On July 3, 2015, the Government of Canada took further steps to overhaul the integrity provisions of its procurement process. Public Works and Government Services Canada, the body which conducts most public procurements for Canadian government departments, announced a new government-wide “Integrity Regime” for procurement and real property transactions. The Integrity Regime is intended to replace the Integrity Framework previously put in place in 2012. Among the most significant changes are the elimination of automatic debarment for affiliate conduct and the reduction of the debarment period from 10 years to five years where suppliers can demonstrate that they have cooperated with law enforcement or undertaken remedial actions.
The Government previously made “enhancements” to the Integrity Framework in March 2014. Those enhancements created a system that was among the most restrictive in the world. It quickly became apparent that the revised Integrity Framework would lead to intractable complications due to its overly draconian nature. For example, as we have discussed previously, the Integrity Framework risked debarring the Government’s largest computer hardware supplier for the actions of a distant corporate relative over which the Canadian supplier had no control or authority.
Claiming to reflect the input of stakeholders in the procurement process, the new Integrity Regime attempts to strike a careful balance between the need to ensure ethical conduct among suppliers and maintaining flexibility for the Government and its suppliers.
What Will Debar a Supplier?
Under the Integrity Regime, a supplier is ineligible to do business with the Government if it, or any members of its board of directors, have been convicted or discharged (either absolutely or conditionally) in the last three years of any of the following offences under Canadian law or a similar foreign offence:
- payment of a contingency fee to a person to whom the Lobbying Act applies;
- corruption, collusion, bid-rigging or any other anti-competitive activity under the Competition Act;
- money laundering;
- participation in activities of criminal organizations;
- income and excise tax evasion;
- bribing a foreign public official;
- offences in relation to drug trafficking;
- bribery of judicial officers;
- bribery of officers;
- secret commissions;
- criminal breach of contracts;
- fraudulent manipulation of stock exchange transactions;
- prohibited insider trading;
- forgery and other offences resembling forgery; and
- falsification of books and documents.
All suppliers are required to provide a certification on bidding that the company, its directors, and its affiliates have not been charged, convicted, or absolutely/conditionally discharged of the above offences or similar foreign offences in the past three years. Providing false or misleading certifications is, in and of itself, cause for debarment.
Length of Debarment
The ineligibility period will extend for 10 years from the date of conviction or discharge. However, if a debarred supplier addresses the root cause of the offence and cooperates with Government authorities fully, it can obtain a reduction in this debarment time. The length of the debarment may be reduced by up to five years, but will also require an administrative agreement whereby law enforcement may monitor the supplier’s ongoing behaviour.
The debarment period runs in perpetuity for those suppliers that are convicted of committing frauds against the Government under either the Criminal Code or the Financial Administration Act. All such suppliers will be permanently debarred until a record suspension is obtained. In addition, unlike a regularly debarred supplier, no public interest exception or administrative agreement is possible for a company subject to permanent debarment.
These changes considerably mitigate the formerly draconian debarment periods. Providing for the ability of a company to shorten its debarment period by up to five years gives considerable incentives for cooperation and remediation. This places the focus of the rules on achieving ethical conduct going forward, and preserving market forces in the public procurement space, and away from principles of retribution.
The Government has the ability to suspend a supplier for up to 18 months immediately upon that supplier being charged with or admitting guilt to any of the above listed offences. There is no requirement that the supplier or one of its affiliates actually be convicted of the offence in question and, at this stage, there does not appear to be any sort of compensation mechanism if the supplier is ultimately vindicated. The Regime does not explicitly extend this suspension provision to violations by affiliates of the supplier, yet the Regime also requires suppliers to certify that neither they nor any affiliates have been charged with a listed offence or foreign equivalent.
The changes also allow for suppliers that have been charged to request an immediately determination of their debarment status. While this may result in immediate debarment, this will at least “start the clock” on the debarment period. Otherwise, such companies may be subject to a full 18 month suspension pending charges and investigation, and then only begin a 5-10 year debarment at that point.
Termination of Existing Contracts
The Government also took steps to close off any potential holes in the Regime for companies that are convicted during the course of an ongoing supply contract. If a supplier is convicted of a listed offense, the Government is entitled to terminate the contract.
Three key issues exist in regards to the termination provision. First, it only applies in situations where there is a conviction, and not simply a charge.
Second, termination is permissive but not mandatory – the Government allows suppliers to submit argument as to why the contract should not be terminated.
Third, if the Government chooses not to terminate the contract, it must put in place an administrative agreement for the contract. The agreement must include provisions for third party monitoring of the contract.
As noted above, there are certain circumstances where the Government mandates an administrative agreement be put in place with a supplier. These agreements are meant to cover situations which require caution and additional monitoring. Agreements will generally be conditional and require suppliers to engage in remedial action and take further compliance measures.
There are four instances where such administrative agreements are mandatory:
- an ineligible supplier has had their ineligibility period reduced;
- in lieu of suspending a supplier;
- a public interest exception was invoked with a ineligible supplier; or
- a decision is made to continue with an existing contract with a supplier which has become non-compliant with the regime.
These agreements must have provisions for monitoring by qualified independent third parties paid for and retained by the supplier. Given this, it will likely behoove a supplier that is seeking some form of leniency to enter into negotiations with a draft agreement to try and set parameters of the monitoring to the extent possible. Having a third party monitor already waiting to begin work, and a rigorous plan in place for how the monitoring will be done, may save considerable time and money negotiating with the Government on these points.
Affiliate Enterprise Conduct & Sub-Contractors
Under the new system, suppliers will no longer be penalized simply because an affiliate violated one of the listed offences. Instead, the Integrity Regime requires that the affiliate be assessed by an independent third party retained by the supplier to determine whether the supplier had any participation of involvement in the underlying offence. If the supplier can show that they had no such involvement, they will not be debarred.
This is a major departure from the previous Integrity Framework. Under the Integrity Framework, a supplier would be debarred for 10 years for actions by affiliated foreign companies over whom the supplier had no control and for conduct in which the supplier had no participation. The old framework could result in sweeping debarments of legitimate companies causing large scale economic damage and lead to significant inefficiencies in the procurement system undermining the ability of the Government to procure market price solutions.
The new Integrity Regime is also binding on the subcontractors of any supplier. Suppliers are required to refrain from entering into a subcontract with a debarred entity. Knowingly entering into such a subcontract will debar the supplier for five years. This is likely to be assessed on the basis of strict liability, and as such all contractors should implement due diligence procedures specifically directed at the compliance of any potential subcontractor with the Integrity Regime.
The Government will retain the ability to grant limited Public Interest Exceptions. These will only be granted where a debarred supplier must be retained and no other reasonable options exist. Factors that will influence the granting of a Public Interest Exception include where no other supplier can actually perform the contract, there are emergent circumstances or national security concerns, or potential exists for material injury to the financial interests of the Government if the exception is not granted. This does not apply to any supplier that is permanently debarred.
Considering that the new Integrity Regime significantly ameliorates the draconian nature of the former debarment rules, it is likely the Government will be hesitant to grant any Public Interest Exceptions.
The former Integrity Framework created a great deal of concern and confusion among stakeholders in the procurement process. The new Regime attempts to clarify and ease the burden on suppliers.
Suppliers must give serious thought to conducting internal investigations to determine if they have any potential reason to disclose to the Government. This method can be advantageous for two reasons. First, it demonstrates cooperation with authorities which is required for the amelioration period of five years. Second, it allows companies an opportunity to present the actions of foreign affiliates that may give rise to potential debarment as actions in which they had no control or involvement. By being proactive, suppliers can head off potential debarment issues before they arise.
Given that offences under the Corruption of Foreign Public Officials Act are also listed offences, such an investigation can and should dovetail with any investigations into potential foreign corruption concerns under either the CFPOA or the US Foreign Corrupt Practices Act. Conducting thorough reviews of corruption concerns is now more important than ever, as international corruption may debar Canadian suppliers from Government contracts. Conducting a comprehensive independent investigation gives support to any arguments that corrupt practices, which would otherwise debar a company, were isolated to foreign affiliates without direct involvement of the Canadian entity. This is even more crucial in the Canadian context where mechanisms that enable companies to voluntarily disclose anti-corruption violations and avoid a criminal conviction, such as deferred or non-prosecution agreements used in the United States and now the United Kingdom, are not currently available. The Government has reiterated that these mechanisms are outside the scope of the Integrity Regime.
Suppliers should also create careful due diligence processes to screen the conduct of any potential subcontractor involved in a procurement bid. Contracting with such an ineligible subcontractor can create serious liability for a supplier, and the only defence will be demonstrating that serious and careful due diligence was undertaken.