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Analyzing corporate behaviour in relation to CFPOA obligations

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Introduction

Recently, in Canada, there have been some high-profile cases stemming from charges arising out of the Corruption of Foreign Public Officials Act (CFPOA). Though there have not, to date, been many prosecutions under this Act, that is starting to change. The RCMP now are involved in more than 30 active investigations and it is only a matter of time before more charges are brought. However, even with the limited number of cases we have in Canada, there are still some valuable lessons to be learned.

I would like to examine the two biggest Canadian cases – Niko Resources Ltd. and Griffiths Energy International Inc. – and discuss the role of what I call ‘corporate cooperation’. Specifically, when a company discovers corruption within its entity, how should it respond – circle the wagons, voluntarily disclose, or respond in some other way? If the authorities have already commenced an investigation should the company cooperate with the investigation or not?

The Niko Case

Let’s start with the Niko case.

On June 24, 2011, Niko pleaded guilty to one count of bribery under the CFPOA in relation to two incidents in 2005. During negotiations on a gas pricing contract, Niko admitted to bribing the Bangladeshi State Minister for Energy and Mineral Resources by providing a vehicle worth more than $190,000 and also paying for his travel costs of approximately $5000 to attend an Energy Expo in Calgary and for a trip to New York and Chicago to visit family.

With respect to sentence, a joint submission was placed before the court, which it accepted. Niko was fined $9,499,000.00 (an actual fine of $8,260,000.00 plus the mandatory Victim Fine Surcharge of 15%). Niko was also placed on probation for a period of 3 years. Terms of the probation order subject Niko to regular independent audits to ensure it is in compliance with the CFPOA. Costs of complying with the probation order are to be borne by Niko.

In this case, Niko did not step forward and voluntarily disclose corruption once it had discovered it. However, there were several mitigating factors noted by the court: (1) Niko pleaded guilty, which avoided the expenditure of further Crown resources, (2) it was cooperative once it knew it was being investigated (3) Niko agreed to take corrective steps going forward, (4) it had no previous criminal history or record and (5) there was no evidence that Niko actually received a benefit as a result of the bribes.

The court noted the aggravating features in support of the large fine: (1) Niko was a large and successful company around the world (2) the seniority of the official bribed (3) the fact that there were 2 separate incidents of bribery and (4) the resources expended by the RCMP in their investigation.

The Griffiths Energy Case

Let’s now turn to the Griffiths case.

In 2009, around the time of its formation, Griffiths and several founding shareholders set about developing relationships with senior political figures from Chad, including the Chadian Ambassador to Canada and the country’s minister of petroleum and energy. The bribery scheme involved setting up a consulting contract between Griffiths and a company owned by the Ambassador whereby this company would provide consulting services in the area of oil and gas to Griffiths. The contract provided for a fee of $2M payable to the consulting company upon Griffiths being awarded certain production sharing contracts.

Griffiths terminated this contract in early September 2009 after receiving legal advise that it amounted to bribing a foreign public official. But it then turned around and entered into an identical contract with another company owned by the wife of the Ambassador. Additionally, Griffiths gave her 1.6M founder shares in the company at a price of $0.001 per share and gave an additional 2.4M founder shares at the same price to two people chosen by the Ambassador’s wife.

The consulting contract was renewed in 2011. Eventually, Griffiths obtained the Chadian production sharing contracts it was after and it subsequently mad the $2M payment to the Ambassador’s wife’s consulting company.

In an agreed statement of facts put before the court on January 22, 2013, Griffiths admitted that it violated sections 3(1)(b) of the CFPOA by providing direct or indirect benefits to the Ambassador in an attempt to induce the Ambassador to use his position to influence decisions of Chad with respect to the desired production sharing contracts.

Griffiths received a fine of $10.35M (a fine of $9M plus a victim fine surcharge of 15%). This was imposed after the court accepted this amount as part of a joint submission. No probation order was imposed upon Griffiths.

What’s important to note here is that for a bribe of about $200K, Niko paid a fine of $9.5M. The bribery amount in Griffiths was ten times larger at $2M, yet the fine was less than 10% (closer to 8%) higher than in the Niko case. It’s also important to note that in the Niko case, the court acknowledged that Niko never did actually receive a tangible benefit whereas in Griffiths, the company did ultimately secure the production sharing contracts it was after. Also, compare the nature of the bribery schemes in the two cases: In Niko it they were very basic bribes – a couple of crude and obvious payments. Compare that to the sophisticated scheme in Griffiths designed to mask the fact that the payments were, in fact, bribes.

So, what accounts for the difference?

Several key points were noted in the Agreed Statement of Facts:

(1) Griffiths hired a completely new management team and appointed 6 new independent directors.

(2) New management took immediate and meaningful action upon discovering the bribe scheme by

(i) creating a special committee composed of the new and independent board of directors,

(ii) retaining a team of specialized external legal counsel,

(iii) granting the external legal team a broad and extensive mandate to investigate not only the scheme under question but any other past corruption,

(iv) the special committee, the board or directors and management remained fully involved and cooperative in the investigation by external counsel.

(3) Griffiths decided to voluntarily self-disclose the fruits of their special investigation to the relevant authorities, which helped foster a meaningful cooperative process between the company and law enforcement. Specifically, the following was noted:

(i) Griffiths shared all the information it had gathered through its special investigation including legally privileged information.

(ii) Griffiths agreed to enter a guilty plea at a very early stage even before charges were laid.

(iii) Griffiths continued to cooperate with the Crown in relation to other past activities.

(4) Griffiths incurred numerous significant costs as a result of its own corrective actions including:

(i) legal and accounting costs of approximately $5M,

(ii) hundreds of management hours expended in relation to the investigation,

(iii) the withdrawal of its IPO, which resulted in a write off of about $1.8M in IPO related expenses,

(iv) increased financing costs due to being forced to turn to the private sector as a source of capital,

(5) Griffiths had no previous record relating to such offences. Moreover, it had taken steps to ensure that corrupt practices would not occur in the future.

Essentially, the actions on Griffiths part of self-investigation (at considerable expense) and voluntary disclosure carried tremendous weight with both the Crown and the court.  It is important to note that the court also declined to impose any probation order upon Griffiths in light of the fulsome compliance program it had put into place following the discovery of the corruption.

The actions of Griffiths can serve as a guide to other companies that find themselves in similar circumstances. Though Griffiths provides but one example of the benefits of self-disclosure, there are other examples south of the border, where the Foreign Corrupt Practices Act (FCPA), the U.S. equivalent applies.

Ralph Lauren

According to the U.S. Securities and Exchange Commission in a press release dated April 25, 2013, it resolved a corruption case with the Ralph Lauren Corporation.

In the course of shoring up its worldwide compliance program, Ralph Lauren discovered a bribery scheme whereby its Argentine subsidiary was paying bries to government and customs officials to secure the importation of products into Argentina whilst bypassing the necessary paperwork and avoiding inspection of prohibited products. The bribes totalled $593,000 over a period of 4 years.

The company reported its findings right away to the Securities Exchange Commission (SEC). As a result of its extensive cooperation with the authorities, it was offered a non-prosecution agreement (NPA) by the SEC. As part of the agreement with the SEC, the Corporation agreed to pay $593,000 in disgorgement and $141,845.79 in prejudgment interest.  It also entered into a separate NPA with Justice Department and agreed to pay a penalty of $882,000.

The company’s cooperation included:

(1) reporting its preliminary findings of its internal investigation within 2 weeks of discovering the corruption,

(2) voluntarily producing documents in a timely manner,

(3) providing English translations of documents,

(4) providing summaries of witness interviews conducted overseas, and

(5) making available to the SEC overseas witnesses and bringing them to the U.S. to be interviewed.

The SEC is quoted as saying, “The NPA in this matter makes clear that we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC.” The DOJ stated that one of the factors which led to its NPA with Ralph Lauren was “the Company’s timely, voluntary, and complete disclosure of the conduct.”

The Parker Drilling Co. Case

Parker, a U.S. based oil services company, is another U.S. case reported in April of this year.

The investigation of Parker Drilling grew out of a Justice Department probe of another company named Panalpina World Transport Holding Ltd.

In the Parker Drilling case, Basel, Switzerland-based Panalpina, working on Parker’s behalf, trimmed costs associated with Nigerian customs law by fraudulently claiming that drilling rigs had been exported and then re-imported into Nigeria.  The Nigerian government subsequently fined Parker Drilling $3.8 million. The company responded by paying a middleman, who succeeded in getting the fine reduced to $750,000.  The company gave a middleman $1.25 million knowing it would go to a foreign official to lower a legally imposed fine.

Parker Drilling agreed to pay $11.8 million to settle prosecutors’ charges it violated the Foreign Corrupt Practices Act.  The company also agreed to pay $4.1 million in disgorgement and interest to settle a civil complaint by the Securities and Exchange Commission that alleged violations of anti-bribery and record-keeping provisions of the FCPA, the Justice Department said in a statement.

The SEC settlement is contingent on approval by a federal judge, according to a company announcement accompanying Rich’s statement.

Though Parker did not self-disclose, the DOJ noted that company’s cooperation, including conducting an extensive internal investigation and collecting, analyzing, and organizing voluminous evidence and information for the Department. It also worked very hard to create a gold standard compliance program whilst undergoing its own internal investigation. According to the Deferred Prosecution Agreement (DPA) entered into with the DOJ, “the Company has engaged in extensive remediation, including ending its business relationships with officers, employees, or agents primarily responsible for the corrupt payments, enhancing its due diligence protocol for their-party agents and consultants, increasing training and testing requirements, and instituting heightened review of proposals and other transactional documents for all the Company’s contracts.”

Parker’s conduct in cooperating earned it an “approximately 20 percent reduction off the bottom of the fine range”, which is suggested at between $14.7M and $29.4M.

Conclusion

These cases make it abundantly clear that corporate proactivity with respect to ensuring corruption does not occur within an organization through appropriate compliance measures and policies is a vital corporate function.  With a dramatic increase in investigations under the CFPOA, it is crucial that corporations meet their legal obligations in order to avoid the potentially devastating consequences of a criminal investigation and prosecution.

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