29 janvier 2013
Griffiths Energy International Inc. (GEI) entered a guilty plea on January 22, 2013 to a criminal charge under section 3(1)(b) of Canada’s Corruption of Foreign Public Officials Act (CFPOA), and agreed to a fine in the amount of $10.35 million. The criminal charge related to using the cover of sham consulting agreements to funnel or agree to funnel payments in the amount of US$2 million to two entities owned and controlled by Chad’s ambassador to Canada and his spouse. On January 25, 2012, the Court of Queen’s Bench in Calgary accepted the plea and the settlement.
This conviction is the second such multi-million dollar fine imposed against a Canadian company pursuant to the CFPOA, and the first where a company has voluntarily disclosed illegal conduct based on its own internal investigation. In July 2011, Niko Resources was fined $9.5 million and put under probation for three years for providing benefits valued at approximately $200,000 to a senior Bangladeshi government official.
Activities leading to the Offence
GEI was created in August 2009 to pursue the objective of its three founders, the Canadian financier and investment banker Brad Griffiths, and two brothers Naeem Tyab and Parvez Tyab, of securing oil and gas production sharing contracts (PSC) from the Republic of Chad.
Previous to forming GEI, the three founders had offered Chad’s government a US$2 million signing bonus for the PSC for three oil and gas exploration and production blocks in Chad. These efforts had failed as the government rejected the amount as too low. The offer was thereafter increased in June 2009 to US$10 million and limited to two blocks.
After the incorporation of GEI, a draft memorandum of understanding (MOU) and a consulting agreement relating to the two blocks were prepared. The consulting agreement, dated August 2009, was signed by Naeem Tyab and the ambassador, and provided for a success fee of US$2 million payable to a U.S. company, Ambassade du Tchad LLC, incorporated and owned by Chad’s ambassador. The services to be provided under the consulting agreement were generally described as “advisory, logistics, operational and other assistance with respect to implementing GEI’s oil and gas projects in Chad.” The consulting agreement was thereafter terminated and no payments were made, based on legal advice referencing anti-bribery laws received in early September 2009 from GEI’s external counsel.
However, within days of this advice, in mid-September, 2009, a second consulting agreement, with identical terms to the first consulting agreement, was entered into by GEI and a U.S. legal entity, Chad Oil Consulting LLC, incorporated on September 10, 2009, and wholly-owned by the ambassador’s wife. The ambassador’s wife also subscribed on September 15, 2009 for 1.6 million founders shares for consideration of $1,600. Two other individuals nominated by the ambassador’s wife, including the wife of the Deputy Chief of the Chad embassy, were also allowed to subscribe for founders shares, some of which were then sought to be transferred to her company and to herself. False statements were made in the subscription agreement that required that each of the subscribers had income in excess of $200,000.
Over the course of the 12-month period after the signing of the consulting agreement, GEI was unsuccessful in obtaining an executed PSC. In September 2010, the government announced a three-step process that would lead to an executed PSC, which included a recommendation from the Minister of Petroleum and Energy, approval by the Cabinet, and thereafter a National Assembly approval resulting in a law signed by the President.
Under this new process, Griffiths raised its offered signing bonus to US$20 million (from US$10 million), leading the Ministry to agree to enter into further negotiations. During the final negotiations held on December 23, 2010, a new MOU was executed and the signing bonus payable to the government was increased to US$40 million.
In January 2011 GEI retained another law firm to help finalize the agreements related to the PSC. Instructions to the new law firm included extending or replacing the originally executed consulting agreement with the entity owned by Chad’s ambassador. The signed copy of the agreement with the ambassador's company was attached to the email. Shortly thereafter the instructions from GEI were revised so that the agreement would be entered into with the legal entity owned by the ambassador’s spouse. The amount of US$2 million was held under an escrow arrangement with the new law firm. This new agreement, which was substantially the same as the previous version of the consulting agreement signed in 2009, and which had expired without any success fee payment, was dated as of January 1, 2011. Once the finalized PSC (which included a signing bonus of US$40 million) was executed on January 19, 2011, outside counsel to GEI dispatched the $2 million success fee pursuant to the consulting agreement. The directions concerning the banking information for the deposit of the funds were received from the Deputy Chief of the Chad embassy. The funds were deposited to a bank account in Washington, D.C. belonging to the legal entity controlled by the ambassador’s spouse.
On the basis of the above facts, GEI acknowledged in its settlement agreement that the consulting agreements, even those pursuant to which no amounts were actually paid, violated the anti-bribery provision of the CFPOA, as they constituted agreements to provide, directly or indirectly, a benefit to a foreign public official so as to induce the official to use his position to influence decisions of a foreign state for which he performs duties and functions. Furthermore, GEI acknowledged that under Canadian criminal law principles it was responsible for these acts. GEI also acknowledged that the court had jurisdiction over this offence as “there is a real and substantial link between Canada and [the] offence and that the facts of this case legitimately give Canada an interest in prosecuting this offence.”
In agreeing to the amount of fine of CDN$9 million, plus a 15 percent victim fine surcharge, totalling $10.35 million, the Crown appears to have taken into account the following key factors among others:
- Between July and August, 2011, an entirely new management team was hired at GEI, and six new independent board members were appointed.
- The board and new management became aware of the sham consulting agreements in the course of due diligence for the initial public offering (IPO) of GEI scheduled to take place prior to December 31, 2011.
- Immediately upon learning of the existence of these agreements, a Special Committee comprised entirely of independent GEI board members was created.
- The Special Committee engaged an experienced legal firm and provided a broad mandate to the firm to conduct a robust, credible and independent investigation into the circumstances surrounding the creation of the consulting agreements and the share issuance, and any other potentially improper payments made by GEI.
- The legal counsel engaged an accounting firm with expertise in forensics to assist in the internal investigation.
- The investigation resulted in a review by the external law firm of hundreds of thousands of pages of hardcopy and electronic records, and interviews of 31 individuals including current and former employees, third party consultants, external lawyers, and current and former government officials in Chad.
- The results of the investigation were voluntarily disclosed by as early as November 15, 2011 to the Public Prosecution Service of Canada, Alberta Justice and soon thereafter to the U.S. law enforcement authorities.
- Over the next several months, the RCMP was provided details of the internal investigation including notes and/or transcripts of all interviews conducted, copies of relevant electronic or hardcopy documents including email communications, and general information about the oil and gas industry in Chad.
The Crown also acknowledged that GEI had taken “the extraordinary step of sharing the contents of legally privileged communications between GEI and its former outside legal advisors.” Furthermore, that “the degree of cooperation provided by GEI through its voluntary disclosure of this matter was full and extensive” and that “hundreds of management hours were spent on the investigation.” The Crown also noted that the agreed sentence “takes into consideration steps already taken by GEI to reduce the likelihood of it committing a subsequent related offence. Those steps include the adoption of a robust anti-corruption compliance program and the strengthening of existing internal controls, many of which were already initiated by GEI’s new management and [were] well underway at the time these transactions were discovered by GEI.”
The cost to GEI for the internal investigation at the time of making the guilty plea was $5 million, and furthermore GEI had to abandon its planned IPO. This decision cost the company approximately $1.8 million in sunk pre-IPO expenses related to legal, marketing and other costs. After abandoning the IPO, GEI had to secure financing through private placements at much higher cost in order to be able to continue its operations.
Anti-Corruption Compliance Program
This case makes it clear that we will continue to see vigorous enforcement by Canadian authorities of the provisions of the CFPOA in relation to overseas business activities. Directors, officers, general counsel, and outside legal and other advisors are under notice that hefty fines imposed in the U.S. and other countries under anti-corruption laws will also be imposed in Canada for engaging in corrupt activities.
As we have noted previously, an effective compliance program is an essential first step, and an invaluable tool, to ward off charges of illegal activity and will also serve to mitigate aggressive criminal and civil penalties that can be imposed by governments under anti-corruption laws.1
As the GEI case clearly demonstrates, the upfront time and effort in preventing illegal corrupt activities, including establishing the right “tone at the top” and training all employees so as to ensure full compliance with anti-corruption legislation, is an invaluable investment. Without appropriate preventative measures, a company carrying on business in regions of the world that have high levels of corruption may find itself targeted, many years after the occurrence of any illegal corruption activities, with criminal charges punishable by huge fines under the CFPOA. This is particularly so as there is no maximum fine provided for in the CFPOA and no limitation period for the indictable offence set out in the CFPOA. In addition to corporate liability, directors and officers can also be sanctioned with fines and imprisoned for a period of up to five years.
As this case also confirms, the existence of past illegal conduct can come to light several months or years later, during corporate financings, going public transactions, or merger negotiations, by virtue of internal and external due diligence processes. Often, these are the very times when a company can least afford to be misdirected from its strategic plans to grow a successful business. GEI’s press release announcing its settlement with the Canadian law enforcement authorities, in addition to noting with regret actions of prior management and the voluntary actions of the new management and the board in “whistle blowing” on the past illegal conduct of the company, mentions that “now that the matter is closed, GEI can focus all of its attention on” its business ventures in Chad. The plea agreement however requires that GEI will assist the Crown “in other processes or legal remedies that the Crown may pursue that are relevant to this matter.” It is clear therefore that the Crown has left open the possibility of further investigations or charges being laid against others involved in GEI’s activities and dealings relating to the PSC signed with the Republic of Chad.
In Canada’s report to the OECD, the government reported that as of March, 2012 it had 34 active investigations underway, an increase of 11 active investigations (or approximately 50 percent) from the previous year. Recent headlines in the public media appear to confirm that these investigations are being vigorously pursued by the RCMP and the Public Prosecution Service of Canada.
1 Investing in Ethical Corporate Culture: The Imperative for Instituting an Anti-Corruption Compliance Program for Canadian Businesses Venturing Overseas by Riyaz Dattu, June 2010 Osler Corporate Review.