Investing in Ethical Corporate Culture: The Imperative for Instituting an Anti-Corruption Compliance Program for Canadian Businesses Venturing Overseas

Vigorous enforcement of the Foreign Corrupt Practices Act (FCPA) by the U.S. Department of Justice and the Securities and Exchange Commission (SEC) has continued into 2010 with penalties reaching heights that were unthinkable three years ago.  Furthermore, during this same period unprecedented multilateral cooperation has been evident, principally with European authorities cooperating closely with U.S. authorities, a goal that had been elusive for the U.S. authorities for close to 30 years since the coming into force of the FCPA in 1977.

The recent period has also ushered in new investigation techniques by U.S. authorities targeting individuals and companies, without having to rely on “whistle-blowers” or equally on illicit activities coming to light during the course of legal due diligence of a target in mergers and acquisitions transactions.  Additionally, the U.S. authorities have announced their deliberate intention to  target business executives and not only the companies that they manage, for engaging in corruption activities overseas. This has created an enormous imperative for officers and directors to establish ethical corporate cultures where corrupt activities are strongly and actively discouraged, leading in some cases to dismissal of employees, agents and other representatives of the company.  In this enforcement environment, the immediate adoption of corporate compliance programs aimed at rooting out and avoiding violations of anti-corruption statutes has become critical, and an indispensible defense to mitigating the aggressive enforcement of criminal and civil penalties.

Huge and increasing penalties

The most notorious investigation leading to the largest ever fine was paid by Siemens to the U.S. authorities at the end of 2008, in the amount of $800 million, with a similar amount being paid to the German enforcers.  Since then sky-high penalties have come to be expected, with Kellogg Brown & Root LLC agreeing to pay $579 million in fines and disgorgement in February 2009. Fines in excess of $100 million were also accrued or paid by Daimler, Alcatel-Lucent, and Technip, as reported in their 2009 year-end statements to settle FCPA related enforcement issues. In early 2010, BAE Systems agreed to pay $400 million to the U.S. authorities in addition to the penalties imposed in the U.K., to settle charges that it had lied to the government about its FCPA compliance program and for allegedly bribing Saudi officials when selling fighter jets.

Parallel international enforcement

Accompanying these steep fines is the recent, strongly exhibited willingness of various governments, in particular that of Germany and the U.K., to work in concert with the U.S. authorities. Some of these governments, such as the U.K., had in the past been reluctant to take enforcement actions when this was politically unpalatable domestically, as was the case previously in relation to BAE Systems’ conduct in Saudi Arabia. There is no such reticence now being shown by European authorities and indeed the new U.K. Bribery Act, which comes into force later this year, gives the authorities there far more scope and power and imposes greater compliance obligations on companies engaged in international activities, than the slightly more than 30-year-old FCPA legislation.  The breadth of investigations and intensity of enforcement is suddenly becoming increasingly multilateral, with parallel investigations to those of the U.S. under the FCPA, also being pursued by the authorities in Ireland, Italy, the Netherlands, and France. In 2009, the Japanese courts also confirmed their willingness to attack foreign bribery activities, by convicting three executives of a Tokyo-based consulting firm for bribes paid in connection with road building projects in Vietnam.

The OECD survey of anti-corruption investigations world-wide suggests that there are currently more than 300 active investigations underway.  In Canada, a team of RCMP officials based in Ottawa and Calgary, has been tasked within the last two years to investigate and enforce Canada’s foreign bribery law, known as the Corruption of Foreign Public Officials Act (CFPOA), which has many similar provisions to the anti-bribery provisions of the FCPA enforced by the U.S. Department of Justice (although not the “books and records” provisions of the FCPA enforced by the SEC).  There are apparently some ongoing investigations in Canada, with at least one Canadian company reporting in its annual corporate filings that it is being investigated.  More announcements can be expected to follow in due course.

Of significant concern to Canadian companies, many of which are increasingly eyeing opportunities in the emerging markets, is not only the potential for the application of the CFPOA, but also the likelihood of parallel investigations, both under the local laws where the illicit activities may have taken place and just as significantly under the FCPA.  This is because of the well known and expansive reach of many U.S. criminal and civil penal statutes, and in particular: (i) the FCPA’s “books and records” provisions, enforced by the SEC, applicable to Canadian companies listed on U.S. stock exchanges; (ii) the jurisdictional reach claimed by the U.S. Department of Justice, when Canadian companies are operating in the U.S. or using the “instrumentalities of interstate commerce” (e.g., telecommunications system,  financial system, etc.); and (iii) and the nationality based jurisdiction, claimed by the U.S. authorities with respect to U.S. nationals, who may be employed as business executives of Canadian companies.

Innovative techniques and targeting of business executives

A couple of remarkable and recent developments in the enforcement of the FCPA concern the willingness of the U.S. authorities to engage in “sting” or undercover operations, and increasingly, the targeting of executives and employees of companies that engage in foreign bribery activities.

On January 18, 2010, twenty-one individuals were arrested in Las Vegas, Nevada while attending an annual industry trade show. These arrests followed an undercover operation that had taken place over a more than two-year-period, the first such large-scale FCPA “sting” operation. The charged individuals believed they were participating in the bribing of a (non-existent) Defense Minister in an African country, in order to procure a contract for tear-gas grenade launchers, rifles, vests and handguns. 

In addition to this new investigation technique targeting individuals engaging in illicit bribery activities, the U.S. government has expressly noted that new theories of liability will be used to personally go after directors, executives and agents of companies engaging in foreign bribery.  Assistant Attorney General for the Criminal Division of the U.S. Department of Justice, Lanny Breuer, in addressing a recent ethics and compliance officers conference, stated that “the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations.” An example of this creative use of theories of FCPA liability can be found in the enforcement action taken by the SEC against Nature’s Sunshine Products Inc.  The SEC, using the “control-person” liability doctrine, alleged that both the CEO and CFO of that company violated the “books and records” and internal control provisions of the securities laws in connection with a Brazilian bribery scheme.

This development more than any other, has provided corporate executives the necessary impetus to invest in an ethical corporate culture that eschews activities abroad that are, or can facilitate, bribery offences.  An anti-corruption compliance program is therefore now an imperative not only to protect the company and its assets from government enforcers seeking criminal and civil penalties, and the shareholder and other derivative civil class actions that now usually follow with some predictability, but to also stave off personal liability including jail time for business executives who may otherwise become implicated.

Anti-corruption compliance programs

There is universal acceptance among government officials charged with enforcing anti-corruption laws that an effective compliance program not only helps to prevent violations of these laws, but can also be a very significant factor in their stance when considering the possible imposition of criminal and civil penalties.

In the United States, the U.S. Sentencing Commission, in its Guidelines, has through a recent amendment, re-affirmed the importance of compliance and ethics programs within corporations. As noted by Assistant Attorney General, Lanny Breuer, in his recent conference speech, “the amendment stressed the critical need to embed these programs at the very highest level of the organization. In an interesting twist, the Commission expanded eligibility for effective compliance and ethics program credit [for the corporation] at sentencing even if one or more members of the ‘high level personnel’ has some role in the offence.”

In the U.K., the new Bribery Act criminalizes, among other things, the very failure by a corporate entity to prevent bribery, effectively mandating by legislation the creation of a compliance program.  For those companies that do implement an effective compliance program, the legislation provides a defence if the corporation can show that it has “adequate procedures” in place to deter and detect such conduct.

Based on the guidance provided by various government authorities, and in particular the U.S. authorities that have had the most extensive interaction with businesses that have developed effective anti-corruption compliance programs, the following should be considered as the minimum requisite elements of such a compliance program:

  • Establishment and expression of the right “tone at the top,” with clear directives from the board and management that demonstrates a full commitment to an effective compliance program;
  • Guidelines to prevent fraud and corruption, and clear policies to “quickly detect, fix, and report violations;”
  • Training of employees and periodic review of the guidelines to ensure that the message is clear and understood, and that the program is “dynamic and ever-evolving” and not seen within the company to “exist only on paper;”
  • Sanctions against unacceptable behaviour through the use of disciplinary actions, including dismissal, and rewarding good ethical conduct reflected in the use of  bonus programs, and as part of the criteria for promotions;
  • Creation of a strong “whistle-blower” program using a hotline or appropriate mechanisms, and guaranteeing full protection for employees who report the unlawful conduct;
  • Tasking a person with senior level management authority with the compliance function and giving this person the responsibility to report directly to the audit committee or the board of directors;
  • The use of internal and external auditors, including where necessary, outside legal and other professionals with specialized expertise, to ensure compliance, and in order to make necessary revisions to the company’s compliance program; and
  • The extension of the company’s ethical stance, including its compliance program directives, beyond the company so as to encompass foreign business partners, including agents, distributors, resellers and joint venture partners.

Conclusion

Increased enforcement by the U.S. and other enforcement authorities, including Canadian, will require directors, officers, general counsel, and outside legal and other advisors to actively counsel prevention.

An effective compliance program is an essential first step, and an invaluable tool to ward off charges of illegal activity and also as a means to mitigate against aggressive criminal and civil penal actions by governments.

As Canadian businesses increasingly look beyond the U.S. market to the now growing opportunities in the emerging market countries, investing time and effort in a anti-corruption program will become a necessity, but will also be extremely rewarding.