Over the past few years, Canadian companies have become
increasingly aware of potential civil and criminal liability
arising from improper business practices abroad. Specifically,
companies are increasingly aware that they are liable under the
Corruption of Foreign Public Officials Act (CFPOA) and the
U.S. equivalent, the Foreign Corrupt Practices Act (FCPA)
if they are engaged in “direct or indirect” bribery of
foreign officials. Under the CFPOA, companies can face unlimited
fines and individuals can face up to 14 years in jail.
While it has become quite commonplace for parent companies to be
aware of their liabilities with regards to their subsidiaries under
the CFPOA and FCPA, liability of franchisors for franchisees’
actions has garnered less public attention but remains equally
International franchising models differ (i.e. master
franchising, direct unit franchising, area development franchising)
but they all serve the same purpose of increasing a brand’s
presence in a foreign country and entail a level of risk of
liability. This risk is often assessed based on the control a
master franchisor is said to exert over its franchisees.
The main foreign bribery risk facing a franchisor is potential
vicarious liability for the actions of its “agents”
abroad. Agents can represent franchisees as well as sales brokers,
distributors, preferred vendors and others connected to the
franchisor acting in another country. Many of these agents must
interact with government officials in order to advance the
franchisor’s and/or franchisee’s objectives, including
dealing locally with health and wage compliance officers,
intellectual property officers, utility officials, taxation
officials, customs officials and procurement officials.
Vicarious liability does not require the franchisor to have
actual knowledge of a bribery or
corruption scheme. Under Canadian criminal law, even if a company
and its employees did not actually know that a third party agent
was engaging in bribery, legal principles allow the court to infer
knowledge, and thus impute liability, through wilful blindness.
Liability through wilful blindness is engaged where it can be shown
that a franchisor had suspicions of possible illicit activity on
the part of the franchisee, but consciously avoided asking
questions or taking steps to confirm or deny knowledge about the
illicit activity. The potential for liability through wilful
blindness is obviously influenced by the level, degree and control
a franchisor exerts over its foreign business representatives (i.e.
franchisees). Notwithstanding, it is not a defence to claim one did
not know if one ought to have known or was purposefully oblivious
to illicit actions.
The opportunities for Canadian franchisors to be found
criminally liable for franchisees and their agents abroad should
not be underestimated. Franchisors expanding internationally,
especially into markets that have a reputation for corruption or
bribery, must undertake critical risk identification and mitigation
and carry out precautionary measures to ensure it remains out of
the government’s crosshairs. These might include:
partnering only with reputable, trusted franchisees;
conducting tiered, risk-based due diligence on new partners
including appropriate anti-corruption contractual obligations
with all franchisees;
requiring annual compliance certifications from
monitoring the business activities of franchisees; and
where appropriate, insisting on a right of audit of the
financial records of franchisees.
Franchisors should also require franchisees to adopt a
compliance program as well as provide regular oversight and
training to its own representatives or employees to ensure ongoing
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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