On October 23, 2014, the Government of Canada introduced its Extractive Sector Transparency Measures Act1 (the Bill), which will impose mandatory reporting requirements for each entity engaged in the "commercial development of oil, gas or minerals" (exploration, extraction, or having permits to do so) in Canada or elsewhere or that controls an entity that is so engaged. Introduced as part of the omnibus Bill C-43, the Bill represents a significant step in the Government's commitment to establish mandatory reporting standards for the extractive sector by June 2015, "with a view to enhancing transparency on the payments they make to governments".2 The purpose of the Bill is to implement Canada's international commitments to participate and engage in the fight against corruption in the extractive sector.
The initiative is part of a larger global trend championing greater transparency and accountability within extractive industries. In the United States, the Securities and Exchange Commission is developing mandatory reporting requirements for the extractive sector pursuant to section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.3 The European Union has also set about establishing requirements through its Accounting and Transparency Directives.4 In implementing them, the United Kingdom announced in August 2014 that it will require extractive companies to publicly disclose the payments they make to governments commencing on or after January 1, 2015.5
The Bill will require certain entities to file a report disclosing payments made by them or their subsidiaries to any Canadian or foreign government totalling at least $100,000 (or other prescribed amount) for certain listed categories of payments. Each such entity will be required to file a report annually not later than 150 days after the end of its fiscal year.
Notably, payments made to Aboriginal governments in Canada will be exempt for a period of two years from the date that the legislation comes into force. This delay will allow an opportunity for the Government to engage in further consultation as to whether such payments should be captured by the legislation.
In anticipation of enactment of the Bill, domestic and foreign entities exploring for or extracting oil, gas or minerals directly or through their subsidiaries and having a nexus with Canada should examine whether the rules apply to it. If so, they should prepare to comply, as the legislation could be in effect as early as April 1, 2015.
The requirement to report will apply to entities (a) listed on Canadian stock exchanges, or (b) having a place of business in Canada, that conduct business in Canada or have assets in Canada and that, based on their consolidated financial statements, meet any two of the following three conditions: (i) have at least $20 million in assets; (ii) generate at least $40 million in annual revenue; and (iii) employ an average of at least 250 employees.
In addition, a payment made by an entity that is not captured by the reporting requirements of the Bill (because it does not meet the test set out immediately above) that is controlled by another entity, will be deemed to have been made by the controlling entity. The intended effect appears to be to include a corporate family's collective payments in assessing whether the applicable dollar payment threshold has been exceeded.
The Bill also provides for consolidated reporting in instances involving wholly owned subsidiaries. In particular, where an entity and any wholly owned subsidiary of the entity are captured by the Bill's requirements, the subsidiary will be deemed to have provided a report if: (a) the entity provides the Minister with a report that contains information relating to payments made by the subsidiary during the subsidiary's financial year; (b) not later than 150 days after the end of its financial year, the subsidiary gives written notice to the Minister that the parent entity will be providing the report; and (c) the subsidiary provides the Minister with a report disclosing any payments it has made during its financial year that are not covered by the report provided by the parent entity.
The Bill requires entities to report all payments (whether monetary or in-kind) totalling $100,000 (or other prescribed amount) or more made to any government in Canada or in a foreign state, body established by two or more governments, or body established to perform a governmental function. The following are the categories of payments that must be reported:
Reporting under the Bill is not required if payments within each category do not meet or exceed the $100,000 threshold (or other prescribed amount) even if the combined total of all payments across all categories exceeds $100,000 (or other prescribed amount).
The responsible Minister, who has yet to be designated in the regulations, may specify the form and manner of reporting, which may include the requirement to report on a project-level basis. Although the Bill does not provide a definition of project, a consultation paper published by the Government this past spring defines a project as "an operational activity performed by an extractive entity, the parameters of which are defined by the entity according to its particular industry and business context (e.g., an oil field, individual well, mining site, etc.)".6
The Bill specifies that every entity must, within 150 days of the end of each financial year, provide the Minister with a report disclosing the payments that it made or is deemed to have made during that year. The report must include an attestation by a director or officer of the entity, or an independent auditor or accountant, indicating that the information in the report is true, accurate and complete.
Entities will be required to make any information required by the regulations available to the public or, if no such regulation is made, to make the report and any other information disclosed available to the public. The report and information will need to be available to the public for five years (or other prescribed period). The Bill also imposes obligations on entities to maintain records of payments, which are to be kept for seven years (or other prescribed period) beginning on the day on which the entity discloses its report.
The Bill contemplates the acceptance of reports prepared in accordance with commensurate reporting requirements of other jurisdictions. Specifically, the Bill provides the Minister with the discretion to consider and determine whether the reporting requirements of another jurisdiction are an acceptable substitute for those contained within the Bill. Should the Minister determine that the reporting requirements of another jurisdiction are an acceptable substitute, an entity will be deemed to have provided a report if it: (a) provides the report required by the foreign jurisdiction to its competent authority; (b) provides a copy of that report to the Minister within the period prescribed by the foreign jurisdiction's reporting requirements; and (c) complies with any other conditions imposed by the Minister.
The Minister will designate persons to administer and enforce the legislation, and a broad range of investigative powers are given to such designated persons. The Bill also grants the Minister authority to issue orders to verify an entity's compliance with the Bill. Pursuant to such an order, an entity may, among other things, be required to: (a) list its projects; (b) explain how certain payments were treated for the purpose of preparing its report; (c) disclose policies it implemented for the purpose of compliance; and (d) provide the Minister with the results of an audit of its report or the records of payments made for the financial year to which the report relates. Such audits are to be carried out by an independent auditor in accordance with the generally accepted auditing standards specified in the order.
If, on the basis of information from the entity and from any investigation made under the legislation, the Minister is of the opinion that an entity is not in compliance, the Minister has discretion to require the entity to take measures the Minister considers necessary to ensure compliance with the Bill.
Failure to comply with the requirements of the Bill will be subject to potentially significant sanctions. Specifically, failure to report, make reports and information available to the public, and keep records, all as required, will constitute offences under the legislation. It will also be an offence to (a) knowingly make any false or misleading statements or (b) structure payments with the intention of avoiding the reporting requirements. An entity or person who contravenes such requirements will be guilty of an offence punishable on summary conviction and liable to a fine not exceeding $250,000. Furthermore, if an offence under the Bill is committed or continued on more than one day, it will constitute a separate offence for each day on which the offence is committed or continued. Finally, officers and directors of an entity who direct, authorize, assent to, acquiesce or participate in the commission of such an offence will be considered guilty and liable to the punishment provided for the offence. However, under the Bill, a person or entity will not be found guilty if they establish that they exercised due diligence to prevent the commission of the offence.
Bill C-43 is expected to proceed to second reading in the House of Commons and ultimately become law, potentially with some adjustments, and be supplemented by substantive regulations. The Government has committed to having the legislation in place by June 2015. It has consulted with industry,7 and a recent news release by the federal Minister of Natural Resources reported that provincial ministers had indicated at a meeting their broad support for the principles on which the Bill is based.8