The first full cycle of reporting government payments related to the extraction of oil, gas or minerals under Canada’s Extractive Sector Transparency Measures Act (ESTMA) was completed on May 30, 2017.
ESTMA brings Canada in line with mandatory reporting requirements in the European Union. Despite a high level of convergence in reporting approaches among industry participants, some challenges and uncertainties remain. Canada’s Department of Natural Resources is expected to review the results of the first reporting cycle and may provide further guidance later in 2017.
The Canadian government has expressed a commitment to become a leader in the fight against corruption and for Canadian companies involved in the extractive industries to act ethically abroad.1 ESTMA came into force on June 1, 2015, with reports due within 150 days of the end of the applicable financial year.
As of June 19, 2017, 646 companies had submitted a report under ESTMA that was published on the website of Canada’s Department of Natural Resources (NRCan), the department responsible for administering ESTMA. Of these companies, 355 are listed as submitting consolidated reports, and 34 are listed as submitting substitute reports prepared in accordance with the requirements of another jurisdiction’s equivalent reporting rules.2
History and Background
The history of ESTMA and the international movement promoting transparency laws and publication of government payments in the resource extraction sector can be traced back over 20 years and was originally focused on developing countries plagued with corruption and poverty. The Extractive Industries Transparency Initiative (EITI) was introduced in 2003 as a voluntary initiative under which countries and companies in the extractive sector voluntarily disclose payments to governments.3
In recent years, a number of countries have introduced legislation imposing mandatory reporting of certain payments to governments, the requirements of which largely follow EITI standards. Norway was one of the first countries to require disclosure of payments to governments, with reporting required for financial years starting January 1, 2014.4 The United Kingdom was the first European Union country to transpose the disclosure rules in EU Directive 2013/34/EU5 into domestic law with the Reports on Payments to Governments Regulations 2014.6
The U.S. Securities and Exchange Commission (SEC) introduced reporting rules in 2012 under the Dodd-Frank Act,7 but these rules were subsequently vacated by the US District Court for the District of Columbia.8 Replacement rules adopted by the SEC in 2016,9 and set for implementation in 2018 with the first reports due in 2019, were nullified by the US Congress and President Trump in early 2017.10 Similar proposed legislation in Australia, the Corporations Amendment (Publish What You Pay) Bill 2014 (Cth), lapsed in the Senate in 2016 and has not been re-introduced.11
The UK regulations required reporting for financial years starting January 1, 2015,12 and the first reports under the UK regulations were made available in 2016. Notably, unlike ESTMA, the UK regulations also require the reporting of payments made in relation to the logging of primary forests.13
Overview of ESTMA
The stated purpose of ESTMA 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.”14 ESTMA applies to entities listed on a stock exchange in Canada, and large private entities that have a place of business in Canada or assets in Canada, that are involved in the commercial development of oil, gas or minerals in Canada or abroad.15
Reporting under ESTMA is required for specified categories of payments made to governments (national, subnational or local) in Canada and abroad that relate to the commercial development of oil, gas or minerals (subject to a de minimis threshold).16 Reporting obligations for payments to Aboriginal governments within Canada were deferred until after June 1, 2017.17
Parent companies with subsidiaries required to report under ESTMA are permitted to file a consolidated report on their own behalf and on behalf of their subsidiaries.18 Companies are also permitted to submit a report prepared in accordance with the equivalent laws of an approved jurisdiction as a substitute for the report required under ESTMA.19
In Canada, an officer, director or independent auditor must attest to the accuracy of the report when submitted, including substitute reports initially filed in another jurisdiction.20 Punishment for offences under ESTMA are severe: reporting entities, as well as individual directors and officers, who are not in compliance with ESTMA may be fined up to C$250,000 per day, subject to a due diligence defence.21
Challenges and Lessons Learned
Despite the publication of a guidance document by NRCan and a series of country-wide workshops and seminars, industry participants have been grappling with uncertainty on the proper approach to certain challenges in reporting under ESTMA.
One of the largest concerns has been the treatment of government payments by operators of joint venture projects, and in particular, whether non-operators must report their proportionate share of payments to governments made by operators on their behalf. The majority of companies required to report under ESTMA appear to have taken the approach of having operators send out a letter to their joint venture partners confirming that they will be reporting all reportable payments they make to governments, while non-operators report all direct payments they make to governments. It is unclear whether the approach industry participants have converged on meets the “payment attribution rules” under ESTMA,22 especially for joint venture projects outside of Canada where operators may not be required to report under ESTMA.
In many areas there appear to be disparate approaches to reporting payments to various governmental bodies (along with other errors and discrepancies), which suggests that there is room for clarification and further guidance from NRCan in subsequent reporting cycles, and that industry will likely try to develop a consistent approach to the reporting standards.
NRCan is expected to review the reports that have been filed and the feedback received with a view to providing updated guidance in the fall or winter of 2017.23
1 Global Affairs Canada, Doing Business the Canadian Way: A Strategy to Advance Corporate Social Responsibility in Canada’s Extractive Sector Abroad (2014) online: http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/other-autre/csr-strat-rse.aspx?lang=eng
2 see Natural Resources Canada, “Links to ESTMA reports” online: http://www.nrcan.gc.ca/mining-materials/estma/18198
3 EITI International Secretariat, The EITI Standard (Oslo: EITI International Secretariat, 2016) online: https://eiti.org/sites/default/files/documents/english-eiti-standard_0.pdf
4 see Statoil ASA, 2014 Payments to Governments (Stavanger: Statoil, 2015) online: https://www.statoil.com/content/dam/statoil/documents/annual-reports/2014/statoil-payments-to-governments-2014.pdf
5 EC, Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC,  OJ, L 182/19 at 52.
6 The Reports on Payments to Governments Regulations 2014, SI 2014/3209 [UK regulations].
7 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub L 111-203, 124 Stat 1376 (2010).
8 American Petroleum Institute et al v Securities and Exchange Commission, 5 F Supp (2d) 953 (DC 2013).
9 Disclosure of payments made by resource extraction issuers, 17 CFR § 240.13q-1 (2016).
10 US, HRJ Res 41, Providing for congressional disapproval under chapter 8 of title 5, United States Code, of a rule submitted by the Securities and Exchange Commission relating to “Disclosure of Payments by Resource Extraction Issuers”, 115th Cong, 2017 (enacted).
11 see Parliament of Australia, “Corporations Amendment (Publish What You Pay) Bill 2014” online: http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=s981
12 UK regulations, supra note vii at s 3.
13 Ibid, at s 2 “relevant activities”.
14 ESTMA, supra note ii at s 6.
15 Ibid, at s 8.
16 Ibid, at ss 2 “payment”, 9(2).
17 Ibid, at s 29.
18 Ibid, at s 11.
19 Ibid, at s 10.
20 Ibid, at s 9(4).
21 Ibid, at ss 24-26.
22 Ibid, at s 3(d).
23 A “FAQs” resource on ESTMA and related compliance matters is available on the NRCan website at http://www.nrcan.gc.ca/node/18802/.