Kaeleigh Kuzma, Peter Franklyn
July 14, 2015
On July 3, 2015, the Canadian government announced its new Integrity Regime for government-contracting entities. The prior framework, first introduced in 2012 and revised in March 2014, was criticized as being overly broad in respect of the scope of conduct it encompassed, the entities to which it applied, the harsh, non-discretionary penalty it imposed (10-year debarment from federal government contracts) and the lack of a “safe harbour” threshold. For further details regarding the prior framework and its implications under the Competition Act, refer to our Antitrust Advisory.
While the Integrity Regime addresses some of these criticisms a number of issues remain unresolved:
Broad Application to all Competition Act Offences: A supplier will be ineligible to do business with the Canadian government if it, or members of its board of directors, has been convicted or absolutely/conditionally discharged in the last three years of a long list of offences or similar foreign offences. The list includes “corruption, collusion, bid-rigging or any other anti-competitive activity under the Competition Act” (emphasis added). As with the prior framework, suppliers face potential debarment if they or their board members have engaged in a broad range of competition law-related violations, including misleading advertising. While there is no longer automatic debarment based on the conviction or discharge of a supplier’s affiliate, a supplier may nonetheless be ineligible if it is determined that the supplier had control over that affiliate (the definition of which includes officers and key employees).
Discretion to Reduce Penalty: Suppliers who are offside the Integrity Regime still face a potential 10-year debarment from contracting with the federal government. However, the debarment period may be reduced to five years where the supplier demonstrates that it has cooperated with law enforcement authorities or has taken remedial action to address the wrongdoing. Suppliers must obtain third party certification confirming that they have addressed the actions and behaviour that led to their debarment prior to becoming re-eligible to bid. There is no provision for a due diligence defence under the Integrity Regime, although the implementation of due diligence procedures should reduce the risks associated with running afoul of the Integrity Regime and may affect the government’s decision to seek reduced sanctions.
Potential Suspension Prior to Conviction: A supplier may be ineligible to do business with the Canadian government for up to 18 months (and potentially longer if legal proceedings are in process) if it is merely charged with or admits guilt to a listed offence or a similar foreign offence. This suspensory period raises serious issues of fairness and is inconsistent with the presumption of innocence. For those who are charged and ultimately convicted, the total debarment period may extend beyond 10 years as the suspensory period cannot be credited against the 10-year debarment period.
Implications for the Competition Bureau’s Leniency Program: It remains to be seen whether, even taking into account the possibility of a reduced debarment period, the Integrity Regime will continue to have repercussions for the Bureau’s Leniency Program. The Bureau’s Leniency Program provides for potential reduced penalties for those who have breached the collusion or bid-rigging provisions under the Competition Act and are not eligible for a grant of full prosecutorial immunity but are willing to plead guilty and cooperate with the Bureau’s investigation. However, as a result of complying with the Leniency Program suppliers expose themselves to potential suspension and debarment under the Integrity Regime. Suppliers who derive a significant portion of their revenues from federal government contracts will need to carefully weigh the potential economic consequences of suspension and debarment against the potential benefit of lenient treatment in the context of a Bureau investigation, as these costs may greatly exceed the maximum financial sanctions available under the Competition Act.
Implications for M&A Transactions: As ineligibility is based on convictions or discharges that have occurred in the last three years, it will be important for purchasers in share transactions to develop due diligence protocols to determine whether an acquisition target (or any director, affiliate, officer or key employee) has been charged or convicted or has pled guilty to any listed offence, in Canada or elsewhere, in the last three years.
For a more detailed analysis of the Integrity Regime, refer to our Osler Update.
For further information on the Integrity Regime and how it could affect you, contact a member of Osler’s Competition & Foreign Investment Group.