On September 27, 2019, the U.S. Securities and Exchange Commission (SEC) announced that Vancouver-based Westport Fuel Systems Inc. (Westport) and its former CEO had agreed to pay over US$4.1 million to settle foreign corruption charges. The charges related to Westport's former CEO orchestrating a scheme to transfer shares to a third party entity affiliated with a Chinese government official.
Although Westport had foreign corruption risk-mitigation provisions in its Code of Conduct (Code), in its settlement order the SEC found that those provisions were not broad enough on their face to apply to the specific type of business transaction at issue. In the wake of this settlement, Canadian companies at risk of foreign corruption violations should carefully review their compliance policies to ensure that provisions related to foreign corruption are worded broadly enough to apply to all potential corporate transactions that might pose some risk.
Westport is a Canadian clean fuel technology company interlisted on the Toronto Stock Exchange and NASDAQ. From July 2013 to July 2016, Nancy Gougarty was Westport's COO, and from July 2016 to January 2019 she was its CEO. In the settlement order, the SEC alleged that Westport (acting through Gougarty) paid a bribe to a Chinese government official in 2016 to obtain a sales contract and a cash payment.
Westport had been involved in a joint venture (JV) in China whose largest shareholder was a Chinese state-owned enterprise (SOE). In March 2013, a senior government official at the SOE proposed that the JV conduct an initial public offering (IPO). The JV's manager falsely represented to Westport that, to undertake the IPO in accordance with Chinese law, Westport would have to transfer some of its shares in the JV to a Chinese private equity (PE) fund.
A manager at Westport involved in the negotiations of the share transfer later learned that the transfer was instead motivated by a financial interest that the senior government official had in the Chinese PE fund. The manager also learned that the government official was seeking a low valuation for the shares to "make quick and big money" out of view of Chinese regulators.
The SEC alleged that, after learning of this information from the manager, Gougarty failed to disclose it to the Board. Instead, Gougarty worked to conceal it from the Board by deleting a sentence in a draft letter to the Board prepared by the manager that would have alerted the Board to the Chinese official's financial interest in the PE fund. As part of the negotiations, Gougarty explicitly conditioned the share transfer on Westport obtaining a long-term sales contract with the JV. Ultimately, Westport undertook the share transfer in exchange for both the sales contract and a separate cash dividend from the JV.
As part of the settlement, the SEC concluded that Westport and Gougarty violated the U.S. Foreign Corrupt Practices Act (FCPA) by paying a bribe to the senior Chinese government official through a third party entity. This conduct was prohibited by Westport's Code, which contained a blanket prohibition against using third parties to "funnel bribes to government officials".
However, despite the fact that Westport's Code already prohibited the misconduct at issue, in the settlement order the SEC concluded that Westport's Code was insufficient. Westport's Code contained provisions requiring due diligence and contractual anti-bribery clauses for transactions with vendors, but the SEC faulted it for not being explicit that those provisions also applied to business transactions with other third parties that may be related to foreign government officials. The SEC concluded that Westport had violated the provisions of the FCPA requiring companies to devise and maintain sufficient internal controls.
The Westport settlement demonstrates that, for Canadian companies at risk of foreign corruption violations, a blanket prohibition against foreign corrupt activity in a code of conduct is insufficient. The SEC expects that a company's foreign corruption compliance policies will also include prophylactic provisions designed to minimize the risk of a violation. Such prophylactic provisions could include requiring that all business arrangements be documented in writing, conducting pre-transaction due diligence, retaining the right to perform audits of third parties and mandating that contracts contain anti-bribery clauses.
It is not enough to limit these prophylactic provisions only to classes of transactions that the company considers "high-risk". Canadian companies must ensure that the risk-mitigation provisions in their compliance policies are broadly worded and flexible enough to cover all types of transactions that might pose risk to the organization. Although the provisions should encompass all corporate transactions with risk, the manner in which a company applies the provisions (e.g., the extent of due diligence necessary, if any) for a particular transaction can be proportionate to the level of foreign corruption risk the transaction presents.
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