Canadian Underwriter

Supply Teach

November 1, 2015   by Sean van Zyl, Freelance Writer

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More and more Canadian enterprises are becoming involved in procurement and outsourcing activities as a means of reducing operational costs and boosting shareholder returns. Consider these figures from the national office of the Supply Chain Management Association (SCMA), Canada and data collected by Statistics Canada: the annual value of goods imported up to August 2015 – including manufacturing and retail, which combined are considered foreign supply chain goods – amounted to roughly $550 billion.

Notably, this volume, as reflected in dollar terms, rose by 25% year-on-year for the same period in 2014. It suggests Canadian enterprises are becoming more reliant on procurement of foreign goods, whether “finished” or “unfinished” in terms of raw materials, components and part-assembly.

In most instances, the foreign countries involved are third-world economies or so-called emerging and fast-growing markets, where bribes to “oil the wheels” of commerce are not uncommon. In fact, the “best practices” applied within these countries can conflict with the anti-bribery and corruption standards set in Canada, the United States and other first-world nations.

A report from PricewaterhouseCoopers (PwC), Bribery and Corruption: The Impact of the Canadian Corruption of Foreign Public Officials Act on You, shows a marked increase in related prosecutions both in Canada and the U.S. PwC reports the watchdogs for the U.S.’s Foreign Corrupt Practises Act (FCPA) – namely, the Securities Exchange Commission (SEC) and the Department of Justice (DOJ) – presented 48 prosecutions in 2010 versus two actions in 2004; the RCMP has conducted 34 non-compliance investigations under Canada’s Corruption of Foreign Public Officials Act (CFPOA) since 2012 compared with little prior activity.

RCMP reports to Canadian Underwriter that, so far, there have been four successful prosecutions with another two charges before the courts.

The FCPA and the CFPOA have the same authority within their jurisdictions, says Ray Haywood, who, based in Toronto, leads PwC’s Intelligence Screening Services. Most importantly, Haywood observes, the laws in question not only provide for prosecution of companies as entities, but also their Boards of Directors (BoDs) and, possibly, shareholders.

The PwC report notes that under the CFPOA, penalties for anti-bribery (giving a bribe to a foreign public official) are an unlimited fine for corporations and up to five years imprisonment for individuals. Under the FCPA, penalties are up to US$2 million for corporations and a fine of US$100,000 and as much as five years imprisonment for individuals.

The regulators are placing pressure on corporate boards to enforce the notion that management and responsibility of foreign supply chains should lead from the top to the bottom of the organization, Haywood says.

In this regard, the overseers are pushing enterprises to adopt the same level of corporate governance in terms of oversight, compliance and transparency within their organizations to a broader level of accountability, he adds.

“Effectively, what they [the regulators] are saying is that companies need to expand their enterprise-wide risk management protocols to include the ‘wider enterprise’ such as foreign supply chain sources,” Haywood notes.


“It’s no coincidence that the dramatic uptick in SEC/DOJ prosecutions under the FCPA occurred in 2010,” says Haywood. “This corresponds with the introduction of the Dodd-Frank Act,” meant to better regulate oversight of the financial service sectors. “The regulators are now applying pressure on all enterprises to implement this level of corporate governance internally and externally,” he says.

Embedded within the Dodd-Frank Act is the “Conflict Minerals Rule,” which has been applied by the U.S. regulators of suppliers of so-called “3TG minerals,” which include tin, tantalum, tungsten and gold. The legal bureaucracy and delays in securing access to these minerals by industries ranging from electronics to healthcare led to several lawsuits being launched against the SEC.

Notably, the Canadian government introduced the Extractive Sector Transparency Measures Act this past June, effectively aligning with the foreign mineral disclosure requirements under the Dodd-Frank Act. This legislation impacts companies engaged in the oil and gas, and minerals sectors in terms of disclosure of payments made to foreign sources.

The RCMP does not perform oversight of the anti-bribery and corruption laws, but did establish two anti-corruption units in 2008 that work on a “case-by-case” basis with provincial and international security agencies. “Corruption can have significant repercussions on business transactions and international relations and, thus, are treated with the utmost confidence,” the RCMP adds.


Are directors of Canadian enterprises engaged in foreign supply chain procurement aware of the liability dangers they may face? “I don’t think there is sufficient knowledge among Canadian companies of the potential ramifications. However, some companies are now drawing a hard line in the sand. I think the situation with regard to compliance is improving,” suggests Arthur Hamilton, a partner at Cassels Brock.

The devil in the mix, Hamilton says, is how a Canadian enterprise applies appropriate corporate governance measures as set by Canadian regulations across an international supply chain that could extend several levels down from the first party in the chain. There is also the potential of conflict with the regulations applied in emerging economies in that they simply do not apply the same level of compliance, he comments.

While there is growing awareness of the liability exposures Canadian firms face as a result of foreign supply chain, Haywood expects that the issue will attract more attention in the future. At the moment, regulators have been involved with high-visibility cases that attract media attention and, thus, increase awareness at the BoD level, he says.

Peter DaSilva, chief executive officer of Cornerstone Insurance Brokers, says he believes there is broad awareness of anti-corruption laws among Canadian enterprises, but questions if they have adequately applied the necessary oversight in terms of monitoring and audit process across their supply chains.

DaSilva notes the cost associated with foreign supply chain management is not restricted to liability, but includes property and reputational risk. “By far, the greatest financial impact is reputational risk linked to a company’s name or brand, which could run the company into bankruptcy,” he contends.

The rapid response by Loblaws/Joe Fresh to the 2013 building collapse in Bangladesh and the lawsuit filed in Toronto this past July on behalf of blast victims – and the transparent manner in which the catastrophe was handled – is an excellent example of crisis/risk management response to a potentially devastating blow to the group’s clothing brand, DaSilva suggests.

Anne Chalmers, vice president of risk and security for Teck Resources, views Canadian enterprises as being “well-established” in foreign supply chain procurement and the anti-corruption legal ramifications involved. “As Canadians, we need to lead and not reduce standards with regard to supply chain management, and this means open communication and regular audits of suppliers in accordance with quality and safety associated with developing standards and legislation,” Chalmers says.

The SCMA notes in a statement it has a code of ethics, the first of its kind in the world for supply chain professionals, which all members are required to sign as a condition of membership. “This includes being aware and complying with their obligations laid out in the CFPOA and more recent laws,” SCMA reports.


Coverage of cases involving anti-corruption violations “on the face of it is not a comprehensive general liability (CGL) issue,” one insurer told Canadian Underwriter. “It’s very hard to see any likely coverage triggers because CGL and excess [coverages] generally require bodily injury or property damage.”

The source notes that “if any coverage is available, it would likely be under a directors’ and officers’ (D&O) policy,” most often for defence costs, although any final criminal judgment would not be covered. “Fines or penalties against a director or officer for violating anti-corruption laws are rarely covered, though in some policies, there may be limited coverage in a settlement if insurable by law. Of course, any coverage analysis is subject to the terms, conditions, limitations, exclusions and endorsements of a policy, so there can never be a general, hypothetical response.”

Jim Proferes, vice president of speciality insurance D&O underwriting for Chubb Group of Insurance Companies, says there is a lot of “grey area” when it comes to liability coverage available in D&O policies and what legally might be deemed a criminal offence. However, Proferes concurs the clauses and conditions set in D&O policies play a pivotal role in whether or not legal and other related costs associated with corrupt business practices may come into effect.

“We [at Chubb] work hard to remind clients their liability exposure doesn’t only exist in their country of incorporation. Rather, the risk can come from any country in which they do business.”

Proferes says D&O-related costs have been on the rise in recent years with regard to prosecutions under the anti-corruption laws, more so in the U.S. than in Canada. As a result, insurers are focusing more underwriting on a client’s risk to alleged corrupt business practices.

At the end of the day, the greatest risk/cost facing enterprises found in non-compliance of the anti-corruption laws pertaining to foreign supply chain exposures are legal expenses and reputational damage, Proferes reports.

Enterprises exposed to the convoluted legal morass associated with foreign supply chain procurement need to pay close attention to clauses and exclusions of their insurance coverages, observes DaSilva. Many companies assume they have adequate coverage under their CGL and D&O policies, and find out too late that they are fully exposed as a result of their coverage conditions, he says.

DaSilva says even defence costs covered under a D&O policy can be limited, leaving individual directors and BoDs stranded in a legal battle. Furthermore, insurance coverage may not extend across an enterprise’s foreign supply chain, which could include 20 different levels within the procurement network.

The safest approach to limiting exposure and prosecution is to have proper risk management procedures in place. Top management can no longer afford to delegate supply chain management to lower levels within the organization, DaSilva emphasizes.

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