World Bank debars German company for thirteen months

In addition to mitigating regulatory risks that can lead to the imposition of fines and imprisonment arising from conviction under relevant law, companies must always be aware of the ancillary and business risks associated with corrupt conduct, including reputational risks, transactional issues and debarment. On February 24, 2021 the World Bank Group (the “World Bank”) announced the 13-month debarment of Ferrostaal Oil & Gas GmbH (the “Company”), an international engineering, procurement and construction contractor based in Germany. The debarment is in connection with a fraudulent practice related to the Ayeyarwady Integrated River Basin Management Project, a World Bank-financed project in Myanmar.

The Company instructed a local business partner in Myanmar not to disclose the Company’s agreed-upon commission in the initial bid for the project. This omission was not corrected in a later amendment to the contract and constituted a fraudulent practice under the World Bank procurement guidelines.

The sanction is part of a settlement agreement by which the Company acknowledged responsibility for the sanctionable practice, and agreed to conditional release from debarment on the basis that the Company completes integrity compliance programs consistent with the principles set out in the World Bank Group Integrity Compliance Guidelines. As a result of this sanction, the Company is ineligible to participate in projects and operations financed by institutions of the World Bank for 13 months, what the World Bank described as a significantly reduced period with conditional release is in light of the Company’s voluntary remedial actions and cooperation. The World Bank funds many major infrastructure projects worldwide, and therefore debarment comes with business risks including the potential adverse impact on revenue generation, especially for companies who rely on World Bank or government contracts.

Business Risks of Corrupt Practices

It is crucial for organizations to have proactive measures in place including due diligence to mitigate the risk of triggering or inheriting criminal liability. As we have written previously, businesses may be subject to criminal liability either for fault of negligence under the Criminal Code and other federal legislation such as the Corruption of Foreign Public Officials Act. But avoidance of legal liability alone ought not overshadow the need to address significant business risks associated with failing to conduct business ethically. Among other things:

• Companies may face significant reputational damage as a result of corrupt or improper conduct.
• Allegations and regulatory proceedings may impact on transactions including M&A activity. Criminal or regulatory liability can also be inherited in the context of M&A transactions where a company is acquired.
• Companies may face debarment from public procurement or certain forms of financing, including from World Bank-funded projects.

Debarment in Canada

Companies convicted of specified offences are generally debarred from certain forms of public contracting, as well as World Bank financing.

In Canada, the federal government’s debarment regime applicable to government contracting and procurement is referred to as the Integrity Regime. As we have previously written, this regime was significantly expanded effective January 1, 2019 to increase the number of offence and ethical circumstances that trigger debarment from federal contracting in Canada.

Under the Integrity Regime, there is an automatic 10-year ineligibility for public contracting for certain designated offences. These offences among others include secret commissions, participating in organized crime, laundering proceeds of crime, fraud, forgery, extortion and bribery among others under the following legislation: Corruption of Foreign Public Officials Act, Competition Act, Criminal Code, Income Tax Act, Excise Tax Act, Financial Administration Act, Controlled Drugs and Substances Act and Lobbying Act.

In addition to the automatic offences, there are also a number of offences where there is discretion under the Integrity Regime for 10-year ineligibility for public contracting, including being convicted of an offence outside of Canada similar to one of the listed designated offences. This includes “directing, influencing, authorizing, assenting to, acquiescing in or participating in” an affiliate committing such an offence. Such discretion also applies to breaching a term or condition in an administrative agreement.

Under Canadian law, companies are not subject to automatic debarment if, rather than being convicted of an offence, they resolve charges by way of a deferred prosecution agreements – referred to under Canadian legislation as a “remediation agreement”. As previously discussed here and here, following the lead of other jurisdictions, amendments to the Canadian Criminal Code came into force on September 19, 2018, establishing remediation agreements as an enforcement tool for Canadian authorities.

Implications for Canadian Businesses

It is important for Canadian businesses to ensure they have robust compliance programs in place. Policies and controls should facilitate ethical business practices, prevent corruption, and ensure businesses are compliant with applicable regulatory regimes. Effective compliance programs should incorporate effective due diligence, auditing, risk identification protocols, incentives designed so as not to encourage corrupt behaviour and effective training including setting a culture of compliance from the top of organizations.

Further, companies that conduct business in different counties must keep up to date with developments under different anti-corruption regimes when designing and implementing their compliance programs, especially in light of the discretionary debarment sanctions under the Integrity Regime. Canada has come under increasing domestic and international scrutiny to increase enforcement efforts, and it is expected we will see an increase in such efforts as a result.