Corruption and Bribery Compliance – Significant Measurable Metric

November 21, 2011

 

Bribery in your organization? Can you picture any one of your employees saying “all my competitors are doing it, so I am forced to grease the wheels just to compete”, or “there is a small chance that my (corrupt) activities will be uncovered, and even if they are uncovered I may or may not be disciplined; but, if I miss my budget for three quarters I will definitely lose my job.”

Canada is not known for its enforcement of corruption laws. In fact, it is a haven for fraudsters specifically because our weak history of enforcement. However, this is changing and your only protection is a documented effort to reduce corruption. There is considerable international political pressure on Canada to make Anti-Corruption and Anti-Bribery a top enforcement priority. The OECD (here) Phase 3 “Report on the Application of the Convention on Combating Bribery of Foreign Public Officials” mentions “enforcement more generally of the Corruption of Foreign Public Officials Act (CFPOA) may be uncertain, due to significant concerns that remain about Canada’s framework for implementing the Convention.” The OECD has been critical of Canada and our legislation because it is limited to “real and substantial” link to Canada, our interpretation of OECD Convention has been too limited, our enforcement has been “too low to be effective, proportionate and dissuasive”, and we have not committed enough resources to the prosecution of cases. According to the report we are on a tight leash and obligated to provide multiple reports on our progress through 2013. Perhaps the best evidence of our future focus is the Niko Resources case (see previous blog post, here,) which came out shortly following this report.

The enforcers of anti-corruption in other countries have a lot of power, and they are willing to exert it. Recently, the US Department of Justice (DOJ) and the UK Serious Fraud Office (SFO) joined forces in the Aluminium Bahrain B.S.C. (Alba) and Alcoa case. (This case has a Canadian spin, but not on the enforcement side, it just happens that one of the individuals recently arrested in London England on corruption charges was a Canadian citizen.) The case originated as a civil suit in 2008 in the US where Alba accused Alcoa, here, of misappropriating “$2 billion in Alba’s payments under supply contracts passed from Bahrain to tiny companies in Singapore, Switzerland, and the Isle of Guernsey, and that some of the money was then used to bribe Bahraini officials involved in granting the contracts.” The DOJ had a stay of prosecution executed in the civil suit to give them time to purse FCPA options.

I am going to hazard a guess that the top stated priority and top action item for most Compliance Officers in Canada is not controlling corruption. If controlling corruption is not a top priority in your organization, then I doubt you are comfortable that you can quickly document a host of “Significant Measureable Metrics” for Anti-Bribery and Anti-Corruption activities. There is not a lot of guidance to Canadian Officers on the subject of CFPOA loss control, but that is where we can learn from our US, UK and Australian counterparts.

The DOJ provides extraordinary information on its anti-corruptions initiatives. This is a key priority for US companies, and there are many examples of loss control initiatives coming out of US companies and their third party service providers. Thomas Fox and Howard Sklar team up in a production called This Week in FCPA, and in one of their recent sessions concentrated on Tone at the Top. They suggest that this is a key issue in FCPA defense and settlement negotiations. Here are seven ideas for Corporate Compliance Officers:

  1. Have CEO author a letter and attach it to the Code of Conduct and send to every employee in every country and region stating that breaching this Code of Conduct will not be tolerated;
  2. Have CEO record a video message to be played at every compliance training session, stating that breaching the Code of Conduct will not be tolerated;
  3. Have CEO send a quarterly email to every direct report reminding them of the Code of Conduct and that she/he will hold them to that Code and she/he expects them to disseminate this same message to each of their direct reports,
  4. Put compliance metrics in employee score cards, including the sales team,
  5. Train CEO to use the six most powerful words in compliance, “What does compliance think about that?” whenever she/he hears of a new market, new idea, new product, new effort, new program – every time, (and document this action),
  6. Everyone in the organization needs training but the workforce has to be grouped by risk category and the highest priority groups should get “in-person” training specific to their function and to the company’s Codes, Policies and Procedures that are in-force in that organization; and the underlying law (and document this action),
  7. Every person in the organization needs to know their internal alternative reporting options for conduct that breaches the codes and policies and procedures,
  8. Incorporate Audit Rights, (see here for more info on Audit Rights) into every contract; the DOJ demands that audit rights exist in every high-risk (anyone who is spending your money) third party contracts, (but there must be evidence of these rights being exercised).

This is very simple, but almost every good loss control technique is simple (see previous blog post “Risk Management is in the Details”). But I recognize this is much easier to say than do. CEO’s might not be the easiest people to train, but they will be the one in the spotlight of the RCMP / SFO / DOJ, and there are many examples (including the Canadian one) of the ultimate punishment being directly related to the value of policies, procedures and related actions of the company and its executives at the time the corruption and/or investigation became known to the executive team.

The above comments will add to the “measureable metric” list and improve the overall compliance evaluation and ultimately reduce the fine or penalty and other loss from an FCPA / CFPOA / UK Bribery Enforcement Action. However, a message is not enough, there must be Evidence of Action. Compliance has to be an integrated business force, not an outside nuisance.

Greg Shields is a Directors’ and Officers’ Liability, Professional Liability, Employment Practices Liability, Fiduciary 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 gshields@mitchellsandham.com,  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. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.

 

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Mitchell Sandham at RGD DesignThinkers Conference

November 7, 2011

Mitchell Sandham attended the DesignThinkers conference last week to discuss the insurance program in place for RGD members.  We had a lot of visitors during the conference and the program is being well received.  It is one of the premier events for graphic designers in Canada.  Contact Ryan Mitchell at Mitchell Sandham Insurance Brokers for more information regarding Professional Liability/Errors & Omissions Liability, Commercial General Liability and Property Insurance at rmitchell@mitchellsandham.com or (416)862-5620.


Ryan Mitchell featured on CBC News

October 17, 2011

 

CBC News interviews Ryan Mitchell for comments regarding the Occupy Toronto Protest to find out what businesses can do to protect themselves during the event.   Click here to watch the video.  For more information regarding commercial insurance please contact Ryan Mitchell at (416) 862-5620 or rmitchell@mitchellsandham.com to discuss further.

 


Risk Management During Occupy Toronto

October 14, 2011

 

Ryan Mitchell, Vice President of Mitchell Sandham Insurance Brokers has been quoted in today’s Toronto Star, providing insight into the Occupy Toronto Protest happening this weekend.  He comments on risk management strategies for businesses in the downtown core to consider implementing.  Please click here to access the article.

 


Injury Risk

August 12, 2011

 

Physical injury is an extremely important risk to organizations. Most high risk industries, like construction, have very strong employee safety policies and procedures. Some organizations, like amateur sport leagues, may not have the resources necessary to educate and respond to safety concerns.

Chartis has launched their “aHEAD of the GAME” program, here, to help organizations, coaches and families identify and reduce the risk of brain injury. It offers some very good statistics, resources, tips and loss control information.  We encourage every organization, ref, coach, parent and teammate to take advantage of this information and help reduce the risk of concussions and other brain injuries.

 


Franchisor – Franchisee Risk in Canada

May 27, 2011

I have heard many people complain about Tim Hortons donuts being smaller than the competition, and that “always fresh” donuts (actually it is doughnuts) actually means “recently frozen”, but most of us wish we owned THI shares (trading at a 53 wk HI with a 36% increase over this time last year and a 55% increase over two years.)

However, there is a group who is not very happy about it. A (small) group of franchisees filed a $1.95 billion class-action lawsuit against Tim Hortons claiming breach of contract, breach of duty of fair dealing, negligent misrepresentation, and unjust enrichment stemming from Hortons’ conversion to frozen donuts. As with many franchisee claims, they seem to have a problem with inflated prices within the mandatory supply agreements. MACLEANS.ca released an article, here, in September last year, on the suit and the connections within the class action claim. They followed-up with a second article, here, a few weeks ago because the corporation provided a breakdown of average store profits. Please note this action has not been certified and the court has not ruled on the defendants’ motion for summary judgment.

It will be interesting to see if the court takes one look at the growth in per store profit since the introduction of the frozen product strategy and class action claim. But, the most important thing about this action is the risks it identifies for other franchisor entities. Outside of the almost $2 billion demand, the legal costs, distraction of management, franchisee infighting and the extraordinary reputational damage, actual loss will be difficult to measure. In the Tim Hortons case, a separate group of franchisees incurred considerable legal costs in an attempt to seek intervenor status, here, in the class action so they could argue against the certification of the action and protect private information and their corporate brand. Their motion was denied.

Franchisee – Franchisor risks are different from non-franchise operations, because franchise companies have the same exposures to property loss, general liability lawsuits, management liability, shareholder lawsuits, and employment practices and crime risk as any other operation, but they have a unique supportive / hostile relationship with their key business partner. The business model can be extraordinarily successful, and Tim Hortons is a textbook example, growing from one Canadian coffee shop in 1964 to 3,000 Canadian and 600 US stores today. But success can bread contempt and recent or ongoing franchise cases include the likes of Tim Hortons, Midas Inc., Quiznos, General Motors and Shoppers Drug Mart (see Financial Post, here.)

Managing franchise risks may come down to communication.

Risk management by contract language can be a mine field. Simple contract language may not provide the protection that many franchisors expect because language prohibiting class actions is common but the courts are still certifying national class actions. I do not suggest removing the language, just do not rely on it as your only form of risk management.

Another form of risk management could come from pre-screening potential franchisees. Myers Briggs and other personality tests are very common for large organizations, but there are now test specifically designed to measure future success of potential franchisees (here.) Individual franchisees may be more interested in starting a claim or participating in a class action if their individual franchise is not as successfully as other operations. It is easier to accuse the franchisor of collusion or negligence than it is to recognize that they are not cut-out to be a franchise owner.

Franchisor liability insurance is available in the insurance marketplace in Canada. It can respond to claims made by franchisees alleging breach of contract, breach of duty of fair dealing, negligent misrepresentation, and unjust enrichment. Limits of liability can be available from $1 million to $25 million or more, but large limits may become prohibitively expensive. The value of this insurance is not only in its response to defence costs, settlements or court awards, but also the support in the claim. One major issue for franchisors, is that they may not have the time and experience needed to find the best, non-conflicted, and most experience counsel available for their case. The lawyers who helped draft contract language may not have litigation defence experience, or may be conflicted out of handling your defence if their contract language has any connection to the underlying allegations. The insurance can also have a calming effect on public reaction to news of a lawsuit, because stakeholders are comforted to know that there will be at least some insurance in place to cover losses.  Finally, the value of any franchise is the ongoing relationship between franchisee and franchisor. A third party insurer being inserted into a dispute between franchisee and franchisor can help maintain the long-term relationships between the parties.

A few words of caution regarding insurance coverage: 1) a D&O policy is not designed to coverage the vast majority of total loss from a franchisee vs franchisor lawsuit, 2) you should determine the appropriate insurance broker based on experience, independence and effort, but only let one broker approach and negotiate with potential insurers, 3) don’t make assumptions about what the policies cover, ask questions and discuss claim scenarios and policy exclusions with your broker.

If you would like more information on franchise liability insurance please don’t hesitate to contact me directly, Greg Shields, Partner, Mitchell Sandham Insurance Services, gshields@mitchellsandham.com, or at 416 862-5626.

CAUTION: This is not an exhaustive list of definitions, duties, liabilities, limitations, defences, or suggested actions. The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered 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. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com


Commercial General Liability Insurance – Coverage for Any Business

November 8, 2010

 

As one of the most common types of liability insurance policies purchased in Canada the Commercial General Liability Insurance policy is an important piece of the insurance buying process.  The Commercial General Liability policy referred to as CGL for short is intended to defend and indemnify a business facing a claim by a third-party alleging property damage or bodily injury resulting from an “occurrence.”  Other additional coverages can include Personal Injury and Advertising Injury, Tenants Legal Liability and Medical Payments coverage.

The CGL policy in Canada is not uniform across all insurance companies as each insurer has their own wording.  While there are some significant differences among the wordings most of the essential terms and conditions are very similar, if not identical. 

Commercial General Liability Insurance policies are written on an “occurrence” based form which means that the event or occurrence that is the subject of the loss must have occurred during the policy period.  In order to trigger coverage under the property damage and bodily injury section of the policy either property damage or a bodily injury must have occurred during the policy period caused by an occurrence (includes insureds negligence) which takes place in the coverage territory and for which the insured is legally obligated to pay compensatory damages. 

The CGL policy includes a “per occurrence” limit as well as an “aggregate” limit.  Per occurrence refers to the most the policy will pay for any one occurrence/incident.  Aggregate refers to the total amount that the policy will pay out during the policy period or term.  Most policies are written for a 12 month period.  For example, if a company has a $1,000,000 per occurrence limit and $2,000,000 aggregate limit and is successfully sued for $1,500,000, the insurer will only pay $1,000,000 because the claim is $500,000 more than the per occurrence limit on the policy.  This then reduces the aggregate limit from $2,000,000 down to $1,000,000 for the remainder of the policy period.  The Commercial General Liability Insurance policy is not intended to provide coverage for claims arising from the rendering or failure to render professional services.  The difference between the CGL policy and the Professional Liability policy is often misunderstood.  In order to provide coverage for the professional services that a business provides a Professional Liability or Errors & Omissions Liability policy needs to be purchased.

In today’s litigious business environment where even small incidents can result in large lawsuits the Commercial General Liability policy is a very important component of the overall insurance buying process. 

This article provides an overview of some of the key issues in relation to the Commercial General Liability Insurance policy although it is not intended to be a comprehensive analysis of this type of coverage.  As mentioned in the article, the coverage can vary from policy to policy and as a result the policy wording should be reviewed carefully by a registered insurance broker to ensure that it meets the requirements of the insured business. 

 For more information please contact Ryan Mitchell at 416-862-5620 or rmitchell@mitchellsandham.com