November 08, 2018

Canada’s Crackdown on Foreign Corruption

If Canada had previously been slow to enforce foreign anticorruption legislation, times have changed. A recent Transparency International report indicates that Canada is among the most improved countries in antibribery enforcement. This means that it is more important than ever for Canadian companies to invest in corporate compliance in this area, as the risks associated with noncompliance are substantial.

Canada’s Corruption of Foreign Public Officials Act

With the introduction the Foreign Corrupt Practices Act (FCPA) in 1977, the United States led the way in foreign anticorruption legislation. Originally, many hoped that this would be part of a trend towards the adoption of similar legislation in other countries. However, it was not until 1997 that the Organisation of Economic Co-operation and Development (OECD) countries created an antibribery convention. The convention required signatories to pass legislation criminalizing the act of bribing foreign public officials. Canada passed the Corruption of Foreign Public Officials Act (CFPOA) in 1999 to meet its obligations under the convention.

Section 3 of the CFPOA describes the offense of bribery of a foreign public official:

(1) Every person commits an offence who, in order to obtain or retain an advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official
(a) as consideration for an act or omission by the official in connection with the performance of the official’s duties or functions; or
(b) to induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organization for which the official performs duties or functions.

Actions constituting an offense may result in a criminal conviction and sanctions, including significant fines and imprisonment for up to five years.

While the aim of the CFPOA was to disincentivize corruption, the deterrent effect of the legislation was low during Canada’s period of lax enforcement. For many years, not much happened in Canada with respect to foreign anticorruption matters. Canada was sharply criticized for its weak enforcement approach to the legislation. This did not go unnoticed. In 2004 and 2011, the OECD stated that Canada failed to meet its antibribery commitments. There were two primary reasons why Canada had found itself at the center of international criticism.

First, Royal Canadian Mounted Police (RCMP) members did not have sufficient resources for the investigation of possible CFPOA offenses, and, thus, Canadian investigations were rare. This situation was rectified in 2008 when the government established the International Anticorruption Unit (IACU) for the enforcement of the CFPOA. The IACU consists of two divisions: one in Calgary and one in Ottawa. The IACU focuses on detecting, investigating, and preventing international corruption such as bribery, embezzlement, and money laundering.

Second, the CFPOA has been characterized as being weaker than similar American and British legislation. Of concern is the fact that the CFPOA’s jurisdiction is limited by the common law territoriality rule. The Crown must prove that there is a “real and substantial connection” between the offense and Canadian territory. In 2009, the federal government introduced a bill designed to broaden the CFPOA’s jurisdiction to include bribes paid by Canadians anywhere. The bill would have made Canadian companies, citizens, and permanent residents subject to the jurisdiction of the CFPOA even in the absence of a link to Canadian territory. However, the bill died on the order paper when Parliament was prorogued that year.

Enforcement on the Rise

Over the past year, there has been a 50 percent increase in IACU investigations of CFPOA matters. Since police agencies may keep the fact of an investigation secret, the precise number of current CFPOA investigations is unknown, though an estimated 34 matters are presently under investigation. According to a Transparency International report, in 2012, Canada ranked among the most improved anticorruption enforcers, and it is now making “moderate” enforcement efforts.

Since 2011, the federal government has taken significant steps to review aspects of CFPOA enforcement, including consultation with government agencies and the public. While Canadian efforts may not be as robust as so-called “active” enforcers such as the United States and United Kingdom, a more rigorous Canadian anticorruption enforcement era has begun.

This new era, coupled with international criticism of foreign corruption, has generated increased media attention, which, in turn, has acted as a deterrent to corruption. Recent cases illustrate that it is important for Canadian companies to try to steer clear of foreign corruption issues, not just because of potential criminal consequences that may result, but because of the impact that they may have on public relations and share prices.

R. v. Niko Resources Ltd.

R. v. Niko Resources Ltd. is symbolic of the new era. In the summer of 2011, Niko Resources Ltd. (Niko), the subject of one of the first CFPOA prosecutions, pleaded guilty to offenses under the CFPOA and was forced to pay a $9.5 million fine. Niko, which is a publicly traded corporation headquartered in Calgary, conducted international business operations through wholly owned subsidiaries. The Crown alleged that Niko directly and indirectly provided improper benefits to a foreign public official in Bangladesh in order to further its business objectives.

Niko owned 100 percent of a holding company, which in turn owned 100 percent of Niko Bangladesh. Consequently, Niko Bangladesh was funded solely by Niko, and the flow of money from Canada to support Niko Bangladesh was monitored from Canada. Further, the CEO of Niko sat on the board of directors of Niko Bangladesh.

In 2003, Niko Bangladesh signed a joint venture agreement with the Bangladesh Petroleum Exploration & Production Company Limited (BAPEX) to conduct petroleum operations in gas fields in Bangladesh. In early 2005, a blow-out occurred at a Niko Bangladesh gas well, which left a massive crater in the earth, resulting in significant damage to a surrounding village.

Niko Bangladesh had to deal with significant pressures as a result of the blow-out. Negative press for the Niko Group soon followed. The Bangladeshi government began an inquiry that led to a report alleging that Niko Bangladesh was responsible for the explosion and triggering a legal proceeding. This was particularly problematic because Niko Bangladesh had not yet concluded a gas purchase and sales agreement with the joint venture partner BAPEX.

Subsequently, Niko Bangladesh paid for and delivered a Toyota Land Cruiser to the Bangladeshi minister of Energy and Ministerial Resources. A Niko Bangladesh vice president wrote a letter to the managing director of BAPEX indicating that the vehicle had been turned over to the minister and thanking him for the support that Niko management had received in the past and hoped to receive in the future. Significantly, Niko was aware of the purchase.

An investigation commenced after a Bangladeshi newspaper published an article titled “Niko Gifts Minister Luxurious Car.” This triggered action on the part of the Canadian Diplomatic Corps and the RCMP. Ultimately, Niko was charged and convicted. The court imposed what is by far the largest CFPOA fine to date and imposed a probation order to reflect the degree of planning, duration, and complexity of the offense. It also reflected the fact that Niko made these payments in order to persuade the Bangladeshi minister to exercise his influence to secure a gas purchase and sales agreement acceptable to Niko and to ensure that it was fairly dealt with in the matter of compensation claims.

Several commentators heralded the case, only the second conviction under the CFPOA, as a major “wake-up call” to Canadian companies doing business abroad.

SNC-Lavalin Investigation

Montreal-based SNC-Lavalin has recently found itself in the center of an unwanted media focus on allegations that payments of millions of dollars were made to commercial agents to help it win foreign contracts. The company is one of the largest engineering and construction firms in the world. Since 2011, the RCMP searched SNC-Lavalin offices twice in connection with an ongoing investigation over the payments. The searches appear to have been carried out in cooperation with World Bank and Swiss authorities.

Subsequently, several key executives are no longer with SNC-Lavalin. These include the former head of SNC-Lavalin’s global construction division, who was alleged to have played a key role in funneling funds to officials to secure overseas contracts in Libya during the time of the Gadhafi regime. Two former Canadian SNC-Lavalin executives have also been charged under the CFPOA for their alleged roles in trying to bribe Bangladeshi officials in connection with a bridge project. They are expected to appear in court in 2013.

In addition, investors have launched two class actions against SNC-Lavalin. The first lawsuit is a $250 million claim launched in Quebec. A decision respecting the certification of this class action is expected soon. Another suit, filed in the Ontario Superior Court, was certified in September 2012. In the Ontario case investors seek damages of $1 billion arising in connection with a drop in the value of SNC-Lavalin’s shares. In that case, the plaintiffs have alleged that SNC-Lavalin misrepresented that the firm’s policies and practices were designed to ensure internal and external compliance with antibribery laws. They have alleged that news of the CFPOA investigations and related activities have caused shares of SNC-Lavalin to drop sharply.

Observations and Summary

Recent Canadian enforcement activities show that Canadian companies with foreign operations cannot treat payoffs to foreign officials as the “cost of doing business.” The Niko case shows that CFPOA offenses can result in significant penalties. The SNC-Lavalin investigation serves as a warning that allegations of noncompliance may lead to loss of goodwill and can result in costly litigation. It also shows that corporate directors and officers may be caught in the cross hairs of a CFPOA investigation. Regardless of the outcome, the Niko and SNC-Lavalin matters show why a strong foreign anticorruption compliance program is a good investment. With increased enforcement of the CFPOA and bribery and corruption at the forefront of the public eye, the case for taking all reasonable care to ensure compliance with Canada’s foreign corruption legislation has never been stronger.