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New Risks for Extractive Sector - Transparency Law in Effect

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Corporate Social Responsibility Law Bulletin

On June 1, 2015 the Federal Government brought into force the Extractive Sector Transparency Measures Act (the “Act”). Companies that are engaged in (or that control companies engaged in) the exploration or extraction of oil, gas or minerals are now required to report annually on payments made to all levels of governments both in Canada and abroad.

The Act covers many categories of payments (monetary or in-kind) in relation to the exploration or extraction of oil, gas or minerals, including taxes, royalties, fees, bonuses, dividends, infrastructure improvement payments and any other type of payment that is prescribed by regulation. Payments to Aboriginal governments and organizations in Canada will be subject to the Act from June 2017.

The new reporting obligations apply to all financial years that start after the Act’s effective date (June 1, 2015). If payments covered by the Act are made to a government payee (Canadian or foreign), and are payments of $100,000 or more, then affected companies must report the payments to the Canadian government. These reports will be made available to the public, for a period of five years.

The Act applies broadly to extractive sector companies that are listed on a stock exchange in Canada (including foreign companies). It also applies to extractive sector companies that have a place of business in Canada, are doing business here or have assets in Canada, and meet at least two of the following criteria: (i) assets of $20 million or more; (ii) revenues of $40 million or more; and (iii) 250 or more employees.

The Act introduces a number of new risks to companies in the extractive sector. Companies need to act now to manage those risks.

    • Companies should review internal policies and procedures to confirm that appropriate control and reporting mechanisms are in place and are aligned with the Act to ensure that government payments are being properly tracked and can be reported.
    • The Act provides for a due diligence defence. Prudent directors and officers will be acting now to put in place an appropriate internal compliance framework to prevent individual employees from putting their companies offside the Act.
    • Purchasers considering acquisitions should be ready to assess target companies’ compliance with the Act because proceedings can be brought up to 5 years after an offence occurs. Purchasers may want to develop additional tools to mitigate post-transaction risk where warranted.
    • Directors and officers also need to consider their personal exposure under the Act. Directors and officers can be found personally liable if they directed, authorized, assented to, acquiesced in or participated in conduct that is an offence under the Act (whether or not the company itself is ever prosecuted or convicted). 

Penalties under the Act can accumulate quickly. If found guilty of an offence, fines can reach $250,000 per day for each day an offence continues. Under the Act, it is an offence if a company fails to submit a report, knowingly provides false or misleading information, or fails to maintain proper records. It is also an offence to structure payments to governments to avoid being caught by the Act.

If you would like more detailed information on the Act, please see our "Government Payment Disclosure: Introduction of the Extractive Sector Transparency Measures Act in the House of Commons" bulletin or contact one of the authors.

Special thanks to articling student Sarah Lumsden for her help in drafting this bulletin.

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