Avoiding Corruption and Sanctions

Canadian businesses beware: Many western governments are getting tough on both corruption and sanctions violations
Avoiding Corruption and Sanctions

Canadian businesses beware: Many western governments are getting tough on both corruption and sanctions violations

 

Canadian corporations doing business in the world’s geo-political hotspots must sometimes feel like bugs buzzing blindly around an increasingly big spider web.

Lately, some big bugs – HSBC, SNC-Lavalin and France’s biggest bank BNP Paribas, to name three – have found themselves caught in either the sticky web of corruption charges or violations of international sanctions. That can suck plenty of blood out of any corporation. For instance, in 2014, BNP agreed to pay US$8.9 billion in fines after it pleaded guilty to United States Department of Justice charges it violated American sanctions by laundering up to US$100 billion in funds from Iran, Sudan and Cuba.

The largest such fine in US history, in case you think that was a mere sting for a huge international bank, consider this: the fine significantly exceeded the bank’s 2013 income of US$6.4 billion.

There’s strong evidence that many Western governments are getting tough on both corruption and violations of their own international sanctions against other foreign governments.

For Canadian business people, constantly evolving domestic and international sanctions against countries such as Russia, Iran and other countries, along with increased enforcement of legislation including the Corruption of Foreign Public Officials Act (CFPOA) – which makes it a Criminal Code offence to bribe foreign officials – has them wondering: Who you gonna call if you get in trouble? Or, better yet, who you gonna call to keep you out of trouble in the first place?

It may well be a relatively rare breed of lawyers such as Stéphane Eljarrat, Milos Barutciski and others who specialize in fields such as white-collar criminal defence or international trade law and understand how to arm companies against the growing multitude of risks in operating abroad.

“In the last year I definitely have seen much more focus and attention” on these subjects, says Eljarrat, a partner and Co-leader of the Investigations & White Collar Defence practice with Davies Ward Phillips & Vineberg LLP in Montréal. Canadian business leaders, says Eljarrat, who practises in Montréal and Toronto, “are more and more interested in seeking advice to ensure their compliance programs are adequate.” Increasingly they want the legal tools to deal with problems should they uncover corruption or sanctions breaches in their own company, or even with foreign suppliers, agents or partners.

Among the many things Canadian executives must worry about is how to design effective compliance programs, how to properly conduct internal investigations, and, critically, whether to pro-actively self-report possible violations.

A violation can mean a company could be barred for 10 years from bidding on contracts with the Canadian government — a costly prospect SNC-Lavalin Group Inc. now faces. In February, in addition to prior charges and convictions, the RCMP laid additional corruption and fraud charges against the engineering firm, already debarred from World Bank-related contracts. The RCMP allege SNC made $47.7 million in bribes to Libyan officials and committed fraud in the amount of $130 million related to construction of Libya’s Great Man-Made River project. SNC has vowed to fight the new charges.

In 2007, Public Works and Government Services Canada (PWGSC) established its Integrity Frameworkwhich it strengthened last year – setting out a code of conduct for companies vying for government contracts. The framework debars companies from government work for 10 years if they or their subsidiaries have been convicted in Canada or elsewhere of a wide range of offences, including insider trading, bribery, falsification of books or extortion, to name a few. A leniency provision that once existed for companies that self-disclosed violations was recently eliminated.

A company that acquires or merges with another, only to discover the acquired entity may have violated the Integrity Framework even years ago, could suddenly find itself entirely debarred from bidding on government projects.

“If I am doing a significant M&A transaction, I really need to be concerned about finding the skeletons in the closet,” says Clifford Sosnow, a partner practising in Fasken Martineau DuMoulin LLP's Ottawa office who specializes in cross-border corruption law and economic sanctions compliance law. “The worst skeleton in the closet right now, in light of the integrity framework, is prior violations. Because then the board has to make some really difficult decisions. Does it voluntarily disclose? If it does that, it gets lower penalties but it is debarred. And not only is it debarred, all its subsidiaries are debarred.”

“That,” suggests Sosnow, “is one of the hardest issues that a board and senior management will ever face.” It’s not an easy one for a company’s lawyers to call either. Sosnow’s view, in light of what happened to Griffiths Energy International in 2013, is to lean towards disclosure. Griffiths, a Calgary company, pleaded guilty to paying a US$2-million bribe to the wife of the ambassador to Chad and was fined $10.35 million. It could have been worse. New management at Griffiths, after discovering through their own due diligence that prior management committed bribery, disclosed the offence to authorities and cooperated with an investigation. In imposing a lighter-than-expected fine, the judge took Griffiths’ cooperation into account as well as the fact the company had implemented a rigorous compliance program after the discovery.

Still, adds Sosnow, such situations put companies in a difficult box between seeking leniency from the courts by disclosing, but being debarred from government-related contracts if they do. “There’s punishment for being honest. There is punishment for being ethical.”

In the US, there’s less of a dilemma, says Eljarrat. There, when companies disclose bribery of foreign officials, they can, in some cases, resolve the matter through the "Deferred Prosecution Agreement" scheme which allows for the resolution of the criminal proceedings without criminal convictions and jail time for those involved. Not so in Canada, where charges under the CFPOA remain in the criminal courts regardless of self-disclosure. “This is a crime punishable by up to 14 years in jail,” in Canada, points out Eljarrat, who would like Canada to adopt a similar US policy of funnelling self-disclosure cases away from the criminal courts. “I personally feel that is a change that would likely be very, very good.” It would certainly encourage more self-disclosure, meaning more corruption would be exposed and dealt with, he contends.

But currently if a senior Canadian executive participated or omitted to do something that enabled the commission of a CFPOA crime, he or she could face significant prison time. Eljarrat says while a general view among Canadian lawyers is towards their clients self-disclosing, “You have to make a thorough legal analysis based on the original internal investigation as to what the exposure is, who is at risk, and what is the risk if charges were laid that a conviction would be secured.”

For years, anti-corruption legislation went mostly unenforced by Western governments. Many companies, including Canadian businesses ranging from the resource sector to aircraft equipment manufacturers, simply accepted that paying bribes in some regions is a norm.

Though the United States, which has led the fight against bribery, brought in legislation making it illegal in 1977 for American firms and their international subsidiaries and suppliers to pay bribes, the law was only sporadically enforced until around the year 2000. Since then, though, the American government has intensified enforcement and prosecuted about 200 companies, says Milos Barutciski, who co-chairs the International Trade and Investment Practice at Bennett Jones LLP in Toronto.

In Canada, since it came into force in 1999, there have been just a handful of cases prosecuted under the CFPOA. However, in May 2014, Nazir Karigar became the first Canadian businessman sentenced to prison under a CFPOA conviction. Though he brought his own actions to the attention of RCMP, Karigar, acting as an agent for the technology firm Crypto Metric, was given three years in prison for conspiring to bribe foreign public officials. The court found he had plotted to bribe an Indian cabinet minister and Air India officials to the tune of US$450,000 in an attempt to win a contract with the airline.

The sentence sent a strong message that the federal government and the courts would deal harshly with corruption both by Canadian companies and the individuals working for them. “Those laws are about making the cost of bribery so high the payers will stop,” says Barutciski.

Guided by a firm moral compass, anti-corruption laws are more than sanctions regulations. Those are tools countries adopt for geopolitical reasons, sometimes, suggests Barutciski, on fuzzy grounds. It was largely because of a powerful expat Cuban lobby that Barutciski says the US placed sanctions on Cuba. Those laws could capture Canadian companies that, for instance, might use American-made components in their products that are shipped to Cuba. Meanwhile, no other countries followed suit on Cuban sanctions.

“With sanctions you have a fluid geopolitical environment,” Barutciski points out: one week there might be sanctions against Libya, the next, they’re no longer in effect. “Canadian business, with the exception of those exposed to US law,” he argues, “have historically been pretty oblivious to the international impact [of geopolitics] on their business.” Most are “burying their heads in the sand.”

It’s vital, he adds, that Canadian executives and board members doing business abroad pay much more attention now to political dynamics. Barutciski, for instance, has a client with operations in Russia. Now – thanks to continually expanding Canadian sanctions against that country – that client must go through a complicated disentangling of its relationship with certain Russian entities without incurring liabilities under Russian law.

To reduce the risk of being caught with skeletons in the closet, explains Barutciski, it’s critical for companies conducting mergers and acquisitions to conduct deep pre-closing anti-bribery due diligence and to ask probing questions of the target companies. They should also get strong post-closing representations and warranties that minimize the risk of harm to the acquiring company in the event of an unwanted discovery.

When companies are doing business abroad, or considering it, it’s important they conduct a thorough risk analysis of their exposure to domestic and international anti-corruption and sanctions laws. They should also implement rigorous compliance programs that include suitable training for employees and ongoing due diligence for all future transactions.

Eljarrat suggests if a company conducts internal investigations of suspected corruption issues, it should be by lawyers with criminal law experience and deep knowledge of the CFPOA. They should also be accompanied by proper forensic accounting expertise. Labour law and privacy issues can frequently come into play as well.

Adds Bennett Jones’s Barutciski: “There is no one-service supplier or single discipline that gives you the entire solution.” He often relies on specialized investigative firms such as Kroll and Control Risks Group to help his clients analyze the current and future risks of operating in various countries. “If you are a business guy who is going to do business in hotspots, you need counsel and people who understand this stuff.”

Lawyer(s)

Milos Barutciski Clifford Sosnow

Firm(s)

Davies Ward Phillips & Vineberg LLP Bennett Jones LLP Fasken Martineau DuMoulin LLP