Anti-Corruption in International Mining Projects: Practical Risk Management and Compliance Strategies

1. Anti-Corruption in International Mining Projects: Practical Risk Management and Compliance Strategies Date: April 28, 2011 Presenter: Janne Duncan, Partner, Toronto officeTel.: +1 416 202 6715 Email: janne.duncan@macleoddixon.com

2. Why is mining an at-risk industry? • Mining companies operate in countries where there is a high risk of corruption or where corruption is viewed as acceptable local practice. • Need for government-issued licenses, concessions, planning consents and permits involve regular dealings with government officials and often involve discretionary consents and approvals. • Taxes and royalties paid to government officials under laws that are sometimes not transparent or subject to change depending on current perceptions. • Frequent dealings with customs and immigration officials.

3. Why is mining an at-risk industry? • Importance of building community relationships. • Frequent use of finder’s fees paid to third parties to find properties and help with governmental consents and approvals. • Joint ventures with third parties are common. • Contracts with third parties are common eg., road and mine construction and these third parties need government issued licenses, etc. • Frequent use of the army or police forces for security purposes.

4. Corruption in Emerging Markets The global hotspots for corruption are developing countries: Source: Transparency International, 2007 Corruption Perceptions Index

5. International Legislative Landscape • Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Convention) (1999) • establishes legally binding standards to criminalize bribery of foreign public officials in international business transactions that include foreign anti-bribery rules and a peer review system • focused on the supply side of bribery transactions • adopted by the 34 OECD member countries and 4 non-member countries including Canada • Canada has just completed its peer review United Nations Convention Against Corruption (UN Convention) • over 80 members • focuses on supply and demand side

6. International Finance Institutional Efforts • World Bank Group • project agreements incorporate Anti-Corruption Guidelines by reference • failure to comply can result in sanctions including debarment • European Bank for Reconstruction & Development; Inter-American Development Bank Group; Asian Development Bank; African Development Bank Group (together “Multinational Development Banks”) • with European Investment Bank Group and International Monetary Fund, agreed in September 2006 - Uniform Framework for Preventing and Combating Fraud and Corruption: • definitions for fraudulent, corrupt, coercive and collusive practices • sets principles and guidelines for investigations • promotes information exchange • April 2010, the Multinational Development Banks signed an agreement to cross-debar firms

7. Key U.S. Legislation Foreign Corrupt Practices Act (FCPA) Dodd-Frank Act

8. FCPA: Key Provisions ANTI-BRIBERY PROVISIONS • Unlawful to make or offer money or anything of value to "foreign officials" to influence any act or decision in order to obtain or retain business • Corrupt payments include direct and indirect payments through third parties ACCOUNTING PROVISIONS • Companies that qualify as "issuers" must keep accurate books and records, and devise and maintain an adequate system of internal accounting controls

9. FCPA: Jurisdictional Reach Anti-Bribery Provision • All U.S. companies (public or private) and individuals – at home or abroad • Non-U.S. companies (called “Issuers”) with securities listed on US exchanges or who file reports with the SEC • Officers, directors, employees or agents, at home or abroad, of any of the above • Non-residents and foreign entities where improper conduct occurs within the US • conduct may be as trifling as using US email servers or wiring money through a US bank • US companies may be liable for acts of foreign subsidiaries, JV partners, and others parties deemed to be acting as agents or over whom they have control Accounting Provisions • Issuers – public companies, their officers and employees

10. Dodd-Frank Act • “Resource extraction issuers” must disclose in their annual reports filed with the SEC information relating to all payments made during the financial year to a U.S. or foreign government for the purpose commercial development of minerals. • Payments made in each country, with respect to each project, on account of taxes, royalties, licensing fees, etc. • Apples to Canadian mining companies with securities registered or traded in the United States for FY ending after April 15, 2012.

11. Key Canadian Legislation Canadian Legislation: Corruption of Foreign Public Officials Act (CFPOA)

12. FCPA: Key Provisions • Substantially based on the US FCPA / OECD Convention, except: • the is no extra-territorial component (although Canada is under pressure from its most recent OECD peer review to adopt such a provision in order to comply with its OECD obligations) • there is no books and records component • few prosecutions although the RCMP have corruption units in Ottawa and Calgary • Canada has not adopted an equivalent to the US Dodd-Frank Act

13. Key UK Legislation Bribery Act, 2010

14. Key UK Legislation: Bribery Act, 2010 • Act comes into force July 1, 2011 • Regulates supply and demand side of bribery • Creates a new strict liability offense for a “commercial organization” to fail to prevent a bribe being paid for or on its behalf, including by “associated persons” • The defense of “adequate procedures” is a complete defense unless senior management is involved • Guidance about what constitutes “adequate procedures” published March 2011

15. Bribery Act, 2010: Jurisdictional Reach The Act applies to: • UK companies, UK citizens and UK residents regardless of where the offence occurs • Any non-UK nationals or organizations if an act or omission forming part of the offence took place within the UK • For the strict liability corporate offence for failing to prevent bribery, the act or omission may occur entirely outside the UK, if the corporation carries on a business, or any part of a business, in the UK • Guidance: A foreign company with securities listed on the London Stock Exchange/AIM will likely not be viewed as carrying on a business, or part of a business, in the UK

16. Legislation in Comparison

17. Best Practices Guidelines • OECD Convention Guidelines • US Sentencing Guidelines Manual • The Bribery Act, 2010 Guidance about procedures which relevant commercial organizations can put into place to prevent persons associated with them from bribing (March 2011)

18. Best Practices to Minimize Corruption Risk: Effective Compliance Programs Effective Anti-corruption Compliance Program Essentials Tone from the top Clear and well known written policy Regular training of staff and related parties Strong internal controls Consistent and fair enforcement Monitoring and revisions when needed - US Sentencing Guidelines Manual, §8B2.1

19. Risk Assessment Ongoing Risk Assessment Internal Risks – deficiencies in compliance policies Country Risks – business in new jurisdictions Transaction Risks – new business lines or methods (e.g. intermediary use) Partnership Risks – due diligence of new partners, consideration of associations with prominent public office holders Periodically engage outside professionals to test soundness of compliance program and recommend areas for improvement Engage various parts of the business in compliance efforts (i.e. legal, finance, HR, Directors) Audit compliance Ensure compliance with compliance programs Spot checks for adherence Monitor effectiveness

20. Create and Maintain Clear, Practical and Accessible Polices & Procedures • Business Conduct Guidelines • active and passive bribery • anti-money laundering procedures • policy on gifts and hospitality • policy on charitable donations • policy on political donations • policy on extortion • mandate transparent documentation of expenses • whistle-blowing procedures and disciplinary consequences • Appoint a Compliance Officer • Require third parties with whom you to business to agree to comply with your Business Conduct Guidelines

21. Create and Maintain Clear, Practical and Accessible Polices & Procedures • Policies must be reasonable • zero tolerance should not overburden compliance staff • Establishing travel/entertainment/gift threshold amounts • Requiring pre-approval for routine and legitimate government payments • May be harmful to have stringent anti-corruption policies “on paper” that are not actually followed or enforced • policies should be designed to prevent key risk areas of the business • i.e. If industry utilizes many consultants who interact directly with government officials, then policy and training should specifically focus on this area • do business operations coincide with anti-corruption policy? • i.e. does sales incentive scheme support or undermine anti-corruption efforts? • i.e. does business plan allow realistic timeframes for the necessary bureaucratic processes?

22. Third Parties Best Practices For Engaging Third Parties • Research the business reputation of third party • Conduct reasonabledue diligence • Require formal application process • Obtain a list of references and interview them • Require approval of third party contracts by centralized authority at the corporate level • Include anti-bribery provisions in third party contracts • Monitor third parties and require additional periodic certifications and audits

23. Watch for red flags during DD: secret or nontransparent details payment to third country, third party, or multiple accounts relationship between agent and foreign official lack of sufficient resources (i.e. staff) or competence to perform services offered requests for payments in cash or "bearer" securities foreign official recommends agent cash transactions or “off-book” payments use of side letters or stand alone consultant agreements lack of written agreements payment to entity run by former governmental officials third party is a shell company or use of unnecessary intermediaries unusually high commission payment or large increase in anticipated fee large dollar travel, gifts, entertainment or gratuities Third Parties

24. Strong Internal Controls • Financial accounting system to prevent illegal payments and to detect questionable payments when made • controls for contract approvals, payments, and other disbursements • maintaining sufficient documentation • confirmation that documented authorization procedures are adhered to • scrutiny of large or unusual payments • identify and track government related payments • involve internal audit and other business managers in ensuring compliance • periodic reviews and assessments of internal controls

25. Reporting and Investigations Reporting • Provide ways for internal & external parties to report compliance violations • Ensure employee whistle-blowers, who act in good faith, are not disadvantaged • Periodic audits of remote offices Investigate • Whether reported violations or due diligence of agents, JVs partners etc • Without an adequate Compliance Team, compliance is a ‘paper tiger’ • Externally consult, as appropriate, attorneys or forensic accountants • Respect data protection and employee rights

26. Reporting and Investigations Prepare Response to Potential Incidents • Determine whether and what to investigate • Separate, categorize and rank allegations • Look at who is the complainant, who is alleged to be involved and whether the allegations are material • Promptly investigate actionable claims • Document all investigation efforts • Determine who will investigate • In-house or outside counsel • Agree on investigation plan • To protect privilege • Order and priority of witness interviews • Process for gathering and preserving relevant documents • Determination of scope of investigation • Consider if self-reporting is appropriate • Decide whether the problem is minor and can be remedied or is material and it will be beneficial to self-report • Understand the scope and size of the issue(s) before reporting to authorities • Anticipate some of the strategy questions that will be asked it

27. Conclusion • Bribery involves huge risks: • Penalties that can run up to billions of dollars • Imprisonment for individuals • Risk of devaluing companies in transactions involving due diligence eg., by investment bankers; potential joint venture partners; potential acquirers in M&A transactions • Reputational risk