Anti-Corruption Compliance In Import/Export Transactions 2017 ICPA Conference Toronto May 9, 2017 Brenda C. Swick 416 594 4052/bswick@dickinsonwright.com

Introduction PURPOSE: How to protect against anti-corruption compliance risks in export/import transactions Third party service providers play critical role in global supply chains, but may create corruption and other compliance concerns Importance of risk-based due diligence on proposed transaction and service providers to detect and prevent problems Importance of cooperation between customs compliance and legal department in conduct of due diligence and developing/implementing controls over transactions on an ongoing basis

Global Enforcement Trends Global enforcement is increasing U.S. Foreign Corrupt Practices Act remains most aggressively enforced foreign bribery law Other countries following suit: notably Brazil, China and India New tougher national laws Canada recently amended CFPOA to make it harsher Increased cooperation between law enforcement authorities in various countries Rise of compliance programs

Corruption is a Worldwide Concern The Corruption Perceptions Index (CPI) rank shows how one country compares to others included in the index based on the perceived level of public-sector corruption in a country.

Corruption of Foreign Public Officials Act The CFPOA contains two criminal offences relating to the corruption of foreign public officials: Bribing of a foreign public official to obtain an advantage Perpetration of accounting offences for the purpose of hiding bribery Punishment: Imprisonment up to 14 years

Application of Other Anti-Corruption Regimes to Canadians Canadian companies and their directors, officers and employees may be subject to enforcement actions in more aggressive anti-corruption regimes including United States – Foreign Corrupt Practices Act US companies and individuals Companies that have issued securities in the US and file periodic reports with SEC Non-US companies and individuals that cause, directly or through agents, acts in furtherance of the corrupt payment to take place within the territory of the US (e.g. meeting in US) United Kingdom – 2010 Bribery Act

Corruption of Foreign Public Officials Act Anti-bribery Provision (section 3) What is prohibited? Four key elements: Direct or indirect giving or offering of a benefit of any kind To or for the benefit of a foreign public official As consideration for act or omission in connection with performance of the official's duties or to induce the official to use his or her position to influence acts or decision of the foreign state In order to obtain or retain an advantage in the course of business Four elements merit special attention

1. Foreign Public Official CFPOA prohibits improper payments to “foreign public officials” Someone who holds a legislative, administrative or judicial position in a foreign state Someone who performs public duties for a foreign state (including someone working for a public commission or other authority) An official or agent of a public international organization Includes Officials and employees of a country’s customs service, import/export licensing and other regulatory agencies Private parties acting on behalf of foreign government departments

2. Business Purpose CFPOA prohibits payments for improper business purpose – broad coverage Payments for the purpose of i) causing foreign public official to fail to perform his duty; ii) securing an improper advantage; or (iii) inducing official to use his/her influence to obtain or retain business Includes payments made to foreign customs officers for the purpose of avoiding the payment of customs duties/taxes or compliance with foreign regulatory requirements for imported goods United States v. Kay et al. 359 F. 3d 738 (5th Cir. 2004)

3: Third Parties Recognition that third party can have significant impact CFPOA applies to direct and indirect offers or payments Prohibition against improper payments made directly to foreign public officials and through third party intermediaries Critical because companies rely upon third parties in connection with import/export transactions Canadian company may be liable for actions of customs broker, local trade consultant, freight forwarder which makes improper payment Company may be liable for improper payment made by third party to foreign official even without actual knowledge if evidence of “willful blindness” Failing to inquire when you know there is reason for inquiry (R v. Briscoe [2010] 1 SCR 411)

3. Third Parties & Risk Mitigation Mitigating Liability Associated with Third Parties Comprehensive pre-engagement due diligence of freight forwarders, customs brokers, logistics service providers, trade consultants to determine if they present any “red flags” Number of questions should be asked Reasons for further investigation? Risk Based Approach Consider Red Flags Abort engagements where unacceptable level of risk Adequate protections in third party contracts Due diligence should continue for duration of engagement through careful oversight and monitoring to FOLLOW THE MONEY

4. Facilitating Payments: Risky Business Exception to anti-bribery provisions for facilitating payments made to foreign public officials to expedite or secure the performance of routine government action including Processing official documents , visas Slippery slope: most companies prohibit them Does not include payments made to avoid the payment of customs duties; compliance with regulatory requirements Red Flag: any characterization of payment to customs broker, freight forwarder or agent as “facilitation payment” No exemption for de minimis payments

CFPOA: Accounting Provisions CFPOA prohibits certain accounting practices designed to disguise improper payments for foreign public officials 4. (1) Every person commits an offence who, for the purpose of bribing a foreign public official in order to obtain or retain an advantage in the course of business or for the purpose of hiding that bribery, (a) establishes or maintains accounts which do not appear in any of the books and records that they are required to keep in accordance with applicable accounting and auditing standards; (b) makes transactions that are not recorded in those books and records or that are inadequately identified in them; (c) records non-existent expenditures in those books and records; (d) enters liabilities with incorrect identification of their object in those books and records; (e) knowingly uses false documents; or (f) intentionally destroys accounting books and records earlier than permitted by law.

CFPOA: Accounting Requirements It is an offence, for the purpose of concealing bribery to a foreign public official to: Keep secret accounts Falsely record, not record or inadequately identify transactions Enter liabilities with incorrect identification of their object Use false documents Destroy accounting records earlier than permitted by law Companies should have a robust system of accounting and financial controls which Accurately record transactions with enough detail to identify the transactions (quantitatively and qualitatively) Provide reasonable assurances that transactions are executed in accordance with management's authorizations

CFPOA Compliance Risks Avoidance of Customs Duties/Taxes Payments made to customs officers for the purpose of avoiding customs duties constitutes an unlawful bribe Risk may arise in connection with dealings though third party intermediaries United States v Panalpina Swiss freight forwarder paid $27 million in bribes to Nigerian and other foreign customs officials to secure preferential customs treatment, customs clearance and import permits in Angola, Nigeria, etc. on behalf of oil field service customers Customers investigated Negotiated non prosecution agreements and paid $237 million in fines

CFPOA Compliance Risks Red Flags: Especially in high risk countries Arrangements which suggest non-compliance with local customs rules Unusual cost/expense charges which may be disguised requests for reimbursement for improper payments customs entry documents declaring customs value at unusual low amount Requests for reimbursement for “customs processing fees”, “customs expediting fees”, “administrative fees”, “special handling charges” Unusual shipping and routing arrangements Contracts with third parties should include audit rights to ensure compliance with CFPOA/FCPA Should be invoked at first sign of “red flag” suggesting possibility of improper payment

CFPOA Compliance Risks Avoidance of Import Regulatory Requirements Can be complex regulatory requirements – non-transparent Time consuming and costly to comply Any payment made to foreign official for the purpose of avoiding compliance constitutes unlawful bribe Characterizing payment as facilitating payment would be violation of books and record provisions Panalpina and Helmerich & Payne cases Noble Corporation SEC charged three oil services executives with bribing customs officials in Nigeria to obtain illicit permits for oil rigs in order to retain business under lucrative drilling contracts

CFPOA Compliance Risks Under-Invoicing Could occur where customer is importer Request to declare value lower than actual sale price of goods To understate value to avoid duties Violation of books and records requirements in accounting provisions False accounting record Also violations of domestic law

CFPOA Compliance Risks Offshore Payments to Third Party Intermediaries Request to pay service fee to an offshore account could be a Red Flag “Off shore account” to establish “off books” account from which improper payments may be made Improper characterization may give rise to books and records offence Best option: Summarily reject request and request normal banking channels be followed or terminate relationship altogether

CFPOA Compliance Risks Hospitality/Gifts to Foreign Customs Officials Slippery Furnishing of gifts to foreign customs officials may be improper bribe if given for an improper purpose to obtain preferential customs treatment, avoidance of customs duties or import restrictions or resolution of customs disputes SEC v. Parker Drilling Company Charged with making improper payments to a third-party intermediary in order to entertain Nigerian officials involved in resolving the company's customs disputes Parker Drilling agreed to pay $4 million to settle the SEC's charges Mitigate risk Compliance with gift giving policy with dollar limits Bona fide purpose with documented justification Transparency Proper recording in books and records (qualitatively and quantitatively)

Conclusions Import/export transactions can pose significant corruption risk, especially in high risk countries Understand the requirements, risks and employ risk mitigation strategies Companies are operating in increasingly high risk environment and mitigation of third party risk should be critical component of compliance strategy

Brenda C. Swick bswick@dickinsonwright.com 416 594 4052 Thank you! Brenda C. Swick bswick@dickinsonwright.com 416 594 4052