RISKY BUSINESS. A Primer on Canada s Foreign Anti-Corruption Enforcement Regime

Transcription

1 RISKY BUSINESS A Primer on Canada s Foreign Anti-Corruption Enforcement Regime

2 A Primer on Canada s Foreign Anti-Corruption Enforcement Regime TABLE OF CONTENTS I. Introduction 1 II. The CFPOA Framework 3 III. Significant Cases 18 IV. Jurisdictional Issues: How to Cope with Multi-jurisdictional Liability 21 V. The Self-Reporting Calculus 24 VI. Transactional Issues and Due Diligence 28 VII. Third Parties and Red Flags 31 VIII. An Effective Compliance Program 32 Our White Collar Crime & Regulatory Enforcement Team CASSELS BROCK & BLACKWELL LLP. ALL RIGHTS RESERVED. This document and the information in it is for illustration only and does not constitute legal advice. The information is subject to changes in the law and the interpretation thereof. This document is not a substitute for legal or other professional advice. Users should consult legal counsel for advice regarding the matters discussed herein. Cassels Brock & Blackwell LLP CFPOA Primer

3 I. Introduction The Corruption of Foreign Public Officials Act 1 (the CFPOA or the Act ) is the principal Canadian statute designed to combat corruption and bribery of foreign public officials in international business transactions. The Canadian federal government enacted the CFPOA more than 15 years ago as part of its commitment to combat foreign corrupt practices An investigation or prosecution against a business entity CAN BE VERY COSTLY and cause significant business disruption and reputational damage. and to engender confidence in the integrity of Canadian businesses. However, only very recently has there been any significant activity in connection with the CFPOA. There have been four prosecutions and approximately 35 active investigations under the CFPOA to date. In 2013, the Canadian government passed legislative amendments (the 2013 Amendments ) to strengthen Canada s foreign corrupt practices regime, which included the creation of a books and records offence, increasing the maximum length of imprisonment to 14 years, eliminating 1 SC 1998, c 34 [CFPOA]. the facilitation payment exemption and expanding jurisdictional reach. These legislative amendments together with a number of recent high-profile corruption investigations and prosecutions and recent public statements by the Canadian government affirming its commitment to combat foreign corrupt practices, raise the spectre of a significant increase in corruption enforcement activity. Canadian-based corporations operating abroad or foreign and domestic entities operating in Canada, and their directors, officers and advisors need to pay attention to these developments and ensure they have robust anti-corruption compliance measures and risk mitigation strategies in place to prevent and detect foreign corrupt practices. An investigation or prosecution against a business entity, or a single individual within or associated with that entity can be very costly and cause significant business disruption and reputational damage. CFPOA Primer Cassels Brock & Blackwell LLP 1

4 I. Introduction Recent high-profile investigations illustrate the significant costs associated with investigations of potential non-compliance with foreign corrupt practices regimes and the importance of avoiding even allegations of misconduct. In Canada, Griffiths Energy International, a private oil and gas exploration company, spent over $5 million 2 to investigate suspected bribes in connection with the award of oil concession rights in the Republic of Chad and SNC-Lavalin has spent over $50 million 3 in the ongoing investigation into allegations of foreign and domestic bribery. In the United States, Wal-Mart Stores Inc. has spent $439 million during the past two years to investigate allegations of bribery in Mexico, China, India and Brazil 4 and Avon Products Inc. has spent at least $344 million in connection with an internal investigation into allegations of bribery in China. 5 To assist corporations and individuals in better understanding the nature of the risk they face in Canada, this paper provides an overview of Canada s foreign corrupt practices regime, highlights recent cases and developments and outlines risk mitigation strategies, including a robust compliance program and anti-corruption due diligence in certain corporate transactions. 2 HMQ v Griffiths Energy International Inc., Agreed Statement of Facts at para SNC-Lavalin, 2013 Financial Report, online: doc/2013_annual_financial-report_none.pdf/. 4 David Voreacos and Renee Dudley, Wal-Mart Says Bribe Probe Cost $439 Million in Two Years, Bloomberg (March 26, 2014), online: 5 Tom Schoenberg and David Voreacos, Avon Bribe-Probe Clean-Up Neared $500 Million as Sales Fell, The Washington Post (May 2, 2014), online: washpost.bloomberg.com. 2 Cassels Brock & Blackwell LLP CFPOA Primer

5 II. The CFPOA Framework A. OFFENCES The CFPOA creates two primary offences: (1) directly or indirectly, giving, offering or agreeing to give a loan, reward, advantage or benefit of any kind to a foreign public official to obtain or retain a business advantage and as consideration for an act or even charitable endeavours may be SUBJECT TO THE CFPOA. (I) THE BRIBERY OFFENCE omission by the foreign official; and (2) making, falsifying or concealing records and payments related to the bribery of a foreign public official. The main bribery offence in the CFPOA is found in section 3(1) and makes it an offence to, in order to obtain or retain an advantage in the course of business: directly or indirectly give, offer or agree to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official as consideration for an act or omission by the official in connection with the performance of the official s duties or functions; or to induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organization for which the official performs duties or functions. 6 The term business is broadly defined and means any business, profession, trade, calling, manufacture or undertaking of any kind carried on in Canada or elsewhere. Under the CFPOA, business is not limited to for profit or profitable enterprises or business ventures. As such, even charitable endeavours may be subject to the CFPOA. The term Foreign Public Official is also broadly defined and means: a) a person who holds a legislative, administrative or judicial position of a foreign state; b) a person who performs public duties or functions for a foreign state, including 6 Supra note 1 at s 3(1). CFPOA Primer Cassels Brock & Blackwell LLP 3

6 II. The CFPOA Framework a person employed by a board, commission, corporation or other body or authority that is established to perform a duty or function on behalf of the foreign state, or is performing such a duty or function; and c) an official or agent of a public international organization that is formed by two or more states or governments, or by two or more such public international organization. Officials of state-owned, controlled or financed corporations are captured within the meaning of Foreign Public Official under the CFPOA. In R v Karigar 7 (Karigar), for example, the court found that Air India officials satisfied the definition of Foreign Public Official because Air India is a corporation owned and controlled by the Government of India. 8 The term Foreign State means a country other than Canada and includes: a) any political subdivision of that country; b) the government, and any department or brand, of that country or of a political subdivision of that country; and c) any agency of that country or of a political subdivision of that country. To date there have been comparatively few prosecutions under the CFPOA and, as such, little judicial guidance on the interpretation and scope of each of the elements of these offences. There is also no comprehensive guidance from the Canadian government on the scope and application of the CFPOA ONSC 5199 [Karigar]. 8 Ibid at para 3; Under the US Foreign Corrupt Practices Act, the term foreign official is defined as any officer or employee of a foreign government or any department, agency or instrumentality thereof. The United States v Esquenazi, No (11th Cir May 16, 2014), the meaning of the term instrumentality in the definition of foreign official under the FCPA. In particular, the court considered whether Telecommunications D Haiti, S.A.M., a privatized telecommunications company with ties to the Haitian government constituted an instrumentality within the meaning of the FCPA. The court defined the term instrumentality as an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. To assist in the determination whether a entity is an instrumentality of a foreign government, the court developed a two-part test. To determine whether an entity is controlled by a foreign government, the following factors should be considered: (a) the foreign government s formal designation of the entity; (b) whether the government owns a majority interest in the entity; (c) the government s ability to hire and fire the entity s principals; (d) the extent to which the government profits from, or subsidizes, the entity; and (e) the length of time these indicia have existed. To determine whether an entity performs a function the government treats as its own, the following factors should be considered: (a) whether the entity has a monopoly over the function it exists to carry out; (b) whether the government subsidizes the costs associated with the entity providing services; (c) whether the entity provides services to the public at large in the foreign country; and (d) whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function. 4 Cassels Brock & Blackwell LLP CFPOA Primer

7 II. The CFPOA Framework The meaning of the term loan, reward, advantage or benefit of any kind and the scope of advantages or benefits that would constitute an illegal bribe under the CFPOA is relatively undeveloped. The handful of completed prosecutions indicate a relatively broad scope which leaves open forms of monetary benefits the possibility of a large variety WITHIN THE SCOPE OF THE CFPOA of monetary and non-monetary could include making charitable or political benefits of varying amounts being contributions and the payment of improper offside the CFPOA. Courts have expenses such country club fees, housing found that transfers of securities expenses and limousine services. in start up companies, payment of travel expenses, provision of lodging and lavish or expensive gifts to be illegal bribes. 9 Other forms of monetary benefits that may fall within the scope of the CFPOA could include making charitable or political contributions and the payment of improper expenses such country club fees, housing expenses and limousine services. The term give, offer or agree to give or offer is fairly broad in scope. It is not only an offence to offer or give a bribe, but also an agreement to offer a bribe will constitute an offence. Further, the court in a recent prosecution broadly interpreted the term agrees to mean that conspiracy to commit a bribe will also constitute a violation of the Act. This means that agrees is not restricted to an agreement between two individuals: one who offers the bribe and one who receives the bribe. 10 Broadening the elements of the offence to include conspiracy circumvents some practical considerations, such as the difficulty in obtaining evidence from foreign jurisdictions. 11 (II) THE BOOKS AND RECORDS OFFENCE In addition to the bribery offence, the CFPOA contains a books and records offence for concealing bribery in the accounting records of the company, including by keeping secret accounts, falsely recording or inadequately identifying transactions, entering liabilities with incorrect identification of their object, using false documents or destroying documents or accounting books and records. Under section 4(1) of the CFPOA every person commits an offence who: 9 In R v Niko Resources Ltd., the benefits that were given to the foreign public officials included a Toyota Land Cruiser and a trip to New York and Chicago, worth about $5000, for the Bangladeshi State Minister for Energy and Mineral Resources to visit his family. In R v Griffiths Energy International Inc., the benefit constituted consulting fees worth about $2 million; in the US. 10 Karigar, supra note 7 at para Karigar, supra note 7 at para 29. CFPOA Primer Cassels Brock & Blackwell LLP 5

8 II. The CFPOA Framework for the purpose of bribing a foreign public official in order to obtain or retain an advantage in the course of business or for the purpose of hiding that bribery, establishes or maintains accounts which do not appear in any of the books and records that they are required to keep in accordance with applicable accounting and auditing standards; makes transactions that are not recorded in those books and records or that are inadequately identified in them; records non-existent expenditures in those books and records; enters liabilities with incorrect identification of their object in those books and records; knowingly uses false documents; or intentionally destroys accounting books and records earlier than permitted. The books and records criminal offence INCREASES THE RISK OF CRIMINAL EXPOSURE for a corporation and its directors and senior officers Payments for bribes are often made possible as a result of weak internal controls over financial reporting as such payments are typically inaccurately recorded in the books and records of a corporation. The books and records criminal offence increases the risk of criminal exposure for a corporation and its directors and senior officers as a result of inadequate internal controls and compliance programs or the false or inaccurate recording of payments of bribes in the corporation s financial records. To date, there has been no jurisprudence in Canada considering the books and records provisions of the CFPOA. B. EXCEPTIONS The CFPOA contains the following three main exemptions to the bribery offence: i) the local law exemption; ii) the reasonable expenses exemption; and iii) the facilitation payments exemption. Of significant note for corporations, the 2013 Amendments to the CFPOA provide for the elimination of the facilitation payment exemption once this amendment is proclaimed in force. 6 Cassels Brock & Blackwell LLP CFPOA Primer

9 II. The CFPOA Framework (I) THE LOCAL LAW EXEMPTION Under section 3(3)(a) of the CFPOA, a person is not guilty of an offence of bribing a foreign public official if the benefit or payment would be permitted or required under the laws of the foreign state or public international organization for which the foreign public official performs duties or functions. 12 There is no Canadian jurisprudence interpreting what would constitute a valid exemption under local law; however, regimes in other jurisdictions may provide some guidance. Under the US Foreign Corrupt Practices Act 13 (FCPA), for instance, the local law defence may only be used if the country has actively sanctioned the payment as being lawful under the foreign country s written laws and regulations at the time of the offence. 14 Merely proving that bribery would not be prosecuted under local law is not a defence. 15 (II) THE REASONABLE EXPENSES EXEMPTION Section 3(3)(b) of the CFPOA sets out the reasonable expenses exemption. Under the reasonable expenses exemption, a payment would not be considered bribery if it: was made to pay the reasonable expenses incurred in good faith by or on behalf of the foreign public official that are directly related to: the promotion, demonstration or explanation of the person s products and services, or the execution or performance of a contract between the person and the foreign state for which the official performs duties or functions. 16 Like the local law exemption, there is no Canadian jurisprudence interpreting this exemption. In the US, reasonable expenses are considered to be items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company 12 Supra note 1 at s 3(a). 13 The Foreign Corrupt Practices Act, 15 USC 78dd-1, 78dd-2, 78dd-3, 78m, 78ff [FCPA]. 14 Criminal Division of the US Department of Justice and Enforcement Division of the US Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act, (Washington: 2012) [FCPA Resource Guide] at Ibid. 16 Supra note 1 at s 3(3)(b). CFPOA Primer Cassels Brock & Blackwell LLP 7

10 II. The CFPOA Framework Large gifts such as sports cars, fur coats, country club memberships, household maintenance expenses, and extravagant trips have been found to be bribes SEVERAL SMALLER GIFTS TAKEN TOGETHER have also been found to amount to a bribe. promotional items, [which] are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action. 17 Large gifts such as sports cars, fur coats, country club memberships, household maintenance expenses, and extravagant trips have been found to be bribes under the FCPA. 18 However, several smaller gifts taken together have also been found to amount to a bribe. 19 Not every jurisdiction has codified a reasonable expenses exemption. The United Kingdom s Bribery Act (the Bribery Act ), does not contain a written exemption for reasonable and bona fide expenses or corporate hospitality. Although this was not meant to be a blanket prohibition of reasonable and proportionate hospitality expenses, the effect is that in the UK what constitutes a reasonable expense is a matter for prosecutorial discretion. 21 Expenses unrelated to the legitimate business purpose of a trip have resulted in prosecution under the CFPOA and the FCPA. For instance, in R. v. Niko Resources Ltd. (discussed in more detail below), Niko Resources Ltd. ( Niko ) paid for a foreign public official to attend an oil and gas exposition in Calgary, Alberta; however, the company also paid for that public official to visit family in New York. As part of the Agreed Statement of Facts in its guilty plea, Niko admitted that the non-business related portion of the travel and expenses of the public official constituted a bribe. Similarly, in the US Securities and Exchange Commission (the SEC ) prosecution of Lucent Technologies ( Lucent ), the company paid $2.5 million in fines and civil penalties to resolve allegations that it violated the FCPA. Lucent admitted that, from 2000 to 2003, the company spent more than $10 million to take approximately 1,000 foreign officials on more than three hundred trips to the United States and elsewhere. The majority of the trips were ostensibly designed to allow for the inspection of Lucent s factories by the foreign officials and to train the officials in the use of Lucent equipment. However, during many of the trips, the officials spent little or no time visiting Lucent s facilities. Instead, they visited US tourist destinations. In addition to paying for all lodging, transportation, food 17 FCPA Resource Guide, supra note 14 at Ibid. at Ibid. 20 Bribery Act 2010 (UK), 2010, c 23 [Bribery Act]. 21 Open letter from Lord Tunnicliffe to Lord Henley (14 January 2010) in Colin Nicholls et al, Corruption and Misuse of Public Office, (Oxford: Oxford University Press, 2011) at 4.135; UK, HL, Parliamentary Debates, vol 716, no 21 (7 January 2010) (Lord Lyell of Markyate). 8 Cassels Brock & Blackwell LLP CFPOA Primer

11 II. The CFPOA Framework and entertainment expenses, in many instances, Lucent provided sightseeing, entertainment and leisure activities, as well as per diems, in relation to the time and expense spent on legitimate training. Accordingly, the SEC took the position that the trips had a disproportionate amount of leisure and sightseeing activities in relation to time spent on legitimate training and site inspections and that Lucent lacked the internal controls to detect and prevent trips intended for sightseeing, entertainment, and leisure, rather than business purposes. 22 expenses that are unrelated to a legitimate business purpose may trigger prosecution for breach of the CFPOA (or FCPA) These cases illustrate the risk that expenses that, in whole or part, are unrelated to a legitimate business purpose may trigger prosecution for breach of the CFPOA (or FCPA), and underscore the importance of care and diligence on the part of the company financing trips (or other expenses) of a foreign public official. (III) THE FACILITATION PAYMENT EXCEPTION The facilitation payment exemption (and its eventual elimination) is of most practical significance to corporations operating in certain foreign jurisdictions either directly or indirectly through local agents. Facilitation payments are made to foreign public officials to expedite or secure the performance of a routine act that is part of the official s ordinary duties, such as the issuance of a permit, the processing of documents such as visas and work permits, or the provision of services normally provided, such as police services. Such payments are a routine cost of business in certain countries. Notwithstanding this reality, there is a growing international trend to eliminate facilitation or grease payments from international business dealings. Section 3(4) of the CFPOA currently carves out facilitation payments from the offence of bribery under the CFPOA: a payment is not a loan, reward, advantage or benefit to obtain or retain an advantage in the course of business if it is made to expedite or secure the performance by a foreign public official of any act of a routine nature that is part of the foreign public official s duties or functions, including: the issuance of a permit, licence or other document to qualify a person to do business; 22 SEC Litigation Release No / December 21, 2007, online: litreleases/2007/lr20414.htm. CFPOA Primer Cassels Brock & Blackwell LLP 9

12 II. The CFPOA Framework the processing of official documents, such as visas and work permits; the provisions of services normally offered to the public, such as mail pick-up and delivery, telecommunication services and power and water supply; and the provision of services normally provided as required, such as police protection, loading and unloading of cargo, the protection of perishable products or commodities from deterioration or the scheduling of inspections related to contract performance or transit of goods. An act of a routine nature does not include any decision to award new business or to continue business with a particular party. 23 Section 3(2) of the 2013 Amendments eliminates the corporations should facilitation payment exemption from the CFPOA and will be prepared for the come into force on a day to be fixed by the Governor federal cabinet to in Council (the federal cabinet). To date, this provision ELIMINATE THE has not yet been declared in force. The Canadian FACILITATION government has stated that it delayed proclaiming this PAYMENT EXEMPTION amendment in force to allow Canadian corporations without any further a period of time to adjust their operations to the notice period. new requirements of the CFPOA. Given that over one year has passed since the 2013 Amendments were implemented, corporations should be prepared for the federal cabinet to eliminate the facilitation payment exemption without any further notice period. The most notable exception to the global trend against facilitation payments is the United States. The FCPA continues to provide an exception for facilitating or expediting payments to a foreign official... to expedite or to secure the performance of a routine governmental action. 24 C. PENALTIES Contravention of the CFPOA carries the risk of significant liability in addition to the reputational damage and business disruption that an investigation and prosecution would cause. In particular, the CFPOA imposes the following penalties: Individuals: A maximum term of imprisonment of 14 years 25 Organizations: A fine with no proscribed upper limit CFPOA, supra note 1 at s 3(5). 24 FCPA, supra note 13 at 78dd(1)(b). 25 CFPOA, supra note 1 at s 3(2), 4(2). 26 RSC 1985, c C-46 at s 735(1)(a) [Criminal Code]. 10 Cassels Brock & Blackwell LLP CFPOA Primer

13 II. The CFPOA Framework Sentences imposed for breaches of the Act are subject to the sentencing guidelines set out in the Criminal Code of Canada (the Criminal Code ) and the discretion of the Court. Section of the Code lists several aggravating and mitigating factors that should be taken into consideration by the Court when imposing a sentence. Section of the Criminal Code enumerates factors to be considered when sentencing an organization, including: Any advantage realized by the organization as a result of the offence; The degree of planning involved in carrying out the offence and the duration and complexity of the offence; The impact that the sentence would have on the economic viability of the organization and the continued employment of its employees; The cost to public authorities of the investigation and prosecution of the offence; and Any measures that the organization has taken to reduce the likelihood of it committing a subsequent offence. The willingness of a corporation to PROACTIVELY IMPLEMENT, OR IMPROVE, A COMPLIANCE AND TRAINING PROGRAM following an investigation or charges under the CFPOA will likely mitigate the corporation s exposure. In assessing the financial penalty to impose on a corporation for breaches of the CFPOA (or other criminal misconduct, including fraud), the court will consider the above factors (among others). The willingness of a corporation to proactively implement, or improve, a compliance and training program following an investigation or charges under the CFPOA will likely mitigate the corporation s exposure. Since there have been few prosecutions in Canada, there is little judicial guidance on the application of the sentencing guidelines to CFPOA violations; however, these guidelines were considered by the Court in Karigar, in its decision to impose a 3 year prison sentence on the first individual tried, convicted and sentenced under the CFPOA. 27 As aggravating factors, the Court considered the sophistication of the scheme, the quantum of the proposed bribe, and other circumstances of dishonesty. 28 As mitigating factors, the Court considered the level of cooperation of the accused, the age of the accused, lack of a prior criminal record and the harm resulting from the offence (in that case, the bribery scheme was a failure) Karigar, supra note Ibid. at para Ibid. at para 12. CFPOA Primer Cassels Brock & Blackwell LLP 11

14 II. The CFPOA Framework In R. v. Griffiths Energy International 30 (Griffiths Energy), the Court also considered the applicable Criminal Code sentencing provisions in its decision to accept a joint sentencing submission that the financial penalty imposed on the corporate defendant for violating the CFPOA should total $10.35 million. In the sentencing decision, the Court weighed the chief aggravating factor, namely the size of the bribe, against the significant number of mitigating factors, including a change in the management team of the company, the swift and decisive internal investigation and that the company self-reported the crime. The court also recognized that Griffiths sharing of information, including privileged documents, from the investigation (which cost in the range of $5 million) saved the prosecution a significant amount of money and time in investigation and that the guilty plea avoided the cost of a full trial. Finally, and very importantly, Griffiths entire course of conduct since discovery the bribe demonstrate[d] a complete and genuine remorse for the illegal conduct manifested by its former officers. 31 D. JURISDICTION Canada has broad jurisdiction to prosecute violations of the CFPOA, and may assert jurisdiction where: a) a significant portion of the actions or omissions constituting a corruption offence are committed in or connected to Canada - in other words, where the transaction has a real and substantial connection to Canada; and b) over the actions of Canadian companies, citizens and residents regardless of where such actions occur pursuant to section 5 of the CFPOA. (I) TERRITORIAL JURISDICTION Where a significant portion of the actions or omissions constituting a corruption offence are committed in or connected to Canada, Canadian prosecutors and courts will assert jurisdiction. 32 While there is limited case law under the CFPOA, according to general criminal law principles, a sufficient territorial link to attract liability under the CFPOA could include communications, directions or meetings relating to the negotiation, authorization or implementation of the bribe or the failure to 30 R. v. Griffiths Energy International, [2013] AJ No 412 (ABQB) [Griffiths Energy]. 31 Ibid. at para According to the Supreme Court of Canada decision in R. v. Libman, [1985] 2 SCR 178, a case which arose in the context of a boiler room fraud, all that is necessary to make an offence subject to the jurisdiction of [Canadian] courts is that a significant portion of the activities constituting the offence took place in Canada. As it is put by modern academics, it is sufficient that there be a real and substantial link between the offence and this country. See also R. v. Karigar, 2013 ONSC2199 at paras 34 to Cassels Brock & Blackwell LLP CFPOA Primer

15 II. The CFPOA Framework prevent the bribe (through inadequate review, implementation or monitoring of anti-bribery policies) which occur in Canada or circumstances where the funds relating directly or indirectly to the bribe flow through Canada. In R. v. Karigar, the first trial, conviction and sentencing of an individual under the CFPOA, the Ontario Superior Court of Justice rejected Karigar s submission that, in the context of bribing a foreign public official, the financial element of the offence (i.e. the approving or funding of the bribe) must occur in Canada in order to satisfy the real and substantial connection test. The court found that it had jurisdiction over Karigar since, among other reasons, he was acting for the benefit of a Canadian company and, had the scheme been successful, an unfair advantage would have flowed to that company. Karigar was charged prior to the 2013 Amendments, which expanded jurisdiction beyond the territorial connection to Canada. Accordingly, the jurisdictional findings in the Karigar decision are of most relevance to foreign nationals. increased willingness by Canadian authorities to assert jurisdiction over individuals, IRRESPECTIVE OF THEIR NATIONALITY OR LOCATION, who conspire to bribe foreign officials where such conduct has a connection with Canada. Immediately following Karigar s sentencing, the RCMP charged three foreign nationals, one British agent and two American former executives of Cryptometics with bribery under the CFPOA. 33 This recent development may demonstrate an increased willingness by Canadian authorities to assert jurisdiction over individuals, irrespective of their nationality or location, who conspire to bribe foreign officials where such conduct has a connection with Canada. The CFPOA s reach is not without limit. Recently, a Canadian court in the case of Chowdhury v HMQ 34 held that it did not have jurisdiction over a Bangladeshi citizen and resident charged in connection with the ongoing corruption investigation involving SNC-Lavalin Group Inc. ( SNC-Lavalin ) who had never been in Canada and all of his alleged conduct took place outside of Canada. The court stayed the prosecution but confirmed that the stay may be lifted should the individual travel to Canada or to another country with which Canada has an extradition treaty. (II) NATIONALITY-BASED JURISDICTION To bring the CFPOA in line with its international counterparts, including the FCPA and the Bribery Act, the 2013 Amendments broadened Canada s 33 See RCMP Charge Individuals with Foreign Corruption (June 4, 2014), online:rcmp, gc.ca/ottawa/ne-no/pr-cp/2014/0604-corruption-eng.htm ONSC CFPOA Primer Cassels Brock & Blackwell LLP 13

16 II. The CFPOA Framework jurisdiction beyond the territorial link requirement of a real and substantial connection by explicitly deeming any act in contravention of the CFPOA committed abroad by a Canadian company, citizen or permanent resident to have been committed in Canada. This nationality-based jurisdiction exposes a corporation to criminal liability for any acts or omissions of its Canadian subsidiaries and its Canadian directors, officers or senior managers related to any contravention of the CFPOA, regardless of where such acts occur or their connection to Canada. The mere fact of nationality is sufficient to attract liability under the CFPOA. Accordingly, a corporation risks criminal exposure under the CFPOA if a Canadian director, officer or employee with a sufficiently important role has The mere fact of nationality knowledge of, involvement in or permits or authorizes is sufficient to attract the bribery of a foreign public official. A company or liability under the CFPOA. a person would not have to operate or be in Canada and the act would not have to occur in Canada or be connected to Canada for such person or company to be tried and convicted under the CFPOA. While it remains to be seen how this new jurisdictional scope will be asserted by Canadian authorities, it has the effect of greatly expanding the reach of the CFPOA to cover activities of Canadian corporations, citizens and permanent residents wherever they occur and without regard to the relationship those activities have to Canada. For instance, Canadian prosecutors could aggressively assert jurisdiction over corporations with Canadian directors or officers where the only action by such Canadian citizens or residents is the indirect facilitation of the bribe by failing to exercise proper oversight to prevent the foreign corrupt practices. On a comparative note, US prosecutors have taken an aggressive view of nationality jurisdiction to commence several high profile prosecutions against corporations, directors and officers under the FCPA for acts which have little or no connection to the US. Canada s federal police agency, the Royal Canadian Mounted Police (RCMP), has exclusive authority to investigate and lay charges for foreign corruption and antibribery offences. This eliminates the potential for jurisdictional conflicts between federal and provincial law enforcement agencies. The RCMP has two specialized investigation units, based in Ottawa and Calgary, responsible for the investigation of potential breaches of the CFPOA. From a prosecution perspective, federal and provincial prosecutors share jurisdiction under the CFPOA. E. CORPORATE LIABILITY Corporations may be held criminally liable for true criminal mens rea offences (offences requiring guilty intent), such as breaches of the CFPOA. For such 14 Cassels Brock & Blackwell LLP CFPOA Primer

17 II. The CFPOA Framework offences, corporations may attract criminal liability for the actions or omissions of a range of individuals. Pursuant to section 22.2 of the Criminal Code, corporations will be held criminally liable for the actions or omissions of senior officers including directors, officers, senior managers and any individual, partner, employee, member, agent or contractor having an important role in the establishment of the organization s corporations will be policies or responsible for managing an important aspect held CRIMINALLY of the organization s activities. Liability for such actions LIABLE for the or omissions is also limited to circumstances where such actions or omissions individuals act or fail to act with the intent, at least in of senior officers part, to benefit the corporation. While section 22.2 of the Criminal Code has not been interpreted in the context of the CFPOA, Canadian courts have confirmed a broad approach to corporate criminal liability. For instance, in R. v Global Fuels Inc., 35 the Court of Quebec interpreted the term senior officer as extending beyond senior management to encompass lower-level employees that meet certain criteria. Relevant factors include the individual s title, duties, the extent of his or her authority and the importance of the activities that the individual manages on behalf of the corporation. More recently, and in the context of corporate liability for criminal negligence, the Ontario Court of Appeal in R. v. Metron Construction Corp. 36 confirmed that a mid-level manager, in that case a construction site supervisor, may qualify as a senior officer under the Criminal Code, where that individual manages an important aspect of the corporation s business. In the CFPOA context, corporations may also face liability for the conduct of third party agents, consultants or intermediaries. The principal CFPOA bribery offence prohibits anyone from directly or indirectly giving, offering or agreeing to an illegal bribe. Accordingly, a prohibited payment or benefit made through a third party could amount to giving an illegal bribe indirectly. F. RISK OF REGULATORY AND CIVIL LIABILITY In Canada, breaches of the CFPOA are prosecuted criminally by either federal or provincial prosecution authorities. Securities regulatory authorities do not have any authority to prosecute breaches of the CFPOA and to date have not brought administrative enforcement proceedings relating to any foreign corrupt practices or conduct. This differs from the FCPA, which permits both the US Department of Justice (the DOJ ) and the SEC to pursue enforcement action for FCPA violations QCCQ ONCA 531. CFPOA Primer Cassels Brock & Blackwell LLP 15

18 II. The CFPOA Framework Illegal bribes under the CFPOA would likely result in a disclosure violation or trigger a disclosure obligation for public companies under Canadian securities laws. For instance, the company s financial disclosure or its disclosure regarding internal controls and compliance with its own policies prohibiting bribery may be inaccurate or misleading. As well, the internal investigation or its results may have also trigger a requirement for further disclosure and any failure to make such disclosure would violate securities laws. While Canadian securities regulators have not shown an interest in pursuing such disclosure violations to date, it nevertheless remains a risk should their focus shift. In addition to criminal prosecution, a corporation and its directors and officers may also face civil actions, including class actions, relating to the foreign corrupt practices. In the high profile corruption investigation involving SNC-Lavalin, a Canadian engineering and construction company, a securities class action was commenced against a corporation may also face SNC-Lavalin and certain of its officers and directors civil actions, including class immediately following the company s disclosure of actions, relating to the foreign its internal investigation relating to allegations of corrupt practices. bribery associated with projects in Bangladesh and elsewhere. The action alleges that SNC-Lavalin s disclosure documents contained material misrepresentations relating to, among other things, the sufficiency of the company s internal controls and compliance with the company s Code of Ethics and Business Conduct. Finally, corporations convicted under the CFPOA may also face debarment under the procurement policy of Public Works and Government Services Canada (PWGSC), the federal department primarily responsible for the purchase of goods and services. The policy restricts the PWGSC from accepting bids from a company convicted of certain offences, including various fraud, bribery and corruption offences. 37 Corporations suspected of engaging in foreign corrupt practices may also face debarment from foreign governments and entities, such as the World Bank PWGSC s Integrity Framework, online: Public Works and Government Services Canada, www. tpsgc-pwgsc.gc.ca/ci-if/ci-if-eng.html. 38 On April 17, 2013, the World Bank announced that SNC-Lavalin Inc. (and over 100 affiliates) was debarred from World Bank funded projects for 10 years. The debarment can be reduced to eight years if the company complies with the conditions of a Negotiated Resolution Agreement. It is also important to note that under the resolution agreement, the remainder of the SNC-Lavalin Group that that is not subject to debarment will face debarment if it fails to comply with the terms of the resolution agreement. See World Bank Debars SNC-Lavalin Inc. and its Affiliates for 10 years (April 17, 2013), online: The World Bank, world-bank-debars-snc-lavalin-inc-and-its-affiliates-for-ten-years. 16 Cassels Brock & Blackwell LLP CFPOA Primer

19 III. Significant Cases There have been few prosecutions under the CFPOA and only one conviction of an individual. The following is a summary of the completed prosecution cases under the CFPOA in Canada: 1. R v WATTS (ALSO KNOWN AS HYDRO-KLEEN) (2005) 39 R v Watts, which was released seven years after the enactment of the CFPOA, was the first successful prosecution under the Act. In that case, Hydro Kleen Services Inc, ( Hydro Kleen ) as well as its president and majority shareholder Robert Watts and Operations Coordinator Paulette Francis Bakke, were charged with making payments totalling $28, to a United States Department of Justice, Immigration and Naturalization Service immigration inspector for assistance with obtaining work permits and entrance to the United States for Hydro s employees and to reduce the need for immigrationrelated legal expenses. As part of a plea agreement, the charges against the individuals were stayed and the Crown prosecutors recommended a fine of $25,000 (an amount which was less than the bribe itself) against Hydro Kleen. In accepting the recommendation, the Court inferred that the prosecution had determined that the amount of the fine was significant for Hydro Kleen and further recognized that the individuals 39 R v Watts, [1995] AJ no 568 (QL) (ABQB). involved did not escape with their integrity intact, even though they avoided the stigma attached to a criminal record R v NIKO RESOURCES LTD. (2011) 41 Niko Resources was the second case successfully prosecuted under the CFPOA and set a new benchmark for financial penalties. Niko Resources Ltd. ( Niko ), an Alberta-based oil and gas company, pled guilty to charges under section 3(1)(b) of the CFPOA in connection with providing improper benefits to the Bangladeshi State Minister for Energy and Mineral Resources. The benefits included a car worth CDN$190,984 and travel and accommodation expenses. Following a guilty plea and joint submission from the Crown and Niko, the Court imposed a fine totalling $9,499,000, and a three year term of probation. As a term of Niko s probation, it was required to implement an anticorruption compliance program. 40 Ibid at paras 184 and R v Niko Resources Ltd, 101 WCB (2d) 118, 2011 CarswellAlta 2521 (WL Can) (ABQB) [Niko Resources]. CFPOA Primer Cassels Brock & Blackwell LLP 17

20 III. Significant Cases In determining the sanction, the Court cited aggravating factors including the severity of the crime, the reputational damage to Canada and Alberta, particularly in light of Calgary s proud reputation as the energy capital of Canada, 42 and the objectives of demonstrating the court s strong denunciation of such conduct and providing meaningful deterrence for others who might be tempted to commit the same offence. 43 The Court also cited mitigating factors such as the company s lack of similar offences, the company s cooperation with the investigation and a plea agreement made before charges were formally laid R v GRIFFITHS ENERGY INTERNATIONAL (2013) 45 In 2012, an investigation was conducted into allegations that the previous management of Griffiths Energy International ( Griffiths ) violated Canada s foreign corrupt practices regime in connection with business dealings in the Republic of Chad. The new board and management team discovered that the company made consulting payments in excess of $2 million and provided certain securities to a company controlled by the wife of a foreign public official while the company was negotiating with the foreign government for the grant of oil concession rights. The company commenced an independent internal investigation, self-reported and shared serves as an example of the MITIGATING BENEFITS of self-reporting, complete cooperation and implementation of a robust compliance regime the results of their internal investigation with the police and the federal prosecutors and implemented a robust anti-corruption compliance program. Griffiths paid a fine of $10.35 million to settle the matter with Canadian authorities. Griffiths Energy serves as an example of the mitigating benefits of self-reporting, complete cooperation and implementation of a robust compliance regime, since the $10.35 million fine was only slightly more than the fine paid by Niko, even though the value of the bribe was more than 10 times greater than the bribe paid by Niko. 42 Ibid at para Ibid at para Ibid paras Griffiths Energy, supra note Cassels Brock & Blackwell LLP CFPOA Primer

21 III. Significant Cases 4. R v KARIGAR (2013) 46 Karigar was the first trial, conviction and sentencing of an individual under the CFPOA. In August 2013, following a lengthy trial, Nazim Karigar was convicted on a single count indictment of offering to bribe a foreign public official contrary to section 3 of the CFPOA. Karigar was found to have played a leading role in a conspiracy to bribe officials of Air India, a individuals [upon conviction] must appreciate that they will face a SIGNIFICANT SENTENCE OF INCARCERATION IN A FEDERAL PENITENTIARY. corporation owned and controlled by the Government of India, and the Indian Minister of Civil Aviation, for the purpose of securing a multi-million dollar Air India contract for a biometric security system on behalf of Ottawa-based Cryptometrics Canada Limited. Karigar was sentenced to three years in prison for his role in the scheme. In delivering the three year sentence, the court identified various aggravating and mitigating factors. In terms of aggravating factors, the court considered the quantum of the contemplated bribe, which would have involved the payment of millions of dollars in bribes and stock benefits over time, as well as other circumstances of dishonesty, including anti-competitive behaviour. In terms of mitigating factors, the Court referred to Karigar s high-level of cooperation, including that he self-reported the bribery scheme after a fall out with his co-conspirators, his age, lack of prior criminal record, and the fact that the bribery scheme was a complete failure. The Karigar case highlights the significant risks for individuals engaged in foreign corruption and, according to the Court in that case, such individuals must appreciate that they will face a significant sentence of incarceration in a federal penitentiary. It is important to note that had Mr. Karigar been convicted under the current Act, the term of imprisonment may have been significantly longer Karigar, supra note Karigar faced a statutory maximum of five years imprisonment as he was charged prior to the 2013 Amendments, which increased the maximum length of imprisonment to 14 years. CFPOA Primer Cassels Brock & Blackwell LLP 19

22 IV. Jurisdictional Issues: How to Cope with Multi-jurisdictional Liability A. MULTI-JURISDICTIONAL LIABILITY Given the broadening jurisdictional scope of the international regimes that prohibit foreign corrupt practices and the inherent international nature of corruption, organizations and individuals engaged in alleged misconduct face potential liability in multiple jurisdictions. There is also a trend towards increased cooperation and information sharing between domestic and foreign law enforcement and regulatory authorities, which will continue to increase the organizations and individuals engaged in alleged misconduct face POTENTIAL LIABILITY IN MULTIPLE JURISDICTIONS. risk of multijurisdictional liability. Although different countries may collaborate and coordinate multi-jurisdictional prosecutions, there is no requirement to do so or established protocol. In some instances, criminal liability has been triggered in up to twelve nations. 48 A notable example of multi-jurisdictional liability is the Siemens case, in which Siemens paid $1.6 billion to settle parallel proceedings in the United States and Germany. 49 (I) AUTREFOIS CONVICT AND AUTREFOIS ACQUIT The CFPOA contains a provision that addresses the circumstances of prosecution in multiple jurisdictions. In particular, section 5(4) of the CFPOA allows certain persons to plead autrefois convict or autrefois acquit if they have been tried and dealt with outside of Canada for certain acts or omissions that would otherwise have constituted an offence under the Act Elizabeth Spahn, Multijurisdictional Bribery Law Enforcement: The OECD Anti-Bribery Convention (2012) 53:1 Virg J Int Law 1 at The Siemens Scandal: Bavarian baksheesh, The Economist (17 December 2008) online: < economist.com/node/ >. 50 Supra note 1 at s 5(4-5). 20 Cassels Brock & Blackwell LLP CFPOA Primer

23 IV. Jurisdictional Issues: How to Cope with Multi-jurisdictional Liability The autrefois pleas embody the principle that no person shall be placed in jeopardy twice for the same matter 51 ( double jeopardy ). Although often narrow in their application, the autrefois pleas are applicable when a court of competent jurisdiction has acquitted or convicted an accused of the same or substantially the same offence charged in Canada. 52 The autrefois convict plea is not available where: The person was not present and was not represented by counsel acting under the person s instructions at the trial outside Canada; and The person was not punished in accordance with the sentence imposed on conviction in respect of the act or omission. 53 (II) DOUBLE JEOPARDY Although protection against multiple liability for the same offence, even offences dealt with in foreign nations, is contemplated under Canadian law and enshrined in section 11(h) of the Canadian Charter of Rights and Freedoms, 54 other jurisdictions may take a different approach. risk is further enhanced by the HIGH LEVEL OF COORDINATION among international law enforcement agencies. In the US, for instance, the principle of double jeopardy is entrenched in the Fifth Amendment of the US Constitution. 55 Nevertheless, under the long-standing dual sovereignty doctrine, double jeopardy does not to apply to successive prosecutions by different sovereigns. 56 As a result, a person that has been prosecuted and sanctioned for foreign bribery offences in one jurisdiction may not be able to invoke a double jeopardy defence in the US. B. A COORDINATED GLOBAL RESOLUTION As stated above, given that foreign corruption is an inherently international issue, corporations facing allegations of suspected wrongdoing must consider the risk of liability in multiple jurisdictions. This risk is further enhanced by the high 51 R v L(P), 1998 CarswellNWT 140 (NWT SC) at para Canadian Abridgement Digest Section V6(b)(vii) Supra note 1 at section 5(5). 54 Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (UK), 1982, c 11 at s 11(h). 55 Michael Van Alstine, Treaty Double Jeopardy: The OECD Anti-Bribery Convention and the FCPA (2012), Ohio State Law Journal, 73:5 at p Ibid. CFPOA Primer Cassels Brock & Blackwell LLP 21

24 IV. Jurisdictional Issues: How to Cope with Multi-jurisdictional Liability level of collaboration and coordination among international law enforcement agencies. As an example of such cooperation, courts in the US and the UK cooperated in the prosecution of Innospec Ltd., a Delaware-based company, and certain of its former executives. 57 US and UK authorities worked closely, even announcing the sentences on the same day to avoid a disorderly market for Innospec shares. The US assumed primary responsibility for the aspect of the case involving misconduct in Iraq (as well as Cuba Trade Embargo violations), whereas the UK assumed primary responsibility for bribery in Indonesia. 58 In the Canadian context, SNC-Lavalin remains the subject of an ongoing investigation in Canada and certain other countries, including Switzerland, over allegations that it bribed foreign public officials to secure contracts in a number of countries, including Bangladesh and Cambodia. To date, at least three individuals from SNC-Lavalin and two others connected with an impugned bridge project in Bangladesh have been charged under the CFPOA and are awaiting trial. These prosecutions involve significant international collaboration. Should SNC-Lavalin itself face prosecution for breach of the CFPOA or its international counterparts, 59 it may have to weigh its liability across multiple jurisdictions. 57 Spahn, supra note 48 at Ibid at An SNC-Lavalin company and its affiliates have already been debarred by the World Bank for up to 10 years as a result of the alleged misconduct. 22 Cassels Brock & Blackwell LLP CFPOA Primer

25 V. The Self-Reporting Calculus Although encouraged under Canada s foreign corrupt practices regime, there are no formal programs, protocols or guidelines for self-reporting, leniency or immunity. This is in contrast to other acts, such as the Canadian Environment Protection Act, 1999, which imposes a requirement to report violations to enforcement officers and members of the public under certain circumstances, 60 and the Competition Act, 61 under which immunity and leniency self-reporting corporations are programs are available. faced with uncertainty Apart from self-reporting, as to whether their a public company may cooperation will be otherwise be required appropriately or to disclose a violation of fairly recognized. the CFPOA or its internal anti-bribery policies or the fact of an internal investigation as part of its continuous disclosure obligations under Canadian securities law. With no specific guidance, guidelines or protocols for self-reporting under the CFPOA, there is little or no assurance for corporations and their directors and officers as to the likely 60 SC 1999, c 33 at s 95(1)(a)(b). 61 RSC 1985, c C-34. benefit from self-reporting, such as the amount of reduction to any sanction or the circumstances that would warrant no enforcement action. As a result, corporations are faced with uncertainty as to whether their cooperation will be appropriately or fairly recognized. In addition to this uncertainty as to the likelihood or extent of leniency, corporations must consider the costs and impact of voluntary disclosure, including reputational damage and the consequences of such admission on potential lawsuits, including class actions, or other potential investigations or proceeding in other jurisdictions in determining whether, when and how to voluntarily disclose. Notwithstanding the absence of a formal leniency program, the limited jurisprudence under the CFPOA provides some indication of the benefits of selfreporting. The benefits can be inferred by contrasting the sanctions imposed in Niko CFPOA Primer Cassels Brock & Blackwell LLP 23

26 V. The Self-Reporting Calculus Resources and Griffiths Energy. In Niko Resources, Niko was fined $9.5 million for providing gifts to a foreign public official worth approximately $200,000. Niko cooperated with the police investigation but did not self-report. In contrast, in Griffiths Energy the company commenced an independent internal investigation, self-reported and implemented a robust anti-corruption compliance program. Griffiths Energy was fined $10.35 million, an amount just slightly more than the fine paid by Niko, even though the value of the bribe was more than 10 times greater than the bribe made by Niko. In Griffiths Energy, the court relied on the company s decision to self-report the CFPOA violation as a significant mitigating factor, noting that the company chose to share the results of their investigation with authorities, including privileged documents. 62 However, the company s contribution to the cost of the investigation may also have acted as a mitigating factor. As stated by the court: the cost of this investigation is said to be in the range of $5 million and thus sharing this information with the RCMP has obviously saved the prosecution a significant amount of money. 63 Notwithstanding the emphasis Canadian courts have placed on self-reporting, the benefit obtained from self-reporting will be tempered if there are outweighing aggravating factors. In Karigar, the court pointed to Karigar s high level of cooperation during the prosecution and his decision to expose the bribery scheme as mitigating factors. 64 However, the court also noted that the bribery scheme was highly sophisticated and largely conceived of and orchestrated by Karigar. 65 Ultimately, while there may be significant benefits to self-reporting, these benefits are circumscribed by the facts of each particular case in context. In the US, the regime for self-reporting breaches of the FCPA is more developed. The DOJ has provided guidance on the benefits of self-reporting of foreign corrupt practices and made it clear that corporations which choose to report violations of the FCPA will receive more leniency, while corporations which try to cover up or not report incidences of bribery will not receive as favourable treatment. 66 US sentencing guidelines also provide corporations with a clearer understanding of the specific benefits of self-reporting. 62 Griffiths Energy, supra note 30 at paras Griffiths Energy, supra note 30 at para Karigar, supra note 7 at para Ibid at para Warren Feldman & Benjamin Rankin, The Voluntary Disclosure Calculus: When Corporations Should Disclose Violations of the U.S. Anti-Corruption Laws in Multi-Jurisdictional Investigations. 24 Cassels Brock & Blackwell LLP CFPOA Primer

27 V. The Self-Reporting Calculus The leniency shown by the US DOJ or SEC often manifests in the decision to resolve matters by way of: (1) deferred or non-prosecution agreements; or (2) the decision to decline to bring an enforcement action. 67 For example, on April 22, 2013, the SEC announced that it had entered into a non-prosecution agreement with Ralph Lauren corporations should in which the company would disgorge approximately weigh the likelihood $700,000 as a penalty for bribe payments made by of prosecution against Ralph Lauren Corporation Argentina s general manager the BENEFITS AND to Argentine customs officials and for improper gifts RISKS OF SELFmade to Argentine government officials. According to REPORTING. public statements, the SEC determined not to charge Ralph Lauren Corporation... due to the company s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC s investigation. 68 In addition, in 2012, the DOJ charged a managing director at Morgan Stanley for conspiring to circumvent the company s internal controls under the FCPA. 69 The DOJ declined to prosecute the company as a result of its rigorous internal controls, the fact that it voluntarily disclosed the wrongdoing and cooperated fully with the investigation. Although the decision to self-report may lead to leniency with respect to the commencement or continuation of a prosecution, such leniency does not necessarily translate into reduced monetary sanctions. Some academics have found that once market capitalization and the amount of the bribe are controlled for, the decision to voluntarily disclose a violation has no effect on the ultimate monetary penalty. 70 In fact, the sanction is significantly determined by the size of the bribe, the profit related to the bribe, and the amount of business affected by the bribe. 71 Notwithstanding the modest reduction in monetary penalties in terms of sanctions, a price can often not be placed on the cost and reputational damage avoided from entering into deferred or non-prosecution agreements and the avoidance of a full-blown criminal investigation. 67 FCPA Resource Guide, supra note 14 at U.S. Securities and Exchange Commission, SEC Announces Non-Prosecution Agreement With Ralph Lauren Corporation Involving FCPA Misconduct (22 April 2013), online: gov/news/pressrelease/detail/pressrelease/ The U.S. Department of Justice also entered into a non-prosecution agreement with Ralph Lauren Corporation. 69 The United States Department of Justice, Former Morgan Stanley Managing Director Pleads Guilty for Role in Evading Internal Controls Required by FCPA, (25 April 2012), online: gov/opa/pr/2012/april/12-crm-534.html. 70 Stephen Choi and Kevin Davis, Foreign Affairs and Enforcement of the Foreign Corrupt Practices Act (2012) NYU Law and Economics Research Paper No (Working Paper Series) at p Ibid. CFPOA Primer Cassels Brock & Blackwell LLP 25

28 V. The Self-Reporting Calculus Notwithstanding the apparent benefits of self-reporting, there are obvious risks involved. Although there is evidence that sanctions will be mitigated in Canada if a person decides to self-report, as discussed above, such benefits are speculative as the government has provided limited formal guidance. In order to evaluate whether self-reporting is the prudent choice, corporations should weigh the likelihood of prosecution against the benefits and risks of selfreporting. Certain considerations may include: whether the CFPOA violation is a clear-cut case or whether it is ambiguous whether a violation has occurred; 72 whether the case is an isolated incident involving non-senior officers and small sums of money or whether the case involves repeated infractions by senior personnel involving large sums; 73 the reputational risk loss of business, debarment or a decline in share price; 74 the consequences, including litigation, that may arise from waiving privilege, which is typically required when self-reporting; 75 the potential for forward sharing of information between regulatory and law enforcement agencies, particularly between jurisdictions; the potential for liability in multiple jurisdictions; 76 and whether there are any business or legal requirements for disclosure, for example a pending merger or other business arrangement or public company disclosure requirements Low et al, The Uncertain Calculus of FCPA Voluntary Disclosures (Paper delivered at the American Conference Institute, 27 & 28 March 2007), [unpublished] at p Ibid. 74 Ibid at p Ibid. 76 Ibid. 77 Ibid at p Cassels Brock & Blackwell LLP CFPOA Primer

29 VI. Transactional Issues and Due Diligence Corporations considering a potential merger, acquisition, investment, joint venture or other corporate transaction involving business or operations abroad may be liable under the CFPOA, directly or as a successor corporation, depending on the nature of the transaction. Accordingly, corporations must include the vetting of the risk of non-compliance with foreign corrupt practices regimes in their assessment of the risk associated with the transaction. The metrics of a transaction may change significantly with the identification of bribery or compliance issues by a possible target or business partner (including a joint venture partner), The metrics of a transaction may CHANGE SIGNIFICANTLY with the identification of bribery as a result of potential business disruption, reputational damage and the costs associated with an external and internal investigation. Effective due diligence is critical to identifying the risks associated with a particular transaction and should be standard practice for corporations with foreign operations (including manufacturing, sales and supply arrangements) or those seeking to expand internationally. Where necessary, corporations should engage reputable legal counsel and investigators in those high risk jurisdictions to assist with due diligence at the local level. While corruption and bribery can occur anywhere, the risk that a potential transaction may trigger anti-corruption compliance considerations is heightened where the transaction involves business in regions and countries identified as having a higher risk of corruption. Transparency International publishes an annual Corruption Perceptions Index that identifies high risk countries and regions. 78 These regions include Central America, Africa, the Middle East, Eastern Europe and Southeast Asia. 78 Transparency International, 2013 Corruption Perceptions Index (2013), online: transparency.org/cpi2013/. CFPOA Primer Cassels Brock & Blackwell LLP 27

30 VI. Transactional Issues and Due Diligence It is important to recognize that, as with compliance programs (described below), there is no one size fits all approach to due diligence; however, the following considerations should be within the scope of any due diligence: 79 Geographical and Sector Risks Does the transaction involve operations in countries at a high risk for corruption? Does the transaction concern sectors perceived as having a high risk for corruption? These industries include: 80 Public works contracts and construction Utilities there is NO ONE SIZE FITS ALL APPROACH to due diligence Real estate, property, legal and business services Oil and gas Mining Are competitors suspected to be engaged in bribery of public officials? Business Model Risks Does the proposed target or partner conduct business through third parties and intermediaries (discussed below)? Does the proposed target or partner engage third parties or intermediaries to manage relations with foreign governments? Are governments, state-owned or financed enterprises clients, suppliers or partners of the proposed target or partner? Is the proposed target or partner engaged in any joint-ventures with state-owned or financed enterprises, government officials or companies owned by government officials? Does the business of the proposed target or partner depend on government approval for permits or licenses in order to conduct its business or operations in a foreign country? 79 See also Transparency International UK Anti-Bribery Due Diligence for Transactions (May 2012), online: 80 Transparency International, Transparency International Bribe Payers Index 2011 (2011), online: bpi.transparency.org/bpi2011/results/. 28 Cassels Brock & Blackwell LLP CFPOA Primer

31 VI. Transactional Issues and Due Diligence Organizational Risks Does the ownership structure of the proposed target or partner include foreign public officials or state-owned or financed enterprises? Does the ownership structure of the proposed target or partner include persons with close relationships to foreign public officials? Does the proposed target or partner have an anti-corruption policy? Is it comprehensive? Does the proposed target or partner have an anti-corruption compliance program? Is it robust and well-implemented? Does the proposed target or partner have senior officers or managers responsible for anti-corruption compliance? Does the proposed target or partner require agents and intermediaries to comply with anti-corruption best practices? Does the proposed target or partner have internal controls in place to monitor expenses and payments to third parties? Does the company maintain complete records of payments and expenses? Are the books and records of the company audited and monitored for anti-corruption compliance? Has the proposed target or partner been accused or suspected of bribery? Does a review of expenses or payments to third parties reveal payments made in connection with transactions involving public officials associated with: Gifts and entertainment Travel and expenses Charitable contributions Political contributions Sponsorships Upon completion of the due diligence process, the company should carefully consider the results and any red flags that may have been raised. Depending on the nature of the compliance issues identified (if any), the company should re-evaluate the transaction and consider whether it is prudent to proceed. Corporations electing to proceed with a transaction notwithstanding the identification of red flags should consider implementing a strategy to mitigate any post-closing risks. This strategy could include approaching law enforcement officials to self-report suspected misconduct and attempt to reach a negotiated resolution. CFPOA Primer Cassels Brock & Blackwell LLP 29

32 VII. Third Parties and Red Flags Increasingly, anti-bribery investigations and prosecutions involve the conduct of third parties and intermediaries retained by a company. As discussed in more detail above, a company may be liable under the CFPOA and its international counterparts for the conduct of its third party agents/intermediaries. As with a corporate transaction, corporations should exercise caution and be diligent in their selection of third party agents/intermediaries. Third party agents/intermediaries commonly retained by a company may include customs agents and brokers, advisers, government relations experts, legal corporations should EXERCISE CAUTION AND BE DILIGENT in their selection of third party agents/ intermediaries. counsel, contractors, distributors and suppliers. In addition to geographical and sector risks, the following are examples of red flags that a corporation may encounter in its selection of a third party or during the course of its relationship with that third party: Background and Identity of Third Party: The credibility and reputation of the third party, and the third party s experience in the sector, as well as any past episodes of misconduct. Connection with Government Officials: Close connections with government officials represent a high risk for potential incidences of bribery. Compensation: Unusual terms or fees with respect to compensation may raise red flags. For example, if the fee is larger than necessary, or there are unusual terms with respect to the manner of payment, this could indicate a high risk for bribery. Expenses are Unusual or Lack Transparency: Agents should provide detailed records of all expenses incurred in relation to the services provided. Ambiguous expenses may disguise improper payments. Lack of Necessary Qualifications: The qualifications of an agent should be known and rationally connected to duties provided. Undisclosed affiliations and sub-agents: The failure of an agent to disclose, or the inability of a company to discern, all those individuals and corporate entities affiliated with the third party creates significant additional risk. 30 Cassels Brock & Blackwell LLP CFPOA Primer

33 VIII. An Effective Compliance Program In order to avoid non-compliance with the CFPOA and other foreign corrupt practices regimes, corporations with international operations are well advised to maintain a code of conduct or antibribery policy as well as a robust compliance program. The existence of such a program will assist a corporation in demonstrating its compliance with the CFPOA in order to mitigate potential liability and may, in certain circumstances, serve as a defence to allegations of wrongdoing where the misconduct is limited to the actions of a rogue actor. A properly designed and implemented compliance program can assist the corporation and its employees and agents in complying with their anti-corruption obligations. Corporations should take care to ensure that they have designed a customized compliance program that is suited to the particular industry, size and geographic reach of the corporation. Elements of an effective compliance program include: Leadership and Communication: It is critical that the board of directors and senior management set the right tone from the top and demonstrate and communicate the organization s commitment to anti-corruption compliance. Policies and Procedures: The company should design and implement a practical written anticorruption policy and ensure that appropriate procedures and structures are in place for ensuring compliance with the policy (such as approving gifts or other expenses to or for a foreign public official).»» Designation of Responsible Persons: Delegating responsibility for the day to day management of the organization s anti-corruption compliance program to specific in-house counsel or compliance personnel increases the effectiveness of the program and demonstrates organizational commitment. CFPOA Primer Cassels Brock & Blackwell LLP 31

34 VIII. An Effective Compliance Program Regular Training and Annual Certification: In order for a compliance program to work it must be communicated to employees and agents. Comprehensive training should be provided to new personnel. Annual updates will keep personnel apprised of any new developments or changes to the policy. Whistleblower Program: Organizations should implement protections against retribution for individuals that report suspected contraventions of the anti-corruption policy. Regular Monitoring and Auditing: The organization should monitor compliance with the anti-corruption compliance program and responsible personnel should periodically audit the effectiveness of the internal controls created by the program. Currency: The organization should ensure that the anti-corruption compliance program is updated as necessary to reflect legal developments or to address changing corporate circumstances or deficiencies identified by the regular auditing of the program. For further information concerning the Corruption of Foreign Public Officials Act or any other issues raised in this paper, please contact Wendy Berman or any other member of the Cassels Brock White Collar Crime & Regulatory Enforcement Team. 32 Cassels Brock & Blackwell LLP CFPOA Primer

35 CFPOA Primer Cassels Brock & Blackwell LLP 33