Confronting Corruption: Anti-corruption is on the corporate radar

Anti-corruption and bribery policies are no longer theoretical exercises for Canadian corporations

In much of the world it's the grimy grease of business, black with moral rot. But increasingly, bribery and other forms of corporate corruption are also rife with the possibility of serious legal and other consequences: massive fines, plummeting stock prices, brand erosion, cancelled government contracts, disbarment from projects funded by international banks — even the exchange of a plushy C-suite office for a barren cell block.

Bribery is a septic reality in many countries where Canadian companies choose to mine, drill, saw and trade. But it is by no means just small and impoverished nations in which individuals and companies are guilty of holding out their hands and demanding a bribe when it comes to business. According to Transparency International's (TI) 2011 Bribe Payers Index, a review of 28 of the world's largest economies, Russia, then China, were the countries in which corporations were most likely to offer or pay bribes abroad to gain an advantage in international business.

Accordingly, companies from The Netherlands and Switzerland were the least likely to pay bribes abroad. Canadian companies were sixth and American companies were 10th least likely to do so.

However, were a survey to be conducted now, Canadian corporate results might well be worse. One may think of Canadian corporations as being relatively squeaky-clean operators in enterprise; there have been examples to the contrary, including Griffiths Energy International and, seemingly, contractors involved in Quebec's public contracts. These are reminders that there is clean-up work to be done.

Into this scenario, the relevant federal legislation – namely, the Corruption of Foreign Public Officials Act (CFPOA) – now provides for police enforcement, shining a perhaps purifying light on the potentially crooked nooks and crannies of Canadian business, especially those corporations operating in countries where corruption is as thick as Shanghai smog. Other nations too are strengthening their anti-corruption efforts – the UK, France, Germany and Australia – are now falling in line with or even exceeding the United States' tough Foreign Corrupt Practices Act (FCPA) passed in 1977.

So where did anti-corruption legislation start in Canada? The CFPOA, enacted in 1998, made it a criminal offence for persons or companies to bribe foreign public officials to obtain or retain an advantage in the course of business. Years went by.

On June 18, 2013, Parliament passed additional amendments strengthening the law. Among other changes, the maximum penalty was increased from five to 14 years, which took it up to the level of penalty for other serious criminal offences. The size of possible fines was made unlimited. And the long arm of Canadian law will stretch further than ever: The CFPOA's jurisdictional reach permits Canadian authorities to prosecute persons or companies of Canadian nationality for charges of international bribery, regardless of where the alleged bribery happened.

But for a decade, the CFPOA had no serious enforcement tools to back its bite. Even though things began to improve in 2008, when the RCMP created the International Anti-Corruption Unit, with special teams in Ottawa and Calgary dedicated to enforcing the Act, in 2011 the Organisation for Economic Co-operation and Development (OECD) publicly scolded the Canadian government for its lax effort in prosecuting Canadian corporate wrongdoers.

“Nothing really happened until 2008,” says James Klotz, a Toronto partner with Miller Thomson LLP who chairs the firm's Anti-Corruption and International Governance Group. When the RCMP ramped up the anti-corruption unit, he says, the legal community knew it was just a matter of time before the RCMP's scrub brush started picking up dirt. Lawyers let their corporate clients know about this new reality.

“Anti-corruption cases by their nature take a lot of investigation and they take time,” says Klotz. “It was clear it was going to take a couple of years for there to be any results from that.” The results began emerging in 2010, “and every expectation is they will just continue to snowball,” he says.

To date three companies and one individual have been convicted under the CFPOA. The first, in 2005, was Hydro-Kleen Group, which specializes in cleaning oil refinery piping. It pleaded guilty to charges it paid $28,299 in bribes to a senior US immigration inspector at Calgary International Airport in order to help it get its employees into the United States. Still there were critics who complained the $25,000 fine was too paltry to send the right signal to Canadian business.

In 2011, Calgary-based Niko Resources was fined a heftier $9.5 million after the publicly traded company pleaded guilty to giving Bangladesh's Energy and Mineral Resources Minister a $190,000 vehicle for personal use and trips to Calgary and New York in order to influence him. Next was Griffiths Energy. It pleaded guilty in January 2013 to paying a US$2 million bribe to the wife of Chad's ambassador to Canada while negotiating with that nation's government for land concessions. Griffiths was fined $10.35 million.

There are potentially more to come. The RCMP has indicated there are at least 35 Canadian companies currently under investigation for bribery involving foreign officials. “Typically because these cases cost so much money to investigate” says Klotz, and the RCMP must be judicious on spending money on investigations, “those are likely big cases and ones with sufficient evidence.” Those being investigated, he adds, “will have no idea they are under investigation until a search warrant is executed.”

Canadian business may have been considered somewhat lethargic when it comes to adopting the programs necessary to ensure compliance with the CFPOA. But the RCMP's activities have been a big wakeup call. Many companies are taking a hard look at their own bribery and anti-corruption policies – or lack of them – and either implementing or revising them. Klotz has seen a seismic shift in corporate attitudes to corruption in the past six years. One prime indicator has been “the number of lawyers that are now practising in the area and firms creating specialized practice groups.” In February, for instance, Norton Rose Fulbright announced the launch of a global regulation and investigations practice with a focus in part on anti-bribery and corruption investigations.

“The demand is there,” says Klotz. “If you tried writing this article 10 years ago, there would be one or two, maybe three people to talk to. Now you have lots.”

And there is much to talk about. Topping the list is the overall challenge: What are the most effective ways that corporations large and small – especially those doing business in places like Africa, India, China, Latin America, Russia and Eastern Europe – can construct effective compliance programs that will help them stay out of trouble under the CFPOA? In a nutshell, it isn't easy. And it isn't cheap.

Broad Links

Last year's conviction of Ottawa high-tech executive Nazir Karigar for bribery under the CFPOA especially got CEOs to stir from their chairs and start thinking about compliance, says Sally Gomery of Norton Rose Fulbright Canada LLP in Ottawa.

Karigar was the first CFPOA case to go to trial. And he's the first individual – not just a company – convicted under the Act. He is currently facing up to five years in prison (he was charged before an amendment to the CFPOA increased the maximum term to 14 years). Karigar, an executive with American security company CryptoMetrics' Canadian subsidiary, was convicted of conspiring to distribute $450,000 in bribes to state-owned Air India officials in order to gain an advantage in winning a contract with the airline. The Ontario Superior Court of Justice decision, delivered by Justice Charles Hackland, would surely have put the Canadian business community on notice that future prosecutions could indeed happen: The Court convicted Karigar even though there was no proof of bribe money received and CryptoMetrics did not win any contract.

The ruling, says Gomery, who heads Norton Rose's business ethics and anti-corruption team in Canada, makes it clear to the legal and corporate community that the courts are going to apply the CFPOA in a meaningful way. “Just because you can't show the money went into someone's pocket — if you can show the money went into a bank account for that purpose, then that is sufficient for conviction.”

So broad have become the possible convictable links for corporations to bribery abroad under the CFPOA, the American FCPA, and the United Kingdom's even tougher Bribery Act passed in 2010, that companies need to think globally, but act locally, in creating viable anti-corruption compliance programs, warns Gomery. “It does no good to have some theoretical idea of what anti-corruption measures should look like sitting in an office in Toronto for example. Or giving advice to a company that is doing business in China, or mining in Africa, unless you have actual experience on the ground in China or Africa. It's just not a meaningful exercise otherwise.”

Paper Thin

Riyaz Dattu is a highly experienced international trade lawyer in Toronto with Osler, Hoskin & Harcourt LLP. He has, in 25 years of practice, been counsel in more than 50 Canadian and international trade remedies proceedings. Increasingly though, his practice is focusing on international bribery and corruption matters. This has meant he needs to take personal precautions: When he travels to places like Africa or South America to conduct internal investigations on behalf of clients who suspect their employees, agents or subcontractors have engaged in bribery, he is accompanied by bodyguards.

Three or four years ago, he says, companies would call Osler and ask them to draw up an anti-corruption policy for them. “And we would say, well, do you want a policy or a program? Theyoften just wanted a one-pager that says, ‘We don't engage in bribery.'”

Law firms may have been reluctant to recommend further steps be taken. Both in-house and external counsel were reluctant to push clients beyond that paper policy. Lawyers want to help, not hinder, clients in landing foreign deals. And they had difficulty justifying the expenditures of anti-corruption compliance programs in light of Canada's weak reputation for enforcement at the time. The costs of instituting the kind of compliance programs that can safeguard companies against the insidious tentacles of bribery in dealings with many foreign nations can be startling — especially for smaller companies involved in foreign trade.

Wal-Mart, for instance, recently revealed that the costs of enhancements to its compliance program after US Department of Justice and Securities and Exchange Commission probes in 2011 cost it US$282 million in 2014 and would range between US$200 and $240 million in 2015. Authorities were investigating possible violations of the FCPA after The New York Times reported Wal-Mart handed envelopes of cash to Mexican officials responsible for issuing business licences and building permits for new stores in that country.

Despite such expenses, Canadian business people are coming to realize that relatively inexpensive paper policies on their own won't cut it anymore, says Dattu. “They understand that anti-corruption is something they really need to worry about by way of enforcement, with authorities actually coming after them.”

As well, lenders and financiers, he adds, are now demanding proof companies have solid anti-corruption compliance programs in place before financing projects, mergers or acquisitions.

The World Bank, for instance, debars companies from bidding on projects it funds if they have been found to have even loose and indirect ties to corruption. “Canada, as you might know, tops the list in terms of number of entities debarred by the World Bank,” points out Stéphane Eljarrat, a partner in Davies Ward Phillips & Vineberg LLP's Investigations & White Collar Defence, Litigation and Taxation practices in Montreal and Toronto.

Speaking generally, Eljarrat says bribery of foreign officials by Canadian companies has the potential of “putting at risk our economy because at one point, as more and more companies from Canada get debarred, that means that companies from outside of the country are going to be able to come in and propose their services.”


Ironically, then, and at long last, you can actually lose business abroad for bribing corrupt foreign officials as you can for refusing to bribe them, which has usually been the case in the past.

That might partly explain why the Mining Association of Canada, the Prospectors & Developers Association of Canada, Publish What You Pay Canada and the Revenue Watch Institute – sensing a more scrutinized future – jointly formed the Resource Revenue Transparency Working Group. In January, the group released a list of recommendations for creating a new and standard framework for Canadian extractive industries to report payments to government officials and others abroad when they are above certain thresholds — $100,000 in the case of TSX-listed companies, and $10,000 for junior mining outfits listed on the TSX-Venture Exchange.

Eljarrat expects to see other Canadian industrial sectors making an effort to set higher standards for transparency in reporting payments and profits stemming from their foreign business affairs. “You will be seeing more and more companies becoming very proactive in terms of dealing with those issues from the get go, and trying to avoid even being placed” in situations that smell of corruption.

Meanwhile, unlike some civil laws or tax statutes, says Dattu, the CFPOA is not the kind of legislation upon which lawyers might advise clients there's wiggle room to test limits, especially with these latest amendments to the CFPOA.

Among the most significant of those amendments, Dattu says, is a new books and records provision that makes it not only a crime to bribe or attempt to bribe foreign public officials, but to record those transactions inaccurately in accounting records. The provision, unlike the American FCPA, also applies to private companies.

“Prosecutors will tell you that it is far easier for them to prosecute and win convictions on books and records violations than it is in the area of actual bribes,” says Dattu. “In the Karigar case they never did find where the money went. They never were able to prove a bribe was paid. But if the amount that was intended to be paid as a bribe is recorded inaccurately as, say a consultant fee, or agent's fee, or government relations expenditure, and treated as a lawful transaction, that is going to be the basis for a conviction. To me that's a watershed in terms of how the government is planning to go after companies that are operating abroad that are not in compliance” with the CFPOA.

The second amendment Dattu believes needs to be taken more seriously is the phasing out of the facilitation payment exemption in the prior version of the CFPOA. Previously, the Canadian legislation – as the American FCPA currently does – allowed for small facilitation payments. These were considered by many to be a masquerading word for bribe payments, given to government functionaries to encourage them to do something they were required to do anyway. It might be for something as mundane as getting telephone service hooked up, but without that “facilitation payment” it might take months instead of days to be completed. Such payments were easily covered up in petty cash transactions. The new amendment makes them illegal.

Compliance programs

Klotz at Miller Thomson, who was President and Chair of TI–Canada until 2012, is someone who believes – perhaps to the skeptically raised eyebrows of some Canadian executives – “that it is possible to invest in most countries in the world without paying bribes. But if you do not have strong resolve going in, and you do not have training for all of the people around you, it is much harder to avoid. So yes you can do business in China without paying bribes. I believe that. And there might be some business opportunities lost. But you know what? Our law has a 14-year maximum prison sentence,” he says with emphasis. “That's huge. You might have to kill someone to get 14 years in Canada.

“A compliance program,” Klotz explains, “is really about training people to deal with requests for bribes in ways that they don't lose business. You can train them how to anticipate a bribe and how to deal with that in advance.”

He gives an example: An engineer is in charge of building a plant in the kind of country whose flag should probably be the image of a manila envelope exchanging hands. A vital cement truck has been pre-ordered three months earlier. When it comes, an inspector unexpectedly tags along with it and demands $500 for a clearly phony inspection fee. Options? You could pay it, work proceeds on time, but you risk that even years down the line the illicit expense will get company employees – from top to bottom – hauled in front of one of those RCMP anti-corruption units. Or you indignantly refuse and the cement truck doesn't return for weeks or months, putting the project behind schedule.

Klotz sees an alternative. “You can actually train that engineer in advance to sidestep that sort of thing. He could jump out, he could see the inspector, and say ‘Thank goodness you are here, Mr. So-and-so, where you are known as a man who doesn't accept bribes. And that's why we are delighted you are here.'” That could put the inspector on the spot, disarm his intentions and possibly result in an uncorrupted transaction. “That's one of a myriad of techniques that are available. But without that training to know to do that, you wouldn't do that.”

Klotz has a theory: That even in crushingly impoverished countries like Honduras or India – where many people, despite negligible incomes, own telephones that can tap into the Internet – social media has enabled a swelling grassroots resistance to corruption amongst their officials and business executives. Able to bypass the censorship of mainstream media in many of these countries, resistors are collectively voicing their anger, protesting in the streets. “The cheats harm the poorest in society most. So most people really don't like corruption.”

André Vos, based in Johannesburg, heads the Business Ethics and Anti-Corruption practice group at Norton Rose Fulbright in South Africa. According to Vos, bribery and corruption are clearly major challenges in many African jurisdictions, however he has seen “several recent examples across the African continent where, at [the] grassroots level, communities have sent a strong signal that they will no longer simply put up with corrupt officials, be it at local or national government level.”

He adds that “the extra-territorial reach of Canadian, US and UK anti-corruption legislation and the increased regulatory drive worldwide to stamp out corruption and penalize errant companies have also had an impact in Africa.”

Many African governments, says Vos, are being “more vociferous against corruption.” And, he adds, during the past decade a number of African countries have introduced or improved their anti-bribery and anti-corruption laws. Even elements of the South African business community are showing they support international efforts to combat corruption.

Asked if she was seeing the cancer of corruption shrinking in international business, Sally Gomery offers a positive prognosis. At the University of Ottawa, for instance, Garrick Apollon, a Department of Justice lawyer, teaches a course in business ethics developed in consultation with Patrice Poitevin, the RCMP's Senior Investigator and Outreach Coordinator, on anti-corruption matters. The course, innovative in Canada, challenges MBA students to develop a compliance program that could be adopted by an SME without otherwise requiring a great outlay of resources.

“I regard this as tremendously exciting because 20 years ago people studying for an MBA would not have even been taught something like this,” says Gomery. “So yes, I think we are seeing some very good treatments [for bribery and corruption]. We have understood there is a problem. We are beginning to address it. But we haven't beaten it yet. And we have to accept the fact that we will never eradicate it entirely. It's always going to be a matter of identifying it and stamping it out.”

Anthony Davis is a freelance business and investigative writer based in Calgary.



PUT A PROGRAM IN PLACE: Future trouble can be avoided with the right steps

With the strengthened CFPOA and corollary legislation in other countries, it will take rigorous compliance programs to keep company employees and executives out of handcuffs. Lawyers Lexpert consulted with say a proper anti-corruption program boils down to a number of core things:

> The first thing is an audit of your actual risk, says Sally Gomery. “That would involve Ú guring out what your current practices are. And here again it's important to understand what is going on locally.” Companies often operate with agents and subcontractors in foreign jurisdictions and it's important to know whether they may be subject to bribery pressure.

> Set the right tone at the top: If an old-school CEO who rose in an era when bribes were grudgingly accepted as the way business gets done in some regions is still at the helm, any compliance program is likely to rot in a short time. Straighten him or her out.

> Training: It must apply to anyone and everyone at a company (or the partners, agents, third parties and contracts it deals with) exposed to risky activities.

> A whistle-blowing program is also important so employees and agents on the ground in trouble spots feel safe and supported in helping to root out corruption.

> Ongoing audits: Compliance programs are not a one-shot deal. An ongoing routine of annual audits and due diligence in all foreign mergers and transactions are required to ensure the message is getting through.

A great starting resource is Transparency International Canada's Anti-Corruption Compliance Checklist, updated in 2012. Available on their website at transparency.ca, it outlines six actions, along with reference tools, companies can take to launch compliance programs.