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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No Defence Costs from a D&O Policy

November 11, 2011

It is common in Canada that Defence Costs under a D&O policy will stop upon exhaustion of the limit of liability. There is the exception for Quebec where defence costs are outside of the limit of liability, but even Quebec risk does not guarantee unlimited defence costs. If there is any question regarding “jurisdiction” (ie. any part of the plaintiff, defendant, wrongful act, or policy construction was outside of Quebec) you can be sure the insurer will attempt to push the case into another jurisdiction that does provide defence costs within the limit of liability. You can also be sure that the insurer will regularly apply to the court to relieve them from the burden of defence costs based on, 1) their offer to settle having been made or 2) the policy limits being exhausted or
potentially exhausted by indemnity. There is no rule as to how much the insurer will be responsible for above the limit of liability, but the insurer will eventually be relieved from their defence obligations.

The concerning new precedent (here – provided by Kevin LaCroix, OakBridge Insurance Services and his The D&O Diary) is out of the New Zealand High Court (Auckland Registry) in a case where a real estate development and investment firm went bankrupt. The liquidators and receivers made a charge against the D&O policy limits of liability because their claim are “for a sum significantly greater than the amount of cover available under the D&O policy,’ and the insurer is “bound to keep the insurance fund intact.” The court agreed, and directors are left to fund their own defence of a number of large civil and criminal lawsuits.

If you are a Canadian director or officer, with no exposure to New Zealand, this case should not keep you up at night. But it should not be ignored. It is a great example of the risk of erosion or complete exhaustion of large limits of liability on defence costs. It is great example of the need to restrict some or all of the D&O limits to specific “loss.” Broad policies are not in the best interest of every insured. The conflicts between the various insured’s should be front and centre, not hidden in a hundred pages of insurance contract. Priorities for the insurance coverage should be balanced over the interests of each insured, and the priorities should be established long before the contract language is negotiated. And it is warning that jurisdictional differences should be examined to determine the need for locally issued policies, but also that “legal risk” is present in almost every country in the World due to
underdeveloped case law regarding D&O insurance.

Kevin LaCroix offers an explanation of the case, details on “choice of law provision”, and broad “discussion” commentary in his blog post, here.

Greg Shields is a D&O, 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.

 


Employment Risk in Canada

September 23, 2011

Mitchell Sandham is again excited to have an article featured in Canadian Insurance Top Broker Magazine, called “Employment Risk in Canada” by Greg Shields.  Please click here to access the article featured in CI Top Broker.  http://www.citopbroker.com/news/employment-risk-in-canada-2699

Greg Shields is a D&O, Professional Liability, Employment Practices 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: These articles 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.   

 


Canadian Class Action Securities Claims

April 14, 2011

This may surprise a lot of Canadian directors and officers. NERA Economic Consulting recent published its “Trends in Canadian Securities Class Action: 2010 Update”, here, co-authored by Mark L. Berenblut, Bradley A. Heys, and Tara K. Singh. They suggest there are 28 active lawsuits, alleging almost $16 billion in damages. Eight new filings in 2010 was one less than 2009 and two less that 2008. The study notes that five cases were settled in 2010 at average and media settlement amounts of $13.5 million and $10 million, respectively, with total settlement by defendants of almost $68 million. The majority of these cases were brought under the secondary market liability legislation, Bill 198.

The study also raises the important issues of claims brought against Canadian domiciled companies in the US. They noted 13 such filing, but, surprisingly, only 3 of these have parallel actions in Canada.   

The Canadian D&O insurance landscape will obviously be affected by these cases. The numbers may pale in comparison to the US, but our spread of risk and total incoming D&O premium is also much smaller than the US. My very rough guess on total D&O insurance premium generated in Canada in 2010 is $250 million. This is not just publicly traded D&O premium, but all public, private, pseudo Government and non-profit D&O premium. If five settlements, based on relatively new and untested law, can take this big a chunk of the premium, and the vast majority are still pending, then D&O premiums will be going up. Remember, after distribution costs (our commissions), claims costs, underwriting expenses, reinsurance, corporate overhead, etc. etc., the combined loss and expense ratio starts going up quickly. Then you have to think about the lawsuits that do not fit into that very specific category of “certified securities class actions.” These are derivative claims, employment and pension/fiduciary suits (remember, D&O policies are often, and unfortunately, extended to Employment Practices Liability and fiduciary liability risk), competitor actions, regulator investigations, client claims, etc.

But all this fear mongering aside, the sky is not falling. The are many competitors in the Canadian D&O marketplace (27 last time I looked, but far fewer for Public Listing Exposure), and renewal premiums seem to be flat in many industries and even falling in the small private and non-profit space. The key will be to watch for capacity leaving the Canadian D&O marketplace. We had one Managing General Agent (not a standalone, Canadian capitalized insurance company, but an entity underwriting on behalf of Canadian insurance or reinsurance companies or Lloyd’s of London Syndicates) closed its D&O doors last week; but, since its renewal rights were purchased by a relatively new player in this line of business in Canada, it does not suggest that capacity is being squeezed.

And the great thing about public cases, you can read about the alleged wrongful acts and strengthen your loss control tools to mitigate risk.

One of the ways to mitigate risk is to purchase a GOOD, I repeat, GOOD, D&O insurance policy. Broad is not always better. For example, extending the D&O policy to cover loss of the corporate entity can be classified as broad, and even good, but that does not mean it will serve the best interests of the individual, independent directors, non-independent directors, or the corporate officers. Management needs to engage the services of an experienced, truly independent, insurance broker who is dedicated to the client and to the insurance products. They need to discuss and investigate the broker’s potential conflicts of interest, and be satisfied that the individual (not just the firm) who is responsible for knowing the insured, and its operations, is also the person negotiating and servicing the coverage.

Far too many Canadian insurance brokers are willing to call themselves independent, even when they are owned by an insurance company or insurance related financial conglomerate.

A D&O policy is not good unless the priorities of each of the Insureds have been identified and applied to the coverage purchased.

If you would like more information on Directors’ and Officers’ Liability Insurance, or Canadian D&O litigation, please contact me, Greg Shields, Partner, Mitchell Sandham Insurance Service, gshields@mitchellsandham.com, or at 416 862-5626.

CAUTION: 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 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 site from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Theft of Company Documents: Employment Practices Liability (EPL) – A Loss Control Opportunity

February 8, 2011

I don’t like to post US case law, but this situation presents a good loss control opportunity for Canadian companies. This decision, reached on December 2, 2010, is an interesting EPL case. In Joyce Quinlan v. Curtiss-Wright Corporation, the New Jersey Supreme Court found that an employee (even the Executive Directors of HR) can search for and remove company documents and use them to help prove her case of discrimination by her employer. But, to caution those considering such an act, the court did not go so far as to protect her from losing her job for taking the documents. So this employee won her “failure to promote” discrimination claim, but lost her claim for wrongful dismissal.

The legal decision surrounds the US Federal Computer Fraud & Abuse Act (CFAA). Though we don’t have this legislation in Canada, Canadian courts will at least consider US decisions if Canadian precedent is not available. In this case the court was very careful not to protect employees who exceed their employment authorized access to gather information from their employer’s database without a business reason (say for romantic reasons or personal vendettas.) But, the majority of the court felt they needed to protect “the employee’s right to be free from discrimination or retaliation.”

In this article, “When Is It Okay For An Employee To Steal Trade Secrets?” found on mondaq.com, here, and written by Michael R. Greco of Fisher & Phillips LLP, this court applied a specific test called “totality of the circumstances approach.” In coming to their decision, they considered the following; 1) the manner in which the employee obtained the documents (innocent or active investigation), 2) what they did with the documents (shared only with their lawyer or leaked to third parties), 3) the content of the documents (privileged or proprietary information), 4) if the employer had a clearly defined, routinely enforced, confidentiality policy, and did the employee violate their duty of loyalty to safeguard confidential information obtained during employment, 5) if the document was material to the employee’s case or just disruptive, 6) why the employee took the document instead of merely describing it to counsel so that it could be sought in discovery, and, 7) all of the above factors must be considered in the context of the strong competing interests – the employee’s interest in being free from discrimination and retaliation, and the employer’s interest to operate it business within the bounds of the law with an expectation that its employees will behave with loyalty.

The value of case law for loss control purposes is that for every situation that goes to trail (and subsequently to appeal) there must be tens, if not hundreds, of similar situations that were never made public. Public or not, these employment situations can cause significant loss to a company, in legal fees, severance costs, down-time, management distraction and reputational damage. Therefore, if the success or failure of the case hinged on a few specific actions, then every company could benefit by taking a few actions to avoid the same loss.

This case demonstrates that courts look at the specific actions taken by corporations. The mere existence of a boilerplate policy or procedure is not enough. It must be appropriately communicated to all stakeholders, and the company must be able to demonstrate that the policy has been routinely enforced. This time it is regarding confidential corporate data. But it is just as applicable to sexual harassment policies, insider trading procedures, and many other loss control tools.

If you would like more information on Employment Practices Liability, Directors’ and Officers’ Liability, Professional Liability or Fidelity insurance, please contact me, Greg Shields, Partner, Mitchell Sandham Insurance Service, gshields@mitchellsandham.com, or at 416 862-5626.

CAUTION: 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 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 site from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.