Quebec’s anti-corruption law proves to be a niche market for accounting firms

Quebec’s anti-corruption law, adopted more than a year ago in the wake of allegations of bribes, collusion, influence peddling, and widespread corruption in the construction industry, is proving to be good business for accounting firms.

Adopted more than a year following the launch of the Charbonneau Commission, a public inquiry mandated to examine potential corruption in the awarding and management of public construction contracts, the Integrity in Public Contracts Act (Act) compels companies to obtain a seal of integrity if they wish to bid on the billion dollars in contracts awarded annually in the Quebec public sector.

Under the Act, the province’s securities commission is the public guardian responsible for granting authorization to enterprises in a call for tenders or an award process for a contract or subcontract with a public body. The Autorité des marchés financiers (AMF) has sweeping discretionary powers to determine the integrity of enterprises and of its shareholders, partners, directors or officers and of any person or entity that has direct or indirect legal or de facto control over the enterprise. The AMF, however, has no choice but to blacklist an enterprise if the company or any of its directors, officers or shareholders holding 50 per cent or more of voting rights, have in the preceding five years been found guilty of a long list of offences.

The AMF works closely with Quebec’s anti-corruption police squad, otherwise known as UPAC. After an authorization request has been submitted by an enterprise to the AMF, the financial watchdog refers the matter to police, who conduct an investigation and scour their databases to see if any of the company’s principals are the subject of investigations or have been named at the Charbonneau Commission. UPAC then provides the AMF with an advisory opinion. Based on the UPAC report, the AMF notifies the applicant about its intention to either to grant or refuse an authorization. In either case, the company’s name enters into a public register.

Jean-Paul David, a partner with the Raymond Chabot Grant Thornton, one of Quebec’s largest accounting firms. In almost all cases, companies who have been blacklisted will have to stop working on public contracts already underway. Even more damaging, the business will automatically be listed in the Register of enterprises ineligible for public contracts (RENA).

“To be listed on RENA can be a very hard blow to a company,” said David, who is part of the recovery and reorganization group in Montreal. “It can have immediate consequences, such as losing all government contracts, unless the provincial government makes an exception for work already underway. Also, to be on RENA is to be in the public eye: your clients, your suppliers and your bankers all end up finding out that you are in RENA, and that has very important consequences.”

When the Integrity Act was introduced in December 2012, the Quebec government initially required companies bidding on public contracts worth $40 million or more to obtain authorization. That figure has now dropped to $10 million, and the Quebec government has sent out clear signals that it intends to drop the threshold below the $10 million mark in the future. In Montreal, that figure is even lower, plummeting to $100,000 or more for contracts on road, sewer or water-main projects.

That’s when accounting firms come in. A growing number of enterprises, principally in the engineering and construction sector, are turning to accounting firms to help and guide them with the AMF authorization process. “They have one shot, and they want to do it right and so they come to us,” said Marie-Chantal Dréau, a partner at PwC Canada in Montreal who leads the forensic services practise for the Quebec region.

Accounting firms assist clients in a variety of ways, and at different phases of the AMF vetting process. When clients are in the process of preparing their application, accounting firms will begin by analysing, if not even helping them to develop, internal governance structures, with an emphasis on ensuring that independence is a cornerstone of their operations. They also conduct management reviews, examine the company’s ethical and financial policies and procedures, and often times perform forensic investigations to look for evidence of wrongdoing.

“What you want to prove (to the AMF) is that you have enough independence on your operations that non-ethical behaviour would be caught or at a minimum would be questioned,” explained Dréau, CPA•CA, CA•IFA, MBA, CFE. “Then we look at their policies and procedures as it relates to integrity (to determine) if they have a proper code of ethics that addresses fraud, bid-rigging, and other such issues that were part of the industry motto before. You also want to make sure that before you submit an authorization request to the AMF that you have gotten rid of the bad apples.”

Accounting firms also step in when the AMF warn companies by letter that they are about to be refused. In such cases, the AMF spells out the reasons why they are about to be refused and then provides companies with an option: either withdraw its application or provide the AMF with additional information within 10 days that may help sway the financial watchdog to change its mind in the company’s favour. Some companies opt to withdraw their application because the consequences of being registered in the RENA registry are too deleterious, said David. Others turn to accounting firms to help draft a response to the notice of refusal. “We then often need to educate companies as to what they missed in providing the AMF with some comfort, and (help them) answer every single question the AMF is putting on the table,” said Dréau. “The notice of refusal provides reasons for the refusal so you know what needs to be addressed. Smaller companies don’t necessarily provide all the information the AMF or UPAC needs to give a positive response.”

Sometimes, the AMF hands out a conditional authorization in which case the company has made a commitment to put in place certain measures and to have them verified by an independent monitor such as an accounting firm. If the company fails to meet its obligations, then it risks losing its authorization.

All in all, it’s a new, exhaustive, and time-consuming process that is hard on companies, said David. Before the introduction of the Act, accounting firms were providing these specific services to public companies that had to comply with National Instrument 52-109 or the 2002 U.S. Sarbanes-Oxley Act.

But with the threshold likely to drop in the foreseeable future to below $10 million, chances are it will spur new growth opportunities for accounting firms. Indeed, smaller regional accounting firms like Le Groupe Amyot Gélinas are now considering entering the market. “It’s all about helping our clients,” said Marc Legault, CGA, of Amyot Gélinas. Though the majority of the clients now come from the construction and engineering sector, the Act covers all public contracts. It’s only a matter of time before other sectors will begin to seek out the expertise provided by accounting firms, said David. It’s also likely that there will be an influx of small-and-medium sized enterprises that will have to go through the vetting process, and that presents a different challenge to accounting firms. “Smaller companies are differently structured and have different means so they are likely going to come in and ask us what is sufficient and how to adapt it to their reality,” remarked Dréau. “We are going to have to provide different levels of assistance, much more practical.”

But it is not a line of business that will in and of itself sustain an accounting firm, warned David. “It’s a niche market,” said David. “It’s a market that will likely grow as the thresholds diminish, but I don’t think that there is enough volume to do just this.”

Tough new anti-corruption laws in the horizon

Canadian companies who paid little heed to anti-bribery compliance can no longer afford to be complacent following proposed amendments that will beef up Canada’s anti-corruption laws and bring it somewhat in line with jurisdictions such as the United States and the United Kingdom.

Under proposed amendments to the (CFPOA) maximum jail times have been increased, territorial jurisdiction expanded, facilitation payments possibly being phased out and most notably a new “books and records” offence created that will hold senior corporate officials and boards of directors accountable for misdeeds.

The federal government’s latest effort to combat corruption and bribery by Canadians in foreign markets comes on the heels of stinging rebukes from international organizations like the Transparency International and the Organization for Economic Cooperation and  Development (OECD) for failing to enforce its anti-corruption laws. A 2011 OECD report “welcomes Canada’s recent enforcement efforts” but describes Canada’s legislative  and institutional framework as “problematic.” To date, there are 35 ongoing investigations but only three convictions under the Act. In stark contrast, 58 individuals and 28 corporations have been convicted in the U.S.

“The government is in a certain sense playing catch up with jurisdictions in the U.S. and the U.K. in its efforts to convince Canadian business not to engage in corrupt practices overseas so it is trying to muscle up its legislation,” remarked Peter Kirby, whose practice covers the spectrum of cross-border disputes, trade and regulatory compliance issues at Fasken Martineau DuMoulin LLP in Montreal.

With the passage of Bill S-14 (the Fighting Foreign Corruption Act), now before the Senate, it is widely expected that more anti-corruption investigations will be launched and more charges will be laid. Besides increasing the maximum jail time to 14 years, up from the current five, Bill S-14 grants the Royal Canadian Mounted Police exclusive enforcement jurisdiction – a seemingly technical but very important amendment, according to Toronto lawyer Milos Barutciski, co-head of international trade at Bennett Jones LLP. While the RCMP has two specialized investigation teams (based in Ottawa and Calgary) that are responsible for the investigation of any potential breaches of the CFPOA, at present any police officer in Canada has the authority to lay charges. The proposed amendment is more than welcome as it will eliminate the potential for any jurisdictional conflicts between federal and provincial law enforcement agencies, says Barutciski.

anticorruptionEliminating the notion of territorial jurisdiction by allowing authorities to prosecute Canadian citizens for offences under CFPOA wherever they may be living and even in absentia is judicious, adds Barutciski. “Nationality is basically a traditional approach on jurisdiction that made sense at a different time,” said Barutciski, who took part in the government’s consultation process on the changes. “It was very difficult for a company that was involved in this to actually use this as a defence. What company that cares one bit of its reputation and its investors wants to be able to say we did it but Canada has no jurisdiction so we are innocent.”

The creation of a books and records offence effectively lowers the bar for prosecutions of anti-corruption offences and brings it in line with U.K. and U.S. anti-bribery laws, assert experts. Proving bribery offences is notoriously difficult, points out Ottawa lawyer Richard Wagner, senior partner at Norton Rose Canada LLP. The proposed amendment, which will make it a criminal offence to make, falsify or conceal records and payments relating to the bribery of a foreign public official, will arguably make it easier to achieve convictions under the Act. In the U.S. the majority of cases have been prosecuted under book and records offenses “because it is so much easier to prove,” says Wagner, an international law expert.

“Right now you have to prove there was intent, mens rea, by offering or paying a bribe,” explained Wagner. “With the new offense, all you have to prove is that the books and records did not reflect the bribe that was paid. So what’s going to happen in Canada is a similar evolution to the U.S. where most cases or a large number of case are prosecuted under books and records because it is usually so difficult to prosecute bribery offenses.”

A books and records offence will also entail broader obligations. It will hold not only corporate officials who have arranged or paid the bribe accountable but also senior corporate officials — including chief financial officers, chief executive officers and members of the Board of Directors – criminally liable if they turned a blind eye or ignored expenditures that were not inaccurately recorded. “In other words it’s not just the guy who did the bad thing; now it’s people after the fact,” explained Barutciski. “It puts a real onus on corporate officials to pay attention – even if their boss tells them to do it – on pain of their own criminal culpability. That is why it’s such a big thing.”

But though a books and records offence should be ostensibly lead to more investigations and prosecutions in Canada, it still will likely be more difficult to prove than in the U.S. That’s because in the U.S. the books and records provision is enforced by the Securities Exchange Commission (SEC). The SEC, a civil law enforcement agency, has a lower burden of proof than the U.S. Department of Justice in prosecuting violations. The SEC has jurisdiction over issuers and its employees and agents and can bring civil charges for violations of the anti-bribery provisions and the books and records and internal controls provisions. “It’s unfortunate that we are relying only on criminal enforcement,” said Barutciski. “It’s important to adopt a civil or administrative remedy as well.” Barutciski suggest that provincial securities commissions be “sub-delegated” to enforce books and records offenses.

Perhaps the most controversial amendment involves the possible elimination of facilitation payments. Unlike bribes, facilitation payments are payments made to a government official to facilitate approval of some type of business transaction or activity.  As points out Kirby, to get things done in many jurisdictions you need to pay off civil servants because they consider facilitation payments as part of their income. At present, facilitation payments are not considered bribes under the CFPOA. While all of the other provisions of Bill S-14 will become law on Royal Assent, the provisions eliminating the facilitation payments will come into force at a date to be determined by the Cabinet, prompting speculation that the Canadian government is adopting a wait-and-see approach. In the U.S. facilitation payments are not illegal. The U.K. Bribery Act is “silent but basically does not allow facilitation payments,” said Wagner, adding that it has yet to be enforced. “If the Americans get rid of facilitation payments, I would expect the Canadian government to put that in place,” added Wagner.

In any case, the overriding message behind the federal government’s efforts to tackle corruption and bribery by Canadians in foreign markets is clear. The traditional approach that business have long taken — “when in Rome do as Romans do” —  is no longer acceptable. Canadian companies active on the international scene will have to ensure that they adopt and implement effective compliance programs, particularly since the new amendments will make it easier to take legal action against Canadian individuals and companies. “It adds another layer of compliance that business have to watch,” said Kirby. “Does it make life tougher? Life has been getting tougher in terms of compliance for the last decade at least. It’s the cost of doing business.”

This story was originally published by The Lawyers Weekly.