Legal news and trends for Canadian in-house counsel and c-suite executives
Issue link: https://digital.canadianlawyermag.com/i/50895
GLOBAL UPDATE BETTER SAFE THAN SORRY The business case for legal audits commodity prices, prudent companies today should prepare for enhanced scrutiny from regulators and prosecutors, both armed with new powers that could lead to dire consequences for firms, their directors and "senior officers." According to research by University of Illinois A law professor Amitai Aviram, there is a tendency for white-collar, crime enforcement activities to increase when the economy enters a downturn. "The risk of fraud seems greater, and the enforce- ment of anti-fraud laws increases, after a slump in the business cycle as compared to during the boom segment of the cycle," Aviram writes in an exhaustive study in the authoritative Yale Journal on Regulation. As if business did not have enough to worry about. "When the economy weakens, people are look- ing for someone to blame — and enforcement efforts increase," says Kenneth Jull, a Toronto-based Of Counsel at Baker & McKenzie who specializes in risk-management strategies for regulatory and corporate compliance. "That means companies need to take proactive steps such as a legal audit of their due diligence systems — even when times are tough and they may be cutting back." The stakes are higher, a lot higher than ever before. Jail sentences are more common and longer. Fines have grown exponentially, often amounting to several million dollars. Companies understand the need for financial audits, but not all are as comfortable with the idea of legal audits. Yet there are two compelling reasons for conducting regular legal audits. First, they are likely to turn up something that has been missed. "There are always new legal develop- ments, a new law or regulation, that companies need to be aware of and prepare for," says Jull. Take the case of a leading Canadian distributor of household appliances. It was convicted of sell- ing refrigerators with ozone-depleting substances, contrary to the Environmental Protection Act. The court rejected the company's defence that it had exercised due diligence through its internal process to ensure compliance with the Act. The court acknowledged the company had a general due diligence system to promote envi- ronmental compliance, but said that it was not designed to deal with the specific problem of ozone-depleting substances. The problem, says Jull, was that the company's policy did not evolve with new developments. "It's our job to keep up-to-date with these changes, and we have the systems to do that," he says. "A legal audit might have saved the company a lot of grief." Secondly, legal audits can serve as an insur- ance policy. "God forbid, you are charged with a violation," Jull adds. "But if you had performed a legal audit beforehand, that could show that you undertook due diligence, and it can become part of a defence of reasonableness." The concept of due diligence is becoming increas- ingly important as corporate and individual behaviour has come under closer scrutiny in recent years, espe- cially since the Enron collapse of 2001. In Canada, the aftermath of the 1992 Westray coal-mining disaster that killed 26 miners spawned a new Criminal Code definition of corporate criminal liability. The failure to successfully prosecute the mine operators led in 2003 to the passage of Bill C-45 that greatly broadens the 20 OC T OBER 2008 C ANADIAN Lawyer INHOUSE concept of corporate responsibility. Previously, such accountability rested with a company's board of directors and others who set corporate policy. Showing criminal intent or care- lessness among these people, almost always far removed from the scene of the crime, was nearly impossible. But C-45 extends liability to "senior offi- cers," which includes anyone who "plays an impor- tant role in the establishment of the organization's policies or is responsible for managing an important aspect of the organization's activities." A legal audit, says Jull, will help identify these "senior officers" and ensure they receive the appro- priate training commensurate with their height- ened legal obligations. On the civil side, the requirement for due dili- gence is becoming increasingly strict. "What strikes fear into everyone is the Kipnis conviction," says Jull, referring to the Hollinger corporate counsel convicted of fraud although he did not benefit directly from the non-compete arrangements he helped arrange. "Kipnis failed to exercise due diligence," explains Jull. "These days, anyone can be a party to an offence: if you sign off on documents, even if they are approved by your board of directors, and they are later found to be illegal, you are party to the crime." warning to all businesses: beware the legal consequences lurking in troubled economic times. In addition to confronting the chal- lenges of a stronger dollar and soaring