Patrick G. Welsh, Evan Barz, , Gerard Kennedy, Riyaz Dattu
July 6, 2015
The Prior Framework
The Canadian government quietly announced the long awaited Integrity Regime for procurement and real property transactions on July 3, 2015. The Regime replaces the former Public Works and Government Services Canada (PWGSC) Integrity Framework which had attracted severe criticism. Under the Framework, a debarred supplier was confronted with the potential loss of millions of dollars’ worth of existing or prospective federal government contracts, regardless of mitigating circumstances and with no opportunity to remedy its transgressions. With the new Regime, flexibility has been introduced to ameliorate some of the harshest aspects of the Framework.
The Framework, enhanced in March 2014 without any consultation process, applied to PWGSC-managed contracts, including: construction contracts, goods and services contracts, and real property transactions. The central component of the Framework was the debarment mechanism. Debarment applied for 10 years following a conviction or a guilty plea (even one accompanied by a conditional or absolute discharge) for a number of “Canadian or similar foreign offences.” The scope of enumerated offences was broad, encompassing 18 categories.
The Framework also contained “no minimum dollar threshold.” Thus, the consequence of committing a debarment offence was the same for a company that paid a nominal bribe as for an entity that was convicted of paying bribes totaling millions of dollars. In addition, the Framework contained no discretionary provisions. As such, public works officials did not consider mitigating factors including a strong record of compliance, concerted efforts to rehabilitate, or whether the underlying offence was committed by a single rogue employee in the context of performing a task that had no connection to Canada. Furthermore, the Framework was retrospective, attaching additional penalties for convictions that occurred prior to the Framework’s adoption.
Other government departments and agencies could choose to apply the Framework to their solicitations and contracts. PWGSC would assist these entities in applying the provisions by conducting supplier checks under memoranda of understanding (MOU). Under the old Framework, PWGSC entered into MOUs with a number of government departments and agencies, including: Aboriginal Affairs and Northern Development Canada, Canada Border Services Agency, Canada Revenue Agency, and the Parole Board of Canada, among others.
Criticisms of the Framework
Despite good intentions, the Framework faced mounting criticism from many respected Canadian organizations, including the Canadian Chamber of Commerce, the Canadian Council of Chief Executives, Transparency International Canada, and the Canadian Bar Association. Serious concerns were expressed that the Framework was excessively severe and unyielding. Unintended consequences of the Framework could include placing Canadian companies at a competitive disadvantage and forcing Canadian taxpayers to pay excessive prices for goods and services.
The CBA, in an April 9, 2015 letter to the Minister of Public Works and Government Services, emphasized that:
A debarment regime should balance the public interest of preventing corruption with fairness to those who are subject to debarment as well as maintaining a competitive supplies base for the provision of goods and services to the government.
Unlike the United States or the European Union, the Canadian Framework did not offer convicted companies an avenue to be reinstated after reforming their practices or removing employees who were the source of wrongdoing. This approach failed to acknowledge the significant steps taken by companies in introducing and reinforcing programs to combat internal illegal and corrupt practices. The Framework was similarly criticized for failing to positively consider a company’s willingness to self-report. Under other Canadian legislation, including the Competition Act, self-reporting of internal illegal practices is encouraged and considered at sentencing. The Framework’s failure to consider self-reporting perversely provided a disincentive to self-report for firms seeking federal government contracts. Simply put, an entity that discovered its involvement in illegal activities may not have seen the advantage of self-reporting under the Framework.
Another source of rebuke was the application of the Framework for convictions of foreign offences, seriously expanding the reach of Canadian law. Integrity International Canada, among others, criticized this aspect of the Framework for failing to recognize the differences between legal systems and the reality that businesses may operate in jurisdictions where convictions may be politically motivated or otherwise antithetical to the rule of law. At the very least, critics were seeking clarity as to how “similar foreign offences” would be interpreted under the Framework.
The retrospectivity of the Framework was an additional controversy. The CBA emphasized that it is debatable whether it was fair to have automatic debarment for a 10-year period for conduct that occurred before the Framework came into effect. This aspect of the Framework appeared particularly harsh to larger companies that merged with other entities for which a complete historical record of past practices and convictions may not have been available.
A more general criticism of the Framework was the fact that it was contained in a PWGSC policy. Governmental policies are not considered with the same public consultation or debate as an act of Parliament or regulatory process. Enshrining the Framework in legislation, the CBA argued, would allow for a process of public consultation, which may satisfy interested parties who were unable to make submissions with respect to the Framework. More importantly, a statutory process would ensure the provisions have the same application to all suppliers, not just those suppliers of public works and government departments or agencies that have adopted the PWGSC integrity provisions.
The New Integrity Regime
The Regime was developed through consultation with industry associations and independent procurement ethics experts. It is intended to apply on a government-wide basis to all construction contracts, goods and services contracts, and real property transactions. PWGSC will administer the Regime on behalf of the government and will establish MOUs with each department and agency to implement the Regime.
The Regime consists of an Ineligibility and Suspension Policy and Integrity Provisions. Some of the key components of the Regime include:
Scope of Offences Qualifying for Ineligibility
The scope of offences for which a supplier may be deemed ineligible remains broad under the Regime, encompassing offences from the Financial Administration Act, the Criminal Code, the Competition Act, and the Corruption of Foreign Public Officials Act, among others. Some of the enumerated offences qualifying for ineligibility include: bribery, fraud, money laundering, falsification of books and documents, extortion, and offences related to drug trafficking. Under the Regime, much like the prior Framework, there is no minimum dollar threshold for committing a listed offence.
Term of Ineligibility
A determination of ineligibility to participate in federal government procurement projects continues to apply for 10 years for listed offences. However, the Regime permits the ineligibility period to be reduced by up to five years if a supplier is able to establish that it has cooperated with law enforcement authorities or addressed the causes of misconduct.
A supplier may at any time apply for a reduced ineligibility period, and an administrative agreement would be imposed to monitor the supplier’s progress. Administrative agreements include conditions and compliance measures that the supplier must meet to remain eligible to contract with the federal government. Suppliers would be required to contract with a private sector third party that has expertise in corporate governance and integrity to ensure the terms of the administrative agreement are met. The third party would then report to the government, pursuant to the terms of the agreement. If a convicted supplier fails to meet the requirements of an administrative agreement, the period of ineligibility to which they are subject would be lengthened.
Convictions of Frauds Under the Financial Administration Act and the Criminal Code
Importantly, a supplier convicted of frauds under the Financial Administration Act and the Criminal Code will be deemed permanently ineligible to contract with the Government of Canada, unless a record suspension is obtained. A record suspension is available in very limited circumstances and will only be issued if the supplier has: (i) been granted an absolute discharge in respect of the offence, or has been granted a conditional discharge in respect of the offence and those conditions have been satisfied; (ii) been granted a pardon pursuant to the royal prerogative of mercy; (iii) been granted a pardon under section 748 of the Criminal Code; (iv) received a record of suspension ordered under the Criminal Records Act; or (v) been granted a pardon under Criminal Records Act, as that Act read immediately before the day section 165 of the Safe Streets and Communities Act comes into force.
New Suspension Period
If a supplier is merely charged with, or admits guilt to, a listed offence or a similar foreign offence, it may be ineligible to do business with the Canadian government for up to 18 months. The suspensory period may be extended if legal proceedings are ongoing. If a suspended supplier is convicted, the suspensory period does not count as “time served” for the debarment period.
The Regime tones down the strict rules with respect to offences committed by an affiliate. Before declaring a supplier ineligible for the actions of an affiliate, an assessment will now be conducted to determine whether the supplier exercised a sufficient degree of control over a convicted affiliate. To undertake this assessment, PWGSC will consider whether the supplier directed, influenced, authorized, assented to, acquiesced in or participated in the commission or omission of the acts or offences that would result in ineligibility.
Significant changes have also been made for international convictions. Under the Regime, an assessment will now be undertaken regarding the similarity of the foreign conviction to a listed offence in Canada to determine whether a supplier should be deemed ineligible for a foreign conviction. In making this assessment the constitutive elements of the foreign offence will be assessed and a consideration of the following factors will be carried out:
(i) that the foreign court acted within its jurisdiction; (ii) that the supplier/affiliate voluntarily appeared during the Court’s proceedings or submitted to the Court’s jurisdiction; (iii) that the Court’s judgment was not obtained by fraud; and (iv) that the supplier/affiliate was entitled to present to the court every defence that they would have been entitled to present in Canada, had they been tried in Canada for committing the act or omission.
Independent third parties must be hired by the supplier to conduct this assessment, but the federal government will make the ultimate decision on ineligibility.
Applicability to Subcontractors
The Regime applies to subcontractors and prime contractors will be required to subcontract only with eligible suppliers. If a prime contractor knowingly subcontracts with an ineligible subcontractor, the prime contractor will face a five year ineligibility under the Regime. PWGSC will publish a list of ineligible suppliers and prime contractors will be required to verify the eligibility of the subcontractors with which they choose to work. If a prime contractor wishes to contract with an ineligible subcontractor, prior approval of the government must be sought by the prime contractor in advance.
The retroactive nature of the prior Framework has been abandoned under the Regime. The Regime will be adopted on a “go-forward” basis and will not impact existing contracts. Significantly, PWGSC will inform currently ineligible suppliers of the new provisions and will reassess their ineligibility under the Regime. Therefore, a supplier that was debarred under the stricter Framework may be eligible for reinstatement under the new Regime.
Termination of a Contract
If a supplier is convicted of a listed offence, the Government of Canada may terminate existing contracts with the supplier. If the decision to terminate is made, the supplier will be notified and will be provided the opportunity to demonstrate that they have addressed or are in the process of addressing the transgression. If the government decides to continue with the contract, an administrative agreement will be established to provide additional assurances that the supplier is proactively addressing the causes of the wrongdoing.
Advanced Determination of Ineligibility
Suppliers or potential suppliers that have concerns about their eligibility can request an advanced determination of ineligibility from PWGSC. In making this request, suppliers will be required to describe any adverse information in their request and this disclosure must be complete and accurate. Moreover, the Minister may request that the supplier obtain third party confirmation of any of the information included in the request. The Minister will then review the request and make a determination of whether the supplier should be declared ineligible. The advanced determination will be considered final and binding, subject to the right to request a limited review, and may be contested only through judicial review.
Public Interest Exception
The Public Interest Exception may be invoked, on a case-by-case basis, to allow the Government of Canada to contract with an otherwise ineligible supplier where it is in the public interest (such as no other supplier being capable of performing the contract, or an emergency or national security concerns being present). In such cases, an administrative agreement between the supplier and the Government of Canada would be required, with compliance monitoring and reporting by a third party at the supplier's expense. Failure to comply with the terms of the agreement would see the ineligibility period extended.
A Public Interest Exception cannot be invoked in cases where a supplier is convicted of frauds under the Financial Administration Act and the Criminal Code, unless a record suspension has been obtained.
No Exception for Cooperating Suppliers
There is no exemption from the debarment policy for suppliers who cooperate with enforcement officials in ongoing criminal investigations. Accordingly, cooperative suppliers face potential suspension and, if convicted, debarment (although the debarment period may be shortened to five years). This may have repercussions for government programs designed to incentivize cooperation and guilty pleas, including the Competition Bureau’s Leniency Program.
The Regime remains strict. In particular, the fact that a period of ineligibility is generally automatic for a minimum of five years, even in the face of mitigating factors, is a serious, impediment to contracting with the Government of Canada. The “no minimum dollar threshold” also remains.
Despite these ongoing concerns, some of the revisions are in the best interests of prospective suppliers, the Government of Canada, and Canadian taxpayers. The more contextual analyses of what constitutes an “affiliate” and when convictions will result in ineligibility to contract with the Government of Canada recognize that Canadian businesses that have branches in other countries ought not to be held strictly liable for the actions of those extraterritorial branches in all circumstances.
Ultimately, it remains to be seen precisely how the Regime will work in practice. But it is fundamentally welcome news for businesses contracting with the Canadian government.