Bribery Enforcement Action in the Insurance Business……Again

December 22, 2011

 

The insurance industry looks to be a target. This would not be a surprise if you read my recent blog, Bribery and the Board in the Insurance Broker Business, here. With only days left in 2011, I won’t go so far as to use the (2011 word of the year, at least as per my list) contagion, but I have a feeling I will be using the term “systemic” industry risk a lot in 2012.

This time it is Costa Rica. The funds were intended as education and training for INS officials (see how difficult it is to avoid doing business with public officials in the international space),  but some of it went to travel to “tourist destinations” or other purposes not provided within the brokers “books and records.” In this case, and unlike the previous Willis UK Bribery Act case, the NPA (non-prosecution agreement) made note of invoice and other records that made it obvious “that the expenses were clearly not related to a legitimate business purpose.”

The NPA included “failure to devise and maintain an adequate system of internal accounting controls with respect to foreign sales activities sufficient to ensure compliance with the FCPA.”

The price tag you ask?………….$25 million ($1.76 million penalty, with was a substantial reduction thanks to “extraordinary cooperation”, “timely and complete disclosure of improper payments”, and the 5.25 million pound payment to the UK’s FSA (Financial Services Authority); plus $14.5 million in disgorgement and prejudgment interest in a related SEC settlement) not to mention their legal, investigation and communication cost.

The ultimate cost will be difficult to determine, but is potentially much greater than the above, due to potential reputational damage, the new costs to “adhere to rigorous compliance”, and the costs of possible follow-on civil liability claims.

Who you ask…………….? Sorry,………………………………………………….. AON. Here, here, here.

The bigger question……….did they buy investigation coverage under the Marsh exclusive program, or negotiate it themselves with Chartis (to save the commission)? And, will they jump on the band wagon to market this case as the perfect “loss example” to their clients?

At the risk of defending a competitor, it is very likely that the SFO, SEC, DOJ, etc, have a great scapegoat in the insurance brokerage industry: 1) we are the best direct link to business of every size and in every sector, 2) going after international accounting/auditing/consulting firms is difficult because they have a longer history of successfully defending themselves from liability; 3) many of the clients of audit/consulting firms don’t retain them for risk management advice, 4) “do as I say, not as I do” doesn’t just apply to child raising.

The loss control opportunity (the investment in time and resources should reflect the risk, which means the risk needs to be identified to determine the applicability of the following):

  1. Get the “rigorous compliance, bookkeeping and internal controls standards” in place now, not after the enforcement action,
  2. Follow the DOJ “minimum best practices compliance program” as per their common Deferred Prosecution Agreement (the research is a good start, but here is a hint) aka Plea Agreement,
  3. Establish Legal and Compliance Committee of the Board (3 members, no execs),
  4. Appoint one or more senior executives to implement of oversee anti-corruption policies, procedures and standards, and provide adequate resources and an adequate level of autonomy from management, (note that US Sentencing Guidelines suggest that this compliance officer reporting to the General Counsel who reports to the board may not qualify, see here for NY Times article, “MF Global’s Risk Officer Said to Lack Authority”),
  5. Appoint a Compliance Consultant to aid in those activities and the reporting obligations,

The insurance spin – There are two insurance vehicles that come to mind for the transfer of direct “bribery enforcement” based loss:

  1. Standalone Investigation Costs Coverage – this is a new product, rarely purchased and largely unknown product, but no matter what the purchase decision, the due diligence alone is worth your (and your broker’s) effort,
  2. Investigation Costs Coverage as built into a D&O or D&O/Professional Liability policy – there is no rhyme or reason to the contract language so tread carefully. Make sure your broker identifies “Entity” coverage vs “Personal” coverage, and if this analysis covers less than a dozen areas of the policy, ask them  to try again,
  3. Request details on “formal” vs “informal” investigations, but recognize that the “broader” the policy the more onerous there “reporting” obligations, and the greater the risk of erosion or exhaustion of limits.

For indirect loss you might only be able to look to your D&O or D&O/Professional Liability policy. The key for D&O coverage is:

  1. Don’t assume it is a D&O policy as almost every policy provide coverage to the corporate Entity,
  2. Know how your policy or program (layers of policies) is exposed to erosion or exhaustion,
  3. Follow-on or Downstream loss can come from many directions, so request information on how your policy responds to “derivative” demands, “securities claims”, and regulatory enforcement not included in the initial bribery/corruption enforcement,
  4. Since some “bribery enforcement” loss does not name individuals, then you may have skipped the “direct loss” comments above, and therefore I will repeat – the “broader” the policy the more onerous there “reporting” obligations, and the greater the risk of erosion or exhaustion of limits.

D&O, Professional Liability and Crime insurance underwriters are tightening their underwriting standards. They are raising the RED FLAG on the departure of Chief Risk Officer, Chief Compliance Officer, or General Counsel, and may no longer settle for “resigned to pursue other opportunities”.

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 gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at https://mitchellsandham.wordpress.com/

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.


Bribery and Anti-Corruption Enforcement Insurance in Canada

December 15, 2011

 

I speculate that the Governance, Compliance and Risk Management issue of Bribery and Anti-Corruption will go from a dusty item entered in to board minutes, to a material agenda item. This is not necessarily a good thing because none of the other agenda items can be easily de-weighted.

As mentioned in previous blogs, CFPOA, Corruption of Foreign Public Officials Act, only recently started receiving press based on the enforcement action against Niko Resources, here, here, here and here.

A March 2011 OECD, report, here, suggested the RCMP was had 20 active CFPOA enforcement investigations. Based on the CFPOA being sleepy legislation for most of its 13 year history, and considering that only two cases, Hydro Kleen and Niko, have seen the light of day, it can be extrapolated that there have been any new investigations launched in the last ten months.

With the inconsistent Canadian legal precedent on disclosure obligations for public issuers, and with few to no announcements by such public issuers disclosing any RCMP investigations, it can also be assumed that many of the 20+ companies have no idea they are being investigated.

With there being such little press and such small financial consequences (until Niko), it would also be a fair statement to suggest that Anti-Bribery, Anti-Corruption compliance programs within individual Canadian companies might not be receiving substantial resources or significant board/executive attention.

My strong recommendation is that this needs to change and change quickly. The best defence (to an investigation or enforcement action) is a good offence. This offence needs to be well worded, aggressively communicated, strongly enforced and meticulously documented.

The FCPA, the use counterpart, has seen very active enforcement. This enforcement has resulted in many follow-on claims including class action securities claims. Since we only have one enforcement action in Canada, that has been brought after the inception of Bill 198 (secondary market liability legislation), and it is too early to determine the risk of follow-on litigation, the only thing Canadian directors and executives can do is assume the financial, market and reputational risk of an CFPOA Enforcement Action will be material to the organization.

There is no doubt that more enforcement actions will soon become public. This means there will be a lot of Directors, Creditors and Shareholders receiving an unpleasant surprise in the new year. When the issue becomes public every company decision, announcement, prospectus and even individual discussions and emails will become the subject of scrutiny and conjecture.

It is usually at this point of crisis that risk management and insurance are raised. Insurance coverage will become a critical question. Directors and officers will want to know if their D&O insurance policy will respond. But they may not recognize that there is no such thing as a “standard” D&O insurance policy. They also might not realize that early response of the D&O policy to a CFPOA enforcement action or investigation may put these directors at a considerable personal risk.

The issues of policy limit adequacy, limit erosion or exhaustion, “notice” obligations, exclusions and continuity are too detailed for this blog post. These issues are also too specific to the specific to the actual insurance program in place and the unique investigative order and potential litigation.

There are dedicated Investigation Costs insurance products available and in the works. These policies are designed specifically for investigation costs, and in most cases they provided limits of liability that will not erode the limits available under the D&O program.

The only way to extract value from the risk management activity of “risk transfer to insurance” is to identify risk, develop loss control tools, determine coverage priorities and negotiate and buy insurance prior to “smelling smoke.”

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 gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at https://mitchellsandham.wordpress.com/

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.

 


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.

 


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.

 


Long Tail Liability for Canadian Directors and Officers

August 4, 2011

This new case, based on old alleged wrongful acts, hits home because it is a Canadian Company in the insurance industry that is active in the US but not listed on a regulated US exchange. The case involves a July 2011 class action securities suit against Fairfax
Financial Holdings Limited (USA) and its Pink Sheet OTCBB trading, here. The allegations are common “violations of the Securities Act of 1933 and the Securities Exchange Act of 1934” and issuing “materially false and misleading statements regarding the Company’s business practices and financial results.” These allegations surround certain reinsurance contracts and the alleged
concealment of its lack of liquidity. Even the significant alleged financial damage (“a decline in market capitalization of approximately $300 million”), and the lead plaintiff being a pension fund, is not a surprise in the securities class action world. The interesting thing is the class period of May 21, 2003 to March 22, 2006. This is a great example of the very long period that can exist between the alleged “wrongful act” and the ultimate litigation and resulting claim that is noticed to the insurer.

This case is also a great example of systemic risk in the D&O insurance business. The Fairfax case is not unique because “in November 2004 the SEC and Attorney General for the State of New York began inquiries into the use of so-called “finite reinsurance” contracts” and launched a number of investigations against many well-known industry players.

Systemic risk in the long-tail, high-severity products should be a key concern for industry-based insurance programs (reciprocals, risk retention groups, group captives.) These programs may have value as a risk-management, defence management, deductible/retention management, political lobby or loss control tool, but should be used very carefully as a pure risk transfer vehicle.

The risk management spin: the plaintiff lawyer’s website, Robbins Geller Rudman & Dowd LLP, here, provides the complaint, here, which details the alleged “gimmicks” used to “artificially inflate the value of its assets” as well as the “lack of internal controls.” Complaints and legal decisions can present useful information for corporate governance risk identification and loss control activities, and with every public case there comes an increased expectation that other boards and senior management will learn for such cases. Here are a few of the governance issues I took from this case:

  1. Procedures to assess whether finite reinsurance contracts meet the prerequisites for risk transfer,
  2. Product inventory and coverage / risk explanations and evaluations of traditional and non-traditional products,
  3. Use of “reinsurance accounting” or “deposit accounting” and the risk transfer test, and understanding of the local accounting practices,
  4. Evaluation of management assumptions for reporting of profit or loss in foreign private investments,
  5. Evaluation of consolidated financial reporting,
  6. Controls for reporting of intercompany purchases and sales, write-offs, advances and foreign currency accounting, receivables,
  7. Adequate internal controls and (discoverable) communication regarding those controls, including bid/quote tracking, expense guidelines,
  8. Public statement oversight for accuracy of details and forward-looking statements,

The insurance spin: don’t let your insurance broker convince you that the only way to get coverage for a securities claim is to purchase “securities coverage” or the “side C” insuring agreement as part of your directors’ and officers’ liability insurance program. This coverage is very valuable, but that value may favour of the corporate entity. Depending on the structure and fine details of your D&O insurance program, the addition of “securities coverage” could be damaging to individual directors and officers of the organization.

The Towers Watson, 2010 Directors and Officers Liability Survey, here, suggested that 54% of respondents did not conduct any independent review of their D&O liability policy. The survey did not comment on the breadth or value of that independent review done for the other 46%. My question would be if that review included all areas in the policy that presented a risk of limit erosion or limit exhaustion to the detriment of individual directors and officers (not just “insuring clauses” or “definition of insured”, but “severability”, “allocation”, “predetermined defence costs”, “exceptions to exclusions”, “final adjudication in the conduct exclusions”.) My assumed answer “no in 98% of the 46%”, because most insurance brokers will provide a “free audit” of an insurance program, and in most of those cases, you get what you pay for.

The survey also suggests that 60% of participants purchased Side A/B/C coverage, and 14% were not sure how their program was structured. 24% said their coverage was blended with other non-D&O coverage like employment practices and fiduciary liability (but this could also include professional liability, crime, and others, even workers comp.) This blending of “first party” and “third party” claim, “entity” and “individual” coverage, and “claims-made (and reported)” and “occurrence/sustained” triggers can create very significant complications for eventual claim handling.

On the issue of exclusive policy limits for independent/outside directors only 4% said there was some such coverage in place. 80% of public company respondents said they purchased an “Excess Side A” or and “Excess Side A with Difference In Conditions (DIC)” features. Note, Side A is the “non-indemnified” loss insuring agreement for individual insured persons, it is not specific to independent or outside directors.

The Fairfax case could become a very good example for insurance company risk management, as the case may be part D&O, party Entity Coverage for Securities Claims, part Insurance Company Errors and Omissions (professional liability), and part Outside Directorship Liability insurance. The insurance risk is that the defence costs, judgments and/or settlement loss may be only partially or not at all covered by any of these policies. But the reality is that though the class action securities litigation risk may be very public, the resulting insurance risk will not likely see the light of day. The lack of publicity of insurance risk means the learning opportunity and loss control lessons are much more difficult to find.

If you would like to learn more about insurance risk, securities class action risk, D&O/E&O/Fidelity insurance or loss control for publicly traded companies or insurance companies; or if you would like to have an in-depth review of your insurance program,
please contact me directly.

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 gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at https://mitchellsandham.wordpress.com/

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.


Bribery and the Board in the Insurance Broker Business

August 1, 2011

 

Between the FCPA, UK Bribery Act and the CFPOA there are many new cases in the bribery landscape. However, there is a very recent case involving a multinational insurance brokerage. This case is not categorized as a direct bribery issue, but rather a failure to prevent bribery. The Financial Services Authority (FSA) announced last week, here, that it fined Willis Limited 6.9 million pounds for “failings in its anti-bribery and corruption systems and controls” which “created an unacceptable risk that payments by Willis Limited to overseas third parties could be used for corrupt purposes.”

This case changes the game before most people have even started to learn the rules. 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).” Most internal and third party professionals will be quick to point out that such realities are not an acceptable defence to regulatory enforcement. However, those defences 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 insurance brokerage industry.

The rules of the game are that directors and senior management need to turn their minds to controls and procedures to prevent this (recently) unacceptable behaviour. In the Willis case, it seems that the organization, unlike many other organizations, did in fact create and implement “appropriate anti-bribery and corruption systems and controls”, but the FSA has suggested with this fine that the existence of controls is not enough and they are required to “ensure that those systems and controls are adequately implemented and monitored”, at the grassroots level.

The time period of the payments in question was January 2005 to December 2009, which means that there is a long tail of liability involved with FSA 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.

The Willis case, and the recent Canadian CFPOA case against Niko Resources, here, might suggest that international bribery enforcement is not a game, because the value of the fines are 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 (the actual value of Niko’s business dealings in “high risk jurisdictions” were not disclosed.) In the Willis case, the total value of transactions over the five year period was 27 million pounds, with the suspicions payments totalling $227,000, and the fine being 6.895 million pounds (after a 30% discount for cooperation and early settlement.)

Here is the loss control opportunity presented by this case to directors, officers, management and employees of corporations doing business overseas (I know this is easier said than done, this is a just a blog):

  • Identify all payments to foreign third parties (especially in “high risk jurisdictions” – if it helps to narrow things down (kidding) the Niko case involved Bangladesh, the Willis case involved Egypt and Russia),
  • Establish and record the commercial rationale for all payments to foreign third parties – this needs to be done to the minute degree of demonstrating “in each case why it was necessary… to use an Overseas Third Party (OTP) to win business and what services (the company) would receive from that OTP in return for a share of its commission”
  • Understand that foreign official is a much broader group than you might think (other bribery cases have set the precedent that doctors and other medical staff in most countries are considered foreign officials, World Bank and IMF staff are foreign officials), 
  • Realize other enforcement examples are not just a learning opportunity but an obligation; the acting director of enforcement and financial crime in the Willis case specifically said this case was “particularly disappointing as we have repeatedly communicated with the industry on this issue”, 
  • Provide formal training to staff to recognize an affected payment and to record in detail (more than a brief description) the reasons and resulting services surrounding the payment. This is the only way to demonstrate adequate monitoring and effectiveness of anti-bribery systems and controls, 
  • Ensure adequate due diligence on OTP to assess how the OTP is connected to the organization’s client, the foreign official and any other involved third party, 
  • Recognize that you are responsible for indirect bribery or alleged bribery of a foreign official, not just for direct bribery. This means you are responsible for the actions of any Third Party that could be in a position of making improper payments to help your organization win or retain business from overseas clients or prospective clients, 
  • Ensure that this due diligence is applied to each and every time a payment is made to a Third Party, not just the inception of business with that Third Party.

There is a very strong argument that the Willis case is not a bribery case, it is a books and records case, but FSA does not seem to care about the distinction. The case has been lumped in with the recent UK Bribery Act / FCPA / CFPOA bribery enforcement actions, so it is getting media attention that it may or may not deserve.

Is this a good example of directors’ and officers’ liability? No, not directly. There was no mention of negligence by an individually named director or officer. But many bribery enforcement actions have spawned downstream criminal, civil and securities liability lawsuits, so if directors and officers do not learn and react to the public pain suffered by other entities, they have a good chance of facing personal liability.

My advice, be careful about extending your D&O insurance policy to FCPA / UK Bribery / CFPOA enforcement action if you don’t fully understand how your policy is exposed to Entity Coverage or other risk of erosion or exhaustion of its limits of liability. There is no regulation or oversight of D&O policy wordings or pricing in Canada, so your assumption of the level of “personal loss” coverage in your D&O policy might be incorrect. Without early investigation you might not find that out until it is too late.

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 gshields@mitchellsandham.com, 416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at https://mitchellsandham.wordpress.com/

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.


Mitchell Sandham Featured in Canadian Insurance Top Broker Magazine!

July 8, 2011

 

Mitchell Sandham is excited to have an article featured in Canadian Insurance Top Broker Magazine, called “D&O and E&O: How much is enough?” by Greg Shields.  Please click here to access the article.   

 


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