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.

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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.

 


Director and Officer Liability without Culpability

September 30, 2011

 

There has always been risk of personal loss to directors, even in absence of intent to harm. Such loss is usually financial loss and not criminal incarceration. However, even though this financial loss may be limited to legal fees incurred to achieve dismissal  or settlement (at least in the situation of absence of intent), such fees can be staggering to individuals and their personal loss will also include physical and emotional stress, damage to reputation and lost opportunities.

Today, corporate directors and officers are subject to criminal prosecution (and potentially a criminal record) based on the “responsible corporate officer doctrine” and their responsibility for the corporation not for their own conduct.

In this blog I usually stick with Canadian experiences. But due to the level of US exposure for many Canadian companies (and their executives and directors), this blog posting, here, of Kevin LaCroix in his The D&O Diary blog is worth sharing.

The Canadian perspective on risk management of criminal or quasi-criminal proceedings is three fold. First, indemnification provisions under the Canadian Business Corporations Act, here, one of the provincial Acts, or an industry based Act, should be reviewed for its trigger of indemnification or denial of indemnification. Under many such provisions the term “may” indemnify,  or
“may” advance moneys, is used, but some contain the word “shall”. These provisions also require the subjective test of “honesty” and “good faith”, and in a criminal or administrative action an additional test of “reasonable grounds for believing the individual’s conduct was lawful”, must be met before indemnification is provided.

Second is the individual contractual indemnity. By-laws may be unique to individual corporations, and they may or may not improve on statute language. Comfort will depend on the wording, but blanket bylaw indemnification can be modified and
restricted with no notice to current and (more importantly) former directors and officers, as long as a proceeding has not started. Therefore, individual contractual indemnities should be considered. I will leave this language between you and your lawyer, but there are being used more often in Canada and should be considered by every director and officer.

Third, insurance, is referenced in some indemnification provisions. The wording of the provision could be “may purchase and maintain insurance for the benefit of an individual” but it is very important to remember that this is full extent of the Government’s involvement in your D&O insurance policy. There is no vetting of that policy, there is no standard or even common policy wording in the Canadian D&O marketplace, and there is no control over who (individual or corporate entity) has access to that policy. The coverage of the policy is the responsibility of each and every director and officer. And though many directors will look to the “due diligence defence” and “reliance on officers and other experts” for protection from liability, the failure of an officer to properly procure a D&O policy for the director will mean that the director will have to cover their defence costs in the underlying suit, while they take on the cost of bring a claim against the officer for negligence. When it comes to financial statement preparation, “reliance” might provide comfort, but not when it comes to the D&O insurance policy.

The due diligence on the D&O insurance policy purchase cannot be done in this short blog posting, but, when considering criminal and quasi-criminal actions, here are a few things to look for:

  1. Is coverage limited to “civil” action?
  2. Is the reference to “criminal”action or proceeding or “penal defence” only given under a “sublimit ofliability”?
  3. Do the intertwined definitionsof “Claim”, “Loss” and “Wrongful Act” explicitly cover, exclude, limit or remain silent on “criminal” action or proceeding?
  4. Is there any reference to “Bill C-45”?
  5. Is the “Bodily Injury / Property Damage” exclusion limited (“for” preamble) or broad (“based upon, arising from, ….” Preamble)?
  6. Does the “benefits” or “statutory” exclusion extend to a health or safety act?

This is not an exhaustive list of issues under the D&O policy, but, regarding criminal actions, it is a good start. It is important to know that no D&O policy will cover the actual fine or penalty related a criminal or quasi-criminal act.

If you would like help navigating the risk of being a director officer, or you would like more information on insurance and D&O claim examples, please don’t hesitate to contact me directly.

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. 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.


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.

 


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.


CFPOA (Bribery) Enforcement Action on the Rise

July 8, 2011

 

Risk Management will be a particular challenge based on the “ground level” exposures and the difficulty identifying and controlling risk that is created by a vast number of activities conducted by a large number of people with significant geographic and supervisory separation.

Therefore, based on single aggregate limits, and considerable number of parties and matters insured under a typical D&O insurance policy, a full understanding of how and where limits are sharing should be a top priority for D&O buyers.

In past blog posts I have been critical of Canadian regulation and enforcement of Bribery. But, I can now suggest there has been an extraordinary increase in Canadian corporate bribery enforcement. I am not suggesting the alarm bells should be raised, as the number of cases has gone from one to two (two to three if you include individuals), and I am sure that 99.something % of Canadians (and nearing that number of politicians) could not tell you what CFPOA stands for. This is not as easily said of FCPA. The Foreign Corrupt Practices Act, here, in the US has seen significant press over the last year. This should be no surprise, the US government provides a website listing enforcement actions in chronological order (there are 14 actions under ‘A’ alone), a dedicated email address for reporting violations, and transparency on settlements/judgments (which have been in the hundreds of millions of dollars.)

I wouldn’t be worried about wiretaps and agents posing as foreign government officials……, if your organization does absolutely no business (purchasing or selling, travel or expenses) outside of Canada. We are not known for aggressively fighting white collar (I prefer the term “financial”) crime. However, if you do any business outside of Canada, perhaps some risk identification and loss control is a good idea.

CFPOA stands for The Corruption of Foreign Public Officials Act. It can be found on a Canadian government site, here, but there is no “enforcement” section, or any obvious “report bribery or corruption” contact information. I don’t even recommend a search of Canadian government information regarding corruption or bribery, as it is a time wasting and frustrating exercise in ineffective links and extraordinarily outdated reports. Prior to this very recent case, I could find reference to only two criminal prosecutions in Canada since the 1999 inception the act and the only one with a dollar figure was for $25,000.

In June, enforcement of bribery in Canada actually made publication. I would like to say that it made headlines, but the only page-one google hits for “bribery enforcement in Canada” were law firm briefs and low profile blogs.

The recent case is Niko Resources Ltd., here, which is based on bribery of a junior energy minister in Bangladesh. As per the Reuters report by Scott Haggett, “the charges stemmed from providing a car worth $191,000 and a $5,000 trip”, but the fine is $8,260,000 plus a victim surcharge of 15% for a total $9.5 million fine. This does not include legal costs and it does not contemplate the reputational damage to Niko, or their 3.2% fall in market cap of their shares (which equates to more than $120 million.) Class action securities claims have been started for less.

A CFPOA settlement in this range is material to even the biggest Canadian corporations and it obvious that the intent is to send a warning signal to all Canadian companies, directors and senior management (and to try to get the Government out of the news for being complete ineffective on bribery and corruption.)

Here is the corporate governance, risk management and insurance spin. For this we will have to look outside of Canada because, in the article here at Canadian Lawyer Magazine by Andi Balla, it has been expressed by the head of the RCMP unit in charge of investigation corruption of foreign officials that “Canadian legislation is very short and hard to interpret.”

Based on the US experience with FCPA, and the very recent UK Bribery Act, the issue of Bribery will receive increased focus as a material Corporate Governance, Risk Management and Compliance responsibility. Risk Management will be a particular challenge based on the “ground level” exposures and the difficulty identifying and controlling risk that is created by a vast number of activities conducted by a large number of people with significant geographic and supervisory separation.

Like most other corporate risks, good loss control will come from establishing, communicating, enforcing and monitoring policies and procedures. But identifying, qualifying and quantifying risk in order develop specific risk based policies and procedures is much easier (not to mention quicker) to say than do.

The U.K. Ministry of Justice, regarding the new U.K. Bribery Act (took effect July 1, 2011), here, has provided some Guidance, here, to their legislation. But enacting policies and procedures is further complicated by the vague language of the official guidance which uses phrases like “extremely unlikely to engage Section 1” (the section prohibiting Active and Passive bribery), and introduces the “reasonable person” test and “common sense approach”. One area that makes it difficult to define or identify risk is the “associated persons” language which is not easily defined and includes any person or entity who “performs services” for the company. Therefore, direct and even indirect contractors could create a risk of liability for the corporation.

Other concerns with the U.K. guidance is that many terms are not defined. One such term is “close connection”, because this close connection to the U.K. could apply to the person committing the offence, or to place of incorporation, or to the location of the consenting senior officers. Another important term “carry on business”, because the parent company or even a subsidiary entity does not have to be incorporated in the U.K. in order to be responsible under the Act.

Directors of affected companies will to have look at the “relative ‘value’ of the spend” in every foreign business dealing and determine its ‘proximity’ to a pending business deal in order to identify activities that generate risk. They will then have to prioritize which activities could become the subject of scrutiny under the Act and direct resources accordingly.

The insurance response has yet to be determined. Some ideas are presented by Anjali Das, a partner in the Chicago office of the Wilson Elser law firm, are published in The D&O Diary Blog, here.

Insurance underwriters will eventually be requesting copies of Anti-Bribery policies and procedures, but that has not started (in Canada) and we hope to provide warning of any such change.

Directors, if not already, will soon be asking their General Counsel, CFO, Corporate Secretary, or whoever else is their go-to-person on personal liability and directors’ and officers’ liability insurance (D&O), about the potential response of their D&O policy to a CFPOA investigation. Since there are many dozens of different D&O policy wording and hundreds of endorsements in current use in Canada, there is no one-size-fits-all answer to this question. Your current in force policy wording needs to be reviewed. I suggest asking for an electronic searchable version from your insurance broker and searching for the term “fine”. If you are attempting to find the answer in paper form I recommend starting from the last endorsement and working backward. It is common for large publicly-traded companies to have more than 20 endorsements on their D&O policy, changing a good portion of the base policy wording. You will likely see a “fines and penalties” exclusion (unfortunately not in the exclusion section,) hidden in the definition of Loss. However, there may be a ‘carve-back’ (and exception to the exclusion) for defence costs.

Before you do anything regarding affirmative insurance coverage for an CFPOA action, an examination of priorities is warranted. Meaning, what do all of the Insureds, or at least Classes of Insureds, want the policy to do? I have not seen a CFPOA exclusion used in Canada, and Canadian underwriters are not likely to take a knee-jerk reaction to the Niko CFPOA enforcement action. I have also not seen any specific CFPOA endorsements in the Canadian marketplace, but I am sure they are in the works. But, the “broadening” of coverage to include Loss based on CFPOA actions may not be in the best interest of all Insureds. There is usually only one limit of liability available and it is shared by every director, officer, employee and the corporate entity (including every subsidiary) for every individual allegation, investigation and lawsuit. Also, it is common that in the middle of a potentially large group of claims (or circumstances which could lead to a claim) policy limits are not renewed (refreshed) at the expiry of the policy and therefore the one limit of liability may be the only limit available for all of these parties and matters for many years.

Therefore, based on single aggregate limits, and considerable number of parties and matters insured under a typical D&O insurance policy, a full understanding of how and where limits are sharing should be a top priority for D&O buyers.

I try not to subject my readers to 2,000 words in a post, but this does not give the corporate governance, risk management and insurance spin the detail it deserves. Therefore, if you would like more details in these areas, or if you would like help understanding your D&O policy and its potential triggers (positive and negative) regarding CFPOA enforcement, notice obligations or risk of limit exhaustion, please don’t hesitate to call 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.