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Civil Enforcement of Canada’s Foreign Corruption Law?

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A guest post by Graeme Hamilton and Omar Madhany (both with Borden Ladner Gervais LLP in Toronto).

Perhaps the starkest difference between the Foreign Corrupt Practices Act and Canada’s foreign corruption law—the Corruption of Foreign Public Officials Act (CFPOA)—is the fact that the CFPOA may only be enforced criminally.  As a result, enforcement authorities in Canada are held to the higher criminal standard of proof beyond a reasonable doubt when negotiating with a company to resolve a CFPOA investigation or contemplating whether to bring CFPOA charges.

The lack of a civil enforcement mechanism for the CFPOA is often cited as one of the main reasons for the disparity between the volume of foreign corruption enforcement activity in the U.S. and Canada.  A recent settlement announced by the Ontario Securities Commission (OSC) with Katanga Mining Ltd. (Katanga), however, may signal the beginning of a shift in this landscape by establishing a role for Canada’s securities regulators in tackling foreign corruption from a civil context.

On December 18, 2018, the OSC approved a settlement with Katanga to resolve allegations that, among other things, the company had failed to disclose adequately the risk that foreign corrupt activity posed to its business.  As part of the settlement, Katanga agreed to pay a fine of nearly $30 million and several of its senior executives agreed to multi-year officer and directors bars.

The Katanga Settlement

Katanga is a Canadian company listed on the Toronto Stock Exchange.  The company operates large-scale copper and cobalt mines in the Democratic Republic of the Congo (DRC), pursuant to a joint venture agreement with a DRC state-owned enterprise (SOE).  Under that agreement, Katanga is obligated to pay the SOE a fixed-entry premium and royalties based on mine production.

Between 2012 and 2017, at the direction of the SOE, Katanga paid more than US$146 million due to the SOE to an entity associated with Israeli businessman Dan Gertler.  The company also separately paid associates of Gertler to represent Katanga in a wide variety of dealings with the DRC government.  During that time period, however, Gertler was alleged in media reports to be possibly involved in corruption in the DRC and Katanga’s Board and senior management understood that he was identified by the U.S. Department of Justice as being implicated in bribery and corrupt acts in the country.

Despite these red flags, between 2012 and 2016, Katanga’s annual information form (similar to a Form 10-K) contained only a boilerplate foreign corrupt practices risk disclosure.  That disclosure stated that the company may be subject to foreign corrupt practices laws and, despite efforts to comply with those laws, there could be no assurance that it would be in compliance with those laws at all times.

The OSC found that the boilerplate risk disclosure was insufficient because it “failed to adequately describe the heightened risks” of foreign corruption presented both by the company’s operations in the DRC and the company’s relationship with associates of Gertler.  By failing to reference the “elevated risk of public sector corruption in the DRC” and “the nature and extent of [Katanga’s] reliance on” associates of Gertler, the OSC concluded that the company’s annual information forms during the time period were materially misleading.

Role for Canadian Civil Enforcement in Combatting Foreign Corruption

Unlike the Securities and Exchange Commission, Canada’s securities regulators have no jurisdiction to investigate or enforce the CFPOA directly.  Enforcement of the CFPOA is the exclusive jurisdiction of the Royal Canadian Mounted Police (RCMP) and Canadian prosecutors.  It is not known at this time whether the RCMP has opened an investigation in connection with this matter.  But the Katanga settlement demonstrates that the OSC (Canada’s largest securities regulator) is prepared to pursue allegations of foreign corruption indirectly by using civil enforcement actions for violations of the securities laws.

There are several theories of civil liability that Canada’s securities regulators may pursue in tackling foreign corruption.  First, as in the case of Katanga, companies may be found to have provided inadequate/misleading disclosure as to the risks that foreign corrupt activity could pose to their business.  Second, companies that are the subject of foreign bribery allegations may be found to have made false/misleading statements either in their public disclosures or financial statements.  Third, unique to the Canadian context, provincial securities regulators have broad jurisdiction to sanction companies for conduct considered contrary to the “public interest”.

This possibility of civil enforcement by Canadian securities regulators will be an issue to watch going forward.  This is significant for companies listed in Canada that have international operations, particularly in the natural resource sector where Canadian exchanges play an important role in global capital markets.  Civil enforcement of foreign corruption issues would increase the Canadian regulatory scrutiny that companies face and could even lead to adverse consequences in situations where prosecutors cannot or choose not to bring criminal charges under the CFPOA.

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