Implementing a Winning Third Party Anti- Corruption Program and Managing Compliance The Canadian Institute’s Practical Guide to Anti-Corruption Compliance

Implementing a Winning Third Party Anti-Corruption Program and Managing

Compliance

The Canadian Institute’s Practical Guide to Anti-Corruption Compliance

June 23, 2015

John W. Boscariol

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John W. Boscariol, International Trade and Investment Law, McCarthy Tétrault LLP / mccarthy.ca

Introduction

¬ various kinds of relationships with business partners

¬ relevant statutory provisions

¬ examples of enforcement

¬ key questions for agents and other business partners

¬ red flags

¬ key compliance measures

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Kinds of Intermediaries

¬ addressing risk arising from your relationship with business partners, including

¬ agents

¬ consultants

¬ brokers

¬ lawyers

¬ distributors

¬ contractors

¬ joint venture partners

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Key Statutory Provisions

¬ Corruption of Foreign Public Officials Act section 3:

¬ “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”

¬ Criminal Code section 22.2:

¬ company is party to the offence if a senior officer “knowing that a representative of the organization is or is about to be a party to the offence, does not take all reasonable measures to stop them from being a party to the offence”

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¬ Criminal Code section 2:

¬ “senior officer” means a representative who plays an important role in the establishment of an organization’s policies or is responsible for managing an important aspect of the organization’s activities and, in the case of a body corporate, includes a director, its chief executive officer and its chief financial officer

¬ “representative”, in respect of an organization, means a director, partner, employee, member, agent or contractor of the organization

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¬ US Foreign Corrupt Practices Act

¬ prohibition includes the “authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to” a foreign official

¬ prohibits corrupt payment to any foreign official or to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official…”

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Relevant Excerpts from the Niko Probation Order¬ a rigorous anti-corruption compliance code designed to

detect and deter violations of CFPOA and other anti-corruption laws, which includes…

¬ compliance standards and procedures that apply to all directors, officers, employees, and outside parties acting on behalf of the company

¬ conducting risk assessment in order to develop these standards and procedures based on specific bribery risks facing the company and taking into account a number of specified factors, including the company’s geographical organization, interactions with various types and levels of government officials, industrial sectors of operation, and involvement in joint venture agreements

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Relevant Excerpts from the Niko Probation Order¬ systems for providing anti-corruption guidance

and advice within the company and to business partners, confidential reporting of possible contraventions, protection against retaliation, and responding to reports and taking appropriate action

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Relevant Excerpts from the Niko Probation Order¬ institute appropriate due diligence and compliance

requirements pertaining to the retention and oversight of all agents and business partners, including:

¬ properly documenting risk-based due diligence pertaining to the retention and appropriate and regular oversight of agents and business partners

¬ informing agents and business partners of the company’s commitment to abiding by anti-corruption laws and of the company’s ethics and compliance policies and standards, and

¬ seeking a reciprocal compliance commitment from agents and business partners

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Relevant Excerpts from the Niko Probation Order¬ include standard provisions in agreements, contracts and

renewals thereof with all agents and business partners that are reasonably calculated to prevent violations of the anti-corruption laws, which may, depending on the circumstances, include:

¬ anti-corruption representations and undertakings relating to compliance with anti-corruption laws;

¬ rights to conduct audits of the books and records of the agent or business partner to ensure compliance with the foregoing, and

¬ rights to terminate an agent or business partner as a result of any breach of anti-corruption laws or the company’s policies in that regard

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Some Enforcement Examples¬ Maxwell Technologies (2011)

¬ Swiss subsidiary alleged to have paid Chinese state-owned electric utility infrastructure manufacturers kickbacks

¬ charged inflated prices for equipment sales and paid the excess to their Chinese agent who passed amounts on to officials

¬ invoices issued to Maxwell by agent for "extra amount" or "special arrangement" fees

¬ found Maxwell had failed to maintain adequate controls over payments to the agent, conduct due diligence regarding the agent, and provide anti-corruption training to relevant employees

¬ voluntarily disclosed, negotiated a deferred prosecution agreement, and paid penalty of $14 million

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Some Enforcement Examples¬ Alcatel-Lucent (2010)

¬ use of agents and consultants in Costa Rica, Honduras, Malaysia, Taiwan, Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, Ivory Coast, Uganda, and Mali in connection with telecom contracts

¬ in Costa Rica, a subsidiary wired about $18 million to two consultants; more than half was then passed to government officials

¬ in Honduras, a subsidiary hired and made payments to a "consultant" who was a perfume distributor with no experience in telecommunications; personally selected by "the brother of a senior Honduran government official“

¬ in Taiwan, the company and its joint venture hired two consultants with no telecommunications experience; passed some of their $950,000 payments to Taiwanese legislators

¬ voluntarily disclosed, negotiated a deferred prosecution agreement, and paid fines of $137 million

¬ also agreed to cease using third-party sales and marketing agents in conducting its worldwide business

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Some Enforcement Examples¬ Panalpina (2010)

¬ Swiss freight forwarder paid bribes of $27 million for customs clearance and import permits in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan.

¬ for Panalpina’s oil field services customers, including Pride International, Royal Dutch Shell, Tidewater, Transocean, Global Santa Fe and Noble

¬ in order “to circumvent local rules and regulations relating to the import of goods and materials”

¬ the oil field services companies were also investigated and admitted to making payments through freight forwarder

¬ voluntarily disclosed, negotiated deferred and non-prosecution agreements, and paid fines totalling $237 million

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Dealings with Agents and Other Business Partners

¬ recognition that what your agent or business partner does can have a significant impact on your company

¬ CFPOA applies to direct and indirect offers or payments

¬ captures your knowledge of or wilful blindness to your agent’s corrupt activities

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Dealings with Agents and Other Business Partners

¬ must exercise due diligence to ensure that agents and other partners are aware and comply with anti-corruption obligations

¬ in addition to agents, includes other third parties such as

¬ consultants, distributors, suppliers, jv partners, legal counsel, other services providers

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Key Questions to Ask About Your Agents and Other Business Partners

¬ what is the service they will provide?

¬ is it legitimate and necessary?

¬ what are their qualifications, experience, expertise for providing the legitimate services required in the circumstances?

¬ what is their reputation? in the industry and country? with banks, customers, suppliers and others?

¬ do a criminal record check

¬ how did you come to know about them?

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Key Questions to Ask About Your Agents and Other Business Partners

¬ what are their anti-corruption compliance policies?

¬ review evidence and materials

¬ are their fees reasonable for legitimate services of this kind and given the location?

¬ is it consistent with others in the jurisdiction?

¬ what are their personal and professional relationships with government officials?

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Agent and Business Partner “Red Flags”

¬ reasons for further investigation and extra vigilance

¬ country has poor history or reputation for corruption

¬ unusual payment patterns or financial arrangements

¬ dealings in cash or with offshore accounts

¬ agent reluctant to readily cooperate in due diligence

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Agent and Business Partner “Red Flags”

¬ reasons for further investigation and extra vigilance (cont’d)¬ unusually high commissions

¬ success-based fees

¬ upfront payment

¬ lack of transparency in its expenses and accounting records

¬ lack of qualifications or resources

¬ recommendation from an official of the government customer

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How Do We Implement?

¬ key compliance measures for dealings with agents and other business partners

¬ due diligence is fluid and must be conducted

¬ before entering the relationship

¬ during negotiations

¬ and on ongoing basis (monitoring)

¬ and it must be risk-based

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¬ key compliance measures for dealings with agents and other business partners

¬ fully document in writing all due diligence

¬ do not proceed unless senior compliance or legal approve

¬ establish procedure for referring “red flags” or problematic cases to outside legal counsel

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¬ screening and pre-approval of agents and business partners¬ internal questionnaires

¬ agent completion of questionnaires

¬ personal interviews

¬ third party investigation – boots on the ground

¬ visit to office / facility

¬ discussions with others¬ in host country

¬ trade and industry associations

¬ government sources

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¬ negotiating the contract with the agent or other business partner

¬ incorporate anti-bribery compliance into agency contracts and JV

and other agreements

¬ acknowledgment and awareness

¬ disclosure of government relationships

¬ disclosure of past corruption and fraud-related charges, convictions

¬ notification of any changes

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¬ incorporate anti-bribery compliance into agency contracts and JV and other

agreements

¬ representations and warranties on compliance

¬ periodic certification of compliance

¬ notification of non-compliance

¬ notification of knowledge of pending or initiated investigation

¬ right to terminate

¬ indemnification for breach of anti-corruption obligations

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¬ incorporate anti-bribery compliance into agency contracts and JV and other agreements

¬ description of services, expertise

¬ use of subcontractors/agents

¬ compensation and reimbursement of agent expenses

¬ accounting and recordkeeping

¬ right to audit

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¬ once retained, ongoing monitoring of agents and other third parties

¬ provide training at the outset and on ongoing basis

¬ periodic certification of compliance

¬ regular reporting on agent’s activities

¬ supervision - identifying and resolving red flags

¬ involvement in agent interactions with government

¬ robust process for expense reimbursement

¬ exercising audit rights

John W. BoscariolMcCarthy Tétrault LLPInternational Trade and Investment Lawwww.mccarthy.caDirect Line: 416-601-7835

E-mail: [email protected]: www.linkedin.com/in/johnboscarioltradelaw Twitter: www.twitter.com/tradelawyer

Documents

Implementing a Winning Third Party Anti- Corruption Program and Managing Compliance The Canadian Institute’s Practical Guide to Anti-Corruption Compliance