OSC approves $30 million settlement with Katanga over financial misstatements and failure to disclose DRC risks
Reflecting the trend toward increasing monetary penalties, the Ontario Securities Commission (the “OSC”) accepted an eye-popping $30 million settlement payment in the Katanga Mining Limited (“Katanga”) matter.
On December 18, 2018, an OSC Panel approved a settlement with Katanga concerning misstatements in the company’s financial statements, as well as disclosure violations and internal controls failures in relation to its operations in the Democratic Republic of the Congo (the “DRC”). As part of the settlement agreement between Katanga, certain individual respondents, and the OSC (the “Settlement Agreement”), Katanga agreed to pay $28.5 million to the OSC to advance its investor protection mandate, plus a $1.5 million payment towards the costs of OSC Staff’s investigation, and to pay for an independent consultant approved by OSC Staff to conduct a review of the policies, procedures, and effectiveness of Katanga’s metals accounting.
Katanga is a mining company with its principal operations in the DRC. Since 2009, Glencore plc (“Glencore”), an Anglo-Swiss multinational and one of the world’s largest commodities firms, has been Katanga’s majority shareholder. While Katanga was incorporated in Bermuda, it continued under the Yukon Business Corporations Act in 2011, and has its registered office in Whitehorse, Yukon and its head office in Zug, Switzerland. The company is a reporting issuer in Ontario and its shares are listed on the Toronto Stock Exchange.
In response to OSC Staff’s investigation, Katanga commenced an internal review led by its independent directors, which it announced on July 31, 2017.
Subsequently, on November 20, 2017, Katanga issued a news release announcing, among other things: OSC Staff’s investigation; the conclusion of the internal review; and the restatement of Katanga’s 2016 annual and 2017 interim financial statements and related MD&A.
The OSC Settlement
In addition to the $30 million total payment in penalties and investigation costs to the OSC and the payment for an independent consultant, Katanga also agreed to certain facts laid out in the Settlement Agreement (the “Agreed Facts”).
As part of the Agreed Facts, Katanga admitted, among other things, that it:
- Overstated copper production and inventory stores and misstated its financial position and the results of its operations;
- Failed to maintain adequate disclosure controls and procedures and internal controls over financial reporting; and
- Failed to disclose material risks to its business, and in particular, the heightened risk of public sector corruption in the DRC and the extent of Katanga’s reliance on individuals and entities associated with Israeli businessman Dan Gertler (“Gertler Associates”), and the risk of an adverse impact of Katanga’s business should its relationship with Gertler Associates deteriorate or cease.
The Katanga settlement demonstrates that the regulator is focused on reporting issuers operating in emerging markets with elevated risks of public sector corruption such as the DRC. Companies operating in these countries should be on high alert to these risks, especially in regards to their activities concerning government relations and public officials. As discussed in a previous post, in October 2017, the Canadian government eliminated the exclusion of facilitation payments (sometimes called “grease payments”, which are made to expedite or secure the performance by a foreign public official of any act of a routine nature that is part of that official’s duties or function) from the bribery offence under the Corruption of Foreign Public Officials Act.
The context of the settlement highlights the need for reporting issuers to ensure that they have effective internal controls and a robust culture of corporate compliance.
Finally, the financial aspect of the settlement is notable for its particularly large size in comparison to monetary sanctions historically imposed by regulators. This reflects the trend toward larger monetary sanctions and underscores the importance of companies’ need to consider the reaction of capital market regulators when considering whether and when to self-report.
 Osler acted for one of the individual respondents.
 This admission was made solely by Katanga, and not the individual respondents.