Riyaz Dattu, Evan Barz
June 18, 2015
MagIndustries Corporation (MagIndustries) announced on June 16, 2015 the interim results of its multijurisdictional internal investigation initiated by a special committee of its Board of Directors into allegations of foreign corruption. This announcement provides details with respect to allegations of bribes paid to public officials in the Republic of Congo by this Toronto-based mining company and its affiliates, currently developing a $1.5-billion potash mine in that country.
The internal investigation was initiated after the RCMP National Division conducted a search of the Toronto headquarters of MagIndustries in January 2015. The Information to Obtain Search Warrant (Information) authorizing the search alleged that a Canadian national, formerly employed by the Congolese subsidiary of MagIndustries, was asked to make payments to foreign officials in the Republic of Congo to obtain certain lands sought by the company. The Information further alleged that the Congolese subsidiary had made “under the table” or “black money” payments to reduce taxes payable and was using two sets of accounting books in order to conceal the payment of bribes.
The announcement comes as a reminder that the Canadian government has become intent on vigorously enforcing violations of the Corruption of Foreign Public Officials Act (CFPOA), legislation that has now been in force for more than 15 years but has received more prosecutorial attention within the last five years. The announcement reinforces the need for Canadian companies with international corporate operations to proactively implement measures to avoid corruption taking place in distant locations for which they may be held legally accountable, and even if not convicted can cause reputational and other irreparable harm to the company. A robust anti-corruption compliance program that requires employees and agents to adhere strictly to instilled corporate values of honesty and integrity, internal whistle-blower policies, training and annual certification by employees can not only help avoid illegal conduct, but may also help provide defences against criminal conviction and the imposition of huge multi-million dollar penalties, which are becoming common in Canada.
MagIndustries Announces Internal Investigation
The Board of Directors of MagIndustries announced an internal investigation on January 29, 2015, overseen by a special committee which engaged external legal counsel. The scope of the investigation was to consider the allegations contained within the RCMP Information and to uncover any other evidence of corrupt activities of MagIndustries or its affiliates, dating back to January 2012. The Investigation was funded by Evergreen Holding Group (Evergreen) based in China, the controlling shareholder of MagIndustries. After incurring millions of Canadian dollars in legal and other expenses on the internal investigation, Evergreen has now advised MagIndustries that it does not have the “financial capacity to continue funding the investigation.” MagIndustries has indicated that the internal investigation will only be revived if it can raise sufficient funds to complete the investigation. The company also announced that due to the investigation being suspended, the independent directors who formed the special committee have resigned. In its press release, the company also indicated that it will be seeking to recruit independent directors to fill the vacancies left by their departure.
Interim Results of the Investigation
Some of the interim results of its multijurisdictional internal investigation disclosed by the company are set out below. Notably, the company accepted the recommendation in the interim report for “management changes and changes in internal practices.”
As a result, the former CEO of MagIndustries was appointed Co-CEO along with the company’s current CEO. MagIndustries also suspended its CFO from his duties, demoting him to a member of its financial staff. Additionally, a new position will be created immediately for a Chief Compliance Officer, who will report to a new board committee, the compliance committee.
Other important findings in the interim report include:
- Gifts for Government Officials: Bribes in the form of gifts were provided to government officials. Allegations that government officials were provide with vehicles remained unconfirmed at the time of the suspension of the investigation.
- Paid Trips to China and South Africa: The company or its subsidiaries organized or supported multiple trips to China and South Africa for the Republic of Congo. At the time the investigation was suspended, the appropriateness of these trips was being investigated.
- “Black Money” or “Under the Table” Transactions: Multiple payments were made to public officials to reduce taxes and penalties.
- Per Diem Payments: Multiple payments were made to senior public officials in excess of the limits placed on per diem payments by the Republic of Congo government.
- Record-Keeping: The Congolese subsidiary maintained separate accounting books for certain activities including per diem expenses and government inspections.
Lessons from MagIndustries Announcement
It is clear that multijurisdictional investigations can be both time consuming and extremely expensive. This internal investigation, according to the company, cost millions of dollars within a span of less than six months.
If anything, this case demonstrates that proactive measures through the implementation of corruption compliance programs, which can be prepared and effectively implemented for only a few thousands of dollars, is a more efficacious use of corporate funds. Corporate compliance programs that incentivize behaviour consistent with corporate values of honesty and integrity and an environment that encourages internal whistleblowing of corrupt behaviour can result in avoidance of criminal prosecution, reputational harm and other collateral damage including shareholder class actions.