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.”

Quebec companies barred from bidding on public contracts have little chance of obtaining legal relief

Companies that have been barred from bidding on public contracts stand little chance of obtaining injunctive relief that would temporarily suspend a new law aimed at curbing corruption in the construction industry, following a closely-watched ruling by Quebec Superior Court.

In the wake of allegations of bribes, collusion, influence peddling, and widespread corruption in the construction industry, corroborated by testimony before the Charbonneau commission, the Quebec government passed legislation last December that 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 Integrity in Public Contracts Act (IPCA), 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 works closely with Quebec’s anti-corruption police squad . After an authorization request has been submitted to the AMF, it refers the matter to police, who conduct an investigation and then provides the AMF with an advisory opinion. So far, there have been 250 authorizations that have been submitted, 194 of which have been granted, some thirty-odd are still under study, and four have been refused, according to AMF spokesman Sylvain Théberge.

Les Enterprises Bentech inc., a Montreal numbered company that was refused an authorization by the AMF because it allegedly is a shell company, issued false invoices and failed “meet the high standards of integrity that the public is entitled to expect from a party to a public contract or subcontract,” is challenging the AMF’s interpretation of the integrity law in a case that has yet to be heard by the courts. In the meantime Bentech however sought an injunction that would allow the Montreal firm to complete a contract it was awarded. But Quebec Superior Court Justice Chantal Corriveau refused to provide an injunction that would suspend the AMF’s decision to blacklist Bentech. “Contrary to what Bentech submits, the Court cannot conclude that the decision by the AMF exceeded its competence,” said Justice Corriveau before adding that the legislator granted broad powers to the AMF that allows it to “weigh discretionary factors.”

The ruling underscores the challenges faced by companies who are blacklisted by the AMF, said Sébastien Laprise, a Quebec City lawyer with an expertise in public procurement law and municipal law. The new integrity law “is a law of public order and therefore judges will demand convincing evidence before even considering suspending the effects of the Integrity Act,” said Laprise of Langlois Kronström Desjardins, LLP. “That is going to be very difficult.”

Eric Simard, a Montreal lawyer who leads the construction practice group for Fasken Martineau DuMoulin LLP, asserts that unless the constitutionality of the integrity law is challenged companies will face a formidable task to “protect their interests” as temporary injunctive relief will be rarely granted in light of the ruling in 9129-2201 Québec inc. v. Autorité des marchés financiers 2013 QCCS 4857. “The only way that entrepreneurs who consider that their rights have been violated can protect their interests is to launch a frontal constitutional attack on this law,” remarked Simard.

Some believe that the law is ripe for challenge. Daniel Bouchard, the managing partner of the  Quebec City office for Lavery, de Billy,  believes that the new law grants the AMF far too extensive discretionary powers. Under the Integrity Act, the AMF may take into account a non-exhaustive list of factors in exercising its discretion, including whether an enterprise (or its majority shareholder or one of its directors or officers) has links with a criminal organization, was prosecuted for an offence listed in the Integrity Act, and whether the enterprise is under the direct or indirect legal or de facto control of another enterprise that has in the preceding five years been found guilty of an offense listed in the Act. More controversially, the AMF may also refuse or revoke any authorization if the enterprise fails to meet the “high standards of integrity that the public is entitled to expect from a party to a public contract or subcontract.”

“What does that mean,” asked rhetorically Bouchard.  “Personally I find that the legislator went too far and the risks for abuse are large. It’s difficult for me to say that the law is unconstitutional or illegal but they have given the AMF such large discretionary powers that it will often be questioned.”

Christopher Mostovac, a Montreal lawyer defending Bentech, does not intend to challenge the constitutionality of the law. When the case will be heard sometime next year before Quebec Superior Court, Mostovac will be pleading that the AMF went beyond the scope and parameter set out by the Integrity Act when it decided to blacklist Bentech.

“I am not going to take the position that this law is wrong or unconstitutional,” said Mostovac, who teaches a tax litigation course at the University of Montreal. “I am taking the simple position that in the case at hand the AMF has an absolute obligation to follow the parameters which the law gives it in attempting to determine who has a moral standard or who doesn’t, otherwise it becomes dangerous for all concerned because it exposes you to decisions of a completely arbitrary nature.”