Northern Exposure: Anti-Corruption Law Exposes Payments to Governments Under Extractive Sector Transparency Measures Act (ESTMA)
May 11, 2017
The Extractive Sector Transparency Measures Act is one of several anti-bribery and anti-corruption laws aimed at fighting corruption in the extractive resource sector by requiring certain commercial developers of oil, gas or minerals, whether domestically or abroad, to report certain payments to government bodies – which effective June 1, 2017, includes payments to Indigenous or Aboriginal governments. And while the Act took effect on June 1, 2015, under its transitional provisions, reporting businesses with a December 31 year end must complete their first full-year report no later than May 30, 2017.
Here’s why the new reporting requirements exist, who must report and what, when and where they must report it.
Why are there new reporting requirements?
The purpose of the Act is to fight corruption in the extractive resource sector through increased financial transparency. To achieve this transparency, certain extractive resources developers are required to report specified payments they make to government authorities.
Who has to report?
The Act imposes reporting obligations on extractive businesses: corporations, trusts, partnerships and other unincorporated organizations engaged in the commercial development of oil, gas or minerals in Canada or abroad – as well as the entities that control such businesses – that either:
- Are listed on a stock exchange in Canada.
- Have a place of business in Canada, do business in Canada or have assets in Canada, and meet two of these three thresholds in at least one of its last two financial years: $20M in assets; $40M in revenue; 250 or more employees.
What must extractive businesses report?
Extractive businesses may have to report payments they make to a broad range of government bodies depending on the purpose of the payment and its amount. And beware: “creative” payment structuring won’t excuse them from their reporting obligations.
Government Payee. Since the Act’s purpose is to combat corruption, extractive businesses must account for their payments to a broad scope of government payees, including: any government in Canada or a foreign state; a body established by two or more governments; or an authority that performs a power, duty or function of such a government or body. And although reporting obligations didn’t apply to payments to Aboriginal governments for the first two years the Act was in force, they do apply to payments to Indigenous or Aboriginal (the term the Act uses) governments, such as under an Impact and Benefit Agreement, made on or after June 1, 2017. Thus reporting obligations apply to payments made to federal, provincial and state governments, and can also apply to other types of payees, including municipal and local governments, Crown corporations and Aboriginal governments. It’s crucial for the extractive business to clearly identify the government payee: where it makes separate, multiple payments to bodies representing or constituted by the same government, those payments are deemed to be made to a single government payee for purposes of the reporting threshold. The Government of Canada’s Extractive Sector Transparency Measures Act Guidance document gives this example (at page 12): separate payments to each of the National Energy Board, Natural Resources Canada and Environment Canada are deemed to be made to one government payee since they all represent the Canadian federal government.
Payments Category & Reporting Threshold. The Act creates reporting requirements in respect of the following categories of payments made to government payees:
- Taxes other than consumption taxes and personal income taxes.
- Fees, including rental fees, entry fees and regulatory charges as well as fees or other consideration for licences, permits or concessions.
- Production entitlements.
- Bonuses, including signature, discovery and production bonuses.
- Dividends other than dividends paid as ordinary shareholders.
- Infrastructure improvement payments.
However, as the Government of Canada’s Extractive Sector Transparency Measures Act Guidance document confirms (at page 14), not every type of payment an extractive business might make to a government payee is reportable: payments to government for ordinary course commercial transactions (such as electrical bills) are not. Payments to the same payee in a single category are reportable when they are $100,000 or more in a financial year and, where possible, extractive businesses are to state the particular project to which the payments relate.
Nature of Payment. The Act emphasizes substance over form: an extractive business is required to account for payments that meet the criteria whether a payment was monetary or in kind, or the total sum was paid as one or as multiple payments. And “creative” structuring of payments to government payees, such as through third parties or subsidiaries, won’t excuse an extractive business from reporting obligations. For example, the Act deems:
- Payments to employees or public office holders of a government payee to have been made to the payee directly.
- Payments to third parties that receive the payment on behalf of a government payee to be made to the government payee directly.
- Payments made to a government payee by an entity the extractive business controls to be made by that extractive business.
When is reporting required?
The Act requires extractive businesses to complete their reports no later than 150 days after the end of each financial year. Extractive businesses with a December 31 year end must provide their first full-year report (i.e., for the year ended December 31, 2016) under the Act no later than May 30, 2017.
Where must the extractive business submit its report?
Extractive businesses must submit their reports to the federal Minister of Natural Resources and must also make it available to the public.
Please contact your McInnes Cooper lawyer or any member of the Energy & Natural Resources Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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