Milos Barutciski is a partner and co-head of Bennett Jones LLP's international trade and investment group. Matthew Kronby is a partner of the firm and was previously the head of Canada's Trade Law Bureau. The authors have represented companies on the implications of the integrity framework.
Every year, the federal government buys more than $16-billion worth of goods and services. As a manager of other people's – taxpayers' – money, the government has a clear incentive to protect the integrity of the procurement process and to avoid doing business with companies that have engaged in fraud, bid-rigging, bribery and other misconduct.
With that in mind, Public Works and Government Services Canada (PWGSC), the federal government's procurement department, established its integrity framework in 2010 to disqualify companies found guilty of certain offences from federal procurement. The rules were further strengthened in 2012 to add a longer list of offences, and once again in 2014 to cover foreign offences.
Ottawa is not alone in this approach. Governments and international organizations around the world do likewise, including the United States and the World Bank. Typically, these disqualification – "debarment" – rules target fraudulent or corrupt conduct, with a view both to protecting the integrity of the procurement process and punishing and deterring wrongdoing.
The 2014 changes tilted to the punishment end of the spectrum, making Canada's procurement rules more draconian than those of any of its trading partners. They introduced an automatic 10-year disqualification not only for a company convicted of a listed offence in Canada, but also where an affiliate of the company was convicted of a similar offence anywhere in the world, regardless of whether the Canadian company had any involvement in or control over the conduct. That had the potential to significantly reduce the pool of qualifying suppliers for major contracts. And while the United States and other countries give credit for mitigating circumstances and remediation efforts in determining or subsequently reducing debarment penalties, Canada gave none, thereby creating a strong disincentive for companies to admit to and redress corrupt misconduct.
Not surprisingly, observers in business, legal and policy circles criticized Canada's rules as unfair and counterproductive. To its credit, the government listened, and in April's budget announcement, promised to address those concerns. A few days ago, it acted, announcing a new integrity regime to immediately replace PWGSC's rules.
On the positive side, the new regime fixes two of the major problems with the old rules: Suppliers will no longer be punished for the conduct of affiliate companies over which they exercised no control or influence, and a process is being established to assess the fairness and legitimacy of foreign convictions. More generally, it adds transparency to the process by which ineligibility decisions will be made. It also eliminates mandatory 10-year ineligibility, a welcome development as it acknowledges the value of co-operation and remediation efforts by suppliers who have committed offences. Co-operative companies can now reduce the ineligibility to five years.
However, five years can still be a death penalty for some companies. Even where a company takes responsibility by pleading guilty, pays a substantial fine, replaces its board and senior management, implements a state-of-the-art compliance program and co-operates with authorities to facilitate prosecutions, the new regime provides no further relief. The company is debarred for five years with no possibility of parole. In these circumstances, the cost is borne primarily by the company's remaining innocent employees, its suppliers and creditors. Even the Canadian taxpayer ends up worse off, as the elimination of a potential supplier and less competition bidding on public contracts will have the predictable result of higher prices.
The new integrity regime fails to strike the right balance between punishment and deterrence of misconduct (principally the domain of criminal law) and protecting the integrity of federal procurement and taxpayer dollars (the domain of procurement rules). The government rightly deserves praise for devoting resources to the investigation and prosecution of corporate crime as well as street crime. The growing severity of corporate fines and individual imprisonment in corporate criminal cases is a testament to that achievement. It is also rational for the government to use its buying power to encourage good behaviour and deter misconduct.
However, the new rules fail to distinguish between two equally important objectives. Having enhanced corporate law and order through legislation strengthening competition, anti-corruption and other laws, the integrity regime tilts too heavily toward punishment and retribution at the expense of promoting a fair and competitive public procurement market and value for the taxpayer.