Facilitation Payments Now Illegal Under Canada’s Foreign Corruption Law
On October 31, 2017, the federal government brought into force a pending amendment to the Corruption of Foreign Public Officials Act (“CFPOA”) likely to have a significant impact on many Canadian firms operating abroad. Starting on October 31, so-called “facilitation payments” – payments to low-level government officials to expedite or secure the performance of an act of a routine nature – will be illegal. Violations of the CFPOA have, historically, resulted in fines in the tens of millions of dollars for corporations, and can now attract prison terms of up to 14 years for individuals.
This amendment, which had been held in abeyance for over four years to allow companies to adjust their practices, was brought into force with only 24 hours’ notice. Companies must immediately review their current practices and procedures to ensure that they have properly implemented controls to prevent any such payments going forward.
The change flows from amendments made to the CFPOA back on June 19, 2013. Prior to the amendments, there were concerns that Canada could do more to fight international corruption by its citizens and corporations. As such, the amendments to the CFPOA focused on improving enforcement by, among other things, imposing “nationality jurisdiction” (which expanded the ability of the government to charge Canadian entities and individuals regardless of the jurisdiction where the acts took place) and the creation of a books and records offense to criminalize improper or fraudulent bookkeeping in connection with making or hiding bribes.
However, one aspect of those amendments was held in abeyance – a repeal of the section of the CFPOA that created an exemption for facilitation payments. At the time, the Canadian government made clear that this was being postponed so that companies would have an adjustment window to change practices and policies in order to eliminate these payments, although no time frame was given as to when the actual termination of the exemption would take effect.
What are “Facilitation Payments”?
Facilitation payments are aptly named – they are payments made to a public official facilitate a government action of a routine nature but excluding decisions to award or continue business. To some, these may simply appear to be bribes but on a smaller scale. To a degree it is a question of the character of the action requested – a facilitation payment usually must be made only to obtain a right or action to which the payee was already entitled. The payee is not paying the official to change, alter, or make a decision that would not otherwise be made. For this reason they are sometimes known as “grease payments” – they simply speed the way to a decision.
For example, paying a customs official to prioritize your paperwork so your goods, which were legal and entitled to an import permit, receive their permit speedily would likely be a facilitation payment. However, paying a customs official to change the designation on your goods so you may benefit from an exemption to which they are not otherwise entitled would not.
Divergent Examples – the United Kingdom and the United States
Usually we expect to see convergence among key players in the fight against corruption. However, in this case there are two divergent models. On the one hand, the United Kingdom’s Bribery Act, which came into force on July 1, 2011,has not recognized the legality of facilitation payments and does not draw any distinction between them and bribes. Conversely, the United States’ Foreign Corrupt Practices Act (“FCPA”) maintains an exemption, albeit a narrow one, for “grease payments”. The FCPA exception applies only to payments made to foreign official with the purpose to “facilitate or expedite routine government action”. The exception has been strictly interpreted in certain US court judgments, such as United States v Duperval which has introduced some confusion as to when and to whom it could apply. It should be noted that, because of the challenges in determining whether payments may clearly fall within this exception, many US companies have chosen to prohibit them regardless of their legal status.
This uncertainty may act as support for Canada to take the position it does - namely that any illicit payment to a government official is a bribe. Introducing the concept that certain payments may be allowed based on an interpretation of whether the requested action is of a routine governmental nature creates uncertainty. Bright line rules are easier for companies to implement, easier for companies to monitor, and easier for administrations to enforce.
One disadvantage of adopting such a bright line approach is that this puts Canadian companies at a competitive disadvantage over companies from other jurisdictions which do not ban facilitation payments. Those US companies that are prepared to make these kind of exempt payments (and comply with any applicable FCPA record-keeping and internal control requirements) now arguably have a greater degree of flexibility in ensuring that their routine actions, such as processing of permits or paperwork, are expedited. However, depending on the jurisdiction, this competitive disadvantage may be minimized by taking advantage of the other exemptions that are still available under the CFPOA.
Defences Still Available
There remain several defences or exemptions that will continue to be available for certain payments made to foreign officials. One relates to bona fide payments to officials (i) for valid promotional or demonstrative expenses, such as those for hospitality, meals, entertainment and other marketing activities, or (ii) related to the execution or performance of a contract with the foreign state. These exemptions are fairly limited but may cover certain payments that were previously exempt as facilitation payments.
Another defence allows for payments that are legal in the jurisdiction in which they are made. For example, in certain jurisdictions it is common to allow entities to pay government employees that are conducting inspections of the company’s facility a per diem to compensate the inspector for travel, food, and other costs. These payments are usually limited by specific statutory language. So long as the payment meets the requirements of local law for a permitted per diem, then there is no CFPOA violation.
These deserve a closer look by entities that have paid what would have previously been described as facilitation payments. This is particularly true in jurisdictions that allow for per diem and other payments of certain types to public officials for the performance of their duties. The removal of facilitation payments as a defence of first instance may drive companies to more rigorously analyze the laws of the jurisdictions in which they have projects to better buttress any claims regarding the legality of their payments.
The CFPOA changes will likely have an immediate impact by greatly influencing what defences may be available for Canadian entities conducting business in high corruption jurisdictions. Implementing the proper policies to ensure local pressure does not cause criminal liability will be important for Canadian entities in the future. If they haven’t already, companies operating in countries where grease payments are common should be considering and implementing strategies to avoid circumstances in which these payments will be requested and, where that is not possible, to take appropriate responsive action, including escalation to senior government officials if that is a viable option.
It will also be very important for US entities with either a Canadian subsidiary, or a Canadian presence (such as through listing or cross-listing on the TSX) to review their internal compliance controls. Previously, the US and Canadian regimes were roughly aligned on this issue, and a single policy regarding such payments could apply equally across the board. Under the new regime this approach may continue, but only if the more stringent Canadian standard is adopted.
Divergence between US and Canadian anti-corruption regimes continue to present challenges for companies operating from both jurisdictions. Another example is the recent US repeal of the US Securities and Exchange Commission resource extraction issuers rule which required project level reporting of payments to US and foreign governments. The Canadian version of these “publish what you pay” rules, the Extractive Sector Transparency Measures Act (“ESTMA”), is broader in scope and remains in force today.
The International Trade and Investment Law Group at McCarthy Tétrault has significant experience with corruption law related issues. This includes both investigations, enforcement and compliance planning and policy creation for both CFPOA and ESTMA matters.