1. Class 11 – Business Theory Applied to Risk Management
Authors suggest the need for regulatory compliance “feedback” within an organization
(e.g. in an appraisal form or annual review etc.). This could be particularly relevant
since regulatory compliance (including strong due diligence systems, etc.) could
come at the expense of corporate profits.
A key suggestion by the authors: employees should be rewarded for ethical
behaviour and regulatory compliance.
Example of Sears auto repair centres in the 1990s shows what happens when a
company provides compensation (i.e. commissions for higher sales – misleading
customers, false invoices, unnecessary repairs, etc.). So why wouldn’t employees
act more “ethically” if they were explicitly rewarded to do so? Thoughts? Agree or
Courts cannot force businesses to reward employees for compliance: however, courts
can recognize the act of rewarding compliance as part of an organization’s overall due
R. v. National Waste Services Inc.: drivers were compensated by way of bonus for
compliance and deducted pay for infractions; driver disobeyed instructions but
company nevertheless acquitted since they proved due diligence (including: safety
manuals, training sessions, mandatory meetings which drivers were paid to attend,
random spot checks by independent company, etc.)
Perhaps compensation for regulatory compliance should be a 15 factor of due
Suggested 7-step Compliance Program
In the U.S., the existence of a compliance program can lead to a court lowering the
sentence: of course, however, the primary reason for a compliance program is to
avoid breaking the law in the first place – mitigation of sentence is simply an
U.S. guidelines mention seven steps for compliance (reviewed in the next few slides),
which can be used in Canada as useful road maps for designing systems and to
help establish practical courses of action
Step #1: Establish compliance standards and procedures that are “reasonably
capable of reducing the prospect of [illegal] conduct” (e.g. Code of Conduct, etc.)
Step #2: High level personnel assigned to oversee compliance – for example;
compliance officer or ombudsman, etc. Step #3: Proper screening of individuals – organization should not delegate
authority to individuals whom the organization should have known, via due
diligence, had a propensity to engage in illegal activities
Step #4: Effectively communicate standards and procedures of the program to all
employees (e.g. CN rail discussion)
Step #5: Organization to police its own policies by enforcing its own compliance
program via: monitoring and auditing systems; reporting systems; internal
“whistleblower” programs; hotlines, etc.
s.425.1 of Criminal Code: Whistleblower legislation in Canada - no
retaliation against employee by employer. However, this does not
explicitly require an organization to actually have a whistleblower
program in the first place…
Possible in-house whistleblower program – anonymity is essential
Step #6: Enforcement through disciplinary mechanisms – organizations must
ensure that employees face appropriate punishment for violations (the nature and
severity of the punishment can – and should – of course vary with the seriousness
and gravity of the violation)
Step #7: Self-reporting to authorities after an offence has been detected:
Interesting discussion because no immunity guaranteed – authors
note that this is the one step most likely to be resisted by the
In Canada, there may be some areas where there is also an
obligation to report to the authorities (e.g. report spills under
environmental legislation, material changes under securities laws,
Interesting exercise in “game theory”: self-report when you know
you will be caught anyway to lower sentencing…but, what if
likelihood of getting caught is low – do you simply remedy the
situation and keep your head down?
Self-Reporting: Is this Due Diligence? no, because due diligence is what you do
before the bad happens.
Can self-reporting constitute due diligence i.e to be a defence of taking “all reasonable
steps”? Let’s take a look at two cases that, on the surface at least, appear to reach
contradictory views. Boyd case: Fisherman self-reports his error. Court concludes that this self-reporting
does not constitute due diligence; it is only a subsequent remedial step…
Home Depot of Canada Inc. v. R.: Seems to be the opposite of the Boyd case. Home
Depot discovered an error in how much tax they paid. They immediately remitted
(i.e. self-reported) a further amount with interest. The CRA took this extra money
and charged them a penalty for getting it wrong in the first place and took Home
Depot to court to collect the penalty. Tax Court: “Yes, the Act stipulates taxpayers
are to be penalized for remitting late, but do not bite the hand that feeds you when
the hand tries so diligently to ensure you get every mouthful”.
Income tax -> self-reporting
Home Depot went to courts because CRA was too much. Courts
were mad at CRA
In this case self-reporting Is Due Diligence.
Authors suggest the two cases can be reconciled based on the fact that Home Depot
had a system of due diligence in place (although an error unfortunately fell through
the cracks which is why they made the error in the first remittance), while the
fisherman in the Boyd case did not.
At the end of the day, the key issue is whether an appropriate due diligence system
was in place.
If not, self-reporting does not, in and of itself, “create” this due
diligence…although it might help on sentencing…
If yes, self-reporting could indeed be additional evidence that your
due diligence system is working – the key point is that, in these
circumstances, self-reporting will not disqualify you from trying to
prove that you had an appropriate due diligence system…in fact,
any subsequent self-reporting could be a part of that very due
What got Home Depot off the hook was not self-reporting, but their
Due Diligence. Since they has a Due Diligence system.
Corporate Compliance Programs: Competition Model
What is the Competition Act? it tries to make the market competitive. Laws against
price fixing. Against anti-competitive behaviour.
Competition Bureau published a helpful “Corporate Compliance Programs” Bulletin
regarding compliance programs – a template to provide guidance on compliance
with competition law in Canada – this is a good practical tool that can also be used
in other areas of the law: The Bulletin sets out seven basic elements of a credible compliance program:
Management commitment and support
Risk-based compliance assessment
Compliance policies and procedures
Compliance training and communication
Monitoring, verification and reporting mechanisms
Consistent disciplinary procedures and incentives for compliance
Compliance program evaluation
Multiple Accused: Immunity and Leniency Dynamics
Often have more than one accused who are charged together for behaviour they
committed together (e.g. price fixing or illegal cartels under the Competition Act,
What do you do if you are the prosecution and cannot convict either them of the most
significant offence without the co-operation of the other accused? you ask one to
turn on the other.
Consider the “prisoner’s dilemma” (not a perfect analogy but you get the idea):
Person A and Person B are suspected of committing armed robbery together
(punishable by 10 years in jail). Prosecution can only prove this if one of the two
testifies against the other, otherwise will only convict them of illegal possession of
firearm (punishable by one year in jail). Prosecution offers both the same deal:
whoever confesses to the armed robbery gets only three months in jail and the
other gets 10 years. If neither confesses, both get one year. If both confess, both
receive 8 years.
What do you think will happen? What would you do? Would your answer be different
if you could not communicate with the other accused?
What is ‘immunity”? What is “leniency”?
What is the dilemma about government authorities providing immunity or leniency?
Immunity: The Competition Bureau has a “first in” immunity program, which provides
immunity (under certain conditions) to first party to step forward (fyi, this is different
than the “prisoner’s dilemma”)
Protection from prosecution
Leniency: The Competition Bureau also has a leniency program with different scales
of leniency – “first in” gets a 50%