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.

 

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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.