By Baker & McKenzie | November 19th, 2014
By Greg McNab and Marcus Hinkley
During the G8 conference held in Northern Ireland in June 2013, Canadian Prime Minister, Stephen Harper, announced that Canada would adopt tougher reporting standards to encourage greater transparency in the energy and mining sectors. On October 23, 2014, the Canadian government delivered on its promise and introduced legislation to enact the Extractive Sector Transparency Measures Act (the “Act”). The Act mandates mining and oil & gas companies to disclose public payments made for the purpose of commercial development of oil, gas and minerals, and takes positive steps towards tackling domestic and foreign corruption in line with international commitments.
As anticipated in our earlier alert, the Act incorporates ideas from foreign jurisdictions as well as recommendations from domestic stakeholders such as the Resource Revenue Transparency Working Group.
1. Does the Act apply to my company?
In general, an entity that is engaged in the commercial development of oil, gas or minerals anywhere in the world is covered under the Act, if the entity is:
a. listed on a Canadian stock exchange (such as the Toronto Stock Exchange); or
b. 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:
i. it has at least CAD$20 million in assets;
ii. it has generated at least $40 million in revenue; or
iii. it employs an average of at least 250 employees.
This also captures corporations, trusts, partnerships or other unincorporated entities that control entities that are engaged in the commercial development of oil, gas or minerals. It is important to note that foreign entities with significant Canadian operations will also be captured by the Act.
It has been reported that Canada is working closely with legislators in the EU and US in order to harmonize the requirements under the Act with upcoming legislation in those jurisdictions. This includes the prospect of a common reporting template and/or mutual recognition of compliance in order to minimize the burden of compliance across multiple jurisdictions - welcome news for domestic and foreign companies( “Companies”) listed or operating in more than one jurisdiction.
2. What does the new Act require my company to disclose?
Companies will have 150 days after their financial year-end to file a report with the applicable Minister that outlines any payments of at least CAD$100,000 (or such amount dictated by regulation) made directly or indirectly to a single public body (including domestic and foreign governments, or entity that performs a governmental function), whether monetary or in kind, during the previous year. The definition of what constitutes a payment under the Act is broad, and includes taxes, royalties, licensing or regulatory fees, production entitlements, dividends (other than dividends paid to ordinary shareholders), infrastructure payments and any other prescribed type of payment.
Although the exact requirements in relation to the level of detail to be included in the report are unknown, it is expected that Companies will be required to provide detailed and thorough information within the reports. The report, and information included within it, must also be made available to the public in a manner to be specified by the Minister for a period of five years.
The Act also requires payments to aboriginal groups to be reported, but this aspect of the Act will be postponed for two years to allow for further refinement of the provisions.
3. What consequences are there for non-compliance?
The Act provides powers for the Canadian government to request a wide variety of information from a Company for verification purposes, and to designate persons to enter a place in which there are reasonable grounds to believe there is anything to which the Act applies (similar to the audit powers enjoyed by the Canada Revenue Agency).
Non-compliance under the Act can result in a fine of up to CAD$250,000, and the Company as well as the officers, directors and agents can be found liable for any breaches of the reporting requirements, including providing false information. There is, however, a due-diligence defence to any potential breaches of the reporting requirements - highlighting the importance of having a robust compliance program in place that catches activities accurately in multiple jurisdictions.
4. Practical tips to prepare
The Act builds upon the recent strengthening of anti-corruption law in Canada under the Corruption of Foreign Public Officials Act. While it is unclear exactly what level of disclosure the report will require, how the report is to be made public, and when exactly the provisions of the Act are to come into force, we do know that in his G8 address back in June 2013, Stephen Harper committed to having a reporting framework in place by June 2015. Therefore, entities covered by the Act have less than a year to prepare for the increased burdens implemented by the Act. and depending on when Companies have their financial year-end date, could result in having to provide a compliant report in a short period of time.
In order to ensure that you are prepared for the new disclosure regime your company may wish to:
- review the compliance program currently in place in your organization to ensure that effective anti-corruption policies, procedures and reporting mechanisms are in place;
- begin keeping records of payments that may trigger the CAD$100,000 threshold;
- review current agreements and licenses to ensure that reporting under the Act will not violate contractual or statutory confidentiality requirements; and
- become familiar with the requirements of the Act generally.
As global attitudes toward anti-corruption begin to change, and legislators introduce increasingly more stringent regimes to combat it, it is important to adopt a pro-active approach rather than a reactive one to increased regulatory scrutiny. Ensuring that an effective anti-corruption regime is in place within the organization, and more importantly, ensuring that an anti-corruption mind-set is prevalent at all levels of management throughout the organization (whether it be in the head office in Toronto or on the mine site in Africa), can aid the transition into the new reporting requirements in Canada and abroad and help mitigate for any issue that may arise.
Baker & McKenzie has experience in complying with anti-corruption laws in jurisdictions around the world and can help guide your company adapt to the new requirements. Feel free to reach out should you have any questions.
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