It is possible I am the only person who gets excited this time of year about the ESTMA reporting cycle wrapping up for the previous year. The Extractive Sectors Transparency Measures Act requires proponents to submit their data to Natural Resources Canada within 150 days of the proponent’s financial year-end. As most publicly listed companies have a December 31 year-end, most reports are due by May 29.
I have written and presented at PDAC previously about the errors and omissions that sometimes appear in ESTMA reports. The good news is that penalties for violating the ESTMA reporting requirements are capped at $250,000 per offence, per day.
Ahead of this year’s reporting deadline, the Extractive Sector Transparency & Taxation Division provided detailed feedback to proponents on issues they are finding as part of their compliance work that began last year. I have reproduced part of the findings below, along with some comments.
I should probably emphasize upfront that none of the below should be considered legal, compliance, or taxation advice. Please speak to the appropriate professionals to see how the ESTMA guidance affects your organization.
Implementing an ESTMA Reporting Policy
Entities should implement internal ESTMA reporting policies that detail their approach and decision-making process for including and excluding payments in their ESTMA reports, establish clear internal reporting processes, and include any other policy considerations relevant to disclosures under the ESTMA. This supports consistency and helps to demonstrate the entities’ due diligence in complying with the Act.
This is good advice that might seem obvious but is apparently not always implemented. As I have mentioned before, I am very certain that all or almost all non-compliance with the ESTMA reporting guidance is due to oversights on the part of the taxation and financial reporting teams that manage the ESTMA reporting process at proponents. Having a proper ESTMA reporting policy takes some work, but it will help the taxation and financial reporting teams prepare the reports consistently and accurately. Some areas to consider in your ESTMA policy:
- How will you correctly identify all Indigenous governments in your list of payments to suppliers each reporting year?
- How will you allocate the payments to various projects and divisions within your organization, particularly where you may have several projects that make payments to the same government body?
- Which divisions will need to review the report before it is issued? I recommend that the community engagement team be involved, particularly for the Indigenous Government list.
- How do you allocate the payments between the various categories of payments? I regularly see inconsistencies in how payments are allocated to royalties, fees, bonuses, etc., particularly to Indigenous governments.
Maintain records during mergers and acquisitions
It is the duty of parties subject to a merger or acquisition to ensure that all requirements under the Act, including the maintenance of payment records and ensuring that report accessibility requirements are maintained for their records following the transaction.
There are many dead links in the online ESTMA data portal for reports that were published by a proponent that was acquired and had the website taken down as part of the merger. It is the responsibility of the acquiring entity to maintain the necessary financial records, and ensure the URL listed on the ESTMA data portal still links to the correct ESTMA report for at least five years. This is also the case for proponents that have entered into insolvency; the bankruptcy trustee is expected to maintain all necessary records and public URLs.
Consider Indigenous payees
Entities must ensure that all payments to Indigenous governments are analyzed for potential disclosure under the ESTMA and their relevant decision-making processes documented.
This guidance warms my heart. Failing to properly identify all payments to Indigenous governments is one of the most common omissions I find when reviewing ESTMA reports. Again, I am very certain that the omission is unintentional because the proponent does not have an appropriate policy to properly identify Indigenous governments (see the recommendation about having a policy in the first place). Most proponents are proud of the IBAs they have signed and publicly announce that the agreements include financial payments to the Indigenous government. I cannot see a reason why they would intentionally exclude those payments when it is so easy to prove that the payments exist based on public statements.
Perform annual evaluation
All entities, enrolled or otherwise, should be aware of the ESTMA, and annually evaluate their obligations under the Act. Those entities that qualify as Reporting Entities (using the criteria under Section 8 of the Act) must also determine if they have made reportable payments. Both a company’s status as an ESTMA “Reporting Entity”, as well as their reportable payments should be disclosed to NRCan on an annual basis, no later than 150 days after the end of its financial year.
Just because you were not considered a “Reporting Entity” last year doesn’t mean you aren’t one this year. This is particularly the case for junior exploration companies that may have only recently entered into an Exploration Agreement and may not fully understand the ESTMA reporting obligations that these new payments have created.
Track and prevent reoccurring report validation issues
The recurrence of report validation errors suggests that entities have no or limited mechanisms in place to track or record feedback on these errors and, consequently, the quality of their reporting does not improve over time. As such, entities with recurring errors are flagged as part of NRCan’s compliance risk-rating system and may be subject to increased scrutiny, potentially leading to compliance reviews and audits. Entities should track errors and feedback to demonstrate due diligence and limit future issues.
Since 2023, the Extractive Sector Transparency & Taxation Division (ESTTD) has been conducting compliance reviews on proponents assessed to be at a higher risk of non-compliance. I think it is safe to assume that an organization’s risk-rating does not decrease if ESTTD finds non-compliance in their reviews. If non-compliance is identified, make sure that you have a process to prevent that non-compliance in the future. As a reminder, an offence continues for each day it is not corrected.
Why ESTMA is Important
When we presented at PDAC in March about how to use ESTMA in negotiating fair agreements, we received a lot of positive feedback from attendees. The ESTMA data has been revolutionary in terms of what it brings to participants in the mining industry in Canada and across the globe. The above recommendations from ESTTD are critical to having accurate and reliable information, and I hope everyone involved in the ESTMA reporting process takes them to heart.