Integrity Rules: tough regulations to fight corruption in Canada

The federal government has enacted tough regulations to fight corruption by Canadian companies doing business abroad

After many years of scant action when it comes to combating corruption by Canadian companies conducting business on the international stage, the federal government has recently introduced tough new regulations.

Some have been well received, others less so.

The most contentious initiative has been met with considerable opposition, so much so that in early July 2015 it was amended, but still not to the satisfaction of its critics.

The matter in question focuses on an integrity regime first proposed by Public Works Canada in 2012 (and subsequently modified in 2014 and amended again in 2015) to deal with procurement processes involving construction contracts, goods and services contracts and real property transactions by Canadian companies doing business in Canada and abroad.

One critical provision, which has been referred to as draconian in many quarters, called for an automatic 10-year debarment from doing business with the federal government for any company, affiliate, supplier or board member convicted of a range of offences, such as bribery, money laundering and extortion, particularly breaches of the Corruption of Foreign Public Officials Act (CFPOA).

“There was a lot of blowback from various directions [to that],” says Paul Lalonde, a partner in the Toronto office of Dentons Canada LLP. Lalonde is also the Chair of Transparency International’s legal committee and a member of the Canadian Bar Association’s (CBA) anti-corruption team. “A 10-year ban for some companies would effectively be a death sentence.”

Kristine Robidoux, a partner practising white collar defence in the Calgary office of Gowling Lafleur Henderson LLP, believes that “maybe 15 separate stakeholders were invited to Public Works” to express their concerns about the regime and “to encourage the government to take a sober second look at the integrity framework.”

Those stakeholders, in addition to the CBA and Transparency International, included the Canadian Chamber of Commerce, the Canadian Council of Chief Executives, Canadian Manufacturers & Exporters and the Information Technology Association. Their main message: the debarment provision would cause serious economic harm to the country.

“It also created the possibility that several major contractors – including Hewlett-Packard Co., Siemens AG and Montreal’s SNC Lavalin Group Inc. – would find themselves on Ottawa’s blacklist,” the Globe and Mail reported. “That prompted SNC CEO Robert Card – who has been cleaning up the scandal-plagued engineering company he joined in 2012 – to threaten that his company could ‘cease to exist’ if Ottawa’s ‘meat cleaver’ approach stood.”

Lavalin, in particular, railed against the proposed debarment provision. “It is important to note that companies in other jurisdictions, such as the United States and United Kingdom, benefit from a different approach that has been effectively used in the public interest to resolve similar matters while balancing accountability and securing the employment, economic and other benefits of businesses,” it said in a news release.

In those jurisdictions, a corporation accused of corruption, for example, can enter into a deferred-prosecution agreement (DPA), in which it commits to cooperating fully with an investigation into its transgressions, implementing certain systemic reforms, paying a fine (often hefty to the point of seeming extortionate) and, in return, having the charges withdrawn.

The collective protests seem to have been heard in Ottawa but only to a degree. In July 2015, the government softened the strict rules, which were far harsher than those in the United States and the United Kingdom. The most important changes were to eliminate automatic debarment for affiliate conduct and to reduce the debarment period from 10 years to five years when the corporations could demonstrate they had cooperated with law enforcement or undertaken remedial actions, says John Boscariol, a partner in the Toronto office of McCarthy Tétrault LLP.

“I think there are some good elements to what they’re now proposing,” he says. “You need incentive-based measures so that companies are incentivized to fix things and go forward and can continue to supply the government. But five years is still a long time to be debarred. It can be devastating. It can cripple a company.”

Although it backed off somewhat in its debarment provision, the government made it clear who would foot the bill if a corporation lobbied for a reduced penalty. In announcing the “new regime,” Public Works Minister Diane Finley noted that, “companies who are criminally convicted or face ethical violations will bear the cost of proving to the government that they are a reliable business, not taxpayers.”

Despite the changes, there remains opposition to the integrity regime, which its critics still believe is unworkable. “I wouldn’t be surprised if the government continues to tinker with it,” Boscariol says.

No matter what the government ends up doing regarding debarment, it will likely face a continuing push from many quarters to adopt the deferred-prosecution agreement option available in other jurisdictions. One argument points to the potential for transgressions to increasingly be contested in the courts, usually a very long and expensive process.

“The advent of public contracts debarment rules has changed the dynamic of corporate regulatory prosecution,” says Stéphane Eljarrat, partner and co-leader of the white-collar and investigations practice in the Montréal office of Davies Ward Phillips & Vineberg LLP. “Today, businesses facing criminal or regulatory charges are less likely to plead guilty out of convenience, even where the proposed fines are dwarfed by the defence costs. The apprehension of debarment will doubtlessly see more corporations challenge accusations before the courts, unless non-prosecution mechanisms, such as the deferred prosecution agreements in the United States and in the United Kingdom, are introduced in Canadian criminal law.”

To Robidoux, a DPA system, in which a company “can comfortably bring self-identified issues to the authorities knowing that you will be treated fairly, is a win-win for everybody.”

While some corporations will fight a potential debarment vigorously, Eljarrat is concerned that others might acquiesce without fully understanding the ramifications of that decision. Despite the public attention the debarment debate has engendered, “many a business is still unfamiliar with the rules’ intricacies and, when charged of a regulatory offence, considers pleading guilty as an easy way to end the proceedings, especially where the proposed fine is trivial,” he says. “Once it realizes that the plea has triggered the debarment rules, it is normally too late. As illustrated by a recent Québec court decision, a plea can be revisited with court authorization, but only in exceptional circumstances. Businesses – especially those dealing with the government on a frequent basis – must be vigilant when analyzing the impact of a guilty plea. Otherwise, what originally appeared as a convenient decision could actually result in catastrophic consequences.”

Eljarrat believes the debarment rules have given regulators a powerful upper hand. “Authorities are aware of the businesses’ apprehension of debarment,” he says. “In Québec, where the debarment rules are broader and more discretionary than the federal counterpart, authorities are using this apprehension to gain leverage during investigations and settlement discussions.”

James Klotz, a partner in the Toronto office of Miller Thomson LLP, says “the recent debacle with the integrity framework has increased the demand for a thoughtful alternative to the criminal guilty/not guilty nature of the CFPOA, given the potential consequence of debarment in public procurement to Canadian companies in Canada and abroad who choose to self-report discoveries of bribery.” He believes there are “many positive aspects to DPAs but also some negative ones.”

That latter perspective is strongly held by Mike Koehler, an assistant professor in the Southern Illinois University School of Law, and an acknowledged expert on the US Foreign Corrupt Practices Act (FCPA). He also closely follows what’s happening in Canadian anti-corruption initiatives.

In his blog, fcpaprofessor.com, Koehler lectures SNC-Lavalin for its public support of a DPA system rather than debarment. “For starters [under a debarment process] SNC-Lavalin can only be found guilty of the charges alleged to the extent one of its ‘senior officials’ engaged in improper conduct,” he writes. “This is a much more exacting standard than the very lenient US standard of respondeat superior corporate criminal liability in which a business organization can face criminal liability to the extent any employee engaged in improper conduct within the scope of employment and intended, at least in part, to benefit the organization.”

More importantly, he argues, Lavalin “should be grateful, and not pout, that Canadian authorities will have to prove the facts and legal theories alleged in the enforcement action. In the US, FCPA enforcement agencies are rarely put in the position of having to prove anything in a corporate FCPA enforcement action. Rather, the DOJ (or SEC) occupy the position of prosecutor, judge and jury all at the same time and use resolution vehicles such as non-prosecution and deferred prosecution agreements (NPAs/DPAs) or administrative settlements all of which are not subjected to any meaningful judicial scrutiny.”

One of the very few individuals debarred by the Organisation for Economic Co-operation and Development (OECD) also supports debarment over DPAs. Richard Bistrong, who served fourteen-and-a-half months in a US prison for bribery and was released in December 2013, says he’s a “big believer in the debarment process.”

After he was charged, the former vice president of international sales for Armor Holdings Inc. (later purchased by BAE Systems PLC), a large, publicly traded manufacturer of police and military equipment, cooperated with authorities in the US and the UK, which significantly reduced his sentence. He says a DPA doesn’t really deter people in the field (he travelled abroad on business about 250 days a year) because the company pays its fine and keeps operating. “But if [people working for them] could potentially be out of a job or have nothing to sell for a period of time, that presents a great source of internal pressure to do the right thing.”

While that may very well be true in the field, debarment doesn’t necessarily bring about the best long-term changes in the fight against corruption. “In my view, it would be much easier to simply provide a defence to a breach of the CFPOA, similar to that provided in the UK Bribery Act,” says Klotz. “Namely, that the company can prove that it had adequate procedures in place to prevent bribery. This would accomplish the public policy goal of reducing corruption by giving companies a positive incentive to have a robust compliance program in place.”

 

A month prior to the amended integrity framework, the federal government enacted another anti-corruption measure, to considerably less criticism.

On June 1, 2015, Greg Rickford, the Minister of Natural Resources, announced that the Extractive Sector Transparency Measures Act, which had received royal assent in December 2014, was immediately coming into effect (although affected parties had until late September to express comments on the act’s implementation tools).

“The Act requires certain entities with connection to Canada, that are engaged in commercial development of oil, gas or minerals in Canada or elsewhere, or that control such entities, to report payments made to any government, whether foreign or domestic, in excess of $100,000 in a given year,” Riyaz Dattu, a partner at Osler, Hoskin & Harcourt LLP in Toronto writes, in conjunction with several colleagues, in a legal alert. “The legislation will require Canadian businesses involved in resource extraction to file detailed reports, which will be publicly available.”

The Act’s purpose is “to implement Canada’s international commitments to participate in the fight against corruption through the imposition of measures applicable to the extractive sector.” Both the US and the European Union have “committed to implementing similar measures, but appear to be lagging at this time relative to Canada,” Dattu writes (in September 2015 a Boston judge ordered the SEC to speed up the implementation of US disclosure rules).

Under section 12 of the Extractive Sector Transparency Measures Act, a company’s report must be made available to the public. “This disclosure requirement may raise serious issues for entities that have agreements with foreign governments covered by confidentiality obligations,” he writes.

“Payment,” whether monetary or in kind, is defined very broadly in the Act. And it is, as yet, unclear as to how payments are to be detailed, although it will likely be on a project-by-project basis. “Testifying before the House of Commons Standing Committee on Finance in late November 2014, representatives from the Department of Natural Resources indicated that the government is waiting for international standards to crystallize before providing more specific direction on the precise nature of reporting obligations through regulations or guidelines,” Dattu points out.

Companies must have a “uniform methodology for reporting the payments” covered under the Act, says Robidoux. “We know that making improper payments is against the Criminal Code and an offence under the CFPOA to do it abroad,” she says. “But what about other payments, such as royalty payments, social development payments … like building a hospital or a road? The devil is in the details with those kinds of payments. Whenever we have clients undertaking these types of social development we take great care and ask questions about who asked for this particular infrastructure project, where is it located, who is going to build it, do you have to use a particular contractor who just happens to be the minister’s brother.”

In August 2105, the government again turned to industry for guidance on how to apply the Act. As Stikeman Elliott notes in its Canadian Securities Law blog, the existing implementation tools “do not constitute prescriptive guidance with the force of law, however. The upshot is that … companies at all times remain responsible for determining whether and how the Act’s provisions apply to them.” A little more prescriptive framework, it added, is necessary.

No matter how the implementation process is ultimately determined, “resource extraction companies in Canada must start planning, developing and implementing proper systems, policies and procedures for reporting in accordance with the requirements of the Act,” says Dattu. 

While tough new rules will certainly help Canada combat corruption, actual court cases and convictions will likely be the most effective deterrent. In this regard, Canada has rightly been criticized for being late in the game when it comes to investigating and prosecuting international corruption cases. Nor have many cases made it to the courts.

To compound the widely held perception that Canada is not doing enough from a prosecutorial perspective, the RCMP has recently decided to no longer announce how many investigations it’s conducting in this area.

“It’s really unfortunate that they’ve stopped their historic practice of reporting on their number of open investigations,” says Gowlings’ Robidoux. “I don’t know why they’re doing that. Maybe they saw it as some kind of investigative disadvantage by having it out there or that they were opening themselves up to additional criticism about the number of cases.”

Lalonde concurs. “The RCMP used to be fairly generous in at least telling us how many investigations they had on the go,” he says, “so they’d give you very macro overall statistics and information on the number of investigations. They’re not even doing that anymore.”

“We don’t like to reply to specific numbers,” says Sgt. Pat Poitevin, Senior Investigator and Outreach Coordinator for the RCMP’s Sensitive and International Investigations Unit. “We have enough on our plate, however, to keep us busy all the time.” A veteran of more than 30 years with the force, Sgt. Poitevin has been part of the unit, which has more than one hundred members, for approximately three years now.

Like Robidoux, Lalonde attributes the RCMP’s new reticence to sensitivity about just how much it’s accomplishing. “They feel they’re under a lot of scrutiny or maybe they feel it’s not that meaningful. It’s the quality of the investigations that should be the focus.”

 

One recent case that has received public attention, however, involves MagIndustries Corp., a Toronto-based potash company whose controlling shareholder is Chinese firm Evergreen Holding Group.

In January 2015, the RCMP raided the company’s headquarters in search of evidence that MagIndustries bribed officials in the Republic of Congo. The RCMP’s Information to Obtain Search Warrant (ITO) alleged that “black money” payments were made to reduce tax and other liabilities of a company subsidiary. The ITO also claimed that MagIndustries paid government officials in the Congo to assist in an expropriation for a $1.5-billion potash-mining project. The ITO also alleged that the company organized at least one trip to China for a government official.

On the heels of the raid, MagIndustries retained Boscariol and others at McCarthy Tétrault as independent counsel to conduct an investigation into the allegations.

In late June the company issued a statement outlining interim results of the internal probe. It admitted that certain inappropriate payments and gifts, including that of black money, had occurred but added that further investigation was required. It also announced the departure of several senior executives and board directors.

How much further investigation would take place, however, was put in doubt when MagIndustries also announced that Evergreen Holding Group was no longer able to finance the inquiry, which had already cost millions of dollars.

It was a somewhat shocking announcement, as companies typically have to see an investigation through to the end. “I would be very careful if I were them because if you want to get credit down the road for having done an internal investigation, you have to make sure it was robust, credible and effective and that the scope was appropriately broad,” says Robidoux, who worked on both the high-profile Niko Resources Ltd. and Griffiths Energy International Inc. internal corruption investigations. “If you’re halfway through the investigation and the mother ship decides to stop funding the investigation, then I would be concerned that the work you’ve done so far would be all for naught.”

What lies ahead for MagIndustries and the investigation is unclear. A probe of alleged fraudulent activities in Canada alone, never mind one centred in a foreign country like the Congo, is almost prohibitively expensive.

“A full and thorough investigation done in accordance with best practices involves paying a lot of money to forensic experts to data miners to outside counsel to outside accountants to unearth every shred of evidence that might shed light on exactly who did what where and when,” says Lalonde. “Just doing email data mining can be a monumental task. You could be talking about going through a million or more emails and then consider their attachments and so on.”

To lawyers such as Dattu, that burdensome cost is further proof of the need for companies to have real and effective compliance programs, a message that is still not accepted by all his clients. “If anything, [the MagIndustries] case demonstrates that proactive measures through the implementation of corruption compliance programs, which can be prepared and effectively implemented for only a few thousands of dollars, is a more efficacious use of corporate funds.”

The RCMP’s Poitevin couldn’t agree more. During his numerous presentations on the perils of a company becoming entangled in corruptive behaviour, he often sees in corporate offices “a big nice great statement of ethics for employees, but it’s not worth the paper it’s printed on if it’s not really embedded within the culture, if it’s not the tone from the top, if the people at the top don’t live it.”

Poitevin urges companies to understand that “ethical behaviour is actually a competitive business advantage. It increases productivity, increases retention, improves job satisfaction and makes it easier to attract new employees.”

Unethical behaviour can also be costly in respect to potential transactions.

“It’s not unusual for me to get a call in the context of an M&A negotiation where the target is being asked to give representations and warranties and it’s at that point in time that senior officers reply that they can’t really give a representation and warranty that there’s been no payment of bribes and corruption because they don’t have the information,” says Dattu. “All they can do is guess. And giving a rep and warranty based on guessing is potentially very incriminating and could result in large amount of damages. It’s usually at that time doing that many companies are realizing that they’ve not been doing what they ought to do and they usually get religion at that point.”

Corruption can also ensnare a lawyer in legal problems and, in some instances, derail a transaction.

“If you don’t have this stuff on your radar and you’re a transactional lawyer, either involved in lending or mergers and acquisitions, you need to be very mindful of whether you’re committing malpractice,” Lalonde says. “We’re seeing it become a very prominent feature now in transactions and I even saw last summer a deal die because of it. Transactions can be killed by these things if you don’t get them right.”

What’s going to get the message across? “When it’s impacting them in the commercial markets through M&A transactions and private equity, I think that’s what’s going to change their minds,” he adds. “That’s what’s ultimately going to make companies act on this.”