Reporting Payments

Mining companies listed on Canadian stock exchanges will likely soon have to report payments to foreign and domestic governments

There might be
gold (or copper, nickel, silver, etc.) in them thar hills. But new rules coming down one hill – Parliament Hill to be exact – will haul the dealings of Canadian mining companies into the light in an effort to curb possible corruption with the foreign governments and officials they deal with.

 The pending rules are likely to be in place by June 2015. They will mean mining companies listed on Canadian stock exchanges will have to annually report many kinds of payments to both foreign and domestic governments above certain thresholds — payments that previously could be legally kept in the dark.

For large companies on the TSX, these would include payments of $100,000 or more for things such as royalties, infrastructure improvements in foreign countries, signature bonuses or any fees for licences or concessions.

The rules will apply to Canadian companies in other extractive industries as well. The disclosure framework, aimed at significantly improving transparency in Canada’s natural resources sector, has mining executives scratching their heads about what’s around the corner and how much it will cost their companies to comply. It also has lawyers trying to figure out how to help their mining clients prepare for what may prove to be expensive disclosure obligations, especially for small and medium-sized operators.

 The push for transparency has its roots in a coalition of organizations, including Publish What You Pay Canada, the Prospectors & Developers Association and the Mining Association of Canada. They created the Resource Revenue Transparency Working Group (RRTWG), which on January16 of this year released recommendations that would bring Canadian rules for disclosure to foreign and domestic governments and officials in line with stricter reporting standards established through Section 1504 of the Dodd-Frank Act in the US and the EU’s Transparency and Accounting Directives.

With $3 trillion in metals, mineral, oil and gas being exported annually around the world — the RRTWG says it’s time Canadian companies did more to ensure the money it pays to foreign governments for the right to mine or drill resources does not wind up in the pockets of corrupt officials.

Such corruption, says the RRTWG, can retard the economic growth and stability of developing nations and, in some extreme cases, contribute to violent conflict.

 The Harper government made a commitment to a G8 initiative to improve transparency surrounding payments by Canadian mining companies to governments at home and abroad. It has said it would prefer new rules be set, harmonized and administered by provincial securities commissions. But the feds warned if provincial regulators did not turn the RRTWG recommendations into rules quickly, it would pass mandatory reporting standards by April 1, 2015.

“I personally suspect... that the provinces will not be able to implement legislation before then,” says Henry Chang, co-chair of Blaney McMurtry LLP’s International Trade and Business Group in Toronto, echoing the view of other lawyers interviewed. “So I suspect that federal legislation is probably in the cards.”

While the US and EU have already laid down their hand on the subject of payment disclosures, it’s still not clear what cards might be in the Canadian government’s deck. With 60 per cent of the world’s mining companies listed on the Toronto Stock Exchange, what it decides will have a major impact on mining companies operating around the planet.

Chang, comparing the RRTWG’s recommendations with the federal government consultation paper issued last spring, says it’s clear the working group has “had an effect on how the legislation will likely be drafted.” The federal government has also indicated it would seek “equivalency” with US and EU rules to harmonize reporting for companies operating in multiple jurisdictions and reduce compliance costs with Canadian rules.

But, for lawyers, the federal consultation paper also hints at possible differences in the Canadian approach. For instance, unlike the RRTWG, the feds say companies would be required to report payments to First Nation self-governments such as Aboriginal organization “with law-making power and/or governance mechanisms related to the extractive sector (i.e., mining, oil and gas).”

Yet, says Chang, there’s been no indication how payments to foreign indigenous entities might be addressed. Or, for that matter, what the penalties will be for failing to disclose payments, and whether they will be civil or criminal penalties.

The feds are likely to use the RRTWG’s $100,000 threshold recommendation for reporting foreign payments by large publicly traded companies. That means one-time or cumulative payments made at or above that amount to foreign governments on a per-project basis in exchange for access and exploitation of minerals would have to be reported annually to government and published on a publicly available website. Junior mining firms would be required to report payments at $10,000 or above threshold.

But Chang says since no law is in place yet, it’s tough for lawyers to provide insightful guidance to clients at the moment. He says once legislation is passed, however, “lawyers will play a very significant role...when companies struggle to interpret the legislation and assess what they need to do in order to comply.”

Still, points out James Clare, a securities lawyer and partner with Bennett Jones LLP in Toronto, for public issuers, the rules will, at possibly considerable cost, force them to intensify internal controls over their financial reporting. “The controllers are going to have an even better handle on where money is going and to whom it’s going to and pay attention to recipients more so than they would have had to in the past.”

As for Clare, “I’ll be offering constant reminders that certain of these types of payments need to be reported,” that they “can’t be left in the dark.”

At the moment, says Clare, his clients, while wary of the coming rules and what it will cost them to comply, aren’t asking a lot of questions about how to prepare yet. “As draft legislation appears and starts to get discussed in the press more,” he’s sure the queries “will intensify.”

Some queries, no doubt, will also come from private companies, not just public issuers. In the US, reporting requirements under Dodd-Frank apply only to publicly listed companies. But the Canadian government, following the EU’s lead, says its standards will apply to medium and large private extractive companies as well. It defines those as companies who meet or exceed $20 million in assets or $40 million in net turnover and 250 employees.

For that reason, Clare doesn’t see many public companies going private in order to escape disclosure rules. Besides, he adds, “It’s not a given that companies are going to not want this information disclosed. They may want it to be quite public. There is an accountability issue on the recipient side.” Knowing they have Canadian rules at their back, mining companies can ensure payments to foreign governments are on record, and that foreign officials can’t dupe or pressure them into paying more than they should.

As Crae Garrett, a Calgary-based lawyer with Norton Rose Fulbright Canada LLP puts it, for clients, the coming legislation will be “a useful tool for managing expectations of government officials abroad.”

“When the secretary of mining for country X tells the cabinet that he has just given away a concession for a dollar and that’s how much was paid, and the company involved is disclosing that it paid $10 million in a signing bonus, then the government is perhaps going to have a conversation with the fellow.”

 One puzzle Canadian lawyers may have to sort out for their mining clients involves confidentiality agreements with foreign governments. Some demand – by their own laws – such clauses when reaping payments from international mining companies. US anti-corruption laws originally made no exceptions for US-listed companies to avoid reporting their foreign payments if a particular country had laws banning such disclosure. But on July 2, 2013, the American Petroleum Institute and co-plaintiffs won a suit against the US Securities and Exchange Commission (SEC), which administers Dodd Frank.

 In addition to saying US disclosure rules inhibited a company’s right to free speech by forcing them to “provide information they did not wish to provide,” a US court also ruled Dodd-Frank is “arbitrary and capricious” in that it may force companies “to violate their contractual and legal commitments by providing information not allowed either contractually or under the local laws of the foreign governments with whom they were interacting.”

The SEC is currently appealing the ruling. Meanwhile, the Canadian government has indicated that for the Canadian extractive industry, there will be no exclusions for reporting payments to foreign governments, even when those nations expressly forbid such disclosures in their contracts.

That could pose big problems for Canadian companies, says Clare. “You have some hard thinking to do as to whether you can execute and enter into that agreement,” with a foreign government that prohibits disclosing payments made to it. “You would be doing so knowing you will either have to breach your reporting obligations at home by not reporting the payments, or breach the confidentiality conditions of the concession or licence agreement.”

Garrett believes Canada will prudently wait to see how the US appeal works out before deciding whether there might be reporting exclusions allowed for Canadian companies signing contracts with nations that prohibit payment disclosure. But, he notes, the US and EU efforts to address foreign corruption by forcing increased transparency on their extractive industries seem to be paying dividends abroad.

He says until fairly recently the Kazakhstan government had rules prohibiting mining concessionaires from disclosing the terms of their deals. But recently, responding to pressure from the international community and the American and EU firms it deals with, it agreed to allow companies to publicly report payments to Kazakhstani officials.

“People are fond of couching [Canada’s planned disclosure rules] as an anti-corruption play. But in its direction it is not that at all. This is just a transparency play.”

Many Norton Rose clients are actually well prepared for the coming Canadian disclosure regime because they are cross-listed on US exchanges and have had to comply with Dodd-Frank rules for several years. But for smaller companies, says Garrett, the impact could be onerous. “The $10,000 threshold for venture issuers are very, very low. I don’t know any mining concession that has ever been agreed to anywhere that I have ever looked at, big, small or indifferent, where you’ve cut a cheque for less than $10,000. So you are pretty much reporting everything.”

 

Anthony Davis is a freelance business writer and investigative journalist in Calgary.