Not seeing is no defence

By James Miklotz
Illustration: Blair Kelly

Bribe-paying agents won’t keep you out of trouble: cash gifts to foreign officials are against the law no matter who gives them

Late last year, the US Justice Department laid charges of corruption, money laundering and conspiracy against financier Viktor Kozeny, an Irish financier of Czech origin, for his involvement in a scheme to bribe senior government officials in Azerbaijan during the privatization of the Azeri oil industry. What is surprising about his indictment is that the broad sweep of the charges includes a managing director of an AIG Inc. company and a principal of two large US investment funds. In light of the massive nature of the bribes and the scope of the charges, this story provides a cautionary warning to Canadians involved in international business.

Despite our “envelopes of cash” revelations from the Gomery Commission, most Canadian business executives are aware that cash gifts to foreign officials are against the law. Unfortunately, the manner in which some of them address this is to pay monies to agents who are thereafter free to pay bribes to foreign officials. The theory is that the separation between the payment to the agent and the payment by the agent of the bribe is sufficient to avoid culpa-bility. They are absolutely wrong.

Canada’s Corruption of Foreign Public Officials Act prohibits payments to agents where the paying company is wilfully blind to sub-sequent bribe-paying by the agent. But, it is common for Canadian com-panies to have an ask-no-questions policy regarding their retention of foreign agents. However, agents ide-ally positioned to serve Canadians are those with the most connections, and in developing countries those connections are typically to government officials. Thus, the top agents are precisely those who are best positioned to pay bribes.

With no significant prosecutions yet in Canada, many executives believe there is little risk that Canada’s law will affect them. However, the landscape in Canada is changing quickly. Canadian anti-corruption legislation makes the proceeds of a bribery offence in fact the proceeds of crime. This means the proceeds of a contract obtained by a bribe — not just the profits (i.e. proceeds less expenses)— are forfeitable to the government. Even modest bribes now have much greater significance. That in itself would not be particularly noteworthy but for the spate of recent cases coming out of the US.

Over the past year, there have been a series of high-profile foreign bribery convictions in the US. A phenomenon of these convictions is the manner in which the information was found. In the past, the snitch was either a disgruntled employee or an ir-ritated competitor, but in these cases evidence was uncovered by US lawyers doing routine due diligence in the course of business acquisitions. In one, Lockheed Martin was in the process of a billion-dollar takeover of Titan Corp. During the due diligence process, Lockheed’s lawyers uncovered evidence of improper payments to foreign agents of Titan. A potential buyer will not purchase a company unless the authorities are notified and the matter is dealt with. There is no statute of limitations on these offences, and the proceeds of the bribe are traceable and forfeitable. Titan ultimately pled guilty to a Foreign Corrupt Practices Act offence, and the acquisition fell through.

As a result of these cases, US lawyers are on the alert for out-of-the-ordinary agency agreements or payments to agents. This extends to Canadian acquisitions. It seems fair to assume that it is only a matter of time before a prominent Canadian firm finds itself facing a major case under Canada’s anti-bribery law. Given that Canada has recently been faulted by the OECD and Transparency International for not taking strong action to enforce its anti-bribery law, such a company and its executives should not expect a painless plea bargain.

Senior management, directors and shareholders of a Canadian company involved in international business that anticipates selling the company to a US buyer any time in the future should take careful note of this potential scenario. They would be severely remiss to wait for such a third-party action to materialize before commencing the process of introspection as to its past conduct, especially if they have failed to introduce a gold standard of corporate behaviour as to their ongoing business relations with agents.

What must a Canadian company do then? How does it avoid the risk of payoffs on its behalf to foreign government officials and the ensuing civil and criminal liability and reputation damage? The answer relies on four pillars of action. First, senior management needs to create an employee training program to properly educate employees about what is or isn’t a bribe. For example, it was common in the past for Canadian companies to pay for the Canadian education of senior foreign officials’ children. This is now considered a bribe and is not allowed. Although many Canadian firms have adopted codes of conduct and guidelines regarding improper payments, they rarely provide active training, monitoring and auditing of the codes. Consequently, few employees have the tools needed to ensure that bribes do not get paid.

Most employees (and uneducated management) are relatively happy to facilitate or turn a blind eye to the indications of improper payments. “Our competitors doit” is the common mantra, which is regret-tably quite true. However, given the conse-quences of such wilful blind­ness, a decisionto allow this conduct is one that only seniormanagement should make. And, if theyare prepared to make it, it should only beon the basis that they are prepared to servetime in prison in Canada for doing so.

Second, when engaging an agent in a foreign country, it’s not enough to demand the agent not pay bribes. While this can and should be entrenched in a company’s standard agency agreements, a company must have proper guidelines for the actual appointment of agents or anyone who earns commissions or payments related to sales. These guidelines should start with a formal procedure to question the rationale for appointing the agent, ensuring that the agent has the skills and background to legitimately make the sales. Thereafter, real due diligence must be performed to determine where the agent’s business premises are located, who the agent’s partners are, the agent’s history and track record and whether the agent is of good repute. The due diligence must also confirm that the agent does not employ government officials or is related to a government official. A company does not want to learn too late that its agent is, for example, the son of the country’s president.

None of this information is difficult to ascertain. For example, TRACE, a US non-profit association, specializes in anti-bribery due diligence reviews and compliance training and provides this service as part of its membership fee. Surprisingly, while due diligence is relatively easy to do, some Canadian companies still don’t recognize its need. Others conduct initial due diligence but are unaware that it must be updated on a regular basis.

Even Canadian firms aware of the need for due diligence often encounter situations where their salespeople must rush through a payment to an agent to facilitate an unexpected sale. The rationale is that a company may have a large number of agents who never make a sale, and it doesn’t want to go through the process of due diligence until the agent actually produces a sale. This creates a momentum within the firm to process the payment and worry about the law later.

The third pillar relies on creating a control mechanism for making payments to agents that is outside the influence of the sales personnel of the business. Ideally, whenever a payment is to be made to an agent, a senior nonsales member of management should sign off that there is a valid agency agreement in place, due diligence has been undertaken on the agent within the previous year, the payment is being made to the agent’s home country (or if not, there is a valid reason for making the payment elsewhere), and there are no other red flags. Not surprisingly, these controls are not in place in most Canadian companies. When the company president learns the company has been making payments to offshore accounts in Switzerland, the Bahamas or any other jurisdiction unconnected to the agent, it is too late. Even when such controls are in place, the sales employees need to understand it is very difficult, if not impossible, to conduct satisfactory due diligence of an agent on the spot. Such sales, if they occur, should be summarily rejected.

The final pillar is restraint. There are some countries where business cannot be done without bribing local officials. Business with those countries should be avoided as Canada’s anti-corruption legislation carries with it a criminal penalty of up to five years in jail. In the US, executives frequently go to prison for breaches of the Foreign Corrupt Practices Act.

Jail and fines are not the only penalty. A conviction could result in the company getting barred from government and World Bank procurements. Even more chilling, in the sealed indictment issued in last year’s Azerbaijan case, the US government listed personal addresses of the three individuals charged and indicated that it may seize them under certain circumstances. Canadian executives are urged to take note.

James M. Klotz is chair of the international corporate governance group and the international business transactions group of Davis & Co. LLP in Toronto

Technical editor: Roddy Allan, CA•IFA, managing director with Navigant Consulting