Corrupt Practices in Canada:

Transcription

1 Corrupt Practices in Canada: Context, Substantive Insights and Managing Your Risk George Addy Stéphane Eljarrat Elisa Kearney October 23, 2013

2 Outline 1. Context & History 2. Bolstering of Foreign Anticorruption Laws 3. Criminal Liability of Organizations 4. Anticorruption Compliance and Due Diligence 2

3 History Pre-1997: Legislation focusses on policing the corruption of Canadian officials. 1997: OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions signed. 1998: Corruption of Foreign Public Officials Act (the "CFPOA") enacted. 2009: Transparency International's report lists Canada among 21 countries whose efforts fall short. 2011: OECD questions the CFPOA's effectiveness. 2013: Bill S-14 Fighting Foreign Corruption Act receives Royal Assent. Today: 35 RCMP investigations of Canadian companies. 3

4 Risks Investigation, prosecution and criminal conviction Fines, penalties and disgorgement of profits Reputational and brand image harm Negative impact on share price Successor liability Debarment from public procurement Suspension of export privileges Discontinuance of business relationships Deferral of M&A activity or public listing Loss of key officers and directors Class actions 4

5 Global Context 5

6 SNC-Lavalin: Allegations in the Headlines Source: Bloomberg (market data); Globe and Mail and National Post (Headlines)

7 SNC-Lavalin: Executive Departures ( ) February 9, 2012: Riadh Ben Aissa (EVP) and Stéphane Roy (VP Controller) March 26, 2012: Pierre Duhaime (CEO) September 7, 2012: Feroz Ashraf (EVP, Global Mining and Metallurgy) December 4, 2012: Andy Macintosh (EVP, Hydrocarbons & Chemicals) January 18, 2013: Patrick Lamarre (EVP, Global Power) April 4, 2013: Gwyn Morgan (chair) and Pierre Lessard, David Goldman and Edythe Marcoux (directors) will not stand for re-election May 1, 2013: Ron Denom (President of SNC-Lavalin International Inc.) May 9, 2013: Ric Sorbo (Acting EVP, Oil & Gas) August 9, 2013: Gilles Laramée (EVP of Infrastructure Concession Investments; former CFO) August 16, 2013: Michael Novak (EVP, Global Government; former chairman of SNC-Lavalin International) 7

8 SNC-Lavalin: Criminal Charges November 2012: Pierre Duhaime (former CEO) Fraud charges related to approval of $56 million of untraceable payments, allegedly related to MUHC contract in Montreal April 2012: Mohammad Ismail (Director, International Projects) and Ramesh Shah (Director, International) CFPOA charges related to Padma Bridge project in Bangladesh September 2013: Kevin Wallace (SVP, SNC-Lavalin International) CFPOA charges related to Padma Bridge project in Bangladesh September 2013: Riadh Ben Aissa (EVP) Extradition from Switzerland to face fraud, corruption and money laundering charges related to MUHC contract in Montreal 8

9 Managing Risk Conduct a Risk Assessment Implement a Compliance Program conduct an annual audit of compliance program Implement Control Measures conduct an annual audit of compliance program Conduct Due Diligence in connection with any acquisition, disposition or joint venture prior to engaging an agent or entering into new relationship periodic audits of internal controls Respond plan for internal/external investigations 9

10 Outline 1. Context & History 2. Bolstering of Foreign Anticorruption Laws 3. Criminal Liability of Organizations 4. Anticorruption Compliance and Due Diligence 10

11 Canadian Case Study Niko Resources, [2012] AWLD 4565 (ABQB) RCMP launched an investigation into allegations of improper payments made to public officials in Bangladesh. Payments were allegedly made to influence negotiations of: a gas supply contract; and the compensation payable by Niko for damages resulting from an explosion in a gas field operated by a subsidiary. Niko Resources pleaded guilty to bribing a foreign public official and was fined $9.5 M under the CFPOA. Niko Resources was also placed on probation for three years, (subject to court supervision and regular audits to ensure compliance with CFPOA). 11

12 Canadian Case Study Griffith Energy, [2013] AJ No. 412 (QL) To secure exploration permits in Chad, Griffith gave $2.0M cash and stocks to the wife of Chad's ambassador to Canada. The illegal payments were discovered by Griffith's new management while preparing a public offering of shares. Griffith conducted an internal investigation and cooperated with Canadian authorities. It pleaded guilty to CFPOA charges and agreed to pay fines of $10.35 M. 12

13 Canadian Case Study R. v. Karigar, 2013 ONSC 5199 Nazir Karigar was charged under the CFPOA for his role in a conspiracy to bribe of Air India and the Minister of Aviation officials. The bribe was intended to induce the Indian officials to accept a bid from Karigar's principal, Cryptometrics Canada, to provide biometric security software to Air India. Karigar argued that the Crown had failed to prove that: i. Indian officials agreed to the bribe; and ii. money changed hands. 13

14 Canadian Case Study R. v. Karigar, 2013 ONSC 5199 The Court found that it was unnecessary for the Crown to prove beyond a reasonable doubt that: i. a bribe was actually paid to a foreign public official; or ii. the foreign public official agreed to accept the bribe. The Crown need only prove that Karigar believed that a bribe is being paid. Thus, the anticorruption provision provides for, inter alia, an inchoate offence: "a conspiracy or agreement to bribe foreign public officials is a violation of the Act" (para. 28). Karigar was convicted, even though Cryptometrics had not been granted the contract. The sentencing hearing has not 14 taken place yet.

15 M&A Risk Study US Case: General Electric ("GE") The SEC accused two subsidiaries of GE, and two other subsidiaries of public companies later acquired by GE, of having made illegal kickbacks amounting to approximately US$3.6 M in the form of cash, computer equipment, medical supplies and services to the Iraqi Health Ministry and the Iraqi Oil Ministry in exchange for contracts under the UN Oil for Food program. In the companies' books and records, illegal payments were inaccurately described as commissions and other legitimate business expenses and were concealed under fictitious line items. GE agreed to pay a fine of US$1 M and another US$23.4 M to settle the SEC complaint. GE paid considerable fines for companies that it did not own at the time that the bribes and illegal activities were committed. 15

16 Anticorruption Provision S. 3 CFPOA: It is an offence, in order to obtain or retain an improper advantage in the course of business, to 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. 16

17 Reform of the CFPOA Removal of the profitability criterion Expanded scope of application More stringent sanctions Upcoming removal of the facilitation payments exception Centralized powers within RCMP's exclusive mandate New books and records offence 17

18 Removal of the Profitability Criterion Former Regime 2. The definitions in this section apply in this Act. "business" means any business, profession, trade, calling, manufacture or undertaking of any kind carried on in Canada or elsewhere for profit. Reform 2. The definitions in this section apply in this Act. "business" means any business, profession, trade, calling, manufacture or undertaking of any kind carried on in Canada or elsewhere for profit. The removal of "for profit" from the definition of "business" ensures that the CFPOA applies to all businesses, including not-for-profit entities, charitable organizations and trade associations. 18

19 Expanded Scope of Application Former Regime Canadian jurisdiction is established in accordance with the jurisprudential "real and substantial link" criterion. To meet this criterion, a significant portion of the activities constituting an offence must have occurred in Canada or have had a real Reform Every Canadian citizen, permanent resident, public body, legal person, corporation and company who commits an act of corruption abroad is deemed to have committed that act in Canada. impact on Canadians. The introduction of a nationality-based jurisdiction enables Canada to pursue Canadian citizens, residents and organizations for acts or omissions committed entirely abroad. Common law "real and substantial risk" criterion also continues to 19 apply.

20 More Stringent Sanction Former Regime 3.(2) Every person who contravenes [the anticorruption provision] is guilty of an indictable offence and liable to imprisonment for a term not exceeding five years. Reform 3.(2) Every person who contravenes [the anticorruption provision] is guilty of an indictable offence and liable to imprisonment for a term not exceeding fourteen years. The increase of the maximum term of imprisonment enhances the CFPOA's deterrent effect. Conditional sentences no longer available. 20

21 Upcoming Removal of Facilitation Payments Exception Former Regime 3. (4) [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 [ ]. Reform The facilitation payments exception will be repealed. The repeal will occur at a date to be set by order of the Governor in Council, therefore giving some time to Canadians to adjust their foreign activities accordingly. 21

22 Centralized Powers within RCMP's Exclusive Mandate Former Regime Federal and provincial authorities can both lay charges under the CFPOA. Reform Only RCMP officers are authorized to lay charges under the CFPOA. The reform has centralized decision-making powers within the purview of the RCMP and the Public Prosecution Service of Canada. It keeps in step with the creation, in 2008, of the RCMP's International Anti-Corruption Unit. 22

23 New Books and Records Offence S. 4 CFPOA: Every person commits an offence who, 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. 23

24 New Books and Records Offence Every person commits an offence who [cont'd] : 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 by law. This new offence is punishable by a maximum term of imprisonment of 14 years. 24

25 Outline 1. Context & History 2. Bolstering of Foreign Anticorruption Laws 3. Criminal Liability of Organizations 4. Anticorruption Compliance and Due Diligence 25

26 Criminal Code s In March 2004, legislative changes to the Criminal Code added the concept of "senior officer" in s. 2 and provided that organizations could be liable for the acts of "senior officers" pursuant to s Cr.C. An organization may now be found guilty of an offence if, with the intent at least in part to benefit the organization, one of its senior officers: acting within the scope of his or her authority, is a party to the offence; having the mental state required to be a party to the offence and acting within the scope of his or her authority, directs the work of other representatives of the organization so that they do the act or make the omission specified in the offence; or knowing that a representative of the organization is or is about to be a party to the offence, does not take all reasonable measures to stop him or her from being a party to the offence. 26

27 Scope of Criminal Code s For the first time, in R. v. Pétroles Global inc., 2012 QCCQ 5749, a court defined the scope of s Cr.C. by holding that the definition of "senior officer" encompasses more than solely the individuals that form an organization's directing mind under the identification theory. The Court adopted a liberal interpretation of the definition of "senior officer". In addition to affirming that an organization could have several senior officers, the Court emphasized the functions and responsibilities of individuals, rather than their formal job title or capacity. 27

28 Scope of Criminal Code s Thus, [translation] "a person may be considered a 'senior officer' and expose the organization to liability [ ] either through having an important role in the establishment of an organization's policies or by being responsible for managing an important aspect of the organization's activities" under s Note that the importance of the individual's role is a criterion that did not exist in prior case law involving the directing mind theory. 28

29 Outline 1. Context & History 2. Bolstering of Foreign Anticorruption Laws 3. Criminal Liability of Organizations 4. Anticorruption Compliance and Due Diligence 29

30 Risk Assessment Identify: Risks associated with organization's industry, commercial activities, providers, clients and countries of operation Government entities and representatives with which the organization or its business partners deal Employees, agents and consultants overseeing or conducting dealings with foreign public officials Payments to government entities 30

31 Risk Assessment Analyze: Procurement policies, standard contracts and long-term contracts (e.g. joint ventures, supply agreements and consulting contracts) Agency relationships Representations and warranties in third party agreements Internal reporting and control structure Employees' and agents' training, compliance program and hiring process General ledger accounts Payments, expenses, bonuses, customs fees, commissions, 31 agency fees, gifts and donations

32 Compliance Program An effective compliance program is central to managing an organization's risk. Design, implementation and enforcement of an organization's compliance program impacts prosecutorial discretion. Apply a "common-sense and pragmatic approach" to designing and evaluating your compliance program. Board or Audit Committee to make a regular independent assessment of the adequacy of the compliance program. Consider making a public commitment to the compliance program. 32

33 Compliance Program Elements of an effective compliance program: Commitment from the top Clearly articulated and unambiguous Proper training and annual certification Responsibility of senior officer who reports to Compliance/Audit Committee Accessible to all employees and third parties conducting business on organizations' behalf (e.g. translate for local languages) Policy on gifts, travel and entertainment expenses Policy on charitable and political donations Policy on facilitation payments Clear reporting channels Whistleblower program Consistently applied disciplinary process for violations 33

34 Compliance Program ACTION DECISION PLAN DEVELOP IMPLEMENT MONITOR EVALUATE RESPONSIBILITY Owner/Board/ CEO Appointed Senior Officer / Compliance Officer Appointed Senior Officer / Compliance Officer Appointed Senior Officer / Compliance Officer Appointed Senior Officer / Compliance Officer Board / Audit Committee PROCESS Obtain commitment "from the top" Define specific company risks Integrate program into organizational structure Communicate compliance program (internal/external) Regular reviews of program Receive feedback from monitoring Decide to implement compliance program Review all legal requirements Review ability to support compliance program Train all employees and business partners Capture knowledge from reported incidents Evaluate effectiveness of compliance program Decide extent of any public disclosure Develop compliance program Develop detailed implementation plan, including HR policies and training programs Ensure capabilities are in place for specialist functions: internal audit, finance, legal Use external audit providers Develop improvements to program Appoint senior officer / compliance officer Get commitment from senior management * Based on Transparency International Six Step Process Set up reporting function Enforce violations of program Review issues Report to management / Board review and sign-off 34

35 Control Measures System of internal controls (e.g. processes for petty cash, employee reimbursement, check authourisation etc.). Accurate books and record keeping. Clear reporting channels and helpline. Standards for relationships with agents and business partners. Agreements with agents and business partners include right to audit clauses. Independent audits of internal controls, books and records, third party books and records. Response plan for internal/external investigations. 35

36 Due Diligence Conduct anticorruption due diligence: prior to any acquisition to avoid successor liability prior to any disposition to retain deal value prior to engaging an agent or entering into new relationship periodic audits of internal controls Retain experienced external counsel and forensic accountants to conduct anticorruption due diligence. 36

37 Due Diligence - Questions Does the business operate in countries or environments known for a higher than normal degree of corrupt behavior? Is the business reliant on direct sales or on a distribution network in high risk countries? Are customers of the business government entities, including state-owned or financed companies? Is the business involved in any joint ventures with quasi-government entities? Are government approvals and licenses needed to operate in the high risk countries? Does the business have significant transactions affecting import/export and customs in the high risk countries? Does the business rely on relationships with third party agents or consultants who interact with foreign officials on the company's behalf? 37

38 Due Diligence Red Flags The obvious: request for payment in cash. Request for payments for schooling, scholarships or charitable organizations. Unusually large payments or request for unreasonable compensation or commission percentage. Introduction of third parties into a transaction. Incomplete, inadequate or questionable transaction documents or accounting records. Gifts, lavishness or secrecy. Request for payment to someone other than an agent or outside target's countries of operation. Agent relationships with government officials. 38

39 Responding to Red Flags Investigate internally with the assistance of an external counsel and a forensic expert. Interview key employees and officers. Review s and apply data analytics. Terminate business relationships with implicated third parties. Enforce the compliance program and activate the internal reporting and control structure. Consider a voluntary disclosure to authorities. 39

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41 Questions 41

42 Thank you George Addy Stéphane Eljarrat (Tor) (Mtl) Elisa Kearney