August 15, 2011 by Greg Shields
The loss landscape changes quickly for organizations, their boards and senior management. One of the hottest emerging risks on the map is corruption/bribery of foreign officials. The most recent piece of legislation is the UK Bribery Act and they are strong out of the gate with their enforcement action. The FCPA is US legislation that was enacted in 1977 but has seen significant new, large and very public enforcement action into the hundreds of millions of dollars. However, Canadians are (now) not able to completely ignore this risk. Our legislation is called the CFPOA, Corruption of Foreign Public Officials Act. It was enacted in 1999, but until recently it was all but inactive with only one $25,000 enforcement action I could find.
The significant new Canadian case brought under the Corruption of Foreign Public Officials Act, is Niko Resources, (click here), and it strongly suggests to directors and senior managers of Canadian companies that international corruption/bribery enforcement is not a game. The value of the fine is many multiples of the alleged inappropriate payments in question (at least those values that were disclosed.) In the Niko case the payments in question were less than C$200,000, but the fine was C$9.6 million.
With resources and international operations and/or sales making up a large portion of Canadian public issuers, the CFPOA will quickly become one of the highest priority Governance, Compliance and Risk Management categories for Canadian directors. There are serious hurdles for these directors because it is still very common for corporate leaders to respond to news of bribery enforcement by saying “everyone is doing it” and “that is just how we do business in (insert industry) (insert city).” It is also very difficult to add considerable new “documentation” controls at the operating levels, particularly in resources companies. But it will be the responsibility of corporate directors to overcome inertia and enact strong loss control policies and procedures, which will include training, documentation and monitoring.
Most general counsel and third party professionals will be quick to point out that such realities are not an acceptable defense to regulatory enforcement. However, those defenses are still being attempted, and the result is industry based systemic risk as regulators then say “ok, where else and who else” and start flipping over rocks in other regions or at industry competitors. Therefore, don’t be surprised to see similar settlements in the resources sector.
Directors and senior management will require a documents trail to establish that they have turned their minds to controls and procedures to prevent this (recently) unacceptable behavior.
Another challenge for corporate directors and senior management is the timeline in bribery/corruption cases. In the Niko case, the Bangladeshi junior energy minister resigned in June 2005. The CFPOA fine did not happen until June 2011, which means there is a “long tail of liability” involved in bribery enforcement actions and therefore organizations and their governing minds had better respond quickly to create and/or increase their controls and control enforcement and monitoring.
All such public bribery enforcement cases present a great (because you don’t need to suffer the loss to learn from it) loss control opportunity. I know this is easier said than done, but this is a just a blog:
1. Identify all payments to foreign third parties,
2. Establish and record the commercial rationale for all payments to third parties,
3. Understand that “foreign official” is a much broader group than you might think,
4. Realize other enforcement examples are not just a learning opportunity but an obligation,
5. Provide formal training to staff to recognize an affected payment and to record all details surrounding payments,
6. Ensure adequate due diligence on all third parties and how they are connected to the organization,
7. Recognize that you are responsible for indirect bribery,
8. Ensure that this due diligence is applied each and every time a payment is made
More details on these points and connections to D&O insurance are available on the Mitchell Sandham blog at http://mitchellsandham.wordpress.com/
Greg Shields is a D&O, Professional Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at firstname.lastname@example.org, 416 862-5626, or Skype at risk.first.
CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions.
This story was originally published by Canadian Insurance Top Broker.