Introduction to Extractive Sector Transparency Measures Act (ESTMA)
On December 16, 2014, the Government of Canada passed an Extractive Sector Transparency Measures Act (ESTMA) setting out new rules regarding the disclosure of payments to foreign and domestic governments. The purpose is to enhance transparency among participants in the extractive industry as part of Canada’s international commitments to participate in the fight against corruption. The Act is seen as an anti-corruption measure and became effective on June 1, 2015. The oversight of compliance with the Act is the responsibility of Natural Resources Canada (NRCan). The following are key elements of this Act:
Reporting entities. Reporting entity under ESTMA is defined as a corporation or a trust, partnership or other unincorporated organization that is engaged in the Commercial Development of oil, gas or minerals in Canada or elsewhere; or controls such an entity. A Canadian corporation will need to report payments made by either Canadian or foreign entities it controls. The definition of control used for the purposes of the Act stems from the guidance of International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (US GAAP).
Payees. Payees include governments at all levels and also include crown corporations and other state-owned enterprises that are exercising or performing a power, duty or function of government. Those include departments, ministries, trusts, state corporations, bodies and other authorities. The term “payee” includes any foreign or domestic government, as well as any state-owned enterprise or other authority that is established to exercise a power, duty or function on behalf of a government. Furthermore, the Act specifically states that any payment made to an employee or public office holder of a government (including relevant state-owned enterprises) will be deemed to have been made to a government, and must be reported accordingly. For the Company, one of the challenges will be to identify each “authority that is established to exercise a power, duty or function on behalf of the government”. It should be noted that ESTMA does not apply to payments made to Aboriginal governments in Canada for the first two years during which the legislation is in force.
Payments Threshold. “payment” means a payment — whether monetary or in kind— that is made to a payee in relation to the commercial development of oil, gas or minerals and that falls within any of the
following categories of payment: (a) taxes, other than consumption taxes and personal income taxes; (b) royalties; (c) fees, including rental fees, entry fees and regulatory charges as well as fees or other
consideration for licences, permits or concessions; (d) production entitlements; (e) bonuses, including signature, discovery and production bonuses; (f) ordinary shareholders; (g) infrastructure improvement payments; or (h) any other prescribed category of payment. ESTMA requires disclosure of payments by a reporting entity to the same payee that meet or exceed CAD 100,000 in a single category. Substance rather than the form should be considered in determining which category is applicable. For example, charity corporate social responsibility payments are to be analyzed for potential relation to the reporting entity’s commercial activities.
Types of Payments. Only taxes related to Commercial Development are within the scope. Taxes exempt from reporting under the Act include indirect taxes (GST, fuel taxes, etc.). Among other payment types reportable under the Act are royalties; production entitlements; bonuses; dividends paid to government and infrastructure improvement payments. Any in-kind payments are to be assigned a monetary value and reported. Payments are to be reported by “project”. If payments cannot be attributed to a specific commercial project they may be included into the report as “not allocated to any project”.
Reporting Timeline and Attestation. Payments made during the course of each financial year are to be reported within 150 days of the end of that year and the report must be accompanied by an attestation made by a director or officer of the entity or by an independent auditor, certifying that the report is true, accurate and complete. The report must also be “made available to the public”. As noted above the Act is in effect for the annual period starting from June 1, 2015 – therefore, for example, for the corporation with the financial year ending June 30, the first reporting year will be the year ending June 30, 2016 and the deadline would be November 2016 while for the entities with the reporting year ending December 31, the first reporting year will be year ending December 31, 2016 and, hence, deadline for the submission of the report will be end of May, 2017. The report must be prepared on Cash basis accounting as opposed to Accrual basis.
The suggested wording of the report is as follows:
In accordance with the requirements of the extractive Sector Transparency Measures Act, and in Particular, section 9 thereof, I have reviewed the information contained in the report for the entity(ies) listed above. Based on my knowledge, and having exercised reasonable diligence, the information in the report is true, accurate and complete in all material respects for the purposes of the Act, as of the date indicated below.
We would expect that the following processes and procedures are to be implemented within the reporting entity for the director or officer to be able to exercise “reasonable diligence”:
- Effective internal controls similar to those required for a public company reporting its financial results;
- Audit, either internal or independent, of the financial information to be submitted and documenting the results of such audit.
Even though the independent auditor attestation is not mandatory, in cases when the company voluntarily involves independent accountant the report will be in the form of an audit report performed in accordance with Canadian Auditing Standards on compliance with the Act.
An entity must keep records of its 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.
The Act contains a number of offenses, including an offense for a failing to comply with the obligation to fully disclose all relevant payments in a filed report. All offenses are punishable on summary conviction with a maximum fine of $250,000. However, for every day that the offending conduct continues a new offense is committed with the corresponding liability for a fine. Entities could therefore find liability compounding on a daily basis and could face potentially significant cumulative penalties.
The Act also provides that any officer, director, agent who directed, authorized, assented to, acquiesced in or participated in the commission of the offense is also guilty of an offense, and liable for the same fine. This provision, taken in conjunction with the requirement for attestation by a director or officer of the company (assuming one cannot find a willing auditor), creates very real direct risks for senior management of extractive sector companies.
The Act does provide that “no person or entity is to be found guilty if they establish that they exercised due diligence to prevent its commission”. This “due diligence” defense is potentially highly significant and a powerful incentive for extractive companies to ensure that they have the necessary policies and procedures to detect and record payments to foreign and domestic governments and to ensure their employees understand the importance of compliance with the Act.
