Legal departments ramp up due diligence as fear of fraud and corruption increases amid pandemic
As economic instability and broken supply chains have arisen from the COVID-19 crisis, many companies may face an increased threat of fraud and corruption, both in Canada and globally. The focus on pandemic response has left some companies vulnerable as less attention is paid to anti-corruption efforts.
“It’s a mistake not to be vigilant on the anti-corruption front because these things come in waves,” says Riyaz Dattu, a partner at Osler Hoskin & Harcourt LLP. Dattu, who is an expert on international trade and investment law, anticipates a wave of disputes between Canadian companies and foreign governments during the next two to three years as general counsel may be less alert to these concerns during the pandemic.
As many Canadian companies have mining operations in less-governed countries such as Mexico, Argentina and Venezuela, in-house counsel should pay particular attention to financial transactions with these countries, particularly in times of economic hardship, says Dattu. He advises in-house counsel to go back after the crisis period is over, to examine potential fraud and payments that could be construed as bribes.
“Changes in intermediaries, suppliers, etc. could give rise to violation of economic sanctions and export control rules not only with the PPE supplies but the very goods that the company is in the business of importing or exporting,” says Dattu.
In dealing with new business partners amid broken supply chains, risks inevitably increase for private companies.
“From my perspective, working at a corporation and talking to in-house peers in corporations, we face risks in terms of procurement, and the risks have increased,” says Daniel Fombonne, senior legal counsel and director of global compliance at Kinross Gold Corporation. “This is because a) you’re not able to follow the same processes and protocols that you generally would in the pre-pandemic landscape because you don’t have the same ability to vet new third parties, and b) you have challenges because of the rapidity of demands that have occurred over the past few months in the supply chain/procurement space as companies have scrambled to procure goods from other means or other third parties when borders are shut or jurisdictions restrict the ability of suppliers to export the way they did pre-pandemic.”
While Fombonne’s legal/compliance department has not revised internal protocols, an extra level of caution has been applied to due diligence to ensure that no steps are skipped. Kinross recently made some donations to communities in which it operates. In order to avoid several risks when interfacing with governmental entities, the gold mining company favours in-kind donations as opposed to cash.
“A good way to mitigate risk with any kind of donation is to openly source goods instead of someone telling you where to procure the goods in order to avoid potential collusion and the risk of fraud. We try to ensure we don’t get into dangerous territory,” says Fombonne.
An important part of Fombonne’s role is training colleagues throughout the international company on anti-corruption.
“It’s going to be incumbent on all of us, including corporations like Kinross, to keep focusing on due diligence and keep asking the right questions and not cut any corners,” says Fombonne.
In one high-profile case, SNC-Lavalin made headlines in recent years for charges of fraud and corruption over its former business dealings in Libya. The construction giant pled guilty in December 2019 and will pay a $280-million fine. A former SNC-Lavalin executive was later sentenced to eight years in prison for fraud, corruption and proceeds of crime offences in connection with the scheme.
Although such high-profile cases are unusual, business crime on a smaller scale will always be a rampant problem according to Léon Moubayed, a partner at Davies Ward Phillips & Vineberg LLP.
“The history of white-collar crime shows us that, in every situation — whether you have a booming economy or a financial crisis — white-collar crime will always find its way,” says Moubayed. “With the pandemic, you are going to see vulnerabilities being extorted more and more, and the role of in-house counsel is to make sure you have proper systems in place to detect, prevent and remediate those problems.”
Moubayed advises in-house counsel to work toward bringing a cultural shift within a company to make corruption socially unacceptable. Outlining rules on a company website is not enough. He believes that such a shift requires real conversations between all stakeholders to create a clear commitment against financial crime and to ensure that everyone understands why it is so important.
Lincoln Caylor, a partner at Bennett Jones LLP, warns that U.S. regulators are actively investigating the public filings of companies to screen for those that are using the pandemic to hide prior failings or losses — a trend that may come to Canada. He also cautions that regulators are actively investigating the use of government funds, so in-house counsel should continue to be vigilant.
“The regulatory environment will swing back to more active investigations and you won’t be able to sweep things under the rug because of COVID. Those that try will risk compliance issues,” says Caylor.
A general counsel who becomes aware of white-collar crime within an organization should drop everything and immediately focus on triaging the situation, according to Norm Keith, a partner at Fasken Martineau DuMoulin LLP. Retaining external counsel and a forensic investigator is recommended, together with rapid freezing of digital data and electronic documents, he suggests.
“When you have taken all remediation and terminated the necessary employees and third parties, then do a review and update of your policy and procedures,” says Keith.