A Canadian Clean Fuel Tech Firm and Ex-CEO Violated the FCPA in China-

Posted: January 4th, 2023

Securities Regulation

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Securities Regulation

A Canadian Clean Fuel Tech Firm and Ex-CEO Violated the FCPA in China-

The United States Securities and Exchange Commission (SEC) on September 27, 2019, made the publications that Westport Fuel Systems Inc., which is a Vancouver based clean fuel technology firm and its Chief Executive Officer (CEO) had settled to pay more than 1.4 million U.S dollars to settle their alleged foreign bribery charges. The deceptive charges linked to the Company’s former CEO, Nancy Gougarty coordinating a plan to transfer the Company shares to a third party organization allied with a government official in China (U.S Securities and Exchange Commission, 2019). Despite that the tech firm had in its Code of Conduct provisions guiding risk-mitigation, particularly regarding foreign corruption, SEC realized that in its settlement order, the guidelines were not comprehensive enough to apply to the particular type of the transaction that the Company was involved in (Cassin, 2019). Following the settlement between the SEC and Westport Inc., Canadian based businesses should consider reviewing their compliance codes and ethical codes carefully. Doing so will enable them to stay in line with the requirements of the SEC and to guarantee that the provisions of their compliance codes are broad enough to apply to every probable business contract that might pose risks to their daily operations.

Background of the Case

Westport Fuel Systems Inc. is a fuel technology firm based in Canada. Westport is interlisted on the NASDAQ stock market and the Toronto Stock Exchange. Nancy Gougarty served as the Company’s COO from July 2013- July 2016 and as its CEO from July 2016- January 2019 (Cassin, 2019). SEC in Westford’s settlement order alleged that the Company was involved in bribery in 2016. The then CEO bribed a Chinese government official to acquire a cash payment and a sales contract.

The fuel tech Company had been part of a Chinese joint venture, in which the biggest shareholder was a state-owned Chinese business. In March 2013, a Chinese senior government official from the Chinese enterprise suggested that the joint venture needed to carry out an IPO (Initial public offering). The manager of the joint venture made false representations to the tech Company that the Chinese law required Westford to first have some of its shares registered in the joint venture to a private equity fund in China for it to assume the IPO.

The U.S SEC, after receiving the information of Westport’s manager alleged that the CEO did not disclose the information about the shares to the Board. Instead, she made efforts to ensure that the board remained unaware of it by erasing a sentence in one of the draft letters that the manager had prepared for the Board (U.S Securities and Exchange Commission, 2019). The sentence would have informed the Board about the Chinese government official’s interest in the private equity fund.  The investigations also found out that the former CEO in the Company’s financial records, accounts, and public filings did not disclose the identity of the Chinese PE fund and deceivingly acknowledged a different business as a signatory to the transaction.

The CEO caused the Company’s violations by ignoring its internal accounting controls and deceitfully ratifying a certification regarding the competence of the controls (Cassin, 2019). During the negotiation, the CEO openly signed the share transfer on the Company gaining a long-term sales agreement with the joint venture. Eventually, the Canadian tech firm carried out the share transfer, which was done in exchange for both a separate dividend payment from the joint venture and the sales contract.

The SEC order in the case against the clean tech Company found that the actions of Gougarty were in violation of the internal controls, records, as well as accounting provisions of the 1934 Securities Exchange Act. The bribery investigation was carried out by the SEC’s FCPA (Foreign Corrupt Practices Act) Unit officials, Mark Yost and Catherine Brilliant, and was overseen by Ansu N. Banerjee. The British Columbia Securities Commission also helped the SEC investigation in conducting the investigation (Cassin, 2019).

Further, they agreed to pay a civil interest penalty of 1,500,000 US dollars. The Company’s former CEO, on the other hand, agreed to pay a 120,000 US dollar civil penalty (U.S Securities and Exchange Commission, 2019). The SEC in determining the acceptance of Westport’s offer took into account corrective acts that the Company considered in regards to its financial compliance programs and its anti-corruption or ethics code.

The Relevant Laws- U.S. Foreign Corrupt Practices Act (FCPA)

Corruption in the United States poses a tremendous economic and legal risk for entities engaging in business globally, especially in transitioning and developing nations. The SEC and the U.S Department of Justice lead the global fight against cases of corruption by heightening the number of prosecutions, settlements, as well as investigations for violations of the FCPA. Given the high enforcement activity, directors and managers running multinational companies are strictly apprehensive of any compliance efforts. To reduce the risk that foreign bribery poses, corporations must have a better understanding of any of the practices that the Foreign Corrupt Practices Act prohibits as well as any other relevant laws, like the United States guidelines against conspiracy, racketeering, and money laundering (Madhany, 2019). Legal advisors and organizational leaders must remain updated on any enforcement trends. Also, company managers should remain mindful of any red flags or situations, which may trigger corrupt practices. With knowledge about the relevant laws that prohibit fraudulent acts, multinational companies investing in foreign countries can then commit to ethical business practices and at the same time, ensure that their compliance programs are competent enough to avoid the downsides of international corruption.

History of the Act

The 1977 Foreign Corrupt Practices Act is a U.S. federal law that is mainly known for its two significant provisions. One of these provisions addresses requirements relating to accounting transparency under the 1934 Security Exchange Act (Koehler, 2016). The other one is concerned with corruption or bribery committed by foreign officials. The FCPA Act was amended in 1988 and 1998. Since then, there has been constant congressional arguments on whether the Act’s application disheartens organizations in the U.S. from venturing in foreign markets.

Timmeny (1982) in his article explains that surveys conducted in the mid-1970s by the U.S SEC revealed that more than 400 firms in the nation accredited making unlawful or dubious payment of over $300 million to foreign political parties, legislators, and government officials The investigations revealed that businesses bribed foreign government officials for them to secure their business practices and to guarantee that some functionaries in foreign governments discharged some clerical or ministerial duties.

To respond to the increased corruption cases, the U.S. Congress passed the FCPA Act to bring to a stop the illegal actions of bribing foreign officials and at the same time, reinstate the confidence of the public in relying on the U.S. business systems. Jimmy Carter, in 1977, signed the FCPA act into law (Timmeny, 1982). The Act controlled global anti-corruption implementation since its advent up until 2010, when nations like the U.K. started introducing stronger and broader laws, especially the 2010 U.K. Bribery Act. There have been increased enforcement actions between nations, with every country increasing its efforts to ban corrupt business activities.

Provisions of the Act

The main role that the FCPA serves is that it prohibits businesses and their leaders from manipulating foreign officials with any form of personal rewards or payments. The FCPA law applies to U.S citizens and nationals acting in an extension of a corrupt practice in a foreign entity. It also applies to any individual with a connection to the U.S and found guilty of corrupt practices abroad. Further, any foreign companies involved in trade activities with the U.S, irrespective of whether they are physically present or absent in the country are answerable to the law (U.S Securities and Exchange Commission, n.d). The explained requirement is known as the FCPA’s nationality principle. Any person charged with the above practices is likely to face time in prison.

The Act, in cases of foreign authorized and natural people, covers their activities only if they were operating within the U.S at the time they were found guilty of corruption charges. This is what is known as the Act’s protective principle. Additionally, the Act oversees not only those payments made directly to external parties, candidates, and officials, but also any transactions made to other recipients in attempts to bribe foreign candidates, officials, or parties. According to U.S Securities and Exchange Commission (n.d), the payments as per the FCPA guidelines are not limited to financial firms but may encompass anything that is of significant value. The explained rule is what is referred to as the FCPA’s territorial principle. Koehler (2016) states that the Act is subject to continuous congressional and academic debate based on the impacts it has on foreign business. As argued by scholars, the FCPA discourages the investment of U.S companies in international markets, especially nations where bribery, graft, or any other corrupt practices, are rampant. The scholars’ arguments concur with the commonly known insight that businesses involved in mergers and acquisitions in developing markets go through distinctively high levels of corruption and regulatory risks.

The people subject to the Act include issuers. According to the Act, issuers are any companies, both foreign and U.S based, that have recorded a class of securities and which are required to file reports under 1934 Securities and Exchange Act as stated in the FCPA guidelines. Domestic concerns are also subject to the Act, and this refers to any person who is a U.S resident, national, or citizen, or any other organization under the U.S laws and corporations that have their central location in the U.S.

FCPA Requirements that all Companies should be Aware of

The FCPA anti-bribery provisions make it illegal for any person in the United States, and specific securities issuers, to offer any payment to a foreign official for the aim of retaining or acquiring a business. The law also applies to foreign people or businesses that engage in bribery while in the country. According to Koehler (2016), the Act states that medics at managed or government-owned hospitals are under FCPA considered as foreign officials. Employees to international entities such as those employed by United Nations are also foreign officials according to the FCPA.

Given the FCPA Act is concerned with a bribery intention rather than the amount a person or an organization paid. It implies there is no materiality requirement, because giving anything valuable as a bribe, non-cash or cash items, is illegal.

In addition, all firms with listed securities in the U.S must meet the FCPA requirements of meeting their accounting provisions. As posited by Mas (2016), a company’s accounting provisions must follow the FCPA anti-bribery provisions. Such provisions also call for businesses to preserve accounts and documents that justly and correctly show their payments and to implement a competent internal accounting control system.

A high number of U.S businesses operating in foreign countries are considering additional measures to minimize their exposure and protect their reputation. These companies are hiring due diligence company services, whose responsibility is to vet third-party mediators and easily recognize any overlooked foreign officials entrenched in otherwise foreign private companies (Mas, 2016). The approach is one aspect of an operative FCPA Compliance Program, which indicates a genuine effort to evade business cases where high-risk organizations or people are concerned.

When it comes to paying foreign officials, the FCPA draws the existing difference between grease payment and bribery. The law permits a grease payment but in some cases, it may infringe local regulations. A grease payment differs from a bribery in that it is made to a foreign official to make them expedite their roles. Certain payments linked to the promotion of the company products may be legal under the FCPA.

Any United States organizations willing to acquire a foreign business may face beneficiary liability for any FCPA violations that might have been committed by the foreign business before the acquitting process. To the acquiring company, this means that it can face FCPA violations charges.

Other Relevant Law: 1934 Securities Exchange Act

The 1934 Securities Exchange Act is a United States federal law that controls the trading of secondary securities like bonds and stocks. The Act was enacted to respond mainly to the 1929 stock market crash, which was as a result of a lack of accountability in the securities market (Mas, 2016). In 1934, the Act established the SEC, thus giving the Commission the responsibility to control the U.S secondary securities market.

The Act is responsible for regulating insider trading and fraud. It prohibits any misrepresentations and fraud linked to securities transactions. PCFA also regulates tender offers, broker registration, and corporate reporting. The law limits the SEC to seek civil penalties like injunctions and fines. The Commission is also responsible for stopping any director or corporate officer from leading a company if involved in bribery or fraud cases (Mas, 2016). The DOJ can file criminal charges against companies that violate the Act. Some of these violations are specific to the transaction of securities like the deliberate failure to file the necessary reports or knowingly making misleading or false transactions or payment statements to auditors. Conspiracy and mail fraud are some of the common crimes for violating the Act.

Significance of the News Story for the Industry

The Westport clean fuel technology company settlement establishes that for any Canadian enterprise that is at risk of foreign bribery violations, any comprehensive prohibition that prohibits the corrupt foreign business payments in a code of ethics is inadequate. The SEC presumes that an organization’s foreign corruption compliance guidelines should also encompass prophylactic policies aimed at minimizing the violation risk. According to Madhany (2019), the SEC states that companies in their FCPA Compliance programs should include provisions that require all its business transactions and payments to be written down. In addition, businesses operating in foreign countries should carry out pre-payment due diligence while at the same time retaining the right to carry out third party auditing and delegating that any business contracts to include anti-bribery clauses. 

It is inadequate for Canadian companies to have the prophylactic provisions limited only to transaction classes that the business thinks are high-risks. Canadian based businesses should guarantee that the requirements for mitigating bribery risks in the FCPA compliance policies are flexible enough and comprehensively worded to include all transaction processes to avoid any risks that may lead to bribery charges (Madhany, 2019). Although the compliance policy provisions should include all business payments with risk, how an enterprise applies them for a specific transaction can be proportional to the foreign corruption risk level presented by the transaction. 

The story should serve as a lesson for any other Canadian based Company involved in a foreign business or joint ventures. Such companies should show commitment to their policy against corruption, and this should be observed by both senior managers and their subordinates. The policy should begin with a tone set from the top leadership hierarchy meaning that company leadership should lead by example. The SEC and the DOJ are both determined to see if companies comply with their FCPA policies. The entities require businesses to have more than just a written compliance program but also an influential ethical culture that backs the active program (Mas, 2016). By observing the ethical principles, senior leaders motivate middle managers to underpin those values. The SEC and DOJ in assessing whether a company acts in compliance with its anti-corruption laws must examine whether the company’s senior management has effectively articulated and communicated the business standards and ensured that they are conscientiously adhered to and distributed throughout the company.

Following the case, Canadian companies have come to understand that an effective compliance program that ensures that corruption or bribery acts do not occur during a transaction is important. The compliance program should have adequate resources to certify that the program is effectively implemented. Lastly, the compliance function must ensure that reports are made to the Audit Committee or the Board of Directors. Overall, the SEC and the DOJ in assessing the compliance code must consider whether the business devoted sufficient resources and stuffing to the FCPA compliance program given the risk profile, structure, as well as the size of the business. 

Over the years, the Code of Conduct has been used by companies to serve as the overall compliance program. SEC acknowledges this fact; however, the Commission states that the policies must be clear. Importantly, the SEC makes it clear that organizations with large employee percentage, which is not fluent in English, should ensure that the Code is translated to their native language to make sure that is well understood. Canadian Companies and any other U.S companies should employ suitable internal controls founded on the risks that the organizations consider for their business model. 

Risk assessment is important for any company that is willing to implement a strong compliance program. The case of Westport Inc. should inspire any other U.S based clean fuel tech firms to assess their risk in all business aspects. When the SEC and the Department of Justice look at an organization’s overall compliance policies, they consider the extent and whether a company addresses and assesses the specific threats that it faces. Businesses during assessment of risks should take into account factors like government involvement levels, prospective business associates, customs exposure, the industry sector, the business prospect, government oversight, as well as immigration laws in carrying out business ventures. 

Canadian clean fuel tech firms and any other U.S companies in the same sector should ensure that their compliance programs have disciplinary measures and incentives administered in case the company violates the FCPA set guidelines and in cases where the compliance program is adhered to. Besides, the U.S SEC and the DOJ acknowledge that positive enticements lead to compliant actions. Such inducements can be in the form of work promotions and individual appraisals, rewards for compliance management and ethics, as well as  rewarding employees to improve the corporation’s compliance program. 

Westport clean tech Inc., as well as other U.S companies operating in the same industry, have learned from the case that communication of a compliance policy is the key to any anti-bribery compliance program. In assessing that, the SEC and the DOJ must appraise whether a company has considered the necessary measures to make sure that appropriate procedures and policies have been effectively communicated to every individual in the organization, through part-time training as well as accreditation to all directors, managers, workers, and where necessary business partners and agents. Training is important and should be based on the identified risk to ensure that high-risk third party business partners and employees receive the appropriate training. An organization should devote the necessary resources to offer its staff with advice and guidance on how they should comply with the company’s compliance program regularly.  

Anti-Corruption or Anti-Bribery Solutions That Westport Inc. And Other Companies in the Same Industry Should Adopt

Organizations highly focus on their key capabilities, and as a result, they involve a number of third parties to carry out vital business functions.  Businesses lack direct control over the operations of third parties. This is risky as the third parties can expose the company to the reputational as well as regulatory risk of the FCPA violations.  As outlined in the FCPA regulations, companies are answerable for activities that involve both external and internal connections.  Corporations that engage in international operations or either engage third parties in highly corrupt areas are at high risk of violating the FCPA law. Today, businesses are adopting the anti-corruption and anti-bribery solutions to mitigate the risks and protect themselves against reputational damage and penalties.

One of the solutions is that Westport Inc. should adopt internal investigation and confidential reporting policy. To the industry, a company regulator or maybe an anonymous reporting can be employed to ensure that employees report any FCPA compliance violations or corrupt acts. Moreover, what a company does after a violation has been reported is important. According to the FCPA guidelines, once a corruption or bribery allegation is made, an organization should have in place a dependable, competent, and a well-funded process to enable it to investigate the charges (Bulovsky, 2018). Also, the company should document its response, including any remediation or disciplinary measures considered.

Another anti-bribery solution that Canadian Companies operating in the clean fuel industry should adopt is continuous improvement, which entails periodic review and testing. The FCPA requires companies to ensure that the compliance codes are not just documents but are practically put into use to inevitably reveal any weaknesses in the policy. Therefore, the SEC and the DOJ appraise whether businesses frequently review and improve their compliance programs and ethical Codes and not let them become outdated or dysfunctional.  Both the SEC and the DOJ expect companies to test and review their accounting controls and critically think about any existing risk and weakness areas. According to Bulovsky (2018), businesses should ensure that they periodically test their internal control through targeted audits to easily identify any corrupt practices.

Multinational companies willing to acquire foreign companies must carry out both a post-acquisition integration and pre-acquisition due diligence. In this case, the SEC and the DOJ guidelines spell out that companies before purchasing a company should try and carry out enough compliance due diligence. After the acquiring or merging process is complete, the acquiring firm should also consider employing an FCPA audit. The entity should have all risk employees, and senior management from the purchased company trained and integrated into their compliance policy.

Conclusion

Companies are seeking ways to use to reach consumers in every part of the world.  As they grow and expand cross-border relationships, businesses must adhere to compliance frameworks. Westport Fuel Systems Inc. failed to comply with FCPA policies, and after auditing was done, the Company was found guilty of bribing a Chinese government official. Nancy Gougarty’s actions violated the records, internal controls, as well as the regulations of the 1934 Securities Exchange Act. The legislative environment requires businesses involved in joined ventures to act in compliance with the discussed laws. Today, corruption and bribery are behind the scrutiny of many laws like the U.S Foreign Corrupt Practices Act, UK Bribery Act, and other specific laws set by different host nations. The case of Westport Inc. is a lesson to any Canadian Companies involved in foreign joint ventures. To evade strict penalties, reputation damage, and prison sentences, organizations should employ anti-bribery programs that reflect both international and local laws.  Businesses expanding in developing markets face the high examination of their daily operations as policymakers focus on corruption and bribery cases. It is not easy to remain ahead of corruption issues, given that it takes time to understand the laws of the host nations. In addition, the companies face pressure to compete in the new markets, which can prompt them to bribe government officials.  Corruption can highly increase in cases of unbalanced operations, unfamiliar business settings, regionalization, and unvetted third parties. Companies should, therefore, work hard to follow the set laws to avoid the challenges associated with bribery and corruption cases.

References

Bulovsky, A. T. (2018). Promoting Predictability in Business: Solutions for Overlapping Liability in International Anti-Corruption Enforcement. Mich. J. Int’l L., 40, 549. Retrieved from https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1955&context=mjil

Cassin R. (Sept. 2019). Clean fuel tech firm and ex-CEO violated the FCPA in China. The FCPA Blog. Retrieved from https://fcpablog.com/2019/09/27/clean-fuel-tech-firm-and-ex-ceo-violated-the-fcpa-in-china/

Koehler, M. (2016). Foreign Corrupt Practices Act Statistics, Theories, Policies, and Beyond. Clev. St. L. Rev., 65, 157. Retrieved from http://engagedscholarship.csuohio.edu/cgi/viewcontent.cgi?article=3952&context=clevstlrev

Madhany O. (2019). Companies Should Review Their Foreign Corruption Compliance Policies After SEC’s Recent Settlement with Canadian Firm. Lexology. Retrieved from https://www.lexology.com/library/detail.aspx?g=967c45ea-9b85-4e90-8146-609ae5976e9a

Mas, A. (2016). Does disclosure affect CEO pay setting? Evidence from the passage of the 1934 Securities and Exchange Act. Princeton University, Princeton, NJ. Retrieved from https://conference.nber.org/conferences/2015/OEf15/CEODisclosure.pdf

Timmeny, W. (1982). An Overview of the FCPA. Syracause J. Int’l L. & Com., 9, 235. Retrieved from https://surface.syr.edu/cgi/viewcontent.cgi?article=1120&context=jilc

U.S Securities and Exchange Commission (2019). SEC Charges Canadian Clean Fuel Technology Company and Former CEO with FCPA Violations. Retrieved from https://www.sec.gov/news/press-release/2019-197

U.S Securities and Exchange Commission (n.d). Spotlight on Foreign Corrupt Practices Act. Retrieved from https://www.sec.gov/spotlight/foreign-corrupt-practices-act.shtml