Transparency Requirements Get Teeth

New requirements to report payments made to governments mean Canada has caught up to global trends
Transparency Requirements Get Teeth

New requirements to report payments made to governments mean Canada has caught up to global trends

The Extractive Sector
Transparency Measures Act (ESTMA), proclaimed in force on June 1, 2015, has been widely lauded for finally bringing Canada up to speed with the European Union, the United Kingdom, Norway and the United States in promoting transparency and accountability in the extractive sector by requiring mandatory reporting of payments made to any government or body performing a governmental function in Canada or abroad.

The global trend has seen the US Securities and Exchange Commission developing mandatory reporting requirements for the extractive sector, expected to come into force in spring 2016 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The EU has established standards in place by way of its Accounting and Transparency Directives, and the UK has enacted The Reports on Payments to Government Regulation 2014, which applies to payments made to governments on or after January 1, 2015.

Although Canada’s late to the party, however, there’s no doubting the ESTMA’s impact.

“With about 75 per cent of all mining companies in the world headquartered in Canada and some 56 per cent of the publicly traded ones listed on the Toronto Stock Exchange, our laws capture more entities than legislation in other countries,” says Brian Graves of McCarthy Tétrault LLP in Toronto.

The ESTMA is also significantly broader than other countries’ laws in its extraterritorial reach, its application to private companies and the range of recipients for whom reporting is required.

“The Act applies not only to Canadian public companies, but also to public companies and large private companies that have virtually any assets at all or a place of business in Canada,” Graves says. “There should be a lot of companies watching this legislation and the forthcoming regulations closely.”

From the perspective of private companies, the legislation applies only to those with $20 million in assets, $40 million in revenue or 250 employees. But these thresholds are determined with reference to an entity’s consolidated financial statements, the intention being to include the collective numbers of corporate families in making the determination.

“The inclusion of private companies is certainly unusual,” says Catherine Wade, who practises in the Vancouver office of Dentons Canada LLP.

But Wade notes that, conversely, TSX Venture Exchange companies are not caught by the ESTMA legislation. “That’s a bit of an anomaly, because the TSX Venture is where large domestic companies tend to be listed,” she says.

In Québec, however, the Liberal government has introduced Bill 55, which mirrors the ESTMA closely. The Bill would close some of the gap created by the omission of TSX Venture listees from federal scrutiny, by requiring businesses operating in the mining and oil and gas sectors in the province to declare all payments made to government bodies and eventually to Aboriginal communities.

The fact remains, however, that companies that are covered by ESTMA will have to deal with a unique spectrum of payments.

“That’s because our definition of ‘government’ is broader than the definition in legislation elsewhere,” says Sarah Powell of Davies Ward Phillips & Vineberg LLP in Toronto.

Both monetary and in-kind payments must be reported, whenever the aggregate, calculated on a per-project basis, exceeds $100,000. The categories of payments include taxes; royalties; rental, entry, license and permit fees; production entitlements; bonuses; dividends; and infrastructure improvements.

Reports must be filed within 150 days of the end of each financial year and include information to be established by regulation. Failure to do so, making false statements, or structuring payments with the intent to avoid reporting requirements, will expose companies to a $250,000 fine, with an additional $250,000 for each day that the violation persists.

“Although we don’t have the final regulations, the legislation is definitely onerous in terms of administration and reporting, especially when you consider that some of these companies are operating in 100 countries and are subject to all sorts of reporting requirements,” Brian Graves says.

As it turns out, Canadian, US and EU regulators are working on a common template, although it’s uncertain whether they’ll be able to thrash one out.

“If there’s no agreement, our legislation does contemplate ‘equivalency’ measures whereby Canadian reporting requirements might be satisfied by filing reports prepared in accordance with commensurate reporting requirements of other jurisdictions,” Graves says.

Administrative guidance and regulations from the federal government were expected soon after the Act came into force. But at press time, neither had been released though expectations were that they might appear in the next few weeks.

In any event, because these releases will address the required method of reporting, the reporting template, the definition of “government” and other uncertainties and gaps in the legislation, they will have a considerable impact on the resources compliance will demand.

“Already, we’re discovering that the nuts and bolts of the Act are more complicated than we originally thought might be the case,” Powell says. “Hopefully, the guidance will provide tools to help the mining industry and stakeholders understand and cope with the Canadian framework — but I expect there will be growing pains, specifically in terms of what ‘government’ means and the type of payments covered.”

Wade believes it’s essential for companies covered by the legislation to engage professional advice from lawyers, accountants and business advisers.

“Professional advice is particularly important for public companies, because these disclosures could be influential in a general way even though they’re not part of the securities regime,” she says.

Wade also suggests that companies ramp up their directors and officers liability insurance.

Despite the cost and complexity, there is a silver lining that could mitigate the burden imposed by the transparency legislation.

For the most part, the perception that mining has a negative impact on local communities is a daunting issue for the industry. To some extent, the perception is unwarranted and fuelled by high-profile impacts, such as the Mount Polley mine environmental disaster in the Cariboo region of central British Columbia.

The disaster originated in August 2014 with a breach of the Mount Polley copper and gold mine’s tailing pond, which released many years’ worth of mining waste. Within four days, the pond’s 4 square kilometres were empty.

“Who knows where the fault truly lies?” Gordon Chambers of Cassels Brock & Blackwell LLP asks. “There was evidence of unstable soil underneath the dam that no one knew about, but regardless of fault, it was a real black eye for the industry.”

Being transparent about payments to government and government agencies, however, could help counter this type of negative publicity by profiling the industry’s positive contributions.

“Mining companies’ positive impacts are not usually understood because the public is not seeing the cheques to the government or to public coffers in general,” says Chambers from his Vancouver office. “Now, in appropriate cases, the industry should at least be able to say, ‘Don’t tell us we should give more without taking a look at how much we’re giving already.’”

As Graves sees it, miners are prone to difficulties because local regulatory issues, environmental issues and social license issues tend to become intertwined.

“Local groups who oppose a project can find all kinds of support with governments, NGOs and media if they can demonstrate that there’s risk surrounding one or more of these issues,” he explains. “Then the issues tend to spread out and draw further support — and fighting battles on too many fronts can quickly grind projects to a halt.”

Graves is careful to point out that the concerns expressed about a project are legitimate much of the time.

“Individually, it’s possible to deal with them,” he says. “But when they coalesce into a collective negative view about a project, you have a problem that can impede negotiations and reduce a company’s leverage with government on such things as financial terms, royalties and taxes — all of which can impact the timing and bankability of a project.”

He believes that companies should organize their resources in anticipation of opposition.

“It’s important to have scrupulous recordkeeping and positive interaction with regulators, environmental groups and local communities, always remembering that their interests are related and that their needs and the way they talk to each other must be understood,” Brian Graves says.

In this context, it’s important that the industry bears in mind the federal government’s overall corporate social responsibility strategy for the extractive sect. By its endorsement of the United Nations Guiding Principles on Business and Human Rights, the strategy speaks to the responsibility of corporations to respect human rights.

The corporate social responsibility strategy also endorses the IFC Performance Standards on Environmental & Social Sustainability, which encompass labour standards; indigenous rights; consultation; grievance mechanisms; resettlement; community health, safety and security; and other issues relating to human rights. More specifically, the Standards require “human rights due diligence” to be conducted in “limited high-risk circumstances,” and in addition to the due diligence undertaken for environmental and social risks.

“Unions are getting involved in these initiatives as well, so you’re going to hear a lot about corporate social responsibility in a broader sense in the next few years,” Wade says. “Increasingly, CSR will be part of the cost of doing business.”

 

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