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Preventing Corruption in Foreign Operations

15/07/2011


In June 2011 the first shots were fired in the Canadian war against foreign corruption. Calgary-based Niko Resources was fined $9.5-million after pleading guilty for violations of the Corruption of Foreign Public Officials Act (“CFPOA”). The company was also placed on court-ordered probation for three years, during which time it will have to improve its corporate culture and financial reporting practices. Ongoing compliance with the legislation will be demonstrated through audits completed at the company’s expense. The uncomfortable media coverage continues, as does the downward pressure on the stock price as the market absorbs the news.

The conviction relates to activities in 2005 in Bangladesh, where the company was involved in petroleum exploration. The Bangladeshi Energy Minister was about to set compensation levels that Niko would have to pay to local citizens impacted by a series of explosions at their well-sites when the company provided the Minister with a Toyota Land Cruiser and trips to New York and Calgary. When news of the trips became public in Bangladesh, Canadian and Bangladeshi authorities there took notice. Presumably the affected citizens were concerned that their compensation would be negatively impacted by the Minister’s close ties to Niko.

Criminal Investigation

The criminal investigation was undertaken by a unit of the RCMP dedicated to handling alleged breaches of the CFPOA. It’s no coincidence that the RCMP has chosen to locate one of only two such units in Calgary (the second is in Ottawa); although all companies are subject to the law, the energy and resource sector is clearly the focus of their efforts. Exploration activities can take companies to remote corners of the earth, where the standards of living are such that a small payment, by Canadian standards, can significantly influence the decisions of foreign public officials and where corruption, unfortunately, often occurs as a matter of course.

Penalties & Fines

The CFPOA has a maximum penalty of five years imprisonment for individuals guilty of an offence. Companies are exposed to unlimited fines. Canadian companies with operations or securities listed in the United States (or Canadian subsidiaries of companies listed on U.S. exchanges) or the United Kingdom are subject to similar legislation there. The U.K.’s Bribery Act and the American Foreign Corrupt Practices Act (FCPA) are broader in scope, stricter in application, and more aggressively enforced than the CFPOA. The U.S. authorities for instance have in recent years expanded the scope of their enforcement activities and have actively been pursuing foreign entities and imposing record fines; management may also be held personally accountable if they ought to have known the activity was occurring. Sanctions under those Acts can include disgorgement of profits, and long-term monitoring of corporate activities, at a significant cost to the company being monitored.

Preventative Measures

Companies with foreign operations need to protect their reputation and their financial statements from corruption issues. Key steps include:

  • Perform a corruption risk assessment by country of operation and identify government touch-points
  • Put clear language against bribery and corruption in your Code of Conduct
  • Ensure your whistleblower hotline is accessible to foreign operations
  • Provide regular ethics training to all employees
  • Conduct due diligence on agents, contractors and distributors
  • Include anti-corruption clauses in all agent, contractor and distributor contracts
  • Monitor banking and accounting transactions for improper activity
  • Perform agent, contractor and distributor audits on a rotating basis
  • Obtain annual attestation from agents, contractors and distributors stating they are in compliance with the anti-corruption clause in their contract
  • Designate a Chief Compliance Officer with experience and knowledge of corruption issues

A small investment in prevention can generate major returns in the long run.

For more information please contact Greg Draper, CGA, DIFA, CFE, Investigative & Forensic Services Leader at MNP.