Protecting Business from Bribery Risk

Protecting Against Bribery Risk in Business Transactions
Developing an Effective Due Diligence
Strategy in Mergers and Acquisitions,
Financings, Joint Ventures and Private
Equity Investments
John W. Boscariol
McCarthy Tétrault LLP
November 13, 2017

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Today’s Focus
 brief overview of anti-corruption enforcement
environment
 impact of anti-corruption compliance on inherent value of
your organization
 mergers and acquisitions
 initial public offerings
 private equity investment and acquisition
 debt financing transactions
 commercial bank lending
 joint ventures
 how to mitigate risk

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Why Does Anti-Corruption Compliance
Matter?
 consequences of non-compliance with anti-bribery
requirements
 significant “hard costs” of non-compliance
• criminal penalties
– significant monetary fines
– forfeit proceeds
– imprisonment
• operational costs
– internal investigation
– executive and employee resources
– external legal counsel, forensic investigators and other experts
– probation costs

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Why Does Anti-Corruption Compliance
Matter?
 hard costs can be eclipsed by
 reputational costs
• impact on share price
• intrinsic value of company as M&A target
• goodwill and reputation – attractiveness to potential
business partners
• possible debarment – Public Works and Government
Services Canada, Export Development Canada, World
Bank, United Nations, Government of Quebec
 multi-million dollar class actions and shareholder
derivative claims
• US experience now being followed in Canada

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The Canadian Anti-Corruption
Enforcement Environment
 Canada’s historically weak enforcement record
 Hydro Kleen - guilty plea January 10, 2005
 $25,000 fine, less than the amount of the bribe
 pressure from OECD Working Group on Bribery,
Transparency International and others – Canada last
among the G7
 ratified the United Nations Convention against
Corruption on October 2, 2007
 RCMP international anti-corruption unit established in
2008 with offices in Calgary and Ottawa

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 and now…
 Niko Resources - guilty plea June 24, 2011
• $9.5 million fine plus three-year probation/monitoring
 Griffiths Energy – guilty plea January 25, 2013
• $10.35 million fine
 Nazir Karigar (Cryptometrics) – convicted August 15,
2013
• May 23, 2014 - sentenced to three years in jail
• July 6, 2017 - appeal dismissed by Ontario Court of
Appeal

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 10+ ongoing RCMP investigations of potential CFPOA violations
 Blackfire Exploration - RCMP raided Calgary offices July 20,
2011
 SNC-Lavalin - RCMP raided offices September 4, 2011 and
April 12, 2012 (activities in Bangladesh, Libya, Algeria)
 CFPOA charges laid against seven individuals so far (all but two
have been dropped or dismissed)
• February 19, 2015 charges laid against SNC-Lavalin for
– bribe to Libyan officials of $47.6 million in violation of CFPOA
para 3(1)(b)
– defrauding Libyan government of $129.8 million in violation of
Criminal Code section 380
John W. Boscariol, International Trade and Investment Law, McCarthy Tétrault LLP / mccarthy.ca

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 Nordion – voluntary disclosure and “declination”
 Other Canadian firms announcing internal investigations
and declinations – e.g., MagIndustries
 November 2016 - President of Canadian General Aircraft
charged with conspiracy to bribe Thai public officials in
proposed deal involving a commercial passenger jet

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Lessons from Enforcement Experience to
Date
 “business as usual” or “that’s how it’s done here” is not
acceptable to the Courts
 Canadian authorities following U.S. precedent on
sentencing, terms of probation, and required compliance
measures
 benefits of voluntary disclosure (Griffiths) and
cooperation with authorities (Griffiths and Niko)
 guidance on what Canadian companies are expected to
have in compliance programs (Niko)

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Lessons from Enforcement Experience to
Date
 cost and exposure
 penalty and probation
 financial
• Niko shares lost 4% of market value when plea announced
• SNC-Lavalin
• Griffiths terminated Initial Public Offering
 operational – internal investigation, resources and other costs
• Griffiths - $5 million internal investigation costs alone
• Nordion - in excess of $20 million
 impact on contract with foreign govt/SOE and broader
debarment concerns (Integrity Regime)
 reputational impact

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M&A and Anti-Corruption Precedent and
Policy
 issues identified during M&A transactions are a common
manner for corrupt practices to be brought to the
attention of regulators
 cautionary tales and example under FCPA:
 Titan
 InVision
 Latin Node
 enforcement actions against private equity firms
 result: increased M&A risk and due diligence costs
 but fulsome due diligence does strongly mitigate risk

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Resource Guide to the US FCPA (2012)
“A company that does not perform adequate FCPA due
diligence prior to a merger or acquisition may face both
legal and business risks. Perhaps most commonly,
inadequate due diligence can allow a course of bribery to
continue—with all the attendant harms to a business’s
profitability and reputation, as well as potential civil and
criminal liability.
In contrast, companies that conduct effective FCPA due
diligence on their acquisition targets are able to evaluate
more accurately each target’s value and negotiate for the
costs of the bribery to be borne by the target.”

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Resource Guide to the US FCPA (2012)
“In addition, such actions demonstrate to DOJ and SEC a
company’s commitment to compliance and are taken into
account when evaluating any potential enforcement action.
For example, DOJ and SEC declined to take enforcement
action against an acquiring issuer when the issuer, among
other things, uncovered the corruption at the company
being acquired as part of due diligence, ensured that the
corruption was voluntarily disclosed to the government,
cooperated with the investigation, and incorporated the
acquired company into its compliance program and internal
controls.”

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M&A Anti-Corruption Risk Assessment
and Due Diligence
¬ anti-corruption risk mitigation in the M&A context is rooted in the
proper due diligence of target entity
¬ risk assessment is the first step in this process
¬ key risk factors to be assessed include:
¬ nature of the foreign jurisdictions in which it operates
¬ nature of target’s industry sectors
¬ target’s reliance on government concessions, licenses, leases
and/or permits
¬ target’s reliance on government contracts, revenues or sales
¬ provisions in foreign government/SOE contracts regarding
bribery and exposure to broader debarment concerns

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and Due Diligence (cont’d)
¬ key risk factors (cont’d):
¬ frequency of target’s claimed discounts and rebates
¬ degree and frequency of target’s interaction with
state-owned entities
¬ target’s reliance on third party agents, including
brokers and consultants
¬ degree of government regulation, oversight and
inspection of target’s industry and operations
¬ target’s sophistication and general compliance
culture

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and Due Diligence
¬ key risk factors (cont’d):
¬ target’s anti-corruption policies and procedures and
the history of its training and enforcement in respect
of same
¬ degree of target’s oversight of its subsidiaries
¬ target history of past anti-corruption violations

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M&A Anti-Corruption Due Diligence:
Where to Look and What to Look For
 example of initial due diligence request:
 a list of the countries target operates in or sells to and the
nature of its presence and operations for each (sales, plant,
branch, subsidiary, etc.)
 a description of target’s use of any third party agents or
consultants in its operations and in any dealings with
government (with copies of agent/consultant agreements)
 a copy of target’s compliance manual, policies and procedures
for anti-corruption laws
 detailed corporate and managerial organizational chart

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Where to Look and What to Look For
 example of initial due diligence request (cont’d):
 a list of governments and government-owned or controlled
enterprises target does business with (including as customer,
supplier, creditor, etc.) and copies of all contracts
 a list/description of the government permits and licences they
require for their operations by country as well as any
concessions, production sharing agreements, etc.
 a description of any internal or external investigation, voluntary
disclosure, laying of charges, or prosecution or any other legal
proceeding in the last 5 years involving the target related to
anti-corruption compliance

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Drilling Deeper…
 full records of all due diligence and/or audits conducted by target in
respect of third party agents and other business partners
 full financial records of target relating to third party agents, business
development, travel and entertainment, petty cash accounts and
charitable donations
 anti-corruption questionnaire focusing on key government touch-
points and personnel
 onsite visits
 interviews/remote interviews
 background checks
 using third party diligence agents
 agent and consultant interviews

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Deal Agreements and Anti-Corruption
Risk
 ensure appropriate representations, warranties and indemnities
 consider obligated parties and appropriate survival periods
 consider disclosure issues
 ensure appropriate ‘due diligence out’ rights
 ensure appropriate material adverse change clause (MAC)
 ensure termination rights, break fees and related triggers
appropriately account for anti-corruption risk
 other relevant terms and conditions…

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Proceeding to Acquire: Risk Mitigation
Strategies
 some circumstances will inevitably be difficult:
 Halliburton and DOJ Opinion Procedure 2008-02
 consider using leverage to force target to immediately implement
and enforce anti-corruption policies and procedures (i.e., ‘day zero’
compliance)
 devise a corrective program for concerning governance structures or
operational organization or management
 consider requiring that target self-report to regulators
pre-acquisition (contrast with U.S., i.e. no DPAs, NPAs in
Canada…so far)
 ensure that the acquisition itself is not a violation of
anti-corruption law

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M&A vs. Asset Acquisition
 share acquisitions and ensuing liability
 asset acquisitions and the doctrine of successor liability
 the doctrine of successor liability in the civil context – Central
Sun
 the doctrine of successor liability in the criminal context – Sigma
Aldrich
 concerns regarding coming into possession of proceeds all or part of
which were obtained or derived director or indirectly from a CFPOA
violation (Criminal Code, Section 354)

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M&A vs. Joint Venture
 JVs involve anti-corruption risk in respect of:
 acts of the JV partner as agent
 acts of the JV itself as agent
 keep in mind doctrine of willful blindness – deliberately failing to
inquire when you know there is reason for inquiry
 diligence a potential JV partner similarly to an acquisition target or
third party agent
 build appropriate protections into the joint venture agreement, i.e.
anti-corruption representations, warranties, covenants, indemnities,
audit rights and termination rights…
 pay attention to the JV management and governance structure

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John W. Boscariol
McCarthy Tétrault LLP
International Trade and Investment Law
www.mccarthy.ca
Direct Line: 416-601-7835
E-mail: jboscariol@mccarthy.ca
LinkedIn: www.linkedin.com/in/johnboscarioltradelaw
Twitter: www.twitter.com/tradelawyer

Protecting Business from Bribery Risk

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