Dodd-Frank of the North? Incentive-Based Whistleblower Program Coming to Canada

Ed. Note-today we have a guest post from Kristine Robidoux QC, a partner at Gowlings. She reports on the soon-to-be implemented whistleblower program in Canada by the Ontario Securities Commission.

It will be of significant interest to US corporations that make securities filings with the Ontario Securities Commissions (“OSC”), that on February 3, 2015, the OSC published “Staff Consultation Paper 15-401”, which sets out a proposed framework (“the Program”) for a whistle blowing program not dissimilar from the Dodd Frank Whistleblower Program created in 2011. The proposed Program is intended to help the OSC identify and resolve enforcement matters quickly. The OSC has identified certain specific objectives of the program, including:

• Increasing the number and efficiency of serious securities cases handled by the OSC;
• Motivating individuals with credible concerns to come forward with information;
• Increasing the quality of the information available to investigative and enforcement personnel;
• Encouraging issuers and registrants to self-report misconduct; and,
• Encouraging continued cooperation from a whistleblower throughout the investigation.

Although no other Canadian provincial securities regulator has to date created a comparable program, the sheer number of companies listed on the Toronto Stock Exchange (“TSX”) and companies listed on other exchanges but which make filings to the OSC, will result in very broad application of this framework when and if it comes into force. The 90-day comment period will end on May 4, 2015.

The Program

As stated above, there are striking similarities between the OSC framework and the Dodd Frank Whistleblower Program.

The proposed framework comprises five key features:

1. Whistleblower Eligibility

The OSC proposes offering an eligible whistleblower with a financial award. In order to be eligible, the whistleblower must:

• Be an individual;
• Provide information that is of high quality, and is original and voluntary; and,
• Must not fall into any of the exclusionary categories set out in s. 5.2 of the program.

Specifically, a financial award would not be available to the whistleblower who:

• Provides information that is misleading or untrue;
• Provides information that is subject to solicitor-client privilege;
• Provides information obtained through the course of a financial audit when engaged to provide audit services;
• Has or had responsibilities as a Chief Compliance Officer or equivalent position or is or was a Director or Officer at the time the information was acquired, and acquired the information as a result of the organization’s internal reporting or investigation process for dealing with possible violations of securities laws;
• Is or was employed by the OSC or other self-regulatory or law enforcement agency at the time the information was acquired; or
• Obtains or provides the information in circumstances which would bring the administration of the OSC program into disrepute.

Importantly, the OSC has indicated that it will not automatically exclude an individual with some culpability in the matter in question from qualifying as a potential whistleblower. The OSC will consider the level of culpability in determining whether a whistleblower award is made to the individual and the amount of any such award. On this point, the OSC is specifically seeking comment.

2. Financial Incentive

The OSC is proposing to provide whistleblowers with monetary incentives of up to CDN $1.5 million for quality information that leads to significant monetary sanctions of more than 1 million (excluding costs). Therefore, the OSC proposed program would not generate whistleblower awards as large as those seen recently in the United States. Whistleblowers may be entitled to up to 15% of the ultimate monetary sanction or agreed settlement amount imposed by the Commission. Unlike the SEC whistleblower program, the OSC whistleblower awards would not be based on monies collected, but on the amount of the sanction ordered against the wrongdoer.

3. Whistleblower Protection

The OSC proposes to enact three new statutory provisions under the Ontario Securities Act to protect whistleblowers from retaliation from their employer. Specifically, these amendments will:

1. Make it a violation of securities law to retaliate against a whistleblower, thereby permitting the OSC to prosecute the employer under the Act;
2. Give a whistleblower a civil right of action against an employer who violates the anti-retaliation provisions; and,
3. Render contractual provisions designed to silence a whistleblower unenforceable.

4.   Confidentiality

The protection of a whistleblower’s identity would be a key feature of the OSC program. The OSC proposes to adopt a policy which would provide that the OSC would use “all reasonable efforts” to keep confidential a whistleblower’s identity. This position however is subject to three important exceptions:

1. When disclosure is required to be made to a respondent in connection with an administrative proceeding to permit a respondent to make full answer and defence;
2. When the relevant information is necessary to make the Commission’s case against a respondent; and,
3. When the Commission is required to provide the information to another regulatory authority, or other self-regulatory or law enforcement agency or body.

The OSC also points out that it would have the obligation to disclose the identity of a whistleblower if ordered to do so by an appropriate authority such as a hearing panel of the OSC or under applicable freedom of information legislation.

The OSC is considering whether to adopt a policy which would enable a whistleblower to remain anonymous to the OSC for a period of time. In order to remain anonymous to the OSC, a whistleblower would need to be represented by legal counsel and anonymously furnish the information to the OSC through such counsel.

5. Program Structure

In order to administer the program, the OSC plans to create a separate intake unit within its enforcement branch to deal with whistleblower reports and other administrative aspects of the program. In this way, we anticipate that its administration would be similar to that in place at the SEC Office of the Whistleblower.

Conclusion

Since the SEC’s whistleblower program was introduced, it has resulted in over 10,000 tips and 14 financial awards, the largest of which was over USD $30 million. If the SEC’s experience is any indication, it is expected that the OSC Program will similarly generate large numbers of new securities investigations for the OSC. As noted above, the OSC is seeking written feedback on all issues raised by this proposed Program until May 4, 2015. US companies listed on the TSX or that make securities filings to the OSC may consider providing such comment.

Kristine Robidoux QC is a partner in the Calgary office of Gowling Lafleur Henderson LLP, in the White Collar Defence, Investigations and Compliance Practice Group. She practices in the area of business crime, anti-corruption, internal investigations, privacy and data security, corporate risk and compliance and has broad  experience representing corporations, boards of directors, company officers and directors facing allegations of wrongdoing. Kris was lead defence counsel on Canada’s two major prosecutions to date under the Corruption of Foreign Public Officials Act, has conducted numerous internal investigations, including hundreds of witness interviews around the globe. She specializes in the creation and implementation of corporate compliance programs in the areas of domestic and international anti-bribery and corruption laws, privacy and data protection laws, competition laws, export control laws, sanctions,  market conduct regulations, energy trading regulations and business ethics.

She can be reached at Kristine.Robidoux@gowlings.com

North of the 49th: Recent Developments in Canadian Anti-Corruption Enforcement

Ed. Note-I recently ask John Boscariol a partner at McCarthy Tétrault LLP if he could provide an update of anti-corruption comings and goings from North of the Border. John graciously responded with information which is today’s post. 

In Transparency International’s recent report, Exporting Corruption: Progress Report 2014: Assessing Enforcement of the OECD Convention on Combating Foreign Bribery, Canada was bumped up from the “Limited Enforcement” category to “Moderate Enforcement”, joining Australia, Austria, Finland and Italy. Although still ranked below the “Active Enforcement” countries – Germany, Switzerland, the United Kingdom, and the United States – it’s positive news for Canadian authorities as the report highlights Canada as one of only two countries to improve its standing as a result of their enforcement efforts during 2013.

However, as we approach 2015, some may observe that there has not been a corporate penalty imposed under Canada’s Corruption of Foreign Public Officials Act (CFPOA) for almost two years now – the last one being the fine of $10.35 million levied against Griffiths Energy’s as a result of its guilty plea in January of 2013. That being said, all has not been quiet on the enforcement front as a number of developments during 2014 are worthy of note. These are my top five:

1. CFPOA Prosecution Stayed

On April 28, 2014, Mr. Justice Ian Nordheimer of the Ontario Superior Court stayed a CFPOA prosecution against Abul Hasan Chowdhury (Chowdhury v. H.M.Q., 2014 ONSC 2635). Chowdhury was one of five individuals, including three former employees of SNC Lavalin Group, jointly charged with bribing a foreign public official in connection with alleged attempts to exert influence over the selection committee for the Bangladesh Padma Bridge project in favour of SNC Lavalin.

Chowdhury, a Bangladeshi citizen and resident and the former Bangladesh Interior Minister and Minister of State, was alleged to have acted as agent for SNC Lavalin in offering bribes to Bangladeshi government officials. The Court agreed that Canada had jurisdiction over the offence at issue, however, because Chowdhury was neither a citizen nor resident of Canada, was not and had not been in Canada, and his acts in furtherance of the alleged bribery occurred entirely in Bangladesh, it determined that Canada did not have jurisdiction over him and granted an order staying the prosecution. Notably, Canada does not have an extradition treaty in place with Bangladesh.

2. First Jail Sentence Under the CFPOA

On May 23, 2014, Mr. Justice Charles Hackland of the Ontario Superior Court sentenced business executive Nazir Karigar to three years in prison for conspiracy to bribe foreign public officials in India (R. v. Karigar, Sentencing Decision, 2014 ONSC 3093). This was the first jail sentence handed down under the CFPOA since it came into force in 1999. All previous prosecutions had been against corporations and were disposed of with guilty pleas and fines.

Karigar’s case arose prior to the CFPOA amendments in 2013 which increased the period of imprisonment from five to 14 years. Karigar was convicted on August 15, 2013 for his leading role in a conspiracy to offer bribes to officials of Air India and an Indian Cabinet Minister. The scheme was intended to make Cryptometrics the successful bidder in a multi‑million dollar contract to supply facial recognition software to Air India. For more detail on this case, see First Trial Under Canada’s Corruption of Foreign Public Officials Act Results in Conviction and First Prison Sentence Under Canada’s Corruption of Foreign Public Officials Act Sends Strong Message to Business Community.

3. RCMP Charge Foreign Nationals

Despite the Crown’s lack of success against a foreign national in the Chowdhury case discussed above, on June 4, 2014 the Royal Canadian Mounted Police (RCMP) charged three foreign nationals in connection with the Cryptometrics case – US nationals Robert Barra (former Cryptometrics CEO) and Dario Berini (former Cryptometrics COO) and UK national Shailesh Govindia, an agent of Cryptometrics in connection with their roles in the conspiracy to bribe Indian government officials.

The RCMP’s press release is here. All three have been charged under the CFPOA and Govindia faces an additional fraud charge under the Criminal Code. Canada‑wide warrants were issued for all three and it is expected that extradition requests will also be pursued as necessary with the United States and United Kingdom.

4. New Legislation and Policies Targeting the Extractive Sector

One legislative development is of particular significance for companies in the extractive sector. On October 23, 2014, the Extractive Sector Transparency Measures Act (ESTMA) was introduced into Canada’s Parliament. It contains broad reporting obligations with respect to payments to governments made by oil and gas and mining companies and is intended to supplement the anti‑corruption measures contained in the CFPOA and Canada’s Criminal Code.

Expected to be in force by April 1, 2015, the ESTMA applies (i) to firms listed on a Canadian stock exchanges and (ii) private companies that have a plce of business in Canada, do business in Canada or have assets in Canada and meet certain asset, revenue and employee thresholds. The ESTMA is intended align with similar measures set out in the EU Transparency Directive and the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act, although its full impact will not be known until its regulations are released. More detail on the ESTMA can be found at Canada Introduces New Payment Disclosure Regime: The Extractive Sector Transparency Measures Act.

Extractive companies should also be carefully reviewing Canada’s “enhanced” corporate social responsibility (“CSR”) strategy, Doing Business the Canadian Way: A Strategy to Advance Corporate Social Responsibility in Canada’s Extractive Sector Abroad, announced on November 14, 2014. In addition to setting out key initiatives and international CSR standards, including those related to anti‑corruption, the Policy provides that extractive companies that do not comply with CSR best practices or fail to participate in the CSR strategy dispute resolution processes will face the loss of trade commissioner and government advocacy support abroad as well as financing or other support from Export Development Canada.

5. Waiting on Facilitation Payments

Although last on the list, it’s certainly not least. The impending removal of the facilitation payments exception from the CFPOA continues to cause significant concern for a number of Canadian firms operating in jurisdictions where these payments can be demanded on a daily basis.

As a result of amendments to the CFPOA made on June 19, 2013, the exception for facilitation payments is now subject to elimination by an order of the federal Cabinet. In doing so, the Canadian government put companies on notice that the exception for payments made to expedite or secure the performance of acts of a routine nature will be eliminated at a future date, allowing time for changes in compliance policies. This is of concern to a number of Canadian firms that are cognizant of the competitive disadvantage this may create vis-à-vis the small group of other countries (such as the United States) whose anti-corruption laws continue to allow their companies to make such payments.

Forecast for 2015?

Although the RCMP no longer appears to be publicly announcing the number of ongoing CFPOA investigations, it is generally understood that there are three dozen or so in the pipe – some very public, but the vast majority still undisclosed. Depending on how those investigations play out, 2015 could be the most active year yet for Canadian anti-corruption enforcement.

John Boscariol leads the International Trade and Investment Law Group at McCarthy Tétrault LLP and specializes in enforcement and compliance matters involving anti-corruption law and policy, economic sanctions, export and technology transfer controls and other laws governing cross-border trade in goods, services and technology. He can reached via email at jboscariol@mccarthy.ca 

First Jail Sentence Under Canada’s Corruption of Foreign Public Officials Act Sends Strong Message to Business Community

Ed. Note-recently it was announced that Canada had made its first Canadian anti-corruption law, the Corruptions of Public Officials Act. I ask John Boscariol, a partner at McCarthy Tétrault LLP if he could explain  the case in a blog post he graciously agreed to do in this guest post. 

On May 23, 2014, Mr. Justice Charles Hackland of the Ontario Superior Court in Ottawa sentenced business executive Nazir Karigar to three years in prison for conspiracy to bribe foreign public officials. This is the first jail sentence handed down under Canada’s Corruption of Foreign Public Officials Act (CFPOA) since it came into force in 1999. All previous prosecutions have been against corporations and were disposed of with guilty pleas and fines.

Karigar was convicted on August 15, 2013 for his leading role in a conspiracy to offer bribes to officials of Air India and an Indian Cabinet Minister. The scheme was intended to make Cryptometrics Canada the successful bidder in a multi-million dollar contract to supply facial recognition software to Air India. Our previous analysis of this significant conviction can be found in First Trial Under Canada’s Corruption of Foreign Public Officials Act Results in Conviction.

This is an important sentencing decision as it provides a first glimpse of how courts will determine sentencing under the CFPOA. It also indicates that Canadian courts are closely aligned with efforts of the RCMP and Canadian prosecutors to punish international bribery more stringently than in the past. Businesses and individuals should take careful notice of the decision and ensure that they are acting in compliance with CFPOA in all of their dealings abroad.

Reasons for the Sentence

The CFPOA was enacted by Parliament in 1998 reflecting Canada’s obligations under the Convention on Combating Bribery in International Business Transactions of the Organization for Economic Co-operation and Development. In his sentencing decision, Justice Hackland made reference to Article 3 of the Convention which outlines that bribery of foreign officials should be punishable to the same extent as bribery of domestic officials.

In his decision, Justice Hackland outlined four aggravating factors and three mitigating factors in support of Karigar’s three year sentence.

Aggravating Factors:

• The sophistication and planning involved in the bribery scheme.
• Other acts of dishonesty by Mr. Karigar, including entering fake competitive bids to create the illusion of a competitive process and the use of confidential insider information in preparing his bid.
• Mr. Karigar’s attitude of entitlement throughout the bidding process, including his admission to the Canadian trade commissioner regarding bribery.
• The fact that Mr. Karigar personally conceived of and orchestrated the bribery.

Mitigating Factors:

• Karigar confessed to authorities and co-operated throughout the proceedings which helped save trial time.
• Karigar has no prior convictions, his respectable business past and his older age and health issues.
• The bribery scheme failed and any harm was restricted to the promotion of corruption among a limited group of foreign public officials.

Based on these factors, Justice Hackland sentenced Karigar to three years in prison. The maximum penalty for a CFPOA violation was five years. The maximum penalty period was increased to fourteen years in Bill S-14, Fighting Foreign Corruption Act (received Royal Assent on June 19, 2013), however the offence in Karigar’s case occurred before that amendment came into force. This increased maximum penalty reflects the current trend towards punishing the bribery of foreign officials more stringently in Canada.

Focus on Stiff Sentencing

Prevailing throughout Justice Hackland’s sentencing decision was his emphasis on the seriousness of the crime that Karigar committed. He noted that “…a substantial penalty is to be imposed by the courts even in circumstances where a guilty plea was entered and the accused has cooperated with authorities”.

Justice Hackland relied on cases of fraud under the Criminal Code in order to determine what a reasonable sentence should be for bribing foreign officials. Based on this jurisprudence, he concluded that cases of serious fraud require penitentiary sentences in the range of three to five years, and that usual mitigating factors, such as prior good character, health problems, contributions to the community and the absence of criminal records should not be used to depart from this range.

Justice Hackland also referenced domestic bribery and corruption cases under the Criminal Code. Most importantly, he noted that an overriding consideration in sentencing for bribery should be the deterrence and denunciation of bribery. He concluded his decision by stating that “any person who proposes to enter into a sophisticated scheme to bribe foreign public officials to promote the commercial or other interests of a Canadian business abroad must appreciate that they will face a significant sentence of incarceration in a federal penitentiary.”

With this sentence, Canadian authorities are sending a strong message to companies and executives doing business abroad that individuals, not just entities, will be held responsible and pay a significant price for their involvement in the bribery of foreign officials. The development and documented implementation of a comprehensive compliance program for the detection and prevention of bribery is a critical tool to ensure that a company and its executives stay on the right side of Canadian law.

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John W. Boscariol is head of the firm’s International Trade & Investment Law Group and a partner in the Litigation Group. He can be reached via email at jboscariol@mccarthy.ca.

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Shifting Sands In Canadian Anti-bribery And Trade Control Laws Raise The Stakes In M&A Due Diligence

Ed. Note-I recently saw an article on M&A compliance due diligence, from the Canadian perspective, by John Boscariol. I asked John if I could repost his article, which he graciously allowed me to do. 

Recent developments in Canadian anti-corruption, economic sanctions, and export control laws are having a significant impact on the due diligence that should be conducted on potential targets in the context of mergers and acquisitions as well as other business combinations such as joint ventures. 

New and expanding measures along with increased enforcement, particularly in the resource extraction industries such as energy and mining, have raised the stakes for those investing in Canadian companies. Today, it is becoming more common for potential acquirers or investors to delay, re-price or even walk away from transactions because of actual or perceived compliance failures in the target’s operations.

A misstep in this area can have significant ramifications – in addition to criminal prosecution and penalties, compliance failures can also result in significant expenditure on internal investigations, the inability to move product or transfer technology cross-border, delayed or cancelled customer orders, debarment from doing business with government, and substantial reputational costs in relationships with business partners, including banks, investors, customers, suppliers and other stakeholders. Further, the now well-established pattern in the United States of shareholder class action suits being launched following allegations of management failure to implement proper internal controls is beginning to take hold in Canada.

Canadian authorities becoming more aggressive

In recent years, Canadian authorities responsible for implementation and enforcement of trade controls and anti-corruption laws – including the Royal Canadian Mounted Police (RCMP), the Canada Border Services Agency, Foreign Affairs and International Trade Canada, and Crown prosecutors – have stepped up their game.

Canada’s experience in the anti-corruption sphere is a good example. After many years without any significant enforcement, in 2008 the RCMP formed a special unit responsible for the enforcement of the Corruption of Foreign Public Officials Act (CFPOA). In June of 2011, Nike Resources was convicted of violating the CFPOA and penalised $9.5m. In January of this year, Griffiths Energy was also convicted and fined $10.35m. At the present time, it is understood that the RCMP is conducting over 35 investigations of Canadian companies and individuals suspected of CFPOA violations.

Five areas deserving special attention for due diligence

Although not intended to be exhaustive, the following are five areas where you should at least initially focus before drilling down into any specific matters of concern:

Where is the target doing business? Identifying countries with which the target does business is critical to assessing risk exposure from both the anti-corruption and trade control perspective. Where are their customers, suppliers, licensees/licensors creditors and other business partners located?

Canada currently maintains trade controls of varying degrees of aggressiveness in respect of activities involving Belarus, Burma, Côte d’Ivoire, the Democratic Republic of the Congo, Cuba, Egypt, Eritrea, Guinea-Bissau, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Pakistan, Sierra Leone, Somalia, Sudan, Syria, Tunisia and Zimbabwe. Activities in these countries with entities based in these countries should be carefully reviewed to ensure compliance with economic sanctions and export controls.

Location also plays a significant role in assessing anti-corruption compliance risk. Developing or newly industrialised countries in Africa, the Middle East, Asia, and areas of Latin America are particularly vulnerable to corruption. Independent country rankings of corruption risk, including Transparency International’s Corruption Perceptions Index, are a helpful starting point.

What are the target’s ‘government touch-points’?Understanding how your target deals with government on a daily basis helps assess the exposure to potential opportunities for government corruption. This includes dealings with government owned entities, including commercial enterprises. Getting a list of the target’s government customers and suppliers is an obvious and important starting point.

It is also necessary to determine what licences or permits are required for the target’s operations and review its dealing in the negotiation of concessions, production sharing agreements or investment agreements with government. The extent to which the target imports or exports product, and therefore its dealings with customs authorities, is important but often ignored government touch-point. This is especially the case for oil, gas and mining companies that need to move heavy, high-value equipment in and out of the host country.

What is the nature of their products, services and technology?Canada controls the export and transfer of goods services and technology, under both export control laws and economic sanctions. These measures are not restricted to military or nuclear items but include many commercial dual-use items used in industry every day, including goods, software and technology for relatively low-level encryption and decryption. Goods and technology controlled for export or transfer from Canada are set out on the Export Control List. Economic sanctions measures also impose similar requirements based on the nature of the goods and technology being supplied – for example, Canada’s sanctions against Iran prohibit the transfer to Iran of any items, including technical data, used in the petrochemical, oil or natural gas industry.

In addition to understanding what product and services your target ultimately provides to its customers, you should consider what inputs are used in the process, how product research and development occurs, and what, if any, after sales service and support is provided. Keep in mind that these controls are not limited to physical export shipments, but include cross-border transfers of information that occur via email transmissions and server upload/download activity or during technical discussions with persons outside of Canada.

What is the target’s exposure to similar measures of other jurisdictions?Depending on the circumstances, Canadian companies can be subject to anti-corruption and trade control laws of other jurisdictions. The US Foreign Corrupt Practices Act (FCPA) is notoriously enforced on a broad, extraterritorial basis often ensnaring Canadian companies that had considered themselves to have little connection to the United States. For example, a Canadian company that causes, directly or through agents, acts in furtherance of a corrupt payment to take place within the territory of the United States is subject to the jurisdiction of the FCPA.

The FCPA obligations are in large part similar to those in the CFPOA. However, the United Kingdom’s Bribery Act 2010 contains some important differences, including the prohibition of private commercial bribery and no exclusion for facilitation payments.

A number of US sanctions and export control measures are also applied on an extraterritorial basis, especially in dealings with Iran or Cuba. In the latter case, Canada has implemented blocking legislation designed to address issues such as US extraterritorial measures. Canadian law prohibits a Canadian company or individual from complying with the US sanctions and export controls on Cuba. This presents a challenging conflict of laws when the target is or will be US-owned or controlled – on the one hand, the company is required to comply with the US trade embargo while on the other hand, to do so will constitute an offence under Canadian law and expose the Canadian company and its officers to potential liability.

What compliance measures does the target have in place? Although there is seldom enough time in the heat of an M&A transaction to conduct a thorough audit of the target’s compliance with anti-corruption and trade controls, there are basic minimum steps that can be taken to get a good sense of the target’s compliance profile and potential exposure. Basic elements we expect to see in any anti-bribery, economic sanctions and export control compliance programs include the following: a written compliance manual and procedures, screening of transactions and all involved parties against lists of sanctioned or designated entities and individuals, appointment of compliance officers, internal compliance auditing, non-compliance reporting, correction and voluntary disclosure, training programs, contract and project review, and procedures for dealing with inconsistent or conflicting laws.

Obtaining a description of the target’s anti-bribery and trade control procedures and a copy of the compliance policy manuals is an obvious start, but it is not enough.

It is also critical to review evidence of implementation of these measures across the operation. For example, how often are employees and executives trained on these policies? When are internal audits conducted and what are the results? How often are potential non-compliance events being reported internally? Is an employee hotline being used and what kind of reports are being made? What voluntary disclosures have they submitted to government authorities? Have they been subject to government investigations or audits and with what results? What is their process for reviewing and determining the control status of their goods, services and technology and what rulings have they obtained in respect of the same? In what circumstances have they terminated or refused to retain agents because of bribery concerns? What specific provisions has the target included in their contracts to address anti-bribery and trade controls compliance? What compliance certifications do they have from business partners? How do they use third parties to assist in implementation of compliance measures – e.g., screening transactions, due diligence of agents, internal review and audit, legal opinions?

What next?

Responses to these initial inquiries inevitably beget more questions in this process and the back and forth continues as you drill down into areas of concern and potential exposure for the target and, ultimately, the acquirer. Risks may be so high that the deal is scrapped or at least delayed until they can be addressed through the implementation of enhanced compliance measures or disclosures to the authorities if necessary. In other cases, representations and warranties as well as appropriate indemnities may be sufficient to address any concerns. Once the transaction closes, however, it is important to immediately begin conducting a more thorough review of the target’s compliance based on potential areas of vulnerability identified during the pre-acquisition due diligence phase and addressing any potential non-compliance.

John W. Boscariol is Leader of the International Trade and Investment Law Group at McCarthy Tétrault LLP. He can be contacted on +1 (416) 601 7835 or by email: jboscariol@mccarthy.ca.          

Significant Amendments Proposed to Strengthen Canada’s Anti-Corruption Regime

Ed. Note-this week there was a-buzz from North of the Border where it was announced that Canada was considering amendments to strengthen the Canadian anti-corruption law, the Corruptions of Public Officials Act. I ask John Boscariol, a partner at McCarthy Tétrault LLP if he could explain these amendments to us. So together with his colleagues Paul Blyschak, Brenda Swick and Robert Glasgow, they have prepared this guest post. 

On February 5, 2013 Bill S-14, the Fighting Foreign Corruption Act was introduced in Canada’s Senate.  It proposes the most significant  amendments to the Corruption of Foreign Public Officials Act (CFPOA) since it came into effect in 1999. These broad ranging amendments will  increase the scope of the CFPOA’s prohibitions and the ability of enforcement authorities to prosecute or penalize alleged offenders. The ramifications of Bill S-14 should therefore be closely considered by all Canadian companies and individuals conducting business overseas.  In particular, companies should be immediately reviewing their business conduct and anti-corruption policies and procedures in light of the key changes discussed below.

Existing Exception for Facilitation Payments to be Repealed

The proposed amendments provide for the eventual elimination of the exception granted for “facilitation payments”. The existing exception in the CFPOA covers payments made to expedite or secure the performance of acts of a routine nature that are part of the foreign public official’s duties or functions – such as small payments for the processing of official documents, mail pick-up and delivery and the like. While the facilitation payment exception continues to be recognized in the United States under its Foreign Corrupt Practices Act, individual and entities subject to the CFPOA will now need to amend their policies and procedures accordingly.

This amendment would not come into force immediately on passage of Bill S-14. Rather, it would only enter into force at future date determined by the federal Cabinet. The intention is to allow  companies time to adjust their anti-corruption policies to be consistent with the amended legislation.

This prohibition would also bring Canada closer in line with anti-corruption laws in the United Kingdom where their Bribery Act 2010 bans facilitation payments.  This is also consistent with movements afoot in some international organizations, including the Organization for Economic Cooperation and Development, to eliminate the facilitation payment exception.

Criminalizing Illicit Accounting: Books and Records

The amendments  create a separate offence for concealing bribery in an entity’s books and records. They prohibit the following when undertaken for the purpose of bribing a foreign public official or for the purpose of disguising such bribery:

(i)    establishing or maintaining 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;

(ii)   making transactions that are not recorded in those books and records or that are inadequately identified in them;

(iii)  recording non-existent expenditures in those books and records;

(iv) entering liabilities with incorrect identification of their object in those books and records;

(v)  knowingly using false documents; or

(vi) intentionally destroying accounting books and records earlier than permitted by law.

US companies (as well as any Canadian companies listed or dual-listed on a U.S. exchange) should be  familiar with this kind of “books and records” offence, as it has been rigorously enforced over the past decade by the US Securities and Exchange Commission. This may provide Canadian companies adapting to the CFPOA’s provisions the benefit of past US compliance practice, including examples of possible additions and amendments to anti-corruption policies and procedures. The lessons to be taken from such insight should, however, be considered in light of the fact that violation of the CFPOA’s “books and records” prohibition will constitute a criminal offence rather than a civil matter.

Expanding Jurisdiction on the Basis of Nationality

An ongoing critique of the CFPOA has been that its application is based on territorial rather than nationality jurisdiction.  Currently, under Canadian common law, the commission of an offence under the CFPOA requires a “real and substantial” connection to the territory of Canada. This territorial test for jurisdiction requires that a “significant portion of the activities constituting the offence took place in Canada” (R. v. Libman, [1985] 2 S.C.R. 178 (Supreme Court of Canada)). The decision in Libman also opened the door to possible objections to jurisdiction based on the principle of international comity (i.e. that where a crime has a closer nexus to another country, it may be more appropriate for the matter to be tried there).    Bill S-14 introduces provisions to expand  the  jurisdiction of the Canadian government to prosecute entities for violations of the legislation, including the bribery offence and the newly proposed accounting offences discussed above.

Under the proposed amendments, every person who commits an act or omission outside Canada that, if committed in Canada, would constitute an offence under the CFPOA is deemed to have committed that act or omission in Canada if the person is (i) a Canadian citizen, (ii) a permanent resident (who, after the commission of the act or omission, is present in Canada), or (iii) a company, partnership or other entity formed or organized under the laws of Canada.  This amendment will greatly reduce the ability of alleged offenders to mount jurisdictional challenges to prosecutions brought against them by enforcement authorities based on the location in which an offence was either planned or conducted.

Increased Sentences for Individuals

The proposed amendments include a significant increase in  penalties for violations of the CFPOA by individuals, including both the bribery and newly proposed accounting prohibitions. Specifically, while contravention of the CFPOA previously carried a maximum five year imprisonment provision., Bill S-14 proposes a new maximum term of imprisonment of not more than fourteen years. Given the recent increased focus by U.S. anti-corruption authorities on prosecuting individuals alongside companies, and that we generally expect the same policy to be pursued here in Canada, this should serve as a stark warning to business people facing pressures to engage in corrupt practices or facing other anti-corruption risks in general.

A Broader Definition of “Business”

Another common critique of Canada’s anti-corruption regime has been that the CFPOA appears only to apply to undertakings carried on “for profit”. The CFPOA  applies to corrupt acts committed “in the course of business”, which is defined to mean undertakings carried on “for profit”. The proposed amendment to the definition of “business” removes the requirement for the business or transactions to be for a profit.  This may increase the exposure of Canadian non-profit entities such as development agencies or charities to violations of the CFPOA such that, where such organizations do not already have in place anti-corruption policies or procedures, the design and implementation of same should be closely considered

RCMP to Have Exclusive Authority to Lay CFPOA Charges

Presently under the CFPOA, charges may be laid by municipal or provincial police or Canada’s federal police force, the Royal Canadian Mounted Police (RCMP).  Under the proposed amendments, the RCMP is accorded the exclusive authority to lay an information in respect of a CFPOA offence or related offences, including conspiracy, attempts, being an accessory after the fact, and counselling.

Conclusion

Over the last year or so, new and vigorous enforcement of the CFPOA by the RCMP and Crown prosecutors has garnered the attention of executives and directors across the country. The widely publicized guilty pleas of Niko Resources Ltd. in June of 2011 and Griffiths Energy International in January of 2012, along with ongoing RCMP investigations into the activities of a number of other Canadian companies, serve as stark warnings of the costs of non-compliance.

With an additional 35 or so RCMP investigations underway, Canadian companies are moving quickly to implement anti-corruption policies and procedures and mitigate the significant risk exposure in this area. Canadian companies should also be  reviewing their operations and accounting and reporting procedures to ensure compliance with these newly proposed legislative requirements

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John W. Boscariol is head of the firm’s International Trade & Investment Law Group and a partner in the Litigation Group. He can be reached via email at jboscariol@mccarthy.ca.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. 

Is a Major Bribery Prosecution Coming in Canada Under the CFPOA?

“What did the President know and when did he know it?” That is the iconic question from the Watergate Hearings asked by Senator Howard Baker of various witnesses. In the case of the Canadian engineering company SNC-Lavalin Group Inc. (SNC), it appears that its chief executive knew something was amiss and had known so for quite some time.

In an article in the March 27, 2012 edition of the Wall Street Journal (WSJ), entitled “Big Builder’s Chief Resigns”, reporters Caroline Van Hasselt and Satish Sarangarajan detailed the ongoing turmoil at SNC. In an article in the New York Times (NYT), entitled “Chief of Canadian Firm Steps Down After the Inquiry”, reporter Ian Austen reported that the chief executive of the firm, Pierre Dunhaime, resigned on Monday, March 26, after the “release of a report indicating that he had authorized that $56 million in improperly documented payments to unidentified agents.” The WSJ reported that the company “still had unanswered questions about the payments and had referred the matter to the Royal Canadian Mounted Police [RCMP]…”

Both newspaper articles reported on the release Monday of a copy of the company’s internal investigation, although the NYT article stated that it “appeared to raise more questions than it answered.” It appeared from the WSJ articles that Dunhamie had personally approved these payments to unknown agents to secure work for SNC projects. Apparently these agents were hired without any formal vetting process. Further the company reported that it was taking a charge to earnings for separate amounts of $33.5 million and $22.5 million, which had been incorrectly recorded on the company’s books and records. These payments had been made from 2009 until 2011.

Interestingly the company’s Chief Financial Officer (CFO) had objected to these payments because, as reported by the WSJ, “the agents identities weren’t properly disclosed and their fees would be charged to other projects.” The NYT reported that the payments to “agents who broker and manage contracts with foreign governments.”

So what does all this mean under relevant Canadian law? It could mean quite a bit. Canada has its own law prohibiting bribery and corruption of foreign governmental officials, the Canadian Corruption of Foreign Public Officials Act (CFPOA) which was enacted in 1999. The criminal provisions of the CFPOA are almost identical to those found in the US Foreign Corrupt Practices Act (FCPA) but it has no equivalent to the books and records component and there is no civil component which is enforced by the US Securities and Exchange Commission (SEC). The CFPOA only contains a criminal component, similar to that which is enforced by the US Department of Justice (DOJ). The FCPA has a longer jurisdictional reach than the CFPOA, where the test for jurisdiction requires that the cases involved have a “real and substantial” link to Canada. This means that a portion of the illegal activities must have been committed in Canada or have a real impact on Canadians.

Under CFPOA, there are clearly questions raised that would be similar to those raised under a FCPA analysis. What due diligence, if any, was done on the agents? What services, once again if any, were performed by the agents? The fact that the agents are still not known to the company or what the $56 million payment was for, or where it went, are problematic as well? Why did the company executive approve these payments over the objections of the CFO? While there is no books and records equivalent under CFPOA, mis-characterizing payments and expenses would seem to indicate a desire to hide the true nature of the payments.

SNC had strong relationships with members of the former ruling family in Libya, the Qaddafi’s, and had done ongoing work for the country before the regime fell. A consultant for the company was reported by the NYT to have traveled to Libya during the allied forces bombing and “produced a five-page report that was critical of the NATO-led bombing campaign in support of Libyan rebels.” In view of these relationships, could some of this $56 million have been paid as bribes in Libya?

As noted, the matter has been turned over to the RCMP for further action. In a guest post on this blog, entitled “Why Does It Appear Anti-Bribery Enforcement Is Lacking in Canada?” our colleague Cyndee Todgham Cherniak wrote that Canada’s criminal justice system does not include grand juries. As a result, the job of the RCMP is to gather sufficient information to cause the Crown to lay charges. Canada does not use grand juries as an investigatory tool. When there is a Canadian investigation, the RCMP is not inclined to talk about it. Appropriately, they declined comment for both articles.

Many questions are left unanswered by the company report. But as we might say down here south of the border, it is time for several people to “lawyer up”.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

Canada and the Corruption of Foreign Public Officials Act

Last Friday, on the weekly Compliance Week podcast, Compliance Week Editor Matt Kelly interviewed Michael Morrison, partner in the Calgary law firm of Blake, Cassels and Graydon on the Canadian Corruption of Foreign Public Officials Act. The CFPOA was passed in back in 1999. However, up until this year, there was only one enforcement action under the legislation involving a Canadian company and no prior enforcement actions against individuals. The Canadian government, as a signatory to the OECD Treaty Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, felt an obligation to actively enforce its foreign anti-corruption and anti-bribery statute. This led to the funding for and creation of two RCMP units dedicated to enforcing the act, in 2008.
Mr. Morrison termed this increased enforcement thrust by the Canadian government as “Canada holding Canadians accountable for their actions overseas” which may lead to bribery and corruption. He cited a very recent example of the arrest of Nazir Karigar, 63, who was charged with one count of corruption. His company, a Canadian firm, allegedly bribed an Indian government official to win a multi-million dollar contract for the supply of a security system. To date the Canadian government has not identified the Indian or Canadian company involved in the alleged bribery scheme. This lack of information led Mr. Morrison to speculate that one or more companies may also be indicted under the CFOPA before all the dust is settlement.
Mr. Morrison was asked to compare and contrast the CFPOA with the US Foreign Corrupt Practices Act (FCPA). He started by noting that the criminal provisions of anti-corruption and anti-bribery were almost identical in the two laws. However, the CFPOA has no equivalent to the books and records component and there is no civil component which is enforced by the US Securities and Exchange Commission (SEC). The CFPOA only contains a criminal component, similar to that which is enforced by the US Department of Justice (DOJ).
Additionally, the FCPA has a longer jurisdictional reach than the CFPOA, applying to issuers in the United States, domestic concerns and any person pursuing a bribery arrangement with a foreign official while within the territory of the US. This is contrasted with the Canadian test for jurisdiction which requires that the cases involved have a “real and substantial” link to Canada. This was interpreted to mean that a portion of the illegal activities must have been committed in Canada or have a real impact on Canadians. It would seem somewhat anomalous that a law intended to enforce bribery and corruption outside of Canada would require that the illegal activities occur inside the country. The RCMP said it would provide no further information about the case against Nazir Karigar so at this point it is unclear which of these nexii the RCMP was relying in its arrest. Mr. Karigar was arraigned this week in Ottawa and will appear in court again on July 28.
While it is unclear whether a US subsidiary of a Canadian corporation can be held liable for the actions of one of its Canadian employees, it does appear clear that a Canadian subsidiary of a US corporation would be liable under the CFPOA. Once again, as there are no civil charges, only criminal charges which can be brought so the consequences for a Canadian subsidiary of a US company could be quite severe. So the CFPOA is one more international regulation US companies need to be aware of in the growing list of international laws in the field of anti-corruption and anti-bribery.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010