By Kevin O’Callaghan and Steven Beharrell
As the corporate risk landscape changes, North American companies need to conduct a risk assessment and implement a top-down culture and compliance program against bribery and corruption. Our first series of CSR Law Bulletins look at the issue from three perspectives (that of the corporate legal counsel, the litigator, and the UK). In the first of the series, we look at the issue from the point of view of a corporate legal counsel, examining proactive steps to foster the development of an ethical business culture within a company.
North American companies often assume they are immune to allegations of corruption or bribery. But the landscape of corporate risk is changing as public scrutiny intensifies and regulations tighten worldwide.
Until recently, the US Foreign Corrupt Practices Act was the most stringent anti-corruption legislation in the world. On July 1, 2011, the UK enacted its new Bribery Act 2010, which significantly toughened UK law relating to foreign corrupt practices. By reason of the new law's extra-territorial reach, any company with a UK connection may now be subject to UK rules governing its business practices abroad.
Even existing anti-corruption laws are now being enforced more often in Western countries. A case in point is Canada's Niko Resources Ltd., an oil and gas company based in Calgary with international operations in South Asia and elsewhere. By pleading guilty under Canada's Corruption of Foreign Public Officials Act to bribing a public official in Bangladesh, the company received a fine of C$9.5 million and was ordered to implement a comprehensive compliance program. While the case itself is unfortunate, the prosecution and guilty plea are being viewed by legal commentators as a healthy development given Canada's history of relatively weak prosecution and enforcement.
Defining Bribery and Corruption
Definitions abound but generally bribery is agreed to be payment — in the form of a gift, loan, fee, reward or other advantage — as an inducement to do something dishonest, illegal or constituting a breach of trust in the course of business. Bribery typically goes hand-in-hand with corruption, which is the abuse of entrusted power for private gain.
As with most laws, jurisdiction matters. In Germany — now considered one of Europe's key champions against corruption — bribes were tax-deductible up until about a decade ago, just as they were in Canada until 1990. US and Canadian legislation largely focuses on corruption of public officials while the UK has extended the reach of its anti-corruption legislation to a broad range of purely private acts as well.
The US Foreign Corrupt Practices Act (FCPA) of 1977 (amended in 1988 and 1998) makes it "unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business." Not only does it regulate the behaviour of US citizens and companies, but also requires any company listed on a US securities exchange to keep accurate accounting records.
In Canada, the statute dealing with bribery of foreign government officials is the Corruption of Foreign Public Officials Act, S.C. 1998, c. 34 (CFPOA), which came into force on February 14, 1999. It implements for Canada the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the OECD Convention).
The CFPOA, in conjunction with Canada's Criminal Code, covers three offenses: bribing a foreign public official, laundering property and proceeds, and possession of property and proceeds. It also allows for prosecutions for conspiracy, aiding and abetting and counselling the commission of an offense.
Unlike the FCPA, the CFPOA does not have a record-keeping requirement and, until recently, Canadian prosecutors were not particularly active in enforcing its provisions. The RCMP recently stepped up its investigations of possible CFPOA violations and a number of prosecutions are rumored to be imminent.
The UK's Bribery Act provides a new codified anti-bribery and anti-corruption regime. It and related legislation may create both civil and criminal liability for foreign companies and their officers and directors. Since many of its provisions go further than US and Canadian anti-corruption legislation, North American companies with connections to the UK should take note.
Protecting Against Accusations of Bribery
The attention companies devote to the topic of bribery generally relates to the type of jurisdiction in which they conduct business. In both the US and Canada, companies with largely domestic operations are often shocked when exposed for the first time to the lax attitudes displayed toward government corruption in many developing (and some developed) countries.
On the other hand, more sophisticated companies with operations in the developing world — particularly in high-risk industries such as mining, defense, contracting, public health, and oil and gas — well understand the issues that can arise in this area.
Regardless of the jurisdiction concerned, a robust system of internal corporate controls embodying clearly understood, transparent and enforced guidelines relating to good governance, anti-corruption practices and procedures, and appropriate due diligence and prudential measures in the company's foreign and domestic operations is essential. Most of these best practices are applicable regardless of the jurisdiction in which the company operates.
Prioritize Good Governance
Good internal policies in the area of corporate governance can help individuals resist internal or external pressures to engage in corrupt practices. Where such policies are clearly understood and applied by all employees and enforced by senior management with real sanctions for non-compliance, the potential for business behaviour that violates anti-corruption rules is significantly reduced.
Implement Clear Policies and Compliance Procedures
It is important to make clear to employees, shareholders and other stakeholders that the company does not condone, in any form whatsoever, corrupt practices, whether within national borders or outside them. Numerous templates exist for company policies in this area. Examples include Transparency International Canada's "Anti-Corruption Compliance Checklist" and the "2010 UK Bribery Act Adequate Procedures," published by Transparency International UK.
Implementation of anti-corruption compliance procedures should include training for all company officials potentially affected by such practices. The board of directors should ensure that senior executives oversee company performance in this area and report in a timely manner directly to the board on any actual or suspected contraventions.
Watch for Red Flags
In the US, the Securities and Exchange Commission has developed a list of "red flags" that serve as indicators of potential foreign corrupt practices.
These red flags include:
whether the agent, if an individual, is a businessperson concurrently functioning as a government official
the size of the payment made to the agent
the nature of the payment made to the agent
the nature of the services performed by the agent
the country in which the payment is made
the place, method and manner of the payment.
Due diligence — particularly focused on employees in high-risk roles (e.g., those on the front line of bids for government procurement contracts) as well as partners and other associated persons — will serve to help avoid the employment of individuals with past histories of improper business practices. Proof that adequate corporate due diligence has been undertaken in relation to company employees and agents may help to mitigate legal sanctions in the event of inadvertent involvement in foreign corrupt practices by foreign company agents or other individuals.
Be Cautious With Third Parties
When working with third parties or acquiring other companies, attention should be paid to potential corporate liabilities in relation to actions taken by agents, sub-contractors, foreign subsidiaries or joint-venture partners of other companies. Clearly worded and comprehensively enforced company guidelines covering agents' activities are essential. For example, a company should avoid at all costs instructing company agents to "do what is necessary" to obtain business.
Adequate due diligence in any cross-border M&A transaction can also help a company to avoid hidden liabilities in respect of foreign corrupt practices. Corporate counsel should examine warranties in respect of compliance with anti-bribery laws and determine who is to bear liability in the event of emerging problems in this area in the future. Other areas where caution is to be exercised include making anti-corruption compliance commitments to underwriters when involved in due diligence activities pursuant to an IPO.
Be Prudent With Facilitation Payments
The OECD has flagged so-called "facilitation payments" as an area of concern for years, although the OECD Convention still permits certain forms of such payments. Domestic anti-corruption-implementing legislation in countries such as the US and Canada allow for facilitation payments. By contrast, such payments have always been illegal under English law and now the Bribery Act makes them easier to prosecute, although the focus is likely to be on more serious or flagrant cases.
While facilitation payments are popularly understood to mean small payments made to secure the performance of routine governmental functions such as customs clearance or temporary police protection, it should be noted that there is no universally accepted understanding or definition of what constitutes a permissible facilitation payment.
Given the new legislation in the UK, recent crackdowns on customs agents and calls for greater transparency in business, it is wise to exercise caution when considering making a facilitation payment. In the US and Canada, the line between what constitutes a permissible facilitation payment and an illegal bribe may not be clear.
Responding if an Issue Arises
The proactive steps outlined in part I of this bulletin series can go a long way toward limiting a company's risk. But even a well-managed and ethical company can face false allegations, fall victim to the rogue actions of one individual or get ensnared in competing rules when crossing borders. In the face of an accusation or potential charge, a litigator experienced in anti-corruption cases can help prepare for a careful — and potentially lengthy — process to resolve the situation.
Address False Allegations
North American companies with international operations can fall victim to unfounded accusations of corruption and bribery, particularly in the difficult to police online environment of blogs and social media. Swift action can help protect the company's name and reassure jittery investors. In addition to launching a crisis communications campaign, it is advisable to seek legal counsel to assist in the event that legal action, such as defamation, is taken.