Promise Delivered, Details to Follow...

by Dentons
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[co-author: Cory Sterling - Summer Student]

The Extractive Sector Transparency Measures Act (the Act) was proclaimed in force by the Government of Canada on June 1, 2015. As a result, Canada has joined the ranks of the EU, UK and US in promoting transparency and accountability in the extractive sector. The Act, a surprisingly swift response to promises made by Prime Minister Stephen Harper at the 2013 G8 Summit, establishes new mandatory reporting standards for exploration and commercial companies that develop oil, gas or minerals. The Act is intended to deter and detect corruption by implementing rigorous and transparent public reporting obligations. While the Act sets out the reporting framework, a reporting template and guidance documents will provide further compliance instructions once they are made available. Until these details are published, companies are left with an incomplete understanding of the full requirements of the Act.

The Act requires entities engaged in the extractive sector to report annually on cumulative payments of CA$100,000 or more made to a governmental “payee”, either domestic or foreign, for work done in the development of oil, natural gas or minerals, either in Canada or abroad. Similar to EU and US legislation, the list of payees in the Act includes boards, commissions, corporations, trusts and other bodies or authorities that perform a function of government. While the definition of “government” has yet to be prescribed, it is understood that the scope will extend to governments at the subnational and local levels.

An extractive enterprise, including a subsidiary of a multinational company, will be required to report payments, whether monetary or in kind, to a government if the enterprise:

  1. is listed on a stock exchange in Canada; or
  2. has a place of business, operates or holds assets in Canada and meets two of the following criteria for at least one of its two most recent financial years:
    1. having at least CA$20 million in assets;
    2. generating at least CA$40 million in revenue;
    3. employing an average of 250 employees.

Payments must be reported on a project basis. The term “payment” is broadly defined to include taxes, royalties, fees (including rental, entry, licenses and permits), production entitlements, bonuses, dividends and infrastructure improvements.

At this time, there is limited guidance as to how reports should be made publicly available. It is known that reporting entities will be allowed to post reports on their corporate website. If an entity does not have a corporate website, it is anticipated that the federal government will specify an alternative approach to making the report accessible to the public. Reports will also have to be filed with the federal government.

The Act has set the reporting deadline at 150 days following a company’s financial year-end. Reporting will not be required until a company has completed one full financial year after June 1, 2015. For example, if a company caught by the Act has December 31, 2015 as its financial year-end, it will need to track all payments to governments within the various prescribed categories during 2016 and file its report by May 30, 2017. Note that the Act does not require the reporting of payments made to an Aboriginal government or entity in Canada during the first two years that the Act is in force. As a result, the reporting of such payments made prior to June 1, 2017 will not be required.

The penalties for not complying with the Act can be significant, with both robust fines and criminal sanctions contemplated. Culpability extends to officers and directors who contribute to a commission of an offence, although a defence exists for those who can show they exercised due diligence to prevent an infraction.

While the Act is now in force, much of the extractive sector is waiting with bated breath for the reporting template and guidance documents to be published. These are expected to address the required method of reporting, the definition of “government”, and direction surrounding other gaps in the legislative scheme. Until then, extractive enterprises should plan to record payments that may be reportable, and watch this space for further updates.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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