Category Archives: Analysis

Governance Response to Rumors of Bribery

Corporate board members devote significant time to financial oversight and strategy, while often neglecting steps needed to protect and promote its most important intangible asset – its culture and reputation. The negative effects of rumors of bribery and corruption can often be as problematics as clear accusations or even convictions.

Corporate boards would be well advised to assess the actual and potential impact that allegations of corruption and other unethical conduct may have on the share price of their company including their company’s market capitalization.

Corporate directors and officers have three general legal duties; the duty to act carefully, the duty to act loyally, and the duty to act lawfully. First, the duty of care of corporate directors and officers is a special case of the duty of care imposed throughout the law under the general heading of negligence. Laws builds on moral, policy, and experiential propositions. The law of negligence is no exception. The moral proposition that underlies the law of negligence is-that if a person assumes a role whose performance involves risk that affect others, this person is under a moral duty to perform that role carefully. Therefore, corporate directors and officers are under an obligation to take steps to affirmatively reduce risks, and an omission may be wrongful.

On this foundation of moral blame, the law of negligence has established a structure of legal blame or liability. The structure of legal blame under the law of negligence generally parallels the structure of moral blame. government officials are engaged by definition in governing, their decisions will often have adverse effects on other persons. When officials are threatened with personal liability for acts taken pursuant to their official duties, they may well be induced to act with an excess of caution or otherwise to skew their decisions in ways that result in less than full fidelity to the objective and independent criteria that ought to guide their conduct.

There are plenty of case studies that evaluate the impact that the loss of trust from key stakeholders resulting from public rumors and allegations can have. These stakeholders may be the general public and institutional investors but they also include existing and potential clients. Especially the institutional investors are increasingly sensitive to compliance related violations (or rumors thereof) by companies within their portfolio. As an example, the world’s largest pension fund (Norwegian Government Pension Fund) excluded ZTE from funding due to alleged corrupt behavior.

International authorities are beginning to establish a track record of corporate convictions and multi-million-dollar penalties. Recent and ongoing criminal prosecutions of individuals have also put executives on notice that they too will face the harsh consequences of violating anti-corruption laws including the U.S. Foreign Corrupt Practices Act (FCPA) or the Canadian Corruption of Foreign Public Officials Act (CFPOA).  Under Canada’s Integrity Regime, companies that do business with government also face suspension or debarment when charged or convicted under the CFPOA or similar foreign anti-corruption laws.

Internationally, cases have shown that enforcement agencies are going to continue to scrutinize anti-bribery and anti-corruption (ABC) compliance programs and will likely bring charges when violations are the result of willful or reckless conduct. In particular, enforcement agencies may bring charges when there is a failure to adequately ensure the existence of an effective ABC compliance program resulting in the failure to prevent violations of the law.

Therefore, board members and executives must protect their organizations and themselves, by effectively implementing a robust ABC compliance program, as well as maintaining effective detection and investigation procedures including continuous improvement of the effectiveness of any existing ABC compliance program.

Here are some practical suggestions that may be useful to Board members and senior executives:

• Sustained leadership on transparency and integrity is vital.

• Strong anti-corruption measures and repeated staff training is crucial.

• The compliance office must be answering directly to the CEO and report to the Board.

• When allegations occur, move quickly with a forensic audit and if criminal issues are uncovered turn them over to the appropriate authorities.

• Ensure that the staff remuneration is not an incentive to sell contracts at all cost.

• Make it clear in documentation that this is a “clean” company that does not bribe – this has been demonstrated to be a deterrent for bribe asking.

• Include in the external audit a review of the compliance on anti-corruption measures.

• Ensure full transparency in contract management.

• Publish who the real beneficial owners of their company and subsidiaries are.

• Beware of transfer pricing and tax evasion since it creates impoverishment in countries where the company is working; especially in the natural resources sector and in poorer countries.

Ontario’s OSC Following SEC in Whistleblower Bounties

The question of internal compliance is always a challenge when regulators offer rewards to whistleblowers with cash awards. Why report internally when the whistleblower can get paid if they report externally? Internal compliance officers are paid to establish, train and enforcement legislative compliance policies internally.  However, internal compliance will not usually result in a reward for good behaviour or for internal whistleblowing. Hence the inherent problem with rewarding the whistleblower.

Since Dodd Frank, the Securities and Exchange Commission (“SEC”) has been giving monetary rewards or bounties for credible tips from whistleblowers that lead to enforcement actions. For example, The SEC recently awarded more than $4.5 million to a whistleblower whose tip triggered the company to launch an internal investigation and report the whistleblower’s allegations to the SEC and another government agency.

The Ontario Securities Commission (“OSC”) adopted a whistleblower reward program in 2016, and has received hundreds of “tips” since then. Earlier this year, the OSC announced that it has paid $7.5 million in rewards or bounties for tips leading to findings of wrongdoing under securities law. The OSC tipsters apparently provided high quality, time, specific and credible information that helped advance enforcement actions resulting in monetary payments to the OSC.

What is troubling, from a compliance perspective, is that the reward is based on the finding of wrongdoing and enforcement. No rewards are given to individuals from reporting internally and preventing a regulatory or criminal contravention.  The bounty reward programs, both in the US and Ontario, only reward individuals when they help catch a corporate or individual after the contravention.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal their identity. The same applies with the OSC program.

One big difference between the SEC and the OSC programs, is that the penalties in the US are much larger than those in Canada. For example, in January 2017, Zimmer Biomet paid $30.5 million to resolve DOJ and SEC investigations into the company’s “repeat” violations of the Foreign Corrupt Practices Act. The DOJ said then thatBiomet “knowingly and willfully continued to use a third-party distributor in Brazil known to have paid bribes to government officials on Biomet’s behalf.” Those kinds of fines have not been seen by our courts or the OSC in their Canadian enforcement activities.

There is also a $5 million maximum on the OSC whistleblower counties program, suggesting that smaller rewards available in Ontario will be enough to achieve the same result and deterrent effect. The SEC has no such restrictions. Is this cap on the size of the bounty necessary, sufficient, and self-defeating?

Since Ontario is the only provincial securities regulator offering bounties, the other question of concern is whether  this is deterrent to business investment and listing on the Toronto Stock Exchange, for small capital firms, that may have the choice to register elsewhere in Canada?

Even non-political businesses could be snared by Canada’s new election law

For many of us, federal election law regulates what is, for the most part, a spectator sport.

Sure, we all have the option to vote. And we could volunteer on campaigns and spread policy ideas around. Some of us even take on the vital role of the ornery family member, burdened with the responsibility of educating his or her politically unenlightened kinfolk over dinner.

But, for the most part, we sit back, watch and cheer (or jeer). For many of us, election season is primarily about excellent TV viewing and inspired political cartoons. Perhaps for even more of us, election season is nothing more than an unavoidable irritant or sleep aid.

Many of us are happy with the status quo. But imagine if the rules changed and forced us to participate in the ruckus? That would be like armchair critics of a hockey team suddenly finding themselves lacing up and submitting themselves to drug tests.

This would never happen in sports, of course. Fans of professional sports are not subject to the rules of the game.

And therein lies a difference between the rules of spectator sports and federal election law.

This year, businesses may be surprised to find themselves as participants in a game they never wanted to play. This risk has long been present, but, as of the 2019 election, Parliament has changed the rules yet again.

Extra games have been added to the election season

First, opening day has moved up, extending the election season.

June 30 this year marks the start of the regulated election communication periods (the pre-election period), even though the election period itself doesn’t begin until the fall. This is the first year that the pre-election period exists for federal elections, adding an additional layer of rules atop the already complex requirements of the election period (which begins once an election is called).

Compliance made difficult by expansive requirements

Second, this new, extended regulated period regulates all sorts of communications through broad definitions in the law. This is where the fans of the game – businesses and individuals – could find themselves in a pickle.

Among other things, the law now applies to all paid online advertisements that hyperlink to websites that identify or name candidates, even though such websites may not have an overly political character. Managing this requirement could prove difficult, especially for businesses with an extensive web presence.

 A huge swathe of advertising will be regulated during the election period

Third, once the election period begins in the fall, all manner of issue advertising touching on policy issues is subject to rules. This includes issues that are associated with a party, party leader, candidate or even a person associated with a political party. The ambit of this definition is indeterminate, with innocuous content potentially being subject to regulation.

Out of step with the internet age

Fourth, federal election law now subjects internet activity, including advertising and online platforms, to specific and onerous requirements.

Election law as currently fashioned does not sit comfortably with our internet age; the resulting uncertainty should be a concern for any business with an online presence.

Follow the rules … or else

The Commissioner of Canada Elections wields expanded powers: he now has the power to lay charges for a long list of offences, which could result in hefty fines and prison sentences. 

Enforcement powers really drive home the importance of following the rules. Canadian businesses may find that election law is a game of higher stakes than may have been previously believed.

IBA Committee Officers 2019

Fasken is pleased to announce that Norm Keith, LL.M., of its Toronto office, has been appointed as Website Officer of the Business Crime Committee of the International Bar Association, commencing January 1, 2019. The IBA is the global voice of the legal profession and the foremost organisation for international legal practitioners, bar associations and law societies. Established in 1947, shortly after the creation of the United Nations, the IBA was born out of the conviction that an organisation made up of the world’s bar associations could contribute to global stability and peace through the administration of justice. Mr. Keith is a senior partner practicing employment, regulatory and white collar and business crime litigation. He is the author of 12 books, including Corporate Crime, Accountability and Social responsibility in Canada. Mr. Keith’s appointment with the IBA Business Crime Committee will be until December 31, 2020.

Safety violation results in contractor getting 18 months in jail

On Sept. 18, Sylvain Fournier, a Quebec based contractor, was sentenced to 18 months in prison followed by two years of probation.[1] Fournier had been found guilty of manslaughter under the Criminal Code relating to a workers death by means of a breach of Quebec safety code. The case is the first of its kind in Canada and raises serious concerns about the use of criminal law to enforce provincial regulatory safety standards.

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