With the introduction of the Extractive Sector Transparency Measures Act (ESTMA), the Canadian government is taking its commitment to anti-bribery and corruption (ABC) to the next level. Resource and mining companies that have interests in Canada need to be prepared.
“This Act will make it compulsory for companies to report government payments to the public,” says Kelly Ohayon, a partner in PwC’s consulting and deals practice who specializes in ABC matters. Reporting requirements will include payments to foreign and domestic governments, government bodies and, subject to a two-year transition period, Aboriginal groups.
Given the broad scope of the Act, legal advisors should speak with their clients about potential exposure. “This proposed legislation isn’t limited to Canadian headquartered companies,” explains Michael Dixon, a partner with Blake, Cassels & Graydon LLP. “Foreign-headquartered companies operating in Canada can also be affected by this Act.”
Indeed, even non-extractive companies could be affected. “A lot will hinge on the definition of control, which is broadly worded in the Act and will likely be set out in more detail in the regulations,” says Brian Graves, co-leader of the global mining group at McCarthy Tétrault LLP. “Private equity firms and other financial institutions with substantial stakes in Canadian companies could potentially find themselves subject to these reporting requirements, even though they’re not operators.”
While many companies are already required to track and record payments to public officials as part of the Corruption of Foreign Public Officials Act (CFPOA) and similar legislation in other jurisdictions, the scope of the ESTMA is unique.
“It will be important to have properly structured internal controls and compliance systems … to ensure all payments are properly recorded and reported,” says Dixon. “Ultimately, a director, officer or internal auditor is going to need to sign off on the report, so having a system in place that gives those individuals confidence is essential, particularly because, if there’s a false statement, there can be personal liability.”
To enhance the reliability of any statements, legal counsel should work collaboratively with accounting and compliance advisors who have expertise developing and evaluating compliance programs and conducting related compliance audits.
One design challenge will be making sure companies can track information at the level of granularity required under the Act. “Companies will need to look at the different payment categories that need to be reported on,” explains Krista Mooney, leader of PwC’s ABC group in Alberta. “They will need to undertake an exercise to review who they make payments to in the various categories and what systems and processes may require enhancement in order to ensure completeness of their reporting obligations.”
Though reporting is only required for payees when cumulative amounts are greater than $100,000, companies will need to track, review and record all payments to specified payees to ensure they are meeting their reporting obligations.
“A lot of companies may think they are covered because their external auditors look at significant payments,” says Ohayon. “But there is no materiality threshold associated with this Act.” As a result, companies may need to enhance their records and incorporate new controls into compliance programs. For example, companies can incorporate payment categories defined in the Act into their general ledger structures and into their compliance audits.
Companies considering M&A transactions in the sector will need to pay particular attention to the new legislative requirements. “You wouldn’t want to acquire a company and then be liable for after-the-fact financial penalties for a target’s failure to disclose properly under the Act,” says Graves. “A violation could result in an initial penalty of up to $250,000, but since each day that the violation persists is considered to be a separate offence, this initial penalty can multiply quickly and the potential financial hit to a company for non-compliance is very substantial.”
With ESTMA expected to be enacted in spring 2015, there isn’t a lot of time for companies to get prepared. Companies need to start now if they want to make sure their systems, processes and compliance programs are aligned with the proposed requirements. “Don’t wait for the regulation to come out to think about what measures you, or your client, need to put into place. No company wants to be scrambling at the last minute to ensure they are meeting their reporting obligations under the Act,” Mooney advises.
Lori-Ann Beausoleil, CA, Deals Partner, is National Co-leader of PwC’s forensic services practice.