Canada Gets Serious on Enforcement

Citing the success of the Dodd-Frank Act’s whistleblower provisions, Canadian securities regulators for the first time are considering a whistleblower program of their own. The proposal is the latest move by Canadian authorities toward a U.S.-style enforcement regime—and in some instances an even harsher one.

Earlier this month, the Ontario Securities Commission (OSC) published a consultation paper seeking feedback on its proposed whistleblower program, whose overall purpose is to encourage the reporting of potential securities law violations. “This appears to be motivated by the U.S. whistleblower program,” says Laura Paglia, a partner with law firm Borden Ladner Gervais in Ontario.

Indeed, the OSC specifically cited the diversity of tips that flowed into the U.S. Securities and Exchange Commission last year as a motivating factor for its efforts. “These types of cases involve sophisticated players, raise complex issues, and are difficult to uncover without the assistance of a whistleblower,” the OSC stated. “We believe whistleblowers could be a valuable source of information for these types of investigations.”

Taking inspiration from the SEC’s whistleblower program, the OSC said it intends to propose that the Ontario government amend the Securities Act to deter whistleblower retaliation. The amendments include providing for a civil action against employers that violate newly established anti-retaliation provisions, by allowing whistleblowers to bypass the Ontario Labor Relations Board and seek punitive damages. Contractual provisions designed to silence whistleblowers would be prohibited, effectively making many confidentiality or non-disparagement clauses unenforceable.

“The public is not content with securities regulators taking a passive role anymore. They really need to be more proactive, and this whistleblower program is part of that more proactive direction.”
Jordan Deering, Partner, Dentons

The OSC’s Whistleblower Program would operate as a separate unit from the OSC’s Enforcement Branch. If the OSC finds a violation of the anti-retaliation provision, the employer could be ordered to amend its workplace policies and procedures, and pay an additional penalty of up to $1 million.

Whistleblowers could be granted a financial award of up to 15 percent where total sanctions or settlement payments exceed $1 million. Unlike the SEC’s whistleblower program, however, the maximum amount of the award would be capped at $1.5 million. The OSC said it does not propose requiring individuals to report conduct internally prior to providing information to the OSC.

The consultation paper goes on to list several circumstances where individuals would not be qualified to receive a whistleblower award. These would include chief compliance officers, or those in an equivalent position, as well as current and former directors and officers who acquired the information through internal reporting or investigation processes.

Securities law experts say it’s only a matter of time before the OSC implements a whistleblower program. “The public is not content with securities regulators taking a passive role anymore,” says Jordan Deering, a partner with law firm Dentons in Calgary. “They really need to be more proactive, and this whistleblower program is part of that more proactive direction.”

OSC WHISTLEBLOWER PROGRAM

Below is an excerpt from the OSC’s Consultation Paper on its proposed Whistleblower Program.
We are considering establishing an OSC Whistleblower Program that addresses the following five key elements:

Whistleblower Eligibility: Established criteria would define whistleblower eligibility requirements and describe the characteristics of information expected to be reported;

Financial Incentive: A monetary incentive would be offered to eligible whistleblowers who provide the OSC with timely, credible, and robust information that leads to an enforcement outcome in a sec.127 Commission proceeding;

Confidentiality: We would use all reasonable efforts to protect the identity of the whistleblower and we would not generally expect the whistleblower to testify at the administrative proceeding;

Whistleblower Protection: Anti-retaliation measures would be implemented and used to deter employers from retaliating against employees who provide information internally or to the OSC; and

Program Administration: The Whistleblower Program would be administered and promoted in a manner to encourage and facilitate whistleblowers coming forward with quality information needed to support more effective enforcement of securities laws.
We believe that each of these key elements is necessary to support a successful Whistleblower Program at the OSC. However, we believe that the payment of a financial incentive is most critical to the success of the program. We are considering offering an eligible whistleblower a financial award of up to 15% of the total monetary sanctions awarded (excluding cost awards) in a Commission hearing or settlement in which total sanctions or settlement payments exceed $1 million.
The maximum amount of any award could be capped at $1.5 million. Payment of the award to a whistleblower would not be contingent on collection of the sanction monies but would only be paid upon final resolution of the matter, including any appeals.
Source: OSC.

“At a minimum, what this is going to do is increase reporting,” Paglia says. Whether that increases the quality of the whistleblower calls has yet to be seen, she says.

After the Blown Whistle

As long as employers have weak internal reporting structures, experts say, anti-retaliation cases will proliferate. “I have no doubt this program is going to result in some fruitful complaints to the whistleblower program that result in investigations and ultimately prosecutions that lead to some rewards, similar to that which you’re seeing in the States,” Deering says.

The size of Ontario’s market means this initiative will have broad-reaching effects, Deering adds. “Most large companies list themselves on the Toronto Stock Exchange and, therefore, fall under the ambit of the Ontario Securities Commission,” she says.

Unlike the United States and most other countries, Canada has no national securities regulator, and it delegates that responsibility to individual provinces—although Ontario is by far the largest and most important of them. As a result, Ontario’s whistleblower program “would be an impetus for other important securities regulators such as Alberta and British Columbia to follow suit and have their own programs,” Deering adds.

The latest developments are warnings to companies with operations in Canada to review—and enhance, where necessary—their internal reporting structure. “If you don’t have a strong whistleblower program, and you have a poor corporate culture, your employees can very quickly turn into watchdogs for the securities commission,” Deering says.

Comments on the proposed whistleblower program are due by May 4.

Other Enforcement

In addition to enhancing initiatives for securities law violations, Canadian authorities continue to flex their enforcement muscles in other areas as well. In some respects, Canada’s enforcement efforts are even more stringent than those in the United States.

Consider, for example, Canada’s Integrity Framework, which has come under heated criticism lately. Last year, the Public Works and Government Services Canada (PWGSC)—the body responsible for coordinating the majority of the Canadian government’s large federal government contracts—made significant changes to the Integrity Framework.

The most controversial component imposes a 10-year strict debarment period, with no opportunity to be reinstated, and broadly applies to convictions of suppliers or anyone who directly or indirectly, legally or de facto, controls the company. This includes any affiliates and members of the board of directors.

“There is no mechanism in the current system by which a debarred supplier can demonstrate that it has reformed its practices and, therefore, deserves to have the debarment lifted,” Transparency International Canada wrote in a letter to the PWGSC. “This seems out of step with most debarment systems.”

“It’s a very strict regime,” says James Klotz, a partner with law firm Miller Thomson in Toronto. Some say it’s a regressive way of dealing with punishment, because companies that have pleaded guilty elsewhere and faced the consequences now have new punishments retrospectively applied, he says.

Observers of the enforcement scene anticipate that Hewlett-Packard Canada, a large technology supplier to the Canadian government, will face debarment following its guilty plea in the United States regarding illicit activities by H-P’s Russian and Mexican subsidiaries. In another example, Germany-based Siemens already received official confirmation of debarment by PWGSC following a finding of guilt in 2008 to corruption-related offenses in the United States and Germany which resulted in a $1.6 billion fine.

SNC-Lavalin is its latest target. On Feb. 19, the PWGSC brought federal corruption and fraud charges against the engineering and construction company and two of its subsidiaries, SNC-Lavalin International and SNC-Lavalin Construction, for potential violations of the Foreign Public Officials Act.

The alleged criminal acts surfaced as part of an ongoing investigation into the company’s business dealings in Libya that began three years ago. The Royal Canadian Mounted Police allege that from 2001 to 2011, SNC-Lavalin and its subsidiaries gave US$38 million to Libyan government officials to use their positions to influence government decisions. The RCMP further alleges during this same time SNC-Lavalin and its subsidiaries defrauded the Libyan government and other entities of “property, money, or valuable security or service” valued at US$103.7 million.

SNC is aggressively contesting the charges: “SNC-Lavalin firmly considers that the charges are without merit and will vigorously defend itself, and plead not guilty.”

The RCMP previously charged three former employees of SNC-Lavalin as part of its investigation. “These charges relate to alleged reprehensible deeds by former employees who left the company long ago,” the company added. Since that time, the company said it has made “significant changes” and has “remained focused on continuous improvements in ethics and compliance.”

Mark Morrison, a partner with law firm Blakes in Calgary, says companies that operate in Canada should not expect any slowdown in enforcement in the years ahead, as Canadian enforcement officials continue to move forward with significant enforcement actions. “Canadian enforcement is going to continue at an increased pace against both corporations and individuals.”