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Risk in Context

What is ESTMA?

Posted by Andrea Orviss June 15, 2016

The Extractive Sector Transparency Measures Act (ESTMA) introduces new reporting and transparency obligations on the Canadian extractive sector and contributes to global efforts against corruption in the extractive sector.

Extractive businesses subject to ESTMA must report annually on certain payments to all levels of government in Canada and abroad for financial years beginning after June 1, 2015.  Reporting of payments made to Aboriginal governments in Canada has been deferred two years to June 1, 2017.

Who is subject to ESTMA?

Entities engaged in the commercial development of oil, gas or minerals that are either:

  • Listed on a Canadian stock exchange.
  • Not listed on a Canadian stock exchange but do business in Canada and meet two of the following thresholds in one of their two most recent financial years:
    • Have at least C$20 million in assets.
    • Generated at least C$40 million in revenue.
    • Employ an average of at least 250 employees.

What are the reporting obligations?

Certain payments made in relation to the commercial development of oil, gas or minerals and valued at least C$100,000 must be reported annually.

Are there penalties for failure to comply?

Yes, failure to comply with ESTMA, knowingly providing false or misleading information and structuring transactions to avoid ESTMA reporting requirements are all offences under ESTMA.  Penalties can apply to entities subject to ESTMA and their directors and officers and can be up to C$250,000 per offence per day.

As a director or officer of a subject business, am I insured?

Some coverage may be available to directors and officers under directors and officers liability insurance policies (D&O insurance).  Most properly drafted policies will pay the cost of defending against allegations that directors and officers have not complied with legal requirements.  There are however a number of pitfalls.

Directors and officers of companies subject to ESTMA are advised to review their D&O insurance carefully.  Key issues include:

  • The policy definition of “Claim” - the key trigger for coverage under D&O insurance – may not capture early stage investigations costs incurred by directors and officers.
  • The legality of D&O insurance in Canada paying fines and penalties on behalf of directors and officers is doubtful.  As a result policy responses may well be limited to the costs of successfully defending allegations.
  • If, as seems likely, charges are brought concurrently against reporting entities and their directors and officers, policy language may require extensive negotiation with insurers to determine what, if any, defence costs are covered.

It is critical that directors and officers understand the insurance programs of the organizations they serve, including any coverage gaps and additional coverage available in the market. They should also obtain appropriate legal advice.

Marsh has dedicated specialists in D&O insurance to help clients understand, evaluate and design effective risk management programs.

Andrea Orviss

Andrea Orviss is the Western Canadian Practice Leader of Marsh Canada’s Financial and Professional Services Practice (FINPRO). Andrea specializes in directors & officers liability insurance. As practice leader, Andrea specializes in complex placements and provides guidance to her team in negotiation and placement and to clients on issues affecting directors and officers.