Thank you, Mr. Chair and committee members, for the invitation to speak today on the proposed extractive sector transparency measures act.
As you know, CAPP represents companies large and small that develop and produce natural gas and crude oil throughout Canada, representing approximately 90% of Canada's natural gas and crude oil production.
CAPP commends the Government of Canada for its leadership in undertaking this initiative. Our members recognize the importance that this act will have in the fight against international corruption through enhanced disclosure of payments by companies doing business in Canada to all levels of government both domestically and abroad.
While our members are broadly supportive of this legislation and the potential role we can play, we are also cognizant of the need to ensure that this legislation is effective at achieving its outcomes while minimizing the administrative burden on business. In this regard we offer our commentary today based on three key principles.
The first is recognizing existing financial reporting practice and standards. Second is minimizing administrative burden while harmonizing with other jurisdictions. And the third is variations arising from competitiveness and conflict situations.
With respect to existing financial reporting practice and standards, perhaps the most substantial challenge confronting CAPP members relates to the issue of attestation under subclause 9(4). The proposed section, as currently worded, establishes a standard that is more stringent than any other major established forms of legislation on the issue of financial disclosure. By comparison, the certifications required by both the federal Income Tax Act and the Sarbanes–Oxley Act, which was introduced in response to the major corporate and accounting scandals of the early 2000s, both contemplate an element of reasonableness with respect to the attestation of the financial statements.
While there may be instances where an officer or director would be comfortable with the true, accurate, and complete language with respect to one entity that he or she is very familiar with such as a tax filing, where an officer is certifying with respect to many payments over $100,000 made by multiple entities around the world, the insertion of a knowledge and due diligence qualifier would be reasonable. This is especially important when considering the complexity of the payment categories contemplated in the act in combination with the potential penalties.
So to address this challenge CAPP recommends that subclause 9(4) be amended and the words “to the best of my knowledge and belief” be added to the end of the sentence.
Second, it's important to consider the impact of the proposed legislation on Canada's extractive sector. A core consideration in this regard is ensuring that the Canadian reporting framework aligns with established reporting frameworks in other jurisdictions. While the U.S. continues to develop its Dodd-Frank framework, the EU transparency directive and its imminent application in the U.K. is the most relevant precedent. The structure of the U.K. reporting framework is comparable to what Canada has proposed. CAPP recommends that the federal government develop an approach similar to that developed in the U.K., particularly as it pertains to the engagement of industry in the development of its industry guidance material.
Key considerations for our members include the definition of project and format of reporting, the identification and attribution of payments, whether reporting will be required for parent companies of reporting entities, and the process for determining substitutability or equivalency of other reporting frameworks. These are complex issues and it is important that the government work collaboratively with industry to achieve the policy objectives of the proposed legislation in the most effective and reasonable manner.
Finally, I'd like to speak to the issue of variations arising from competitiveness in conflict situations. Many contracts have confidentiality clauses and often foreign jurisdictions will legislate confidentiality agreements with respect to payments to government. Compliance with the proposed Canadian rules may therefore require some companies to break confidentiality provisions of contracts and will force them to choose between complying with the proposed act or complying with foreign legislation.
Another consideration is the potential disclosure of information under the act that may be commercially sensitive, at least on a temporary basis. The inability to recognize this consideration was the main focus of the successful legal challenge in the U.S. and is something Canada needs to consider. Other pieces of related Canadian legislation allow for exemptions. The most relevant example is the Canadian securities regulations, which enable a report issuer to report material changes on a confidential basis if such disclosure would be unduly detrimental to the interests of the issuer.
The proposed act contemplates this consideration by regulation and CAPP recommends that the government work with industry now to identify situations where variations to the standard reporting requirements will be warranted and develop a regulation that comes into force concurrently with the legislation.
Thank you very much for the opportunity to present today.