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Cracking down on corruption

|Written By Robert Todd
Cracking down on corruption
Illustration: Anthony Tremmaglia

In March of this year, Canada received a slap on the wrist from the Organisation for Economic Co-operation and Development for its approach to international anti-corruption enforcement. It was the second time the country had received such a censuring by the international economic partnership, and perhaps deservedly so. Despite introducing legislation in 1999 aimed at punishing domestic companies engaged in corrupt practices abroad, the country had yet to land a single significant prosecution using its provisions.

Fast forward to June 24 of this year, when Niko Resources Ltd. was forced to pay a $9.5-million fine for contravening the Corruption of Foreign Public Officials Act, and a much different picture has begun to appear. With the Calgary-based oil and natural gas exploration and production company admitting to providing Bangladesh’s junior energy minister a luxury SUV and trips to New York and Calgary, Canadian lawyers and enforcement officials finally had something tangible to hang their hats on when pleading their case to company executives.

To be sure, experts now agree that Canada is moving full steam ahead in its efforts to clean up the laissez-faire approach to foreign bribery that many companies continue to demonstrate. And it will be up to in-house counsel to create and help enforce international anti-corruption policies within their own organizations. The traditional rationalization that, “This is just how they do business here,” no longer applies.

James Klotz, a partner with Miller Thomson LLP and president and chairman of Transparency International (Canada) Inc., notes that the United States led the way with the creation of its foreign anti-corruption legislation in 1977. The U.S. expected other major economies to quickly fall in line and create their own versions of the Foreign Corrupt Practices Act. But it wasn’t until 20 years later, in 1997, that OECD countries — Canada included — got together and agreed on an anti-corruption convention.

In 1999, Canada created the Corruption of Foreign Public Officials Act, which came into force in 2000. While the Niko prosecution was the first major victory for the RCMP under the act, there is general consensus that Canadian companies have not all been keeping their noses clean on the bribery front in their operations abroad. “It is not uncommon for Canadian companies to have been involved in corruption in doing business abroad,” says Klotz. “While we don’t typically pay bribes directly, Canadian companies have long used agents to facilitate the payment of bribes in countries where bribes were required. It has never really bothered any company to do that.”

Klotz points out that most of the companies he’s seen get caught up in corruption investigations have internal policies forbidding such behaviour. They also consistently fail to investigate potential breaches. “So they hire agents, and their agents do bribe paying, and what they don’t know won’t hurt them. At least, that’s what they thought.”

As already noted, Canadian authorities have taken flak for their feeble approach to corruption abroad. The main criticism has come from the OECD, which targeted Canada’s poor results in reports both in 2004 and earlier this year. The federal government decided to act after the OECD’s first call-out, creating an International Anti-Corruption Unit within the RCMP. The unit consists of 14 officers — seven in Calgary and seven in Ottawa, committed solely to investigations of alleged bribe paying by Canadian companies abroad. There was awareness in the business community during the past few years that the unit was working feverishly on numerous leads. Word spread this March that the unit had 23 ongoing investigations on its books, and there has since been speculation that this number has grown. “Many of those companies that are involved in the investigations may not yet know that they’re under investigation,” notes Klotz. “Often a company won’t find out that they’re under investigation until a search warrant is actually executed.”

The specialized unit’s successful investigation of Niko is being viewed as the first of many dominos to fall. “We do expect to see companies that have problems, that haven’t wanted to come forward in the past, because there hadn’t been a prosecution and no one wanted to be the first,” says Klotz. An absence of a voluntary disclosure program also made Canadian companies reluctant to come forward to report historic corrupt practices, as did the fact that doing so could also diminish or eliminate a company’s attractiveness to foreign buyers, especially those in the U.S. Klotz suggests that details of the settlement in Niko could dramatically alter that approach. While the company was forced to pay a heavy fine at $9.5 million, prosecutors in the case indicated they would have sought a far higher sum had the company not issued a guilty plea.

The man who helps lead the RCMP’s anti-foreign corruption efforts believes the Niko prosecution is a “wake-up call” for Canadian companies operating abroad. “We’ve been telling people for the last two years that we’ve been actively investigating corruption, but it wasn’t until we brought something to the table to show that yes, we’re out there, and the enforcement’s on” that companies took notice, says Insp. Gord Drayton, who is in charge of the International Anti-Corruption Unit. He admits that before that watershed moment, lawyers often told him it was difficult to convince their clients to implement a meaningful anti-corruption program. “Well, I think we just ended that,” remarks Drayton.

The added exposure the Niko prosecution has created surrounding the issue has been essential, says Drayton. “I really think that we aren’t doing our job if we have to investigate and lay charges,” he says. “The prevention side is always the general rule. If you have to lay the charge, it’s already too late.” He believes companies will now understand Canada is serious about enforcing its international anti-corruption legislation, and accordingly take the proper precautions.

It’s no surprise, however, that Canadian companies have been slow off the mark in terms of embracing a zero-tolerance ethos surrounding the payment of bribes to move investments along in foreign countries. As Northwestern University Law School professor Juliet Sorensen pointed out recently, it wasn’t too long ago that international corporate bribery was tax-deductible in many countries. The former assistant U.S. attorney in Chicago, Ill., applauded efforts at the OECD and United Nations to cut down on bribery involving foreign officials, but she believes there’s still a long way to go. “Too much corruption continues to be tolerated today for me to say that there is an international united front against it,” Sorensen said during a seminar at the recent American Bar Association Annual Conference in Toronto. “But do I think we’re getting there? I do, little by little.”

Sorensen did note the significant progress that has been made on account of the OECD convention. Information collected as of March 2011 indicates that 199 individuals and 91 entities have been sanctioned under criminal proceedings for foreign bribery in a total of 13 of the 38 states that have signed on to the convention. The data also shows there are currently 260 ongoing investigations, along with pending criminal charges against 120 individuals and 20 entities.

These numbers demonstrate the need for Canadian companies with operations abroad to consider their exposure to international anti-corruption statutes in other countries. Yet Klotz believes they should be far more concerned about protecting themselves from prosecution under the CFPOA. Luckily, the probation order in the Niko prosecution sets out what a proper compliance program ought to look like. The company must set up the program, and report on it over the next few years. Klotz points out that the directive in Niko follows — essentially word-for-word — an order in a U.S. case involving Panalpina World Transport, a Switzerland-based freight company that admitted to paying $27 million in bribes to officials in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia, and Turkmenistan. In 2010, it agreed to pay a fine of more than $70 million for the transgressions.

Klotz suggests the use of the Panalpina directive in Niko’s prosecution indicates Canadian authorities were in close contact with their U.S. counterparts during the proceedings. “What that says to me is, that’s what a compliance program is supposed to look like,” he says. “And most Canadian companies don’t have compliance programs. There are a few countries in the world where corruption takes place. If you’re operating in those countries without a really good compliance program, you actually may be at risk that corruption has already taken place on your watch.”

Moreover, companies that fail to do so are potentially diminishing their ability to find a suitor should they become engaged in a merger or takeover. Of course the threat of class action lawsuits also lingers.

Meanwhile, he believes too many Canadian companies continue to avoid taking the steps necessary to adequately protect themselves from exposure to foreign corruption prosecutions. He believes this miscalculation will continue until a criminal prosecution takes place.

“There’s not going to be a real change until we see an executive being taken away in handcuffs,” Klotz says.

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