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Case Bulletin: R v Karigar, 2014 ONSC 3093

For the first time in Canada, an individual has been sentenced to jail time for bribing a foreign public official. The three-year penitentiary sentence was handed down by the Ontario Court of Justice under the Corruption of Foreign Public Officials Act, SC 1998, c 34 (the “CFPOA”).

The imposition of a jail sentence constitutes a major milestone in Canada’s drive towards tackling bribery in international business ventures, and should serve as a stark reminder to all Canadian companies active internationally of the critical importance of having in place a strong anti-corruption compliance program.

In 2013, Nazir Karigar (“Mr. Karigar”) was convicted of breaching section 3(1) of the CFPO for conspiring with employees and associates of Cryptometrics Canada Limited to bribe officials of Air India, a state-owned Indian airline, and an Indian Cabinet Minister in order to secure a business contract. On May 23, 2014, Mr. Karigar was sentenced to a three-year term of imprisonment.

Following recent amendments to the CFPOA, the maximum sentence for the offence committed under the CFPOA is now 14 years. However, at the time Mr. Karigar committed the CFPOA offence, the maximum sentence was only five years. The sentence was therefore towards the higher end of the applicable range.

The Court found that the aggravating factors in sentencing included: (i) the sophisticated nature of the bribery scheme; (ii) attempts at concealment by the creation of a fake competitive bid to create an illusion of a competitive bidding process; (iii) Mr. Karigar’s “sense of entitlement” which led to him openly tell a Canadian trade commissioner of the bribes; and (iv) Mr. Karigar’s deep personal involvement in the scheme.

The mitigating factors included: (i) Mr. Karigar’s cooperation in the prosecution, which avoided a lengthy trial; (ii) his prior clean criminal record; and, perhaps most interestingly, (iii) that the bribery scheme was a “complete failure”. At first blush, the success or failure of a bribery scheme might seem an odd factor to take into account when fixing a sentence; however, the Court noted that because of the failure of the scheme, the harm caused was relatively limited.

The Court’s closing remarks left no room for doubt about the serious nature of CFPOA violations:

“[a]ny person who proposes to enter into a sophisticated scheme to bribe foreign public officials to promote the commercial or other interests of a Canadian business abroad must appreciate that they will face a significant sentence of incarceration in a federal penitentiary”.

Canadian Courts are clearly prepared to play their part in delivering the message that Canada is serious about the enforcement of its anti-corruption laws. For Canadian companies doing business abroad the warning is clear – they must take business ethics seriously and ensure they have clear policies and vigorous compliance programs in place.

Case Bulletin: R v Karigar, 2014 ONSC 3093

Mandatory reporting standards for payments by extractive industry companies

The Government of Canada recently issued a Consultation Paper regarding proposed mandatory reporting standards (the proposed standards) for payments by extractive industry companies to governments, both domestic and foreign, and including Aboriginal entities. [1] The proposed standards are Canada’s implementation of a commitment made at the 2013 G8 Summit [2] and reflect similar initiatives in several other countries, including the US through the Dodd Frank Act and the European Union (EU) through its Transparency and Accounting Directives. [3]

The proposed standards will apply to companies operating or headquartered in Canada that are involved in the commercial development of oil, natural gas, and minerals, whether in Canada or abroad. Companies involved in transportation within Canada are, apparently, not subject to the proposed standards, although the consultation paper is unclear as to how cross-border transportation undertakings are to be dealt with.

The proposed standards will apply not only to publicly listed companies, but also to medium and large private extractive companies operating in Canada. Medium and large private companies are determined as those which meet two of the three following criteria: (1) CA$20 million in assets; (2) CA$40 million in net turnover; and (3) 250 employees.

With respect to joint ownership or subsidiaries, extractive companies operating in Canada will be required to report if they have a controlling interest in any project in Canada or abroad. The proposed standards will adopt the International Financial Reporting Standards (IFRS) definitions of “control”, “joint venture”, and “joint operation”.

Affected companies would have to publish annual reports of payments of $100,000 and over, either cumulatively in one year or on a one-time basis. The reports would have to be made on a project-level basis, and include payments made to all levels of government, both domestically and abroad. Under the proposed standards, the following categories of payments would have to be reported:

  • Taxes levied on income, production or profits of companies, excluding consumption taxes;
  • Royalties;
  • Fees, including license fees, rental fees, entry fees and “other considerations for licenses and/or concessions”;
  • Production entitlements (including payments made in-kind);
  • Bonuses, such as signature, discovery and production bonuses;
  • Dividends paid in lieu of production entitlements or royalties (excluding dividends paid to governments as ordinary shareholders; and
  • Payments for infrastructure improvements (including roads, electricity, etc.).

Consistent with the U.S. and the EU, it is proposed that companies would not be required to report social payments such as for community centres, schools, hockey teams, arenas, capacity development, training and the like.

It is proposed that the disclosures would be posted on company websites, and would be available for free and unrestricted use by the public.

Payments to Aboriginal entities

The proposed standards would also extend to payments made to Canadian Aboriginal entities, including in relation to Impacts and Benefits Agreements. Payments to the following types of Aboriginal entities would be subject to mandatory reporting:

  • Aboriginal organizations or groups with law-making power and/or governance mechanisms related to the extractive sector;
  • provincially or federally incorporated Aboriginal organizations that undertake activities in the extractive sector on behalf of their beneficiaries; and,
  • Aboriginal organizations or groups that are empowered to negotiate legally binding agreements on behalf of their members (this would include Impacts and Benefits Agreements).

Third party verification

Under the proposed standards, reports would have to be assured or verified by a third party, according to recognised accounting standards.

Consultation Period

The Government of Canada has indicated its preference for these rules to be introduced via provincial securities regulators. However, if the provinces do not take the necessary steps in the near future, the Government of Canada has stated its commitment to introducing federal standards, and will begin work over the summer of 2014 to implement legislation by April 2015.

The Government of Canada is inviting feedback from interested parties prior to May 9, 2014. The consultation process builds on government dialogue with various groups that has occurred over the past year. The Resource Revenue Transparency Working Group (the Working Group), comprising the Mining Association of Canada, the Prospectors and Developers Association of Canada, Publish What You Pay – Canada, and the Revenue Watch Institute, issued recommendations in a paper published earlier this year.4 The Working Group’s recommendations include mandatory disclosure of the same information as contained in the proposed standards, but also includes transportation and terminal operations fees. The Working Group has also recommended that such disclosure be imposed through the provincial securities regulators.

Conclusion

In addition to placing an obligation on extractive sector companies to implement or adapt systems and processes to track and record relevant payments to governments, the proposed rules should be assessed in the context of business ethics and anti-corruption compliance policies and controls. Given the short lead-in time for introduction of the rules, companies operating in Canada should start the process of evaluating and implementing the steps they need to take, to avoid being unprepared for the changes to the Canadian regime. For companies with an international presence, compliance efforts in Canada will need to be addressed as part of wider efforts to comply with similar regimes to be introduced in the EU, and proposed for the US.

At Dentons Canada, we are working closely with our global colleagues to monitor developments and provide clients with practical solutions and market-leading compliance strategies.

 

[1] Natural Resources Canada, Establishing Mandatory Reporting Standards for the Extractive Sector – Consultation Paper: Spring 2014, online: Natural Resources Canada http://www.nrcan.gc.ca/publications/15753 [Consultation Paper].

[2] See item 5 of the G8 Lough Erne Declaration, online: http://www.g8.utoronto.ca/summit/2013lougherne/lough-erne-declaration.html.

[3] Consultation Paper, supra.

[4] The Resource Revenue Transparency Working Group, Recommendations on Mandatory Disclosure of Payments from Canadian Mining Companies to Governments, online: http://www.pdac.ca/pdf-viewer?doc=/docs/default-source/publications—papers-and-presentations/working-group-transparency-recommendations-(2014).pdf.

Mandatory reporting standards for payments by extractive industry companies