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Anti-Corruption in International Mining Projects:
Practical Risk Management and Compliance
Strategies
Date:
Presenter:
April 28, 2011
Janne Duncan, Partner, Toronto office
Tel.: +1 416 202 6715
Email: [email protected]
Calgary  Toronto  Moscow  Almaty/Atyrau  Caracas  Rio de Janeiro
Why is mining an at-risk industry?
1. Mining companies operate in countries where there is a
high risk of corruption or where corruption is viewed as
acceptable local practice.
2. Need for government-issued licenses, concessions,
planning consents and permits involve regular dealings
with government officials and often involve
discretionary consents and approvals.
3. Taxes and royalties paid to government officials under
laws that are sometimes not transparent or subject to
change depending on current perceptions.
4. Frequent dealings with customs and immigration
officials.
Why is mining an at-risk industry?
5. Importance of building community relationships.
6. Frequent use of finder’s fees paid to third parties to find
properties and help with governmental consents and
approvals.
7. Joint ventures with third parties are common.
8. Contracts with third parties are common eg., road and
mine construction and these third parties need
government issued licenses, etc.
9. Frequent use of the army or police forces for security
purposes.
Corruption in Emerging Markets
The global hotspots for corruption are developing countries:
Source: Transparency International, 2007 Corruption Perceptions Index
International Legislative Landscape
•
Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions (OECD Convention) (1999)
– establishes legally binding standards to criminalize bribery of foreign public
officials in international business transactions that include foreign anti-bribery
rules and a peer review system
– focused on the supply side of bribery transactions
– adopted by the 34 OECD member countries and 4 non-member countries
including Canada
– Canada has just completed its peer review
United Nations Convention Against Corruption (UN Convention)
– over 80 members
– focuses on supply and demand side
International Finance Institutional Efforts
•
World Bank Group
– project agreements incorporate Anti-Corruption Guidelines by
reference
– failure to comply can result in sanctions including debarment
•
European Bank for Reconstruction & Development; Inter-American
Development Bank Group; Asian Development Bank; African
Development Bank Group (together “Multinational Development Banks”)
– with European Investment Bank Group and International Monetary
Fund, agreed in September 2006 - Uniform Framework for Preventing
and Combating Fraud and Corruption:
• definitions for fraudulent, corrupt, coercive and collusive practices
• sets principles and guidelines for investigations
• promotes information exchange
– April 2010, the Multinational Development Banks signed an agreement
to cross-debar firms
Key U.S. Legislation
Foreign Corrupt Practices Act (FCPA)
Dodd-Frank Act
FCPA: Key Provisions
ANTI-BRIBERY PROVISIONS
•
•
Unlawful to make or offer money or anything of value
to "foreign officials" to influence any act or decision in
order to obtain or retain business
Corrupt payments include direct and indirect payments
through third parties
ACCOUNTING PROVISIONS
•
Companies that qualify as "issuers" must keep
accurate books and records, and devise and maintain
an adequate system of internal accounting controls
FCPA: Jurisdictional Reach
Anti-Bribery Provision
• All U.S. companies (public or private) and individuals – at home or
abroad
• Non-U.S. companies (called “Issuers”) with securities listed on US
exchanges or who file reports with the SEC
•
•
•
Officers, directors, employees or agents, at home or abroad, of any of the
above
Non-residents and foreign entities where improper conduct occurs within
the US
– conduct may be as trifling as using US email servers or wiring money
through a US bank
US companies may be liable for acts of foreign subsidiaries, JV partners,
and others parties deemed to be acting as agents or over whom they have
control
Accounting Provisions
• Issuers – public companies, their officers and employees
Dodd-Frank Act
• “Resource extraction issuers” must disclose in their
annual reports filed with the SEC information relating to
all payments made during the financial year to a U.S. or
foreign government for the purpose commercial
development of minerals.
• Payments made in each country, with respect to each
project, on account of taxes, royalties, licensing fees,
etc.
• Apples to Canadian mining companies with securities
registered or traded in the United States for FY ending
after April 15, 2012.
Key Canadian Legislation
Canadian Legislation: Corruption of Foreign
Public Officials Act (CFPOA)
FCPA: Key Provisions
• Substantially based on the US FCPA / OECD
Convention, except:
– the is no extra-territorial component (although
Canada is under pressure from its most recent
OECD peer review to adopt such a provision in
order to comply with its OECD obligations)
– there is no books and records component
– few prosecutions although the RCMP have
corruption units in Ottawa and Calgary
– Canada has not adopted an equivalent to the US
Dodd-Frank Act
Key UK Legislation
Bribery Act, 2010
Key UK Legislation: Bribery Act, 2010
• Act comes into force July 1, 2011
• Regulates supply and demand side of bribery
• Creates a new strict liability offense for a “commercial
organization” to fail to prevent a bribe being paid for or
on its behalf, including by “associated persons”
– The defense of “adequate procedures” is a
complete defense unless senior management is
involved
– Guidance about what constitutes “adequate
procedures” published March 2011
Bribery Act, 2010: Jurisdictional Reach
The Act applies to:
• UK companies, UK citizens and UK residents regardless of where
the offence occurs
• Any non-UK nationals or organizations if an act or omission forming
part of the offence took place within the UK
• For the strict liability corporate offence for failing to prevent bribery,
the act or omission may occur entirely outside the UK, if the
corporation carries on a business, or any part of a business, in the
UK
• Guidance: A foreign company with securities listed on the London
Stock Exchange/AIM will likely not be viewed as carrying on a
business, or part of a business, in the UK
Legislation in Comparison
US - FCPA
Canada - CFPOA
UK - Bribery Act
YES
NOT YET (OECD
peer review?
YES
Books & Records
YES
NO
NO
Facilitation Payments
exception
YES
YES
NO
Offence of failing to
prevent bribery
NO (but “control
person” theory)
NO
YES
Adequate Procedures
Defense
NO but a strong
compliance
program is the
“best defense”
NO but a strong
compliance program
would be the “best
defense”
YES
YES – direct and
indirect payments
Yes
Yes – responsible for
“associated persons”
Extra-Jurisdictional
Liability for third
parties
Best Practices Guidelines
• OECD Convention Guidelines
• US Sentencing Guidelines Manual
• The Bribery Act, 2010 Guidance about
procedures which relevant commercial
organizations can put into place to prevent
persons associated with them from bribing
(March 2011)
Best Practices to Minimize Corruption Risk:
Effective Compliance Programs
Effective Anti-corruption Compliance Program
Essentials
• Tone from the top
• Clear and well known written policy
• Regular training of staff and related parties
• Strong internal controls
• Consistent and fair enforcement
• Monitoring and revisions when needed
- US Sentencing Guidelines Manual, §8B2.1
Risk Assessment
Ongoing Risk Assessment
• Internal Risks – deficiencies in compliance policies
• Country Risks – business in new jurisdictions
• Transaction Risks – new business lines or methods (e.g.
intermediary use)
• Partnership Risks – due diligence of new partners, consideration of
associations with prominent public office holders
• Periodically engage outside professionals to test soundness of
compliance program and recommend areas for improvement
• Engage various parts of the business in compliance efforts (i.e.
legal, finance, HR, Directors)
Audit compliance
• Ensure compliance with compliance programs
• Spot checks for adherence
• Monitor effectiveness
Create and Maintain Clear, Practical and
Accessible Polices & Procedures
• Business Conduct Guidelines
– active and passive bribery
– anti-money laundering procedures
– policy on gifts and hospitality
– policy on charitable donations
– policy on political donations
– policy on extortion
– mandate transparent documentation of expenses
– whistle-blowing procedures and disciplinary consequences
• Appoint a Compliance Officer
• Require third parties with whom you to business to agree to comply
with your Business Conduct Guidelines
Create and Maintain Clear, Practical and
Accessible Polices & Procedures
• Policies must be reasonable
– zero tolerance should not overburden compliance staff
• Establishing travel/entertainment/gift threshold amounts
• Requiring pre-approval for routine and legitimate government payments
• May be harmful to have stringent anti-corruption policies “on paper” that are
not actually followed or enforced
– policies should be designed to prevent key risk areas of the business
• i.e. If industry utilizes many consultants who interact directly with
government officials, then policy and training should specifically focus on
this area
– do business operations coincide with anti-corruption policy?
• i.e. does sales incentive scheme support or undermine anti-corruption
efforts?
• i.e. does business plan allow realistic timeframes for the necessary
bureaucratic processes?
Third Parties
Best Practices For Engaging Third Parties
• Research the business reputation of third party
• Conduct reasonable due diligence
• Require formal application process
• Obtain a list of references and interview them
• Require approval of third party contracts by centralized
authority at the corporate level
• Include anti-bribery provisions in third party contracts
• Monitor third parties and require additional periodic
certifications and audits
Third Parties
Watch for red flags during DD:
•
•
•
•
•
•
•
secret or nontransparent details
payment to third country, third party,
or multiple accounts
relationship between agent and
foreign official
lack of sufficient resources (i.e.
staff) or competence to perform
services offered
requests for payments in cash or
"bearer" securities
foreign official recommends agent
cash transactions or “off-book”
payments
•
•
•
•
•
•
use of side letters or stand alone
consultant agreements
lack of written agreements
payment to entity run by former
governmental officials
third party is a shell company or
use of unnecessary
intermediaries
unusually high commission
payment or large increase in
anticipated fee
large dollar travel, gifts,
entertainment or gratuities
Strong Internal Controls
• Financial accounting system to prevent illegal payments and to
detect questionable payments when made
– controls for contract approvals, payments, and other
disbursements
– maintaining sufficient documentation
– confirmation that documented authorization procedures are
adhered to
– scrutiny of large or unusual payments
– identify and track government related payments
– involve internal audit and other business managers in ensuring
compliance
– periodic reviews and assessments of internal controls
Reporting and Investigations
Reporting
• Provide ways for internal & external parties to report compliance violations
• Ensure employee whistle-blowers, who act in good faith, are not
disadvantaged
• Periodic audits of remote offices
Investigate
• Whether reported violations or due diligence of agents, JVs partners etc
• Without an adequate Compliance Team, compliance is a ‘paper tiger’
• Externally consult, as appropriate, attorneys or forensic accountants
• Respect data protection and employee rights
Reporting and Investigations
Prepare Response to Potential Incidents
•
Determine whether and what to investigate
– Separate, categorize and rank allegations
– Look at who is the complainant, who is alleged to be involved and whether the
allegations are material
– Promptly investigate actionable claims
– Document all investigation efforts
•
Determine who will investigate
– In-house or outside counsel
•
Agree on investigation plan
–
–
–
–
•
it
To protect privilege
Order and priority of witness interviews
Process for gathering and preserving relevant documents
Determination of scope of investigation
Consider if self-reporting is appropriate
– Decide whether the problem is minor and can be remedied or is material and it will be
beneficial to self-report
– Understand the scope and size of the issue(s) before reporting to authorities
– Anticipate some of the strategy questions that will be asked
Conclusion
• Bribery involves huge risks:
– Penalties that can run up to billions of dollars
– Imprisonment for individuals
– Risk of devaluing companies in transactions
involving due diligence eg., by investment
bankers; potential joint venture partners;
potential acquirers in M&A transactions
– Reputational risk