Bribery, Whistleblowing and D&O Insurance
Bribery continues to be a fairly quiet issue in Canada, but it is really heating up in the US and Internationally. In the US, enforcement of the Foreign Corrupt Practices Act (FCPA) has been used to bring or resolve 36 cases in the first quarter of 2010, up from 6 and 4 in the first quarters of 2009 and 2008, respectively, according to international law firm Willkie Farr & Gallagher LLP. The report and significant review of FCPA cases can be found at The D&O Diary, here.
Is bribery a brand new phenomenon, or the creation of a 20th century diabolical genius? No, I would suggest it is as old as time, and practiced regularly throughout the world. However, motivation for whistleblowing could make the FCPA a front-running piece of legislation. The draft bill of the Restoring Financial Stability Act of 2010, (a very detailed review can be found on lexology.com, here), in a small section called Improving Investor Protection at the SEC, includes a proposal to offer “internal whistleblowers a financial reward of up to 30% of any funds recovered.” Which in the SEC v. Siemens case, here, that could mean $480 million to a ‘good Samaritan’.
The US DOJ is good enough to provide a laypersons guide to the legislation, here, and the relationship with Canada is the broad language of “Who” (is the subject of enforcement) including, “any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm” and whether the “violator is an “issuer,” a “domestic concern,” or a foreign national or business.” A fairly easy test for many Canadian companies and individuals to pass. I won’t provide more details, at the fear of it suggesting that Canadian entities can avoid this legislation.
In the UK, the Bribery Act 2010, here, received Royal Assent on April 8, 2010, but I see not provision for whistleblower rewards.
The Canadian version of the legislation is called the Corruption of Foreign Public Officials Act (CFPOA), here, but I could not find any provision for rewarding whistleblowers, and even the Foreign Affairs and International Trade Canada, here, site suggests there has been only one prosecution (2002) under the Act in its ten year history. However, there is one case of a Calgary energy company that acknowledged (Jan 2009) that it was being investigated by the RCMP for alleged improper payments to public officials in South Asia, here. McMillan LLP, suggests, here, that this legislation should not be dismissed, in part, because “a corporation will meet the mens rea requirement where a senior officer or director “intentionally or recklessly, with knowledge of the facts constituting the offence, or with willful blindness to them “permits the offence to occur.” Though this legislation is not likely to keep most D’s and O’s up at night, there is a very real concern of the close US ties in our business activities, an in the significant loss that can occur from follow-on D&O claims. Therefore, I agree with McMillan that compliance with the legislation is important, and it should be a risk management priority because of the reputation damage and D&O defence costs that can result from an alleged violation. In the Calgary energy company case, the announcement of the alleged corruption corresponded with a relatively short term dip in the company stock price and a five year low in that stock. Luckily there were no follow-on claims.
The insurance implications: fines and penalties, from a CFPOA action, are usually excluded from D&O policies, but depending on the wording, there may be some coverage for defence costs. The real exposure comes from follow-on class action securities claims or derivative actions, which could mean significant payout from the D&O policy. The biggest concern is limits management, limits exhaustion and sharing of limits, because entity coverage for securities claims is the most likely case for the ‘entity’ exhausting limits that would otherwise be available to individual directors and officers. A big cheque from the insurance company may be good, if you maintain a $100 million limit, and the total loss is $25 million, but if your limit is $10 million, and the total loss is $25 million, your directors and officers might be very disappointed with ‘broad’ coverage. The Calgary company lost over half its value in a few short months, and if a claim had been brought and settled, even at a very low “plaintiff-style” damage factor, most Canadian public company D&O policies would have been fully exhausted.
If you would like to discuss any of these issues, please call me directly.
Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com
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