Canada: The Corruption Of Foreign Public Officials Act (Canada) - Due Diligence Issues

Canadian law concerning bribery is mainly contained in the Criminal Code². The law prohibits making bribes to Canadian public officials yet there are no specific provisions to cover foreign public officials. Complementary provisions in the Income Tax Act³ make it an offence to make a deduction from income in respect of any outlay or expense incurred for the purpose of doing anything that is an offence under certain sections of the Criminal Code.

Even though Canada had laws pertaining to the bribery of public officials, there were no specific provisions in the statutes to cover the corruption of foreign public officials. There was, however, jurisprudence regarding the extra-territorial application of the conspiracy provisions of the Criminal Code that allowed Canadian officials to argue that existing Canadian criminal law was sufficient to cover the corruption of foreign public officials. The leading case is the Supreme Court of Canada decision R. v. Libman⁴. The case concerned the extra-territorial application of the conspiracy provisions of the Criminal Code. In order for an offence to be subject to the jurisdiction of Canadian courts, the Court determined that the majority of the activities constituting that offence must occur in Canada; in other words, there must be a real and substantial link between an offence and Canada in order for criminal liability to be imposed in Canada. When considering whether an offence falls within Canadian jurisdiction, the Courts will "take into account all relevant facts that take place in Canada that may legitimately give this country an interest in prosecuting the offence. One must then consider whether there is anything in those facts that offends international comity."⁵

The Court did not mention any specific factors necessary to identify a link but instead stated that each case should be examined on its facts. Generally, "where the scheme is "hatched" and largely put into effect in Canada, it is likely that the court will conclude that Canadian criminal law will apply."⁶

With this case, an argument was made by Canadian officials that the bribery sections of the Criminal Code can be applied where there is corruption of foreign public officials⁷. Thus, one might conclude that there was indeed a law against the bribing of foreign public officials prior to the enactment of the Corruption Act. Whether one might actually succeed in prosecuting for the bribery of a foreign public official is unclear as there have been no prosecutions of Canadian companies or individuals for that offence up to the date of this paper.

With the coming into force of the Corruption Act, three new offences have been created: the bribing of a foreign public official; laundering property and proceeds; and possession of property and proceeds. The Corruption Act also covers conspiracy or an attempt to commit the offences, aiding and abetting and counselling others to commit the offences. The Corruption Act closely follows the OECD Convention language. In order to be in sync with similar legislation of other OECD countries, concepts and language have also been adopted from the American FCPA. Many Canadian companies with American operations and affiliates of American companies already come under the jurisdiction of the FCPA. Under the Rules of the Securities and Exchange Commission, Canadian companies that are considered to be "issuers" under that Act are subject to the provisions of the FCPA. Therefore, Canadians could potentially be charged twice for the same offence: once under the Corruption Act and once under the FCPA. The Court in Libman considered this and found that an accused could simply plead autrefois acquit and autrefois convict.⁸ Canadian companies could potentially be subject to a third set of rules, that of the laws of the host country in which the bribe takes place, to the extent they exist. Many countries have laws concerning the corruption and bribery of government officials, but oftentimes these laws are applied arbitrarily or inconsistently. In some cases, local laws may be inconsistent with Canadian or U.S. law and a company may not find relief under the Corruption Act (that is, defences to a charge in Canada may not withstand prosecution in a third country or in the host country).

As mentioned previously, there are three new offences created under the Corruption Act⁹. These offences qualify as indictable offences and no limitation period applies.

1. Offence of Bribery

This offence is the focal point of the Corruption Act. There is no mental element (mens rea) "expressly set out in the offence since it is intended that the offence will be interpreted in accordance with common law principles of criminal culpability. The courts will be expected to read in the mens rea of intention and knowledge."¹⁰ The offence under section 3(1)¹¹ reads:

"Every person commits an offence who, in order to obtain or retain an advantage in the course of business¹², directly or indirectly gives, offers or agrees to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official¹³ or to any person for the benefit of a foreign public official

1. as consideration for an act or omission by the official in connection with the performance of the official’s duties or functions; or
2. to induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organization for which the official performs duties or functions."

There are a few things about this offence that are worth mentioning. First, this offence applies to every person, whether Canadian or not, and also includes corporations as long as the offence occurs in whole or in part in Canada. In order for the Courts to pursue a charge against someone, most of the illegal activity would have to occur in Canada. The Guide indicates that the real and substantial link test from Libman would need to be applied¹⁴ and all relevant facts considered.

Second, it is the intention of the Corruption Act to prohibit payments made to obtain or retain business or other improper advantage. The Corruption Act thus makes it an offence to bribe a foreign public official when the transaction is for profit.

Third, an offence under the Corruption Act does not have to involve the physical crossing of national borders.

Fourth, the Corruption Act also makes it an offence to give bribes directly or through third parties or agents, including family members and political party affiliates. This represents a problem: will the person making the payment know the payment will be used to bribe? After all, the world revolves around the payment of fees and commissions.

Fifth, in order to fulfil its obligations under the OECD Convention, Canada made it a criminal offence under the Corruption Act to bribe a foreign public official "in order that the official act or refrain from acting in relation to the performance of official duties" and "includes any use of the public official’s position whether or not within the official’s authorized competence"¹⁵.

2. Offence of Possession

Section 4(1) of the Corruption Act makes it an offence to possess property or proceeds obtained from the bribery of a foreign public official. The section reads as follows:

"Every person commits an offence who possesses any property or any proceeds of any property knowing that all or any part of the property or of those proceeds was obtained or derived directly or indirectly as a result of

1. the commission of an offence under section 3 or 5; or
2. an act or omission anywhere that if it occurred in Canada would have constituted an offence under section 3 or 5."

With the exception of the "knowing" part, this offence looks like a fencing provision. Presumably, only "actual knowledge" and not "constructive knowledge" counts. So, does a company that purchases assets at a discount from another company that breached section 3 and then books the asset at the low price "know"?

Under Section 7 of the Corruption Act, certain provisions of the Criminal Code related to the search, seizure and retention of proceeds of crime can be used by government authorities to seize any profits obtained as a result of the bribe as well as the bribe itself. Therefore, a company that obtained business through a bribe may have to account for not only the bribe and be liable to substantial monetary penalties but also be forced to surrender all of its profits from such business to the Canadian government. As the proceeds of crime provisions of the Criminal Code apply to the Corruption Act, one may look to those sections and the jurisprudence coming out of those sections to determine how tracing issues and other such issues that arise in relation to prosecution under the Corruption Act will be handled.¹⁶

3. Offence of Laundering

Section 5(1) of the Corruption Act creates the offence of laundering. It reads as follows:

"Every person commits an offence who uses, transfers possession of, sends or delivers to any person or place, transports, transmits, alters, disposes of or otherwise deals with in any manner and by any means any property or any proceeds of any property within intent to conceal or convert that property or those proceeds and knowing or believing that all or part of that property or of those proceeds was obtained or derived directly or indirectly as a result of

1. the commission of an offence under section 3; or
2. an act or omission anywhere that if it occurred in Canada would have constituted an offence under section 3."

No matter where the bribe or the laundering occurred, this provision still applies.

The Corruption Act allows for three defences to the offence of bribery:

1. The Payment is Lawful in the Foreign State

Section 3(3)(a) reads as follows:

1. is permitted or required under the laws of the foreign state or public international organization for which the foreign public official performs duties or functions."

Even though this defence is provided for in the Corruption Act, one commentator thinks that the chances of it being used are rare because, for all intents and purposes, few countries have any such laws¹⁷.

2. The Payment was a Reasonable Expense

Subsection 3(3)(b) provides for the defence that a payment was a reasonable expense incurred in good faith and directly related to the promotion of a product. This section reads as follows:

1. was made to pay the reasonable expenses incurred in good faith by or on behalf of the foreign public official that are directly related to

1. the promotion, demonstration or explanation of the person’s products and services; or
2. the execution or performance of a contract between the person and the foreign state for which the official performed duties or functions."

The wording of this defence closely follows the language of the FCPA.

3. Facilitation Payments

The Corruption Act allows for facilitation payments under section 3(4). This section reads as follows:

1. the issuance of a permit, licence or other document to qualify a person to do business;
2. the processing of official documents such as visas or work permits;
3. the provision of services normally offered to the public, such as mail pick-up and delivery, telecommunication services and power and water supply; and
4. the provision of services normally provided as required such as police protection, loading and unloading of cargo, the protection of perishable products or commodities from deterioration or the scheduling of inspections related to contract performance or transit of goods."

The Department of Justice’s "A Guide to the Corruption of Foreign Public Officials Act" states that the list under the facilitation payment section of the Corruption Act is not an all-inclusive list¹⁸, although the guide does not purport to have the force of law.

The Corruption Act goes on to define "acts of routine nature": "An "act of a routine nature" does not include a decision to award new business or to continue business with a particular party, including a decision on the terms of that business or encouraging another person to make any such decision." The wording with regards to the defence of facilitation payments is almost identical to that used in the FCPA. Unlike the FCPA, however, the Corruption Act does not contain a general provision that covers "actions of a similar nature".

The penalty for bribery of a foreign public official is a 5 year maximum term of imprisonment. This is an extraditable offence. The Corruption Act does not specifically mention financial penalties for those found guilty of bribing a foreign public official, but the Guide states that fines are indeed a possible penalty. Under section 735 of the Criminal Code¹⁹, where an indictable offence calls for imprisonment as punishment, and given the fact that companies cannot be imprisoned, fines can be imposed in lieu. The Corruption Act does not expressly state that section 735 applies, but the Department of Justice has implied so.²⁰ The amount of the fine would be at the discretion of the judge. The Guide claims there would be no maximum.

The penalty for possession of bribery proceeds is a maximum 10 year prison term which is an indictable offence or upon summary conviction a person can receive either a fine of up to $50,000 or imprisonment up to 6 months, or both.

The laundering of bribery proceeds carries the same penalties as possession of bribery proceeds.

Depending upon the circumstances and the strength of the link an offence has to Canada, the Corruption Act would apply to a number of persons and organizations. These would include corporations, partnerships, joint ventures and individuals, whether local or foreign, also those persons aiding and abetting.

The Corruption Act is silent on the matter of enforcement. Therefore, depending upon the facts of each case, either federal, provincial or municipal police forces could be involved in the investigation.

As the Corruption Act is a new statute there is little guidance with regards to what an investigator or other person might look for or what activities would raise suspicion of an offence being committed under the Corruption Act. One might therefore look to the experiences of those who have dealt with or come under the jurisdiction of the FCPA. The following is a list of "red flags" that might alert an investigator to the potential existence of bribery.²¹

1. Off book accounts
2. Shell corporations
3. Sham transactions
4. The board of directors are not aware of the transaction
5. The audit committee does not have any responsibilities
6. Outside auditors unable to obtain information
7. Lack of disclosure to regulatory authorities
8. Poor reputation of a foreign agent
9. Commission for a transaction out of line with local standards
10. Agent refuses to give Corruption Act representations
11. Foreign agent has links to the government
12. Cash payments/lack of paper trail
13. Payments made to third parties or to third country accounts
14. Unusual bonuses paid to foreign personnel for which there is little support

The above list could be used by businesses in preventing bribery with an organization.

Developing an FCPA compliance program has been one of the most effective ways for a company to avoid liability or reduce a fine levied under the FCPA. Under the Corruption Act, there is no explicit defence of "due diligence", and because this is a new statute, there is no jurisprudence to assist in interpreting the nuances of the statute. Even though there is no mens rea element expressly stated in the Corruption Act, the Department of Justice has stated that the offences under the Corruption Act "will be interpreted in accordance with common law principles of criminal culpability".²² The domestic bribery offence in the Criminal Code²³ also does not contain a mens rea element and is not a "strict liability offence".²⁴

The Supreme Court has read into this section the mental elements of intent and knowledge.²⁵ When an accused is tried under the Corruption Act, a court might read in similar mental elements. Other common law principles such as "wilful blindness" or "should have known" might also be applied. If such principles are applied, having a compliance program in place may help a company to avoid liability or reduce a fine levied under the Corruption Act.

The United States Sentencing Commission²⁶ has set out 7 elements of an effective compliance program. The 7 steps are as follows²⁷:

1. A Corruption Act compliance policy and procedures should be established by a company for its employees and agents. This policy should explain the prohibitions of the Corruption Act and the company’s expectations that employees will not violate the Corruption Act.
2. Overall responsibility for compliance with a company’s policy should fall to a specific high-level individual, such as a director, officer or corporate counsel.
3. Substantial discretionary authority should be delegated carefully and not to those persons that a diligent company should have known have a shady background.
4. Effective communication is required by a company to ensure its standards and procedures are followed by its employees and agents. Training programs and the distribution of pamphlets are helpful for employees based in foreign countries or who otherwise are likely to encounter Corruption Act issues.
5. Monitoring and auditing systems should be installed to detect criminal conduct by employees and agents.
6. Disciplinary mechanisms should be in place. These mechanisms demonstrate that a company is committed to enforcing its policies.
7. If a breach of the Corruption Act has been detected, a company should take steps to prevent further similar breaches including making modifications to its program to prevent further violations. Company policy should be reviewed when a breach occurs.

Typically, compliance programs address three broad objectives - documentation of company policy and education of employees, imposition of procedural controls, and monitoring of compliance. Each compliance program should be carefully tailored to the company’s unique circumstances and to the specific risks that accompany those circumstances.

The following are some elements that may be considered for inclusion in a Corruption Act compliance program.

1. Company Policy on the Corruption Act. A company might want to include a code of conduct that states the company’s expectation that employees will obey the law. The company should include a description of the offences in the Corruption Act, with examples relevant to the company’s business. The policy may also want to include information regarding the assignment of compliance responsibilities, documentation of the corporate culture and information-gathering mechanisms, such as employee hotlines and anonymous reporting procedures.
2. Company Control Mechanisms. A company should implement and create mechanisms designed to prevent breaches of the Corruption Act or company policy. Such mechanisms may include due diligence regarding agents, consultants, joint ventures and foreign partners, and ways in which management can certify that employees are aware of and follow company policy. Examples of control mechanisms are as follows:

1. Include terms in contracts that require an agent to comply with the provisions of the Corruption Act;
2. Require special authorization for cash expenditures over a certain limit;
3. Set up due diligence procedures to include requiring prospective agents to answer a standard list of questions regarding their background and the existence of any relationships with government officials. Also, a company should determine whether the fees being charged by an agent are in synch with the fees offered by others in the local market;
4. Require periodic certification by employees that they have not breached the Corruption Act; and
5. Have in place a method of documenting and approving facilitation payments.

3. Monitoring Procedures. In order to ensure that a company’s compliance program is operating properly and to detect any breaches of the Corruption Act, the following should be monitored or attended to:

1. Documentation

• Bids: Can all expenditures be accounted for with appropriate documentation? Have the bids been scrutinized carefully? Has each level of official approval undergone the same level of scrutiny? Were there any unofficial processes involved?
• Foreign Contracts: Are there any unusual provisions? Anything out of line with local practices?
• Agreements, including agency, supply, distributorship and licencing agreements: Unusual provisions? Is the documentation of these agreements in order?
• Tax disputes
• Has a fee or commission been expensed?

2. Conduct Interviews with Local Employees at a Foreign Operation

• Are local employees easily approachable and willing to discuss possible Corruption Act breaches?

3. Supporting Documentation for Cash Expenditures

• Have cheques been written?
• Transactions subject to local authorization?
• Were there any direct or indirect payments to foreign public officials?

4. Consultants’ and Agents’ Contracts

• Do contracts contain Corruption Act representations?
• Has compliance with these representations been documented and filed?

5. Business Practise of Foreign Jurisdiction

• Typical business practices of a foreign jurisdiction should be thoroughly documented
• Review news articles in local papers
• Information services on the conduct of business in foreign jurisdictions

1 R.S.C. 1998 c.34.

2 R.S.C. 1970 c.C-34 ss.118 through 123.

3 Income Tax Act, S.C. 1994 c.7, SCH II, ss 67.5(1).

4 [1985] 2 S.C.J. No. 56.

5 Ibid at 16.

6 A. Timothy Martin, "Canadian Law on Corruption of Foreign Public Officials", National Journal of Constitutional Law, 10 (1999) 189.

7 Ibid at 194.

8 Supra, note 4.

9 Much of the discussion that follows of the Corruption Act is taken from "The Corruption of Foreign Public Officials Act: A Guide" issued by the Department of Justice, Canada, May 1999 (the "Guide").

10 Ibid at 3.

11 Supra, note 1.

12 "Business" is defined in the Corruption Act as "any business, profession, trade, calling, manufacture or undertaking of any kind carried on in Canada or elsewhere for profit".

13 A foreign public official is defined in the Corruption Act as "a person who holds a legislative, administrative or judicial position of a foreign state; a person who performs public duties or functions for a foreign state, including those employed by a board, commission, corporation or other body or authority that is established to perform a duty or function on behalf of the foreign state, or is performing such a duty or function; and an official or agent of a public international organization that is formed by two or more states or governments, or by two or more such public international organizations."

14 Supra, note 4.

15 Supra, note 9 at 6.

16 Supra, note 2, ss. 462.3 and 462.32 through 462.5.

17 Supra, note 6.

18 D.R. Breithaupt "A Guide to the Corruption of Foreign Public Officials Act" issued by the Department of Justice, Canada (3 February 1999) at 8.

19 Supra, note 2

20 Supra, note 9

21 Robert A. Bassett, "Canadian Companies Beware: The U.S. Foreign Corrupt Practices Act Applies to You!" Alberta Law Review Volume 36(2) 1998 at 471.

22 Supra, note 9.

23 Supra, note 2, s.121.

24 R. v. Cogger, [1997] 2 S.C.R. 842.

25 Ibid.

26 USSG §8A1.2.

27 Daniel L. Goelzer, "Designing an FCPA Compliance Program: Minimizing the Risks of Improper Foreign Payments", Northwestern Journal of International Law and Business, Volume 18 (1998) at 288.