, the Act provides that the Minister may specify the way in which payments are to be organized or broken down in the report, including on a project basis, and the form and manner in which a report is to be provided. It is possible that the form of reporting will be specified in the regulations. Regardless of the form requirements, the report must include an attestation made by a director or officer of the entity, or an independent auditor or accountant, that the information in the report is true, accurate and complete.

In addition to providing a report to the responsible Minister, an entity subject to the Act must, simultaneous with the provision of the report, make any information required by the regulations available to the public. In the absence of regulations specifying the information to be made available to the public, the report and any other information provided to the responsible Minister (in the form provided) must be made available to the public.

When must it be disclosed?

An entity subject to the Act must provide the report to the responsible Minister (and make the report available to the public) not later than 150 days after the end of each of its financial years. As noted above, the Act will not apply to the financial year in progress on the day the Act comes into force or for any previous financial year. Assuming the Act's reporting obligations come into force in 2015, entities subject to the Act with a December 31 financial year-end will be required to provide their first report for their 2016 financial year not later than June 14, 2017.

Are there any other material obligations?

In addition to the reporting and public disclosure obligations, the Act also requires entities to keep records of their payments made in a financial year for a prescribed period or, if no period is prescribed, for a seven-year period that begins on the day on which the entity provides the report.

Are there any exemptions from the requirements of the Act?

Other than the ability to provide substitute reports as discussed below, there are no exemptions from the requirements of the Act. Specifically, there is no exemption for disclosures that would violate local laws or the terms of an agreement to which an entity or its subsidiaries or affiliates is subject or is a party.

As discussed above, the Act recognizes that entities operating in multiple jurisdictions may be subject to similar obligations of other jurisdictions in which case substitute reports may be provided in compliance with the Act. Specifically, if, in the Minister's opinion, and taking into account any additional conditions that he or she may impose, the payment reporting requirements of another jurisdiction achieve the purposes of the reporting requirements under the Act, the Minister may determine that the requirements of the other jurisdiction are an acceptable substitute for those set out in the Act. The Minister's determination must be set out in writing and made available to the public.

As far we are aware, the EU counterpart legislation contains similar substitution provisions but the US counterpart does not. As such, entities operating in the US must still comply with the US requirements which may or may not be determined to satisfy the Canadian requirements. It they do, then entities may choose to provide US compliant reporting only. Entities subject to the Canadian and EU requirements, will need to assess which requirements to comply with (assuming the Minister deems the EU requirements to be an acceptable substitute). If substitution is possible, then entities will be in compliance with the Act if the entity:

provides the report required by the jurisdiction to the jurisdiction's competent authority;
provides a copy of that report to the Minister, in the form and manner that he or she specifies, within any period specified in the jurisdiction's reporting requirements for providing the report to the competent authority; and
meets any other conditions imposed by the Minister.

There is no similar exemption from the requirements of the Act relating to record keeping or public disclosure requirements.

What are the consequences of failing to comply with the Act?

Non-compliance with the Act attracts significant penalties for entities subject to the Act and potential personal liability for their directors, officers and agents. Under the Act, every person or entity that fails to comply with the requirements relating to reporting, public disclosure or record keeping or orders issued by the responsible Minister is guilty of an offence punishable on summary conviction and liable to a fine of not more than $250,000. However, no person or entity will be found guilty of this offence if they establish that they exercised due diligence to prevent its commission. This defence creates a strong incentive to design and implement systems and controls to promote compliance with the Act. There is no similar due diligence defence available for any of the offences described below.

The Act also contains offences relating to providing false or misleading statements or information and engaging in certain avoidance transactions. Specifically, every person or entity that knowingly makes any false or misleading statement or knowingly provides false or misleading information, including with respect to the category of payment in respect of which a payment was made, to the Minister or a person designated under the Act is guilty of an offence punishable on summary conviction and liable to a fine of not more than $250,000.

As regards avoidance transactions, every entity is guilty of an offence punishable on summary conviction and liable to a fine of not more than $250,000 if it structures any payments, or any other financial obligations or gifts, whether monetary or in kind, that relate to its commercial development of oil, gas or minerals, with the intention of avoiding the requirement to report those payments, obligations or gifts in accordance with the Act.

If any of the offences described above are committed or continued on more than one day, it constitutes a separate offence for each day on which the offence is committed or continued. Accordingly, the potential quantum of the fine increases each day that a non-compliant report or disclosure is not corrected. There is no overall cap on the amount of the fine for multiple offences.

The Act provides for personal liability for the entity's directors, officers and agents as well. Specifically, if a person or an entity commits an offence under the Act, any officer, director or agent of the person or entity who directed, authorized, assented to, acquiesced in or participated in its commission is a party to and guilty of the offence and liable on conviction to the punishment provided for the offence, whether or not the person or entity has been prosecuted or convicted.

What should you be doing to prepare for complying with the Act?

Although the Act is not yet in force, and the regulations have yet to be introduced, you may wish to begin taking the following steps given the broad reach of these upcoming requirements:

Personnel: Identify and designate appropriate personnel, offices and third parties for gathering the required information, report preparation and filing/disclosure of the report(s) and information.
Covered payments and recipients: Identify paying entities in your organization and governmental entities receiving payments, as well as persons who make covered payments on your behalf and receive such payments on behalf of covered governmental organizations. In that regard, we recommend you consider amending agreements (or entering into new arrangements) with your third party service providers who make covered payments on your behalf to require them to report such payments to facilitate reporting under the Act.
Systems and controls: Design and implement systems, controls and procedures for identifying and tracking covered payments, including in-kind payments (and valuation of such in-kind payments), that flow through to covered governmental organizations. In that regard, give consideration to retaining your auditor (or other independent accounting firm) to verify and/or audit the reports to help minimize the possibility of non-compliance and liability.
Amendments to existing policies and mandates: Review your existing policies and mandates and make necessary or recommended changes to promote compliance with the Act. In particular, we recommend you review your code of conduct, stand-alone anti-bribery and anti-corruption policies, procedures and guidelines and all policies and procedures regarding document retention and destruction in light of the record keeping requirements of the Act.
Conflicts: Analyze the extent of any conflicts between your reporting obligations under the Act and (i) local laws in which you operate and/or (ii) agreements to which you or your subsidiaries or affiliates are party to that restrict disclosure of the required information or require conditions to be satisfied prior to making such disclosure.
Substituted reports: To the extent you operate in multiple jurisdictions with similar reporting requirements, seek advice on those other reporting requirements to determine if providing substituted reports is an option for your organization. See "Are there any exemptions from the requirements of the Act?" above.
Board and committee agendas: Assuming the Act will come into force in 2015, adjust your board of directors and committee agendas for 2016 (and possibly 2015 for advance planning purposes) to specifically address the upcoming reporting and other requirements of the Act and timing for complying with such requirements.

We will provide updates on significant developments in this area as they occur.

Footnotes

1 On August 22, 2012, the U.S. Securities and Exchange Commission ("SEC") adopted rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), requiring extractive sector issuers to report payments to domestic and foreign governments. Shortly after the introduction of the rules, the American Petroleum Institute, in concert with other plaintiffs, launched a legal challenge of the rules. On July 2, 2013, the U.S District Court for the District of Columbia ordered that the SEC vacate its approval of, and reassess the rules. In coming to this order, the District Court determined that the SEC had erred by: (i) requiring public disclosure of the annual reports mandated by the rules when Dodd-Frank only required the SEC to compile these reports and make such compilations public as practicable; and (ii) making the decision to not provide exemptions for activities in countries where the disclosure of payments made to governments is illegal (i.e., Angola, Cameroon, China and Qatar). The SEC is expected to release a revised version of the rules by October 2015.

2 The concerns expressed by aboriginal communities and others largely concern confidentiality. More specifically, making public payments from extractive sector companies could lead the federal government to cut back public infrastructure and social service funding to aboriginal communities. Such disclosure could also diminish aboriginal communities' bargaining position in future negotiations with extractive sector companies.

3 United Kingdom, Department for Business Innovation & Skills, UK Implementation of the EU Accounting Directive, Chapter 10: Extractive Industries Reporting: Impact Assessment, (March 2014) at 20; Dodd-Frank Wall Street Reform and Consumer Protection Act Frequently Asked Questions: Disclosure of Payments by Resource Extraction Issuers, United States of America, Securities and Exchange Commission (30 May 2013).

4 The value of a payment in-kind is the cost to the entity, or, if the cost cannot be determined, the fair market value of the goods or services that it provided.

5 The Act contains several deeming rules relevant to payments made by or on behalf of entities subject to the Act. Specifically: (i) a payment that is made by an entity subject to the Act, other than one that is listed on a stock exchange in Canada, that is controlled by another entity subject to the Act is deemed to have been made by the controlling entity; and (ii) a payment that is made for an entity subject to the Act is deemed to have been made by the entity.

6 A payment that is made to these organizations is deemed to have been made to the government or body for which it is established to exercise or perform, or that for which it exercises or performs, a power, duty or function of government.

7 The Act contains several deeming rules relevant to payments made to governments. Specifically: (i) a payment that is made to an employee or public office holder of a payee is deemed to have been made to the payee; and (ii) a payment that is due to a payee and that is received by a body that is not a payee for the payee is deemed to have been made to the payee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Canada: Canada's Extractive Sector Transparency Measures Act