Update on Government Procurement in Canada: Key International Developments in 2014
1. New Debarment Rules for Federal Government Contracts: The “Integrity Framework”
Federal debarment of contractors that violate federal contracting rules is sharply on the rise. In March 2014, the Canadian government adopted federal procurement “Integrity Framework” regulations that state that companies convicted in Canada or internationally for offences such as fraud, bribery and extortion would be disqualified for a 10-year period from bidding on public works contracts.
The recent Integrity Framework issued by Public Works and Government Services Canada (PWGSC) is fuelled by a desire for government accountability in an age of unprecedented government spending. Contractors must be keenly aware of this heightened level of government scrutiny regarding the performance of federal government contracts and must have a practical approach in place to deal with alleged violations. The consequences of debarment are significant and include the right of the government to terminate the contract for default and to demand the immediate return of any advance payments made. The federal government also has the right to pursue whatever other remedies are available to it, including suing for damages that it may incur as a result of the termination.
The federal government uses debarment to ensure that contracts are awarded only to “reliable and dependable” contractors. In simple terms, debarment amounts to a government-wide ban. Federal departments are prohibited from doing business for a period of 10 years with an individual contractor that has engaged in improper conduct. Although debarments are not intended to be punitive, for contractors whose livelihoods are even somewhat dependent on federal contract performance, debarment not only is undesirable but can be tantamount to professional and financial ruin.
Unlike in other jurisdictions, Canada’s debarment regime is not codified under any particular statute or regulation but rather is a policy administered through a series of certifications and standard terms and conditions given by the bidder or contractor in its proposal or contract with the government. (See Integrity Provisions in the Standard Acquisition Clauses and Conditions Manual.)
A contractor may be debarred from participating in government procurements for 10 years from the date when the contractor or its affiliate has been convicted of an “integrity offence.” Integrity offences include bribery of Canadian and foreign public officials, extortion, tax evasion, bid-rigging, forgery, fraudulent manipulation of stock exchange transactions, insider trading, falsification of books, money laundering and acceptance of secret commissions.
Canada’s debarment regime is implemented by way of a series of certifications provided by the bidder in federal government solicitation documents and resulting contracts. The bidder or contractor, as the case may be, must certify in its bid (or contract) that neither it nor any member of its board of directors or any of its affiliates has a conviction or has been discharged of any of the following integrity offences during the previous 10 years:
- paragraph 80(1)(d) (false entry, certificate or return), subsection 80(2) (fraud against Her Majesty) or section 154.01 (fraud against Her Majesty) of the Financial Administration Act;
- section 121 (fraud against the government and contractor subscribing to election fund), section 124 (selling or purchasing office), section 380 (fraud against Her Majesty) or section 418 (selling defective stores to Her Majesty) of the Criminal Code;
- section 119 (bribery of judicial officers, etc.), section 120 (bribery of officers), section 346 (extortion), sections 366 to 368 (forgery and other offences resembling forgery), section 382 (fraudulent manipulation of stock exchange transactions), section 382.1 (prohibited insider trading), section 397 (falsification of books and documents), section 422 (criminal breach of contract), section 426 (secret commissions), section 462.31 (laundering of proceeds of crime) or sections 467.11 to 467.13 (participation in activities of criminal organization) of the Criminal Code;
- section 45 (conspiracies, agreements or arrangements between competitors), section 46 (foreign directives), section 47 (bid-rigging), section 49 (agreements or arrangements with federal financial institutions), section 52 (false or misleading representation) or section 53 (deceptive notice of winning a prize) of the Competition Act;
- section 239 (false or deceptive statements) of the Income Tax Act;
- section 327 (false or deceptive statements) of the Excise Tax Act;
- section 3 (bribing of a foreign public official), section 4 (accounting) or section 5 (offence committed outside Canada) of the Corruption of Foreign Public Officials Act; or
- section 5 (trafficking in substance), section 6 (importing and exporting) or section 7 (production of substance) of the Controlled Drugs and Substance Act.
Bidders and contractors must provide a complete list of names of all individuals who are currently their directors. When requested, the contractor must provide the government with a Consent to a Criminal Record Verification form for directors or owners. As part of the criminal records verification, persons may be required to provide fingerprints or further proof of identity to complete the verification process.
The contractor must diligently update, by written notice to the contracting authority, the list of names of all individuals who are directors of the contractor during the entire period of the contract (or standing offer or supply arrangement).
Contractor’s Liability for Non-Compliance
A bidder that is unable to provide the certifications will be “debarred” or disqualified from the bidding process.
If, during the term of the contract, the contractor or its affiliate is convicted of an integrity offence, the government has the right to terminate the contract for default, set aside the standing offer and terminate any call-ups or cancel the supply arrangement and terminate any resulting contracts. The government also has the right to demand the immediate return of any advance payments made and to pursue whatever other remedies are available to it, including the right to sue for damages that it may incur as a result of the termination.
In cases in which the conviction or act relates to an individual who is currently a director of the contractor and the individual resigns or is dismissed from the board of directors within a reasonable period of time, the government may continue the contract, standing offer or supply arrangement with heightened scrutiny, subject to other default conditions.
If, during the term of a contract, concerns emerge about the contractor, the government retains the right to conduct an audit or procurement review to verify the presence of irregularities.
After 10 Years
Once the 10-year period has passed, in order to be eligible to do business with the government, contractors are required to have adequate compliance measures and controls in place to avoid the reoccurrence of the activity that resulted in the conviction.
Who Is Affected
Clearly a contractor that has been convicted of an integrity offence cannot solicit or enter into any contract with the government during the 10-year period of the ban. However, the debarment extends to the affiliates of the contractor. The definition of affiliates is broad and includes parent companies, subsidiaries, sister companies and directors, provided that they have control of each other or are under the common control of a third party. Indicia of control include interlocking management or ownership, identity of interests, family members, shared facilities and equipment or common use of employees.
Therefore, if the parent, subsidiary or sister company of the contractor has been convicted of an integrity offence during the 10-year period, the contractor is ineligible to solicit or enter into contracts with the government.
Similarly, a director who controls or possesses the power to control the contractor or its parent, subsidiary or affiliate and who has been convicted of an integrity offence will render the contractor ineligible to participate in a solicitation or contract. In other words, only one convicted director is required to render the contractor ineligible to conduct business with the government.
Convictions of Foreign Affiliates
The contractor must also certify that within the past 10 years, neither it nor its affiliates have been convicted of any foreign offence that Canada deems to have “similar constitutive elements” to the listed Canadian integrity offences. Foreign contractors must certify that they have not been convicted of foreign offences similar to the Canadian offences. Similarly, Canadian contractors must obtain confirmation from their foreign affiliates that they have not been convicted of foreign offences similar to the integrity offences. This may result in a situation in which a Canadian contractor remains debarred by Canada for a 10-year period as a result of a foreign conviction against a foreign affiliate even though the Canadian contractor was not involved in the foreign offence. Further, this will have an impact on contractors in Canada with subsidiaries and sister companies operating in jurisdictions with a high risk of corruption.
The contractor must ensure that all subcontracts include integrity provisions that are “no less favourable to Canada” than the provisions that are included in its contract with the government. In this way subcontractors are now indirectly required to comply with the integrity provisions, and contractors are responsible for ensuring this compliance. Bidders are encouraged to give early consideration to the integrity terms that are to be included in their subcontracts and to ensure that subcontractors can meet those requirements.
The government has retained for itself the right to enter into a contract with an otherwise non-compliant bidder when it is in the “public interest” to do so, which includes when no one else is capable of performing the contract or for reasons related to emergency, national security, health and safety or economic harm.
Hewlett-Packard to Test New Integrity Provisions
Hewlett-Packard (HP), one of the leading technological suppliers to the government of Canada, is the first company to test the reach of the new Integrity Provisions. An HP Russian subsidiary pleaded guilty in September 2014 to bribery of a foreign official under the U.S. Foreign Corruption Practices Act and was fined US$58.7 million. Under the Integrity Provisions, HP now faces an automatic ban of 10 years for any procurement contract with the Canadian government. It remains to be seen how the Integrity Provisions will impact HP’s government contracts; officials from PWGSC have indicated that they need more time to determine the status of the other companies with the foreign convictions and how this will impact HP’s ability to supply the government of Canada.
There have been some warnings that the new Integrity Framework could give rise to investor- state dispute claims by debarred companies, under the North American Free Trade Agreement and eventually the Canada-European Union Comprehensive Economic and Trade Agreement. Both agreements contain investor-state provisions which give foreign companies the right to sue governments for damages for unfair treatment.
Sources in the public domain suggest that in addition to HP, Siemens AG and BAE Systems PLC are among the companies facing this 10-year ban from federal government contracts.
- In December 2008, Siemens AG pleaded guilty in the United States to violating the Foreign Corrupt Practices Act.
- In February 2010, BAE Systems PLC was convicted of felony conspiracy to defraud the U.S. government and fined $400 million. It was also required to pay a fine in the United Kingdom on bribery charges.
- In April 2014, HP acknowledged it had violated the Foreign Corrupt Practices Act when its subsidiaries in Russia, Poland and Mexico made payments to government officials there to obtain or retain public contracts.
Debarment for 10 years is a harsh penalty that can have devastating and long-lasting effects on a contractor. It is clear that the Integrity Provisions create yet another facet of risk management for companies engaged in federal government procurement. Not only must these corporations be free and clear of any convictions in Canada, but they must ensure that any affiliates (including their officers and directors) are also free and clear of any convictions, in any jurisdiction. The implications of the Integrity Provisions remain to be seen as they play out for HP, but the writing is on the wall: corporations could face much greater difficulty regarding government procurement should the actions of their affiliates lead to convictions for bribery, fraud or anti-competitive behaviour.
Contractors can minimize exposure by taking the following proactive measures when legitimate concerns or potential issues arise:
- conducting a thorough internal investigation as soon as potential violations are known or suspected;
- self-reporting to the government, under certain circumstances, on a voluntary basis; and
- preparing a complete and thorough assessment of all possible legal defences and equitably mitigating factors, including whether a public interest exemption applies.
In sum, a robust ethics and compliance program combined with a practical legal strategy will assist contractors in navigating the rough seas associated with this new debarment regime in Canada.
2. Canada-European Union Comprehensive Economic and Trade Agreement
On September 26, 2014, Prime Minister Stephen Harper, European Commission President José Manuel Barroso and European Council President Herman Van Rompuy signed the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). CETA is expected to significantly increase the ability of European Union (EU) companies to sell to not only the federal government but also provincial and municipal procurement entities. The released text of CETA is currently undergoing a legal scrub and will be introduced into the various national legislatures for ratification in late 2015.
Federal government contracting is already subject to international disciplines under the World Trade Organization Agreement on Government Procurement (WTO GPA) and Chapter Ten of the North American Free Trade Agreement (NAFTA). However, allowing European companies access to lucrative provincial and municipal procurement markets is a game changer. Indeed, the overall value of contracts awarded by the federal government in Canada is approximately C$25 billion per year, while the value of contracts awarded by sub-federal entities exceeds C$130 billion per year. Until now, the provinces and municipalities have not been subject to widespread international disciplines governing their procurement process and contract awards. Although some provincial and territorial government entities are subject to the procurement disciplines in the Agreement between the Government of Canada and the Government of the United States ofAmerica on Government Procurement (Canada-U.S. GPA) vis-à-visU.S. suppliers, municipalities, the MASH (municipal, academic, school boards and hospitals) sector, provincial Crown corporations and utilities have never, until now, been subject to permanent international disciplines in their public procurements. Indeed, according to the EU:
The Public Procurement market access offer that Canada made in July 2011 is the most ambitious and comprehensive offer Canada and its Provinces have made to any partner, including the US.... The outcome regarding the inclusion of regional and local government entities, including agencies, crown corporations, and the MASH sector ... is highly satisfactory.
CETA means that Canadian and U.S. companies bidding on large lucrative provincial and municipal procurements will encounter much more competition from EU companies than they have in the past. Canadian companies for their part ought to have greater access to EU government contracts at all levels.
It also means that provincial/territorial and municipal government procuring entities and now utilitieswill have to be more careful about how they draft and conduct their procurements and contract awards. They will have to make sure that their publication of procurement opportunities, procurement processes, selection and evaluation criteria are consistent with the requirements in the CETA provisions. Sole sourcing will be much more restricted and permitted only under prescribed exceptional conditions. Provinces and municipalities will also have to introduce some form of bid review mechanism whereby EU suppliers can challenge a procurement before the contract is awarded and have corrective remedies available. For federal contracts this is done by the Canadian International Trade Tribunal, which is the federal government bid review mechanism under the WTO GPA and NAFTA. In general, most treaties have strict time limits on when a supplier may challenge the procurement process or contract award, and generally it is within 10 working days after the basis of the challenge becomes known to the supplier. A similar time delay is included in CETA.
The CETA disciplines on procurement will apply only to contracts above a certain designated threshold value. Thresholds will be expressed in special drawing rights (SDRs): 1 SDR = C$1.575 for 2012-2013. For federal contracts for goods and services, this threshold is $205,000 (130,000 SDR). For provincial and municipal contracts for goods and services, this threshold is $315,500 (200,000 SDR). This is also the threshold for academic institutions, school boards and hospitals (the MASH sector). For procurements of goods and services by Crown corporations, the threshold is $560,000 (355,000 SDR). For contracts for goods and services procured by utilities, the threshold is double at $630,000 (400,000 SDR). For construction services purchased by all levels of government, the threshold is $7.8 million across the board.
Another significant commitment by Canada is the undertaking that all governments will create a single point of electronic access to bidding opportunities at all levels of government within five years from when CETA comes into force. Although not problematic for federal government contracting opportunities, which are currently posted on the MERX website or Buyandsell.gc.ca, this requirement may prove problematic for some provincial entities, and especially for municipal entities, the MASH sector and utilities, which do not currently post bidding opportunities in one portal.
The following sectors are excluded from CETA’s requirements:
- health services;
- ports and airports;
- procurements under $1 million in rural areas in the territories and Atlantic provinces for regional economic development purposes;
- public-private partnerships;
- shipbuilding and repairs; and
- national security procurements: that is, sensitive goods and services procured by security-mandated entities.
Exclusions will also apply to Manitoba, Newfoundland and Labrador, Nova Scotia, Northwest Territories, Nunavut, Prince Edward Island, New Brunswick and Yukon for specified procurement contracts of $1 million or less, intended to support small firms or employment in non-urban areas.
Although public transit is subject to the CETA procurement disciplines, Quebec and Ontario will be allowed to retain a 25% Canadian content requirement for procurement of public transit vehicles. However, as mentioned earlier, utilities and Crown corporations are not excluded and will be subject to the procurement obligations of CETA.
Looking ahead, provincial/territorial and municipal entities as well as utilities and Crown corporations may come under increasing pressure to open up their procurements to U.S. suppliers in a manner similar to that which has been provided for EU suppliers under CETA. Although this has been done in part in regard to provincial procurements, under the Canada-U.S. GPA, that agreement is not nearly as intrusive on provincial, municipal, Crown corporation and utility procurement practices as is CETA.
CETA will provide Canadian companies with preferential access and will cover goods and services supplied to EU-level institutions, 28 EU member-state governments and thousands of EU regional and local government entities and utilities operators.
Procurement thresholds will be defined in SDRs: 1 SDR = 1 euro = C$1.575. Examples of goods and services thresholds are as follows: for European entities and central member-state government entities, 130,000 SDR/euros; for sub-central entities, 355,000 SDR/euros; for utilities, 400,000 SDR/euros.
As indicated above, Canada will be required to implement a single electronic procurement website that combines information on all tenders at all levels of government to ensure that the EU companies can effectively take advantage of these new opportunities.
 Integrity Provisions — PN-107U1.
 PWGSC-TPSGC 229.
 Treaty Series 2010/5, in force February 16, 2010.
 CETA Landing Zones, November 6, 2012.