Late in January 2011, a small delegation of executives from Calgary-based Griffiths Energy International touched down in N’Djamena, Chad, with a cheque for US$40 million. The sprawling capital of one of Africa’s most desperately poor countries, N’Djamena is home to Chad’s energy ministry, and it was there that GEI’s team formalized the contract and signed the cheque that secured the government licences allowing the company to drill for oil.
For Brad Griffiths, founder of GEI and a legendary Bay Street investor, it was a hard-won victory—the result of more than two years of difficult haggling with all levels of the Chadian bureaucracy. But GEI arranged for an unusual side agreement: GEI would sign a $2-million “consulting” contract with a holding company owned by Nouracham Bechir Niam, the wife of Mahamoud Adam Bechir, Chad’s ambassador to Canada and the U.S.
Griffiths execs got the licences in N’Djamena in January 2011; three weeks later, GEI’s lawyers discreetly transferred $2 million into Bechir Niam’s Washington bank account; she used the money to buy herself a house. (As part of GEI’s settlement, it did not admit, nor did the Crown allege, a direct causal relationship between the bribe and the licences.)
That might have been the end of it: just another cost of doing business in another distant backwater country—hardly alien to the resources industry, where obstructive local officials are common. Except there was an unexpected turn: Griffiths died a few months later in a boating accident, leaving the firm that bore his name under new management. In the course of the transition, they discovered the bribe, set up a special board committee to investigate, and called in the RCMP.
Earlier this year, GEI officials appeared in a Calgary courtroom to plead guilty to violating the Corruption of Foreign Public Officials Act (CFPOA). An Alberta judge imposed a $10.4-million fine and the matter was closed. Weeks later, the RCMP was back with another search warrant targeting millions of GEI shares owned by Ms. Niam.
Canada’s parade of corporate perp walks may, in fact, just be starting. Internationally focused firms are being dragged into court to answer for the grease they used to advance foreign deals. The dragnet began with Calgary’s Niko Resources, which got hit with a $9.5-million fine in 2011 over its Bangladeshi business dealings. SNC-Lavalin, the engineering giant, is embroiled in controversy over bribing officials in both Libya and Montreal, and the drumbeat of salacious media revelations shows no sign of abating.
With Ottawa in the process of bulking up the existing law and the RCMP working on 35 active international corruption investigations, a growing number of companies are nervously waiting for the Mounties’ knock on the door. According to corruption experts, the RCMP’s investigations may be well underway and the target firms won’t have a clue.
The stakes are high: CFPOA has no upper limit on corporate fines, and executives found to be in violation could face up to 14 years behind bars. “The next few years are going to be very interesting,” says Boscariol, who is a partner at McCarthy Tétrault. “This has gotten everyone’s attention. We’re getting a lot of calls.”
The stepped-up enforcement isn’t occurring just because Canadian officials have felt a sudden pang of conscience. In recent years, says University of Toronto ethics expert Leonard Brooks, Canada became known internationally as a jurisdiction that turned a blind eye on the foreign business practices of its global companies. It got so bad that the Organization for Economic Co-operation and Development slammed Ottawa in 2011 for relying on a narrow definition of bribery and failing to give investigators the resources to enforce the law.
Canada’s track record contrasts sharply with that of the U.S., where officials have pursued high-profile prosecutions against corporate giants like Walmart and Avon, which spent $280 million to investigate its Chinese operations. “It’s absolutely unbelievable what’s happened in the last three years,” says Joe Zier, a San Francisco–based forensic partner with Deloitte’s Financial Advisory Services group. In both the U.S. and the U.K., prosecutors are now going after firms that merely have a local office or rely on domestic banks within their jurisdiction. Says Zier: “There is a risk for Canadian companies.”
It’s not a minor risk, either. A corruption conviction can bring not only fines and a lengthy period of probation, but also shareholder class-action suits (SNC is already facing two), debarment orders from multinational agencies like the World Bank and the loss of exploration rights in developing countries where revelations about bribes prove to be embarrassing to high-ranking officials. Then there are the legal, accounting and ongoing court-monitoring fees associated with investigations and their aftermath. “Seven, eight, nine figures,” muses Toronto forensic accountant Ken Froese. “It can be very, very expensive.” Another veteran private-sector investigator, who spoke on condition that he not be named, said a conviction “can be devastating. It can destroy the company entirely.”
On May 23, 2005, two local managers with Niko Resources’ Bangladeshi subsidiary arrived in a Toyota Land Cruiser at the energy minister’s Dhaka home and handed over the keys to the brand new $190,000 vehicle. A few days earlier, the firm’s country manager Brian Adolph had sent a note to the minister, A.K.M. Mousharraf Hossain, thanking him for his past support and “hoping to receive the same” in coming days. Niko soon after ponied up $5,000 to fly Hossain to Calgary for a gas-exploration conference, with a stopover in New York to visit relatives. Just days after Hossain returned, a Bangladeshi newspaper ran a sensational story about Niko’s “gift.” A copy landed on the desk of a Canadian consular official, who promptly notified the RCMP.
Modern bribes seldom take the form of envelopes stuffed with cash. Rather, the bribe may be an overpayment to a vendor, who in turn passes the excess funds on to a local official. In other cases, a bureaucrat may end up with a nice car because a company manager or an agent dropped the keys on the bureaucrat’s desk and then reported the vehicle stolen. Corporate social-responsibility projects represent another channel for dispensing graft: when a company agrees to build a school or a water-treatment plant for a community near a remote mine, for example, it might authorize inflated payments to contractors, who kick back a portion to local officials.
“The goal is to get the money out of Canada and to a foreign jurisdiction without it appearing on the company’s books,” says one well-informed source, adding that senior management may not have even explicitly sanctioned bribery. “Every one of the mining companies will say, ‘That’s not happening,’” says the source. “In reality, they’re not watching that closely.”
In GEI’s case (the company declined to comment), the company’s new management blew the whistle on themselves, but often tips come from outside: consular officials, media reports or local activists. Increasingly, notes Boscariol, a Canadian firm that has become a foreign-takeover target will find itself facing uncomfortable questions from the acquiring firm’s due-diligence teams. He recalls a client in negotiations with a large U.S. private-equity player that wanted to see the company’s anti-corruption program and vet its contracts in the developing world. “They came back with blank stares.”
Staff Sgt. George Prouse, who heads the RCMP’s international anti-corruption unit in Calgary, says his investigators now routinely get calls from U.S. Department of Justice or Securities and Exchange Commission officials who have unearthed something about a Canadian company. “Quite often,” he adds, tips come from environmental or social-justice NGOs operating in the developing world. Others may originate with a competitor. Such leads may be attempts to discredit a firm, or they could be genuine leads, Prouse acknowledges. “It’s like any complaint: there could be motives that are not known to us.”
When the Mounties begin following up, they take all the usual investigative measures: company records, search warrants, production orders. But because the alleged crimes likely took place abroad, the process involves cross-border requests that can take months or years to complete. “You’re relying on a diplomatic process, and it goes on to some overworked police officer’s desk,” says Prouse. “It’s bottom-drawer stuff. You could be waiting a long time.”
In Niko’s case (company officials did not respond to interview requests), the original tip occurred in 2005, but Prouse’s team didn’t start collecting information until 2008. They ended up visiting six different countries as they followed the money. But, says John Boscariol, the firm’s officials didn’t know about the probe until the RCMP was almost three years into the investigation.
If Canadian corporations want to peer into the abyss, they need only ponder the fate of Siemens AG, the global tech and manufacturing giant. Targeted by German and U.S. investigators in the mid-2000s, the venerable firm became embroiled in a sensational scandal that would eventually cost it an astonishing $1.6 billion in fines—the largest corruption penalty anywhere, ever. Siemens’ own internal investigation—1,700 employee interviews, 14 million documents, and 38 million financial transactions checked—revealed the staggering size and pervasiveness of the rot. The company had “cash desks” where employees could withdraw huge amounts with which to bribe local officials: $18.7 million in Venezuela, $5 million in Bangladesh, $15 million in Argentina; the list goes on and on. As a summary of the investigation notes, such practices were neither isolated nor the handiwork of low-level managers. “Problems existed, albeit to differing degrees, across several Siemens operating groups.”
In the summer of 2007, the Siemens board installed a new CEO, Peter Löscher, who promptly declared that the company henceforth would walk away from dirty deals. “It wasn’t a change in the culture,” insists Siemen’s general legal counsel and director Peter Solmssen, who joined the company as part of the epic cleanup operation that began in 2007. “It was a change in the leadership culture.”
Andreas Pohlmann, a former chemical-industry executive, was brought in to take command of Siemens’ compliance group. He oversaw a drastic expansion of its ranks, from 86 to more than 580 today—a kind of in-house global police force. Hentie Dirker, an engineer turned sales and marketing manager, had worked for Siemens for about a decade when he was tagged to take over compliance oversight for the company’s South African operation. He moved to the company’s Burlington, Ont., office in 2009.
Rather than sending in armies of nitpicking lawyers, as other firms do in such cases, Siemens turned to its line managers to do the monitoring. “This is probably one of the biggest aspects that made the implementation of compliance and the associated controls such a huge success within Siemens,” Dirker says.
As a result, the process for bidding on government projects has become much more formalized and transparent. Siemens developed software tools to screen deals not just for technical and financial risks, but for compliance pitfalls as well. “The compliance officer,” says Dirker, “has the power to reject any proposed bid if it is found that there are corruption or bribery risks” that can’t be mitigated with air-tight contracts.
The company also began publishing quarterly compliance reports, which compile statistics on calls to the whistle-blower hotline and how the firm handled breaches. As Solmssen points out, in a company with 400,000 employees worldwide, it isn’t possible to snuff out breaches completely: “We have to be prepared that we’ll have ongoing compliance challenges.”
Anti-corruption experts suggest a number of measures firms should take in the face of bribery risks. Joe Zier, of Deloitte, says companies should first take stock of where they are operating and understand the specific risks in each jurisdiction, including vulnerability to prosecution by U.S. agencies. He also says companies should be doing much more rigorous due diligence on the agents they recruit to handle local operations.
Forensic accountant Ken Froese, whose firm is acting for SNC shareholders in a class-action lawsuit, warns that he’s seen many firms go through the motions without changing their MO. “A lot of companies read the legislation, put in place the steps and forget about it. That’s not living the compliance. You have to believe what you put in place and provide proper leadership.”
According to the RCMP’s George Prouse, that translates into detailed training for employees, with a focus on working through various scenarios that could come up, and having bilingual managers on the ground. “You actually have to go and watch,” says one veteran forensic accountant. “Often, it’s a series of small bad choices rather than one big, bad decision.”
Firms and boards also have to grapple with what to do—and how much to disclose to investors—when they uncover evidence that employees or agents appear to have run afoul of Canada’s anti-corruption laws. In the U.S., companies can make voluntary disclosures to the SEC or the DOJ and then hire outside forensic firms to conduct their own investigation in exchange for what’s called a “deferred prosecution agreement,” which means the authorities can hold off on laying charges.
But Canadian law currently doesn’t allow voluntary disclosure, says Staff Sgt. Lise Faucher, who heads the RCMP’s Ottawa anti-corruption unit. “Companies who do a joint U.S.-Canada disclosure expect the process to be similar,” she says, but it’s different in each country. Here, Faucher adds, “voluntary disclosures are complaints of possible criminal conduct and the allegations will be investigated thoroughly by the RCMP. Immunity of prosecution is not provided to companies who self-disclose the wrongdoings of employees.”
Solmssen, who has seen a huge company come to terms with its own culpability, says it’s unfortunate that Canada’s rules don’t allow for immunity for disclosure. “It can’t be a Get Out Of Jail Free card,” he allows. But voluntary disclosure rules effectively allow law-enforcement agencies to rely on companies to figure out what went wrong and then take their own corrective measures. “It’s foolish not to use that asset,” he says. “You want companies to find [corrupt employees] and stop the bad behaviour.”
That was the outcome for Siemens, he says, which offered amnesty to employees and managers who felt they had no choice but to bribe local officials as the company’s higher-ups pressed for growth at any cost. Still, change was a difficult pill to swallow for a company that had operated by a different rule book since the 1950s, Solmssen says. “There was a fear that if we cleaned things up, we would lose 30% of our revenues. That didn’t happen.” Siemens revenues, profits and market share have all rebounded, in fact, and the company has sought to reposition itself as a global advocate for corporate anti-corruption measures.
Andreas Pohlmann, the compliance czar who shook up Siemens, was recently hired by SNC-Lavalin to overhaul its compliance program. Solmssen urges the company to pay very close attention to what Pohlmann proposes. “He’s very thorough,” Solmssen says. “They’ve picked a great guy, and they’ll come out a better company for it.”
But don’t be lulled by Solmssen’s sanguine tone. Siemens, after all, spent years in purgatory, while some American business people are actually doing time. As SNC’s board knows all too well, corporate Canada is only at the beginning of this sordid mess. And it will get worse before it gets better.