Sunday, February 10, 2019

On Deferred Prosecution Agreements

With the uproar over SNC-Lavalin this past week, I decided it would be a worthwhile exercise to familiarize myself with this legal construct that the government introduced with Bill C-74 (2018 Budget Implementation).  Because this is a large chunk of the legislation, I'm not going to do a detailed analysis of its clauses.  Instead, I will refer to a number analyses in various legal journals that are readily available online.

I will endeavour to be objective in the first part, and reserve my personal comments on the matter for afterwards.

What Is A Remediation Agreement (Deferred Prosecution Agreement)?

Dentons provides the following summary of the structure:
One distinctive feature of the Canadian DPA regime is the label attached to it. Specifically, the proposed legislation announces that Canada’s version is based on “Remediation Agreements,” eschewing the conventional “DPA” label adopted by other jurisdictions. However, it is clear from the precise provisions of the legislation that, whatever the label, the framework is fundamentally similar to DPA regimes adopted in other jurisdictions, most notably the UK. 
The core elements are as follows: 
  • Remediation Agreements will be available for a range of economic crime offences, including almost the entire gamut of fraud and domestic bribery offences contained within the Criminal Code, as well as—notably—offences under the Corruption of Foreign Public Officials Act;
  • Only “organizations” (as already defined within the Criminal Code) will be able to take advantage of Remediation Agreements – they will not be available to natural persons;
  • The decision as to whether to offer a Remediation Agreement to a corporate accused will be made by the assigned prosecutor, subject to the Attorney General’s consent;
  • The prosecutor will be required to take certain factors into account when deciding whether to offer a Remediation Agreement, including the following (non-exhaustively):
  • How the impugned conduct was brought to the attention of authorities;
  • Any efforts by the organization to remediate the wrongdoing and address deficiencies in its compliance program;
  • Whether the organization has taken disciplinary action against employees involved in the impugned conduct, and whether it is willing to identify individual wrongdoers to the authorities;
  • The gravity of the conduct, as well as any history of offending by the organization;
  • "Any other factor the prosecution considers relevant,” thereby giving the prosecutor considerable latitude to take account of specific circumstances.
This provides a fairly good summary of what the basic construct is.  It appears, superficially to be designed to create an environment where it becomes beneficial to the corporation to cooperate with a corruption investigation, better enabling access to the perpetrators of whatever acts have come under suspicion, rather than attempting to prosecute the entire corporate entity as a whole.

Dentons' analysis goes further to describe what the agreement must contain, and some of the implications of these agreements.
The proposed legislation also sets out the mandatory terms of any Remediation Agreement, which most notably include (summarily and non-exhaustively): 
  • An agreed statement of facts and an acknowledgment of wrongdoing, to be made publicly available (save in prescribed exceptional circumstances)
  • Obligations to fully cooperate in any investigation relating to the alleged conduct, including by providing testimony to support related prosecutions (such as against individuals)
  • Certifying that information disclosed to Prosecutors in connection with the offence is both complete and accurate;
  • An obligation to forfeit any benefit or proceeds derived from the wrongdoing (or to otherwise deal with such benefits/proceeds as may be directed by the Prosecutor);
  • Payment of a penalty to the Government, as well as an additional victim surcharge of up to 30% of such penalty (except in CFPOA cases, as the CFPOA makes no provision for victim surcharges to be applied);
  • Payment of “reparations” to any “victims” (as defined), or if no such payments are proposed, the reasons why they are not considered appropriate;
Given that the required terms include not only payment of a penalty, but also require forfeiture of any benefit (which could include the entire proceeds from a tainted contract or concession), as well as payment of potential victim reparations or restitution, the potential sum payable for a given DPA is potentially vast. 
While not a mandatory requirement, the legislation also contains a framework for an independent monitor to be appointed to oversee the organization’s compliance and remediation efforts throughout the term of the DPA. This potential requirement is likely to incentivize companies to demonstrate to prosecutors that proactive and comprehensive remediation and compliance enhancements have already been carried out, such that ongoing monitoring is unnecessary. 
As expected, the Canadian regime also provides for a significant oversight role for the court, similar to the UK DPA regime. Specifically, Remediation Agreements will require the approval of a Superior Court, which must be satisfied that the DPA is in the interests of justice and that the terms are reasonable and proportionate to the wrongdoing.
Borden Ladner Gervais' overview of the legislation points out that the decision to initiate such negotiations rests with the prosecution, not with the corporation.
Negotiations for a Remediation Agreement are formally initiated by the prosecution, although we expect that corporations accused will typically invite the initiation of a negotiation as part of a company’s cooperation with an investigation. Prior to commencing a negotiation, the prosecution must determine that there is a reasonable prospect of conviction, that the negotiation is in the public interest and obtain the consent of the Attorney General to the negotiation. The prosecution must also determine that the act or omission did not result in serious bodily harm or death, injury to national defence or security, and was not committed at the direction of organized crime or a terrorist group. The prosecution must also inform victims of the negotiation, including non-Canadian victims (e.g., in the case of a foreign bribery prosecution).

What Is The Justification For This? 

Prosecuting corporations has long been a complex problem.  Even if you can successfully prosecute the company, levying any punishment beyond fines, and possibly imposing some kind of oversight on the activities of the company, is extremely difficult.  

Stephen Aylward, writing for the Globe and Mail, argues as follows:  
These agreements (called “remediation agreements” in the draft legislation) will be available to corporations facing charges of economic crimes such as fraud and bribery. Prosecutors must consider how the misconduct came to light and corrective steps taken by the corporation when deciding whether an agreement is appropriate. The corporation must agree to publicly acknowledge the relevant facts, compensate victims, pay a financial penalty and co-operate in the prosecution of any individual wrongdoers. The bill foresees an important role for the courts in overseeing these agreements (unlike the U.S. model, which leaves greater discretion to prosecutors). 
A conviction may block a firm from bidding on government contracts for 10 years. But the more serious impact may be on a firm’s reputation. Arthur Andersen was one of the “big five” audit firms before it was convicted in 2002 of obstruction of justice for shredding documents relating to its audit of Enron. The conviction was overturned years later by the U.S. Supreme Court but the firm had already collapsed, with more than 100,000 jobs lost. 
These high stakes mean corporations must treat prosecutions as a life or death battle. There is little incentive for corporations to settle or to come forward when they uncover criminal activity internally. Well-funded defendants dig in for drawn out legal battles. Meanwhile, victims wait for years without knowing whether they will be compensated for their losses.
Critics complain of special treatment for corporations. Individuals cannot pay their way out of criminal charges and neither should corporations. But corporations are not typical defendants. They are a legal fiction that represents the shared interests of a wide array of stakeholders, most of whom are innocent bystanders. Failing to recognize this can have perverse consequences. BNP Paribas pleaded guilty and paid US$9-billion in fines for evading U.S. trade sanctions in 2014. None of the bank’s executives were charged, although some were demoted and a few were fired. The focus on punishing the corporation left shareholders to shoulder the fine while those responsible walked away. Deferred prosecution agreements require corporations to co-operate in pursuing individual wrongdoers, and so place the focus where it belongs. 

My Thoughts

I am by no means in complete agreement with the legislative construct that has been created here.  My first thought is that critics are well within their rights to criticize it for creating, at the very least, the appearance of an exemption for corporate elites from accountability for their actions.  However that isn't entirely true.  It appears that the intent of this legislation is to make it easier to ferret out the culprits and make it more likely that they can be brought to justice.  The fact that oversight of this process is in the hands of the courts, and not politicians is somewhat reassuring.  That is, in fact, where oversight belongs.  

Prosecuting corporate corruption has long been a difficult conundrum, especially with larger companies.  The larger the entity, the easier it is for corruption to take hold in corners while not necessarily being connected to the overall operations of the company.

In my own experience, corrupt practices can survive a long time in an organization as long as they are "beneficial" to someone a step or two above, but not necessarily be visible to higher levels of the company.  Ferreting this kind of corruption out should be the job of internal company processes, but oftentimes the doctrine of "enlightened self interest" takes hold and a blind eye is turned towards the problematic behaviours, or they are even actively supported.  From the point of view of addressing this kind of corruption, there is some merit to the approach being taken. 

That said, I would like to see the creation of greater direct accountability for the executive and board of directors in these matters.  While in some cases of corruption, it truly is a small group of malfeasants involved, the executive and board have fiduciary responsibilities that should be seen as including the identification and handling of corruption within the organization.  When, as in the situation of SNC-Lavalin, there is evidence of long term corrupt behaviour, the consequences must include those charged with oversight of the company's operations.  However, that may be somewhat outside the purview of this particular legislation.  It is not clear to me how this would play out when senior management and above become implicated in these schemes.  

For those currently trying to make political hay out of this (especially the CPC), it is worth noting that Scheer met with SNC Lavalin's CEO in May, 2018 on this very subject.  While I am not familiar with the nature of any conversation between the PMO and the AG on this subject beyond the broad allegations in the news, I presume that any request to change course was refused on the basis of the state of the case against SNC Lavalin.  If the PMO in fact pressured the AG to change direction, as Scheer and others have asserted, it seems quite likely that Scheer himself would have done the same thing.  

The only thing about this legislation that puzzles me is why it got stuffed into C-74.  It seems to have little to do with the core of the government's budget, and could easily have been a standalone piece of legislation.  I do believe that embedding it in the budget bill has done a significant disservice to the interests of political debate in this country.  

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