corrupt practices in canada - davies · corrupt practices in canada: context, ... october 23, 2013....

Corrupt Practices in Canada:Context, Substantive Insights and Managing Your Risk

George AddyStéphane EljarratElisa Kearney

October 23, 2013

Outline

2

1. Context & History

2. Bolstering of Foreign Anticorruption Laws

3. Criminal Liability of Organizations

4. Anticorruption Compliance and Due Diligence

• Pre-1997: Legislation focusses on policing the corruption ofCanadian officials.

• 1997: OECD Convention on Combating Bribery of ForeignPublic Officials in International Business Transactions signed.

• 1998: Corruption of Foreign Public Officials Act (the"CFPOA") enacted.

• 2009: Transparency International's report lists Canadaamong 21 countries whose efforts fall short.

• 2011: OECD questions the CFPOA's effectiveness.

• 2013: Bill S-14 Fighting Foreign Corruption Act receivesRoyal Assent.

• Today: 35 RCMP investigations of Canadian companies. 3

History

• 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

Risks

5

Global Context

SNC-Lavalin:Allegations in the Headlines

Source: Bloomberg (market data); Globe and Mail and National Post (Headlines)

7

SNC-Lavalin: Executive Departures (2012-13)

− 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)

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

• 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 investigations9

Managing Risk

Outline

10





• RCMP launched an investigation into allegations of improperpayments 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 resultingfrom an explosion in a gas field operated by a subsidiary.

• Niko Resources pleaded guilty to bribing a foreign public officialand 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 ensurecompliance with CFPOA).

11

Canadian Case StudyNiko Resources, [2012] AWLD 4565 (ABQB)

• To secure exploration permits in Chad, Griffith gave $2.0Mcash and stocks to the wife of Chad's ambassador toCanada.

• The illegal payments were discovered by Griffith's newmanagement while preparing a public offering of shares.

• Griffith conducted an internal investigation and co-operated with Canadian authorities.

• It pleaded guilty to CFPOA charges and agreed to payfines of $10.35 M.

12

Canadian Case StudyGriffith Energy, [2013] AJ No. 412 (QL)

• Nazir Karigar was charged under the CFPOA for his role ina conspiracy to bribe of Air India and the Minister ofAviation officials.

• The bribe was intended to induce the Indian officials toaccept a bid from Karigar's principal, CryptometricsCanada, 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

Canadian Case StudyR. v. Karigar, 2013 ONSC 5199

• The Court found that it was unnecessary for the Crown toprove 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 abribe is being paid.

• Thus, the anticorruption provision provides for, inter alia,an inchoate offence: "a conspiracy or agreement to bribeforeign public officials is a violation of the Act" (para. 28).

• Karigar was convicted, even though Cryptometrics had notbeen granted the contract. The sentencing hearing has nottaken place yet. 14

Canadian Case StudyR. v. Karigar, 2013 ONSC 5199

• The SEC accused two subsidiaries of GE, and two other subsidiariesof public companies later acquired by GE, of having made illegalkickbacks amounting to approximately US$3.6 M in the form of cash,computer equipment, medical supplies and services to the Iraqi HealthMinistry and the Iraqi Oil Ministry in exchange for contracts under theUN Oil for Food program.

• In the companies' books and records, illegal payments wereinaccurately described as commissions and other legitimate businessexpenses and were concealed under fictitious line items.

• GE agreed to pay a fine of US$1 M and another US$23.4 M to settlethe SEC complaint.

• GE paid considerable fines for companies that it did not own at thetime that the bribes and illegal activities were committed.

15

M&A Risk StudyUS Case: General Electric ("GE")

S. 3 CFPOA: It is an offence, in order to obtain or retain animproper advantage in the course of business, to directly orindirectly give, offer or agree to give or offer a loan, reward,advantage or benefit of any kind to a foreign public official orto any person for the benefit of a foreign public official:

• as consideration for an act or omission by the official inconnection with the performance of the official's duties orfunctions; or

• to induce the official to use his or her position to influenceany acts or decisions of the foreign state or publicinternational organization for which the official performsduties or functions.

16

Anticorruption Provision

• 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

Reform of the CFPOA

Removal of theProfitability Criterion

Former Regime Reform2. The definitions in this sectionapply in this Act.

"business" means any business,profession, trade, calling,manufacture or undertaking ofany kind carried on in Canada orelsewhere for profit.

2. The definitions in this sectionapply in this Act.

"business" means any business,profession, trade, calling,manufacture or undertaking ofany kind carried on in Canada orelsewhere for profit.

18

• The removal of "for profit" from the definition of"business" ensures that the CFPOA applies to allbusinesses, including not-for-profit entities, charitableorganizations and trade associations.

• The introduction of a nationality-based jurisdiction enables Canada topursue Canadian citizens, residents and organizations for acts oromissions committed entirely abroad.

• Common law "real and substantial risk" criterion also continues toapply. 19

Former Regime Reform• Canadian jurisdiction is

established in accordance withthe jurisprudential "real andsubstantial link" criterion.

• To meet this criterion, asignificant portion of theactivities constituting anoffence must have occurred inCanada or have had a realimpact on Canadians.

• Every Canadian citizen,permanent resident, publicbody, legal person, corporationand company who commits anact of corruption abroad isdeemed to have committedthat act in Canada.

Expanded Scope of Application

Former Regime Reform3.(2) Every person whocontravenes [the anticorruptionprovision] is guilty of an indictableoffence and liable toimprisonment for a term notexceeding five years.

3.(2) Every person whocontravenes [the anticorruptionprovision] is guilty of an indictableoffence and liable toimprisonment for a term notexceeding fourteen years.

20

• The increase of the maximum term of imprisonmentenhances the CFPOA's deterrent effect.

• Conditional sentences no longer available.

More Stringent Sanction

Upcoming Removal of Facilitation Payments Exception

Former Regime Reform3. (4) [A] payment is not a loan,reward, advantage or benefit toobtain or retain an advantage inthe course of business, if it ismade to expedite or secure theperformance by a foreign publicofficial of any act of a routinenature that is part of the foreignpublic official's duties or functions[…].

The facilitation paymentsexception will be repealed.

21

• The repeal will occur at a date to be set by order of the Governor inCouncil, therefore giving some time to Canadians to adjust their foreignactivities accordingly.

Former Regime Reform• Federal and provincial

authorities can both laycharges under the CFPOA.

• Only RCMP officers areauthorized to lay chargesunder the CFPOA.

22

• The reform has centralized decision-making powers within thepurview of the RCMP and the Public Prosecution Service ofCanada.

• It keeps in step with the creation, in 2008, of the RCMP'sInternational Anti-Corruption Unit.

Centralized Powers within RCMP's Exclusive Mandate

S. 4 CFPOA: Every person commits an offence who, for thepurpose of bribing a foreign public official in order to obtainor retain an advantage in the course of business or for thepurpose of hiding that bribery,

• establishes or maintains accounts which do not appear inany of the books and records that they are required tokeep in accordance with applicable accounting andauditing standards;

• makes transactions that are not recorded in those booksand records or that are inadequately identified in them;

• records non-existent expenditures in those books andrecords.

23

New Books and Records Offence

• Every person commits an offence who [cont'd] :

− enters liabilities with incorrect identification of their objectin those books and records;

− knowingly uses false documents; or

− intentionally destroys accounting books and recordsearlier than permitted by law.

• This new offence is punishable by a maximum term ofimprisonment of 14 years.

24

New Books and Records Offence

Outline

25





• 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. 22.2 Cr.C.

• An organization may now be found guilty of an offence if, with theintent at least in part to benefit the organization, one of its seniorofficers:

− 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 actingwithin the scope of his or her authority, directs the work of otherrepresentatives of the organization so that they do the act or make theomission specified in the offence; or

− knowing that a representative of the organization is or is about to be aparty to the offence, does not take all reasonable measures to stop himor her from being a party to the offence.

26

Criminal Code s. 22.2

• For the first time, in R. v. Pétroles Global inc., 2012 QCCQ5749, a court defined the scope of s. 22.2 Cr.C. by holdingthat the definition of "senior officer" encompasses morethan solely the individuals that form an organization'sdirecting mind under the identification theory.

• The Court adopted a liberal interpretation of the definitionof "senior officer".

• In addition to affirming that an organization could haveseveral senior officers, the Court emphasized the functionsand responsibilities of individuals, rather than their formaljob title or capacity.

27

Scope of Criminal Code s. 22.2

• Thus, [translation] "a person may be considered a'senior officer' and expose the organization to liability[…] either through having an important role in theestablishment of an organization's policies or by beingresponsible for managing an important aspect of theorganization's activities" under s. 22.2.

• Note that the importance of the individual's role is acriterion that did not exist in prior case law involvingthe directing mind theory.

28

Scope of Criminal Code s. 22.2

Outline

29





• Identify:

− Risks associated with organization's industry,commercial activities, providers, clients and countries ofoperation

− Government entities and representatives with which theorganization or its business partners deal

− Employees, agents and consultants overseeing orconducting dealings with foreign public officials

− Payments to government entities

30

Risk Assessment

• Analyze:− Procurement policies, standard contracts and long-term

contracts (e.g. joint ventures, supply agreements andconsulting contracts)

− Agency relationships

− Representations and warranties in third party agreements

− Internal reporting and control structure

− Employees' and agents' training, compliance program andhiring process

− General ledger accounts

− Payments, expenses, bonuses, customs fees, commissions,agency fees, gifts and donations 31

Risk Assessment

• An effective compliance program is central to managing anorganization's risk.

• Design, implementation and enforcement of anorganization's compliance program impacts prosecutorialdiscretion.

• Apply a "common-sense and pragmatic approach" todesigning and evaluating your compliance program.

• Board or Audit Committee to make a regular independentassessment of the adequacy of the compliance program.

• Consider making a public commitment to the complianceprogram.

32

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

Compliance Program

34

Compliance Program

DECISION

ACTION

PLAN DEVELOP IMPLEMENT MONITOR EVALUATE

RESPONSIBILITY Owner/Board/CEO

Appointed Senior Officer /

Compliance Officer


Compliance Officer


Compliance Officer


Compliance Officer

Board / Audit Committee

PROCESS Obtain commitment

"from the top"

Decide to implement compliance

program

Decide extent of any public disclosure

Appoint senior officer /

compliance officer

Define specific company risks

Review all legal requirements

Develop compliance

program

Get commitment from senior

management

Integrate program into organizational

structure

Review ability to support

compliance program

Develop detailed implementation plan, including HR policies and training programs

Set up reporting function

Communicate compliance

program (internal/external)

Train all employees and

business partners

Ensure capabilities are in place for

specialist functions: internal audit, finance,

legal

Regular reviews of program

Capture knowledge from

reported incidents

Use external audit providers

Review issues

Receive feedback from

monitoring

Evaluate effectiveness of

compliance program

Develop improvements to

program

Report to management / Board review and sign-off

* Based on Transparency International Six Step Process

Enforce violations of

program

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

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

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 riskcountries?

• Are customers of the business government entities, including state-owned orfinanced companies?

• Is the business involved in any joint ventures with quasi-government entities?

• Are government approvals and licenses needed to operate in the high riskcountries?

• Does the business have significant transactions affecting import/export andcustoms in the high risk countries?

• Does the business rely on relationships with third party agents or consultantswho interact with foreign officials on the company's behalf?

37

Due Diligence – Red Flags• The obvious: request for payment in cash.

• Request for payments for schooling, scholarships orcharitable organizations.

• Unusually large payments or request for unreasonable compensationor commission percentage.

• Introduction of third parties into a transaction.

• Incomplete, inadequate or questionable transaction documents oraccounting records.

• Gifts, lavishness or secrecy.

• Request for payment to someone other than an agent or outsidetarget's countries of operation.

• Agent relationships with government officials.38

• Investigate internally with the assistance of an externalcounsel and a forensic expert.

• Interview key employees and officers.

• Review e-mails and apply data analytics.

• Terminate business relationships with implicated thirdparties.

• Enforce the compliance program and activate the internalreporting and control structure.

• Consider a voluntary disclosure to authorities.

39

Responding to Red Flags

41

Questions

Thank you

Stéphane Eljarrat416.863.6407 (Tor)514.841.6439 (Mtl)[email protected]

George [email protected]

Elisa [email protected]

corrupt practices in canada - davies · corrupt practices in canada: context, ... october 23, 2013....

Documents