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.

 


Pension Plan Risk: Conversion of Defined Contribution Plan to Defined Benefit Plan

July 19, 2011

 

The trigger for this post was the G&M Article by Janet McFarland, here, July 18, 2011, titled  “The hidden costs of switching to a cheaper pension plan”.

Janet raises some good points that might not be considered by companies considering closing access to their Defined Benefit Plan and offering only a Defined Contribution Plan to new hires. First, even if you convert today, you could still be managing that DB in 90 years, which means managing two plans. Second, without the employee retention benefits of a DB plan employees might be more willing to move to a competitor. Third, economic downturn will mean lower pension savings for older workers, so they will delay retirement in a period you are looking to trim staff by attrition. Fourth, education costs rise because employees retain the risk of poor investment strategy and the onus is the employer to provide multiple investment options, to explain those options, and to choose the investment management firm. And Fifth, investment management fees may increase, even if the majority of the management fee is being transferred to the employee.

Other risks of a pension plan conversion are disrupted production as employees dispute pension changes.  Pension conversion and has contributed to lengthy strikes. There is also an increased risk for lawsuits based on allegations of improper training, poor selection of investment management and investment options. This risk is double-edged because providing too much information and choice can confuse the plan members.

This risk is known as Fiduciary Liability, because the trustees, board members, employees, administrators, investment committee members, employee representatives, employer representatives and advisors are all consider fiduciaries of the various pension and benefit plans, and they all are subject to lawsuits. The risk of such lawsuits increases during periods of economic downturn, merger, acquisition or divestiture of companies and winding down of plans (including how deficits are funding or surpluses disbursed.)

Fiduciary liability, and lawsuits against plan fiduciaries may include the following allegations:

  1. Failure to advise members of plan amendments with reasonable warning,
  2. Inaccurate or misleading statements, and even if the errors was honest, the allegation will be failure to take appropriate corrective action,
  3. Conflict of interest in investments or investment management choices,
  4. Failure to adequately disclose fees and other related costs,

Fiduciary liability insurance policies are available in two forms, single-employer/sponsor plans and multi-employer plans (labour management plans). The most common fiduciary liability insurance policies respond to cover the individual persons fiduciaries for their defence costs, but also the plan sponsor for loss incurred indemnifying the individual persons, as well the plan itself for asset loss based on the fiduciary’s negligence. Some fiduciary liability policies only cover the personal loss of individual insured persons, and do not respond to the loss of the sponsor or the plan, but these are far less common.

When determining limits of liability for a fiduciary liability insurance policy the Insureds should consider the following:

  1. The limit of liability is an aggregate limit for each and every claim and each and every insured (all insured persons, sponsors, plans, and past, present or future fiduciary (which is not a defined term)), including damages, judgments settlements, costs, defence costs, attorneys’ fees and experts’ fees, investigation costs,
  2. Defence and investigation costs can be very expensive due to the high costs of actuaries, accounts and lawyers specialized in this unique field, and the extraordinary amount of data and paper they have to examine,
  3. The long duration of investigation, defence and settlement, where the aggregate limit of the policy may be stretched over many years and not “replenished” at the expiry of the policy,
  4. The high likelihood of class action proceedings,
  5. The “long-tail” nature of risk based on potential for years or even tens of years between an alleged “wrongful act” and the resulting claim,
  6. The significant value of assets involved in the company’s benefit program

Insurance coverage terms and conditions are complex, and there is no regulation of policy wordings in Canada, so your insurance broker should be truly independent, experienced with policy negotiation and claims, and have access to many insurance companies with experience in fiduciary liability coverage and claims. Your independent broker should be able to explain to your satisfaction and comfort the following:

  1. Limit management,
  2. Risk of limit erosion or exhaustion, and limit sharing,
  3. Continuity of coverage in all of its facets,
  4. Severability of application and exclusions,
  5. Claim trigger, and the positives and negatives of “broad” definition of claim,
  6. Advancement of limits,
  7. Non-Indemnified vs Indemnified Loss,
  8. Discovery and Extended Reporting Provisions,
  9. Insurer structure, strengths and weaknesses,

Other risk management issues that should be considered by all fiduciaries of pension and benefits plans include:

  1. Insurance maintained by third party service providers including fund managers,
  2. Crime/Fidelity insurance for the plans,
  3. Crisis management plans for the sponsor(s) and the plans,
  4. Access to independent legal, financial, economic, actuarial and insurance advice.

Greg Shields is a D&O, Professional 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. 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.