The Push for Transparency

In international business, the pay-to-play tradition of greasing government palms is increasingly under pressure from anti-corruption legislation and new say-what-you-pay laws.
Canada’s new Extractive Sector Transparency Measures Act (ESTMA) is a fairly faithful copy of say-what-you-pay laws in 11 European Union countries, the UK and seven other nations, as well as a new securities rule expected in the US by year end, which will replace an earlier version scrapped by the US District Court.
“Around the world the resource sector is worth $1,000 trillion, yet citizens of many countries are extremely poor,” says Martine Guimond of Gowling WLG in Montréal. This makes extractive industries – mining and oil and gas production – an obvious first target for transparency laws, Guimond says.
Canada’s ESTMA – together with its counterparts in other wealthy nations – is intended to provide some measure of transparency regarding how much governments in developing countries collect in payments from extractive industries.
Under ESTMA, publicly listed companies in the extractive sector are required to report payments to all foreign and domestic governments for each fiscal year beginning after June 1, 2015. Privately owned extractive-sector companies with headquarters, operations or assets in Canada must also report, if they meet two out of three criteria, assets of at least $20 million, revenues of at least $40 million and workforces of at least 250.
Payments to a single government department totalling $100,000 or more in a year must be reported in seven categories: taxes; royalties; regulatory fees; infrastructure improvements; production entitlements; bonuses; and non-stock dividends — plus any categories subsequently added by regulations. Companies have 150 days after their fiscal year end to submit their reports to Natural Resources Canada (NRCan) and publish those reports online.
ESTMA serves as the flip side of Canada’s Corruption of Foreign Public Officials Act (CFPOA), says Erik Richer La Flèche of Stikeman Elliott LLP in Montréal. The recently toughened CFPOA, with unlimited fines and prison terms up to 14 years, is intended to deter Canadians from paying bribes to government officials, Richer La Flèche says. ESTMA, meanwhile, makes it harder for those government officials to divert legitimate resource payments from public coffers to private accounts.
“ESTMA is not really intended to change the way mining companies do business,” he says. “It’s to change the way officials in resource-rich developing countries do business. It forces them to be accountable for the revenues they receive.”
“This is all directed at the so-called ‘resource curse,’” says Melanie Shishler of Davies Ward Phillips & Vineberg LLP in Toronto. Shishler says mining companies routinely make legitimate payments to governments in developing countries, “but sometimes it’s not easy to find immediate corresponding benefits” to citizens in those countries.
While Guimond agrees that ESTMA is primarily aimed at catching grafters in other countries, she cautions that it can be used in combination with the CFPOA and the Criminal Code to bring charges against Canadians, at home or abroad.
It’s a major cultural change from the not-so-long-ago days when many international businesspeople regarded bribes, large and small, as an unavoidable cost of competing for business in certain countries — to the point that some corporations would even claim these kinds of expenses on their taxes. But she says she’s confident companies are now getting the message.
“I think industry is taking this very, very seriously,” she says. Whether the message is reaching jaded employees in far-flung regions, who may have become accustomed to the old ways, she says, is a matter of corporate governance. But she adds that ESTMA allows a due-diligence defence for directors and officers who can show comprehensive governance and internal controls.

The new transparency laws pose the problem of overlapping jurisdiction, with about 20 countries demanding reports on worldwide operations. Mining lawyers say the problem is expected to be substantially reduced by reciprocity agreements, making reports prepared under one transparency law acceptable in other jurisdictions. But Paul Cassidy of McCarthy Tétrault LLP in Vancouver says ESTMA could still cause unintended trouble.
“This could be the sleeper compliance issue of the year,” Cassidy warns. “There may be some degree of surprise once people realize the breadth of the legislation. What’s really interesting is the degree to which private companies can be caught.” He notes that ESTMA makes hedge funds, private equities and pension funds into reporting entities if they hold controlling interests in mining or oil and gas companies. “There hasn’t been a lot of concern or public discussion from the sector” and, as a consequence, some private companies may not be fully aware of their new ESTMA obligations. “The Act is in force now. It’s law and you’ve got to start registering,” he says.
Cassidy adds that, under ESTMA, it’s not corruption that’s an offence but filing deficiencies. “If you didn’t properly report, that in itself is worth a $250,000-per-day penalty. It’s the Al Capone effect,” he says, referencing the mobster famously jailed for tax evasion.  
Shishler observes that “control” is not well defined in ESTMA, leaving open the question of whether control is anything above 50-per-cent ownership or whether the law also applies to stockholders who exercise effective control at lower levels. “It’s also not clear who is a government,” she says. Communal land organizations are common in some countries and state-owned enterprises could be deemed government departments. “That has people scratching their heads a little bit.”
Richer La Flèche says that some SOEs are exclusively commercial in nature but others perform regulatory functions on behalf of governments. “If an SOE has a regulatory function, or if it’s not clear, then I would disclose,” he advises.
Under ESTMA, payments to Aboriginal governments must also be reported for fiscal years beginning after June 1, 2017. And Shishler says reporting companies should not assume the requirement is limited to Aboriginal groups in Canada: “I suspect they mean worldwide.” She says the two-year deferral on reporting payments to Aboriginal groups is likely an artifact of Canadian constitutional law prescribing a duty to consult First Nations on legislation affecting them. She adds that companies and Native groups have traditionally regarded benefits agreements as commercially confidential, especially where revenue sharing is concerned, and that issue may require further consideration.

In order to demonstrate its constitutional primacy in the field of natural resources, Q uébec has passed its own transparency law, which is virtually identical to the federal law — though Alberta, with its traditionally ferocious grip on resource rights, has not seen fit to follow Q uébec’s example.
“Q uébec is occupying the jurisdiction,” says Richer La Flèche. He says the other major motivator for Québec’s new law, An Act Respecting Transparency Measures in the Mining, Oil and Gas Industries, is to support “social licence” or public acceptability of the province’s growing mining industry and its nascent oil and gas sector.
“A rapidly aging Québec population, content with the status quo, has tended in recent years to be hostile to new extractive and industrial projects,” he explains.
“Experience has shown that local populations, properly informed of the tangible benefits offered by projects, are far more likely to support them.” He says that’s why the Québec Mineral Exploration Association wanted all payments disclosed, with no $100,000 threshold. Such a disclosure law would more fully demonstrate benefits of the government’s Plan Nord, a policy to promote mining and infrastructure development in Q uébec’s vast northern region.
For now, Q uébec and federal disclosure laws cover only minerals, including oil and gas. But corruption seeks the path of least resistance and Richer La Flèche says it’s not hard to foresee ESTMA, or some more inclusively named successor law, covering any number of other areas. He notes, for instance, that the EU law also covers forestry.
“Water is going to become one of the world’s most valuable commodities,” he says. “I think you can expect logging or water rights to be covered” in future iterations of disclosure laws around the world.
“There’s no reason,” Cassidy says, “for [transparency] to be restricted to the extractive sector.”
As an aid to clients, Guimond says, associates in her office have created a table comparing reporting requirements in Canada, the UK, EU and US, as well as a six-step guide to compliance with the Canadian law. For the most part, she says, publicly traded companies already have extensive internal controls and accounting systems in place and ESTMA compliance will be a matter of fairly minor adjustments. For companies with a June 30 year end, she says, their first ESTMA filings will be due Nov. 27, 2016. For those with Dec. 31 year ends, their first reports will be due in May 2017.
“Transparency initiatives in the extractive sector are not new,” Shishler says. She notes that many of the multinational mining companies have publicly disclosed payments to foreign governments for a number of years in their corporate responsibility documents, while junior miners often meet disclosure requirements as part of any loan from the International Finance Corporation.
Shishler says the definition of a reporting entity could be interpreted in a way that is “broader than anyone really intended” and she expects some private companies will seek exemptive relief on the grounds that reporting obligations will pass to their subsidiaries in the extractive sector. She says she expects that “guidance will mature over time to clarify what it is they’re trying to capture.”