On July 3rd, 2015, the Canadian government announced a new Integrity Framework (the “Integrity Regime”), which applies to all federal procurement and real property transactions, and debars suppliers who have been convicted of “integrity offences” from contracting with the federal government for a set period of time ranging from 5-10 years.
The previous regime, first introduced in 2012 by Public Works and Government Services Canada (“PWGSC”) was then revised in March of 2014. At the time, the updated Integrity Regime was seen by many as inflexible and unduly harsh. In particular, a number of respected commercial and legal organizations criticized the Integrity Regime for providing for an automatic 10-year ban on government contracting for suppliers who were found guilty (or discharged) in relation to offences included on an enumerated list from a diverse set of laws, including the Financial Administration Act, the Criminal Code, the Competition Act, and the Corruption of Foreign Public Officials Act, among others.
The New Regime
Here are a number of critical changes to the Integrity Regime, including:
- Broad Application: The new regime applies to all federal procurement and real property transactions regardless of dollar value.
- Test for Reduction of Term of Ineligibility: A bidder remains ineligible for 10 years when they have been convicted of a listed offence in the last three years; however, this term can be reduced by five years if the supplier has cooperated with legal authorities or addressed the causes of the misconduct that led to their ineligibility.
- Actions of Affiliates: Suppliers will no longer be automatically ineligible for the actions of affiliates, unless it can be demonstrated that there was any participation or involvement from the supplier in the actions that led to the affiliate’s conviction.
- International Convictions: Changes have been made regarding the way in which a supplier’s foreign conviction(s) will be assessed and compared to listed offences in Canada, and which then may impact their eligibility.
- Permanent Ineligibility: This new section holds that a supplier convicted of specific fraudulent activity may be declared permanently ineligible unless a record suspension is obtained.
- Suspension Regime: The Government of Canada will have the ability to suspend a supplier for up to 18 months if the supplier has been charged with or has admitted guilt to a listed offence.
- Due Process: The new Integrity Regime now provides for the possibility of an advanced determination and an administrative review process of the assessment of affiliates.
- Existing Contracts: If a conviction occurs during a contract, the Government retains the right to terminate this contract, and suppliers will be afforded an opportunity to show cause as to why the termination should not be exercised. If a decision is taken not to terminate the contract, an administrative agreement between the supplier and PWGSC will be required, necessitating third party monitoring of the terms of the agreement.
- Third Party Monitoring/Verification: In specific situations, suppliers will be required to obtain and pay for the services of an independent, qualified third party monitor. This imports a concept widely used in the United States.
This alert aims to provide in-depth analysis addressing these new changes to the Integrity Regime, and forecasting the implications of these changes to industries seeking to do business with the Government of Canada.
Test for Reduction of Term of Ineligibility
A supplier may have its ineligibility period reduced by five years, if they meet the new disjunctive test and demonstrate that they:
- cooperated with law enforcement authorities;
- or have undertaken remedial action(s) to address the wrongdoing.
The disjunctive wording thus provides two avenues to arrive at a five-year reduction. The first route, cooperation with enforcement authorities, will likely involve self-reporting and the disclosure of internal investigations conducted by independent third parties such as law firms or accounting firms. The second route, the taking of remedial actions, underscores the importance of internal compliance programs and remedial actions taken within such programs on a proactive basis.
Actions of Affiliates
The Integrity Regime has clarified the treatment of affiliates and their impact on a supplier’s eligibility. The Framework now states:
If an affiliate of a supplier has been convicted of a listed offence or a similar offence abroad, an assessment will be made to determine if there was any participation or involvement from the supplier in the actions that led to the affiliate’s conviction. If it is determined to be the case, the supplier will be rendered ineligible.
Suppliers will be required to secure the services of an independent third party to undertake the assessment of their involvement in the actions of the affiliate that led to the conviction. This assessment will be provided to PWGSC and a determination will be rendered by the Minister.
In other words, the Government has now adopted a “participation or involvement test” with respect to the actions of affiliates.
Organizations with foreign affiliates should consider a compliance review with a view to the application of this new test.
The new Framework now allows for the Government to assess whether a supplier’s foreign conviction is similar to an offence listed in Canada. This assessment will then lead to a determination as to whether the supplier should be deemed ineligible given the existence of this foreign conviction. Recognized independent third parties will provide the Government with the information specific to the foreign convictions, with the Government making the final determination.
A new section in the Integrity Regime deals with permanent ineligibility. A supplier convicted of frauds against the Government under the Criminal Code of Canada or under the Financial Administration Act results in permanent ineligibility unless a record suspension is obtained. In other words, for the supplier’s bids to be admissible, a record suspension must be obtained, or capacities restored by the Governor in Council, for fraud-related offences under the Criminal Code of Canada or the FAA.
The Integrity Regime now has a separate provision dealing with interim suspension: A supplier may be ineligible to do business with the Government of Canada for up to 18 months if it is charged or admits guilt to one of the listed or similar foreign offences. This period may be extended if a judicial process is underway. Alternatively, the Government of Canada may impose an administrative agreement on the supplier to take interim action.
This section is a curious combination of a charge and an admission of guilt. A charge is accompanied by the presumption of innocence, in contrast to an admission of guilt which has not been formerly entered as a conviction.
The section creates a discretionary power on the part of the Government (“may be”), and the reference to “alternatively” allows the Government the option of continuing to do business with the supplier so long as it enters into an administrative agreement. The Integrity Regime specifies that such agreements would include conditions (e.g., remedial and compliance measures) that the supplier must fulfill in order to be eligible to contract with the Government. Borrowing a page from the U.S. practice in this area, “monitoring of the terms of an administrative agreement would be conducted by an independent, qualified third party monitor paid for by the supplier.” There is a long history in the United States of the use of monitors as part of deferred prosecution agreements, which have not yet been formally recognized in Canada.
The interim suspension provision also contains wording, which may cause concern for foreign companies entering into deferred prosecution agreements in the United States. Under a deferred prosecution agreement, or a DPA as it is commonly known, the Department of Justice files a charging document with the court, but it simultaneously requests that the prosecution be deferred, that is, postponed for the purpose of allowing the company to demonstrate its good conduct. DPAs generally require a defendant to agree to pay a monetary penalty, waive the statute of limitations, cooperate with the government, admit the relevant facts, and enter into certain compliance and remediation commitments, potentially including a corporate compliance monitor.
The interim suspension provisions of the Integrity Regime therefore provide that an entity that admits facts as part of a DPA may be subject to a suspension of up to 18 months or perhaps more if the DPA is considered to be a judicial process (as a charge is pending). It is hoped that Canadian authorities will follow the American model where DPAs do not result in automatic debarment. The vehicle for this will be the use of the alternative administrative agreement system to take interim action.
The new Integrity Regime attempts to answer critics by adding a new “Due Process” provision, which addresses the issue of fairness in the process:
Suppliers are notified of their ineligibility/suspension and provided information of the process(es) available to them. A supplier is able to come forward at any time and ask for an advanced determination. Upon a determination of ineligibility, the supplier would see their ineligibility period begin immediately. This will incent suppliers to come forward and proactively disclose wrongdoing. An administrative review process of the assessment of affiliates would be available to the supplier.
This process is a step in the right direction, as it provides for proactive advance determinations and a review process for the assessment of affiliates, which will oversee the factually complex issue of control, participation or involvement. The due process provision does not appear to cover the decision as to whether the period should be reduced from 10 to five years, however.
Interestingly, the Integrity Regime includes a curious provision that deals with treatment of existing contracts after conviction:
If a conviction occurs during a contract, the Government retains the right to terminate a contract or real property agreement for default. Suppliers will be afforded an opportunity to show cause as to why the termination should not be exercised. An administrative agreement between the supplier and PWGSC will be required if a decision is taken to not terminate the contract or real property agreement. This will require third party monitoring of the terms of the agreement. Prudent organizations should review the status of existing contracts with the Government and conduct a compliance review.
These changes reflect a more flexible and balanced approach to the debarment process. Organizations should consider taking the following practical steps:
- Review the organizational structure with affiliates with a view to the new participation or involvement test;
- Review any pending charges or negotiations regarding potential admissions of guilt on a global basis and in this context consider the potential for an advanced determination;
- Review existing contracts with the Government and strengthen due diligence compliance process where required; and
- Consider retaining an objective third party to peer review existing compliance frameworks.
 This includes the following Canadian or similar foreign offences: frauds against the government; frauds under the Financial Administration Act; 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; extortion; 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.
 For more information regarding the Integrity Regime, please visit the PWGSC website.