A Report Card on Canada's New Extractive Sector Transparency Measures Act

Canada has committed to becoming a leader in the international movement to promote ethical business practices and fight corruption. At the 2013 G8 leaders’ summit in Northern Ireland, Canada announced that it would take action to enhance the transparency of payments to governments made by Canadian extractive companies by introducing mandatory reporting. The resulting legislation, the Extractive Sector Transparency Measures Act (ESTMA), came into force on June 1, 2015.

With all companies subject to ESTMA now having been required to submit their first report of government payments related to the extraction of oil, gas or minerals, the federal Department of Natural Resources (NRCan), which is responsible for administering ESTMA, is now analyzing the first reporting cycle with an eye to increasing uniformity in reporting and to address feedback from stakeholders regarding reporting challenges and uncertainties. NRCan is expected to provide updated guidance in early 2018.

As of November 14, 2017, NRCan’s website had published reports from a total of 729 companies. Of these companies, 421 are listed as submitting consolidated reports and 51 as submitting substitute reports that have been prepared under another jurisdiction’s equivalent reporting rules.

International Transparency Movement

While the international movement promoting the disclosure of government payments in the resource extraction sector goes back over 20 years, the Extractive Industries Transparency Initiative (EITI) first launched as a voluntary program in 2003. Under the initiative, countries and companies in the extractive sector voluntarily disclose payments.

In the years since EITI was introduced, a number of jurisdictions have enacted legislation requiring reporting of certain payments to governments. Norway first required disclosure of payments to governments starting January 1, 2014, and the United Kingdom was the first in the European Union to implement the disclosure rules in the EU’s Accounting and Transparency Directive starting January 1, 2015. Notably, unlike ESTMA, the EU disclosure rules also apply to the logging of primary forests.

While the U.S. Securities and Exchange Commission (SEC) first introduced reporting rules in 2012, they were vacated by a U.S. District Court shortly afterward, and replacement rules subsequently adopted by the SEC in 2016 were nullified by Congress and President Donald Trump early this year. A bill for equivalent legislation in Australia lapsed in 2016 and has not been reintroduced.

Overview of ESTMA

ESTMA requires that entities listed on a stock exchange in Canada—as well as large private entities with 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—prepare and publish annual reports disclosing certain specified categories of payments to governments (subject to a de minimis threshold). In Canada, an officer, director or independent auditor must attest to the accuracy of all reports submitted to NRCan, including consolidated and substituted reports. Entities, as well as individual directors and officers, who violate ESTMA may be fined up to $250,000 per day, subject to a due diligence defence.

Quebec has adopted equivalent legislation that applies to entities listed on a stock exchange in Canada with their head office in Quebec and large private entities with an establishment in Quebec or with activities or assets in the province. Reports prepared under ESTMA have been specified in the regulations as acceptable substitutes.

Initial Challenges

During the first cycle of reporting under ESTMA, the treatment of joint ventures manifested as one of the most prominent compliance challenges. In particular, the reporting obligation of non-operators has been debated between industry and regulators in Canada and abroad. A large number of entities have taken the view that operators will report the government payments they make for the joint venture, with non-operators reporting only payments they make directly.

This approach is generally acceptable when the operator is a reporting entity under ESTMA. However, in situations where the operator is not a reporting entity, NRCan maintains that the “payment attribution rules” under ESTMA require non-operators to report payments made on their behalf by a non-reporting operator. Companies are challenged by this interpretation when they are parties to multiple joint ventures and may not readily know whether each operating partner is a reporting entity under ESTMA, and because the payment information is often not readily available to non-operators.

NRCan has recommended that, in those circumstances where an operator is not reporting under ESTMA, non-operators (1) do their best to get the required information to complete their ESTMA reports and consider amending joint venture agreements to expressly address these information rights; and (2) document their efforts and compliance challenges if they are not able to access information in these situations.

In addition, questions have arisen over the meaning of “control,” the scope of what constitutes a government payee, the treatment and valuation of social or community payments, and the delineation of projects for the purposes of ESTMA reporting. With payments to Indigenous governments in Canada becoming reportable from June 1, 2017, addressing uncertainty with the treatment of community payments and impact and benefit agreements is expected to take on greater urgency in the coming year.

Next Steps

NRCan is targeting to provide updated guidance in early 2018, which will include additional commentary regarding areas of uncertainty and more examples of common reporting situations. The department is also expected to hold additional stakeholder meetings.

The use of data from ESTMA reports is still in its infancy, but the coming years will reveal the manner in which communities, stakeholders, civil society groups and journalists focus on and utilize this information. Organizations such as Publish What You Pay are already starting to raise questions regarding the whereabouts of certain government payments in emerging markets.

We would also expect that companies will become more sophisticated about the manner in which they present this information in their reports and other disclosure documents, potentially coming to view it as a competitive factor in their sector and in markets where they operate.


This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc., on November 28, 2017.

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