“On m’a toujours dit que les PPP c’Ã©tait anti-collusion” – Â Infrastructure QuÃ©bec
According to law enforcement testimony at Canada’s Charbonneau Commission heard last week, the $2 billion public-private partnership (“P3“) infrastructure project in Canada to build the McGill University Hospital Centre (“MUHC“) is the largest corruption fraud case in the history of Canada.
It’s also the first money laundering P3 infrastructure case in Canada.
In reality, it appears to be the largest P3 infrastructure corruption and money laundering case in the world so far, not just Canada.
The Charbonneau Commission in Canada is looking at corruption in the province of QuÃ©bec, particularly the construction industry.
In 2010, SNC-Lavalin was awarded the contract to design, build and manage the MUHC, at that time one of the largest hospital infrastructure projects in the world. According to law enforcement, the Canadian engineering firm paid $22.5 million allegedly as a bribe to the MUHC’s CEO, Dr. Arthur Porter, and perhaps others, to secure the contract.
This week, SNC-Lavalin allegedly asked Infrastructure QuÃ©bec for an additional $191 million to complete the MUHC, which the government has said it will not pay.
ForeignÂ corruption offences
The payment of bribes to secure a public contract is illegal in Canada and constitutes a criminal offence under theÂ Criminal CodeÂ andÂ theÂ Corruption of Foreign Public Officials Act, the proceeds of which are proceeds of crime. According toÂ the American Society of Engineers, the OECD and Transparency International, financial losses from corruption in infrastructure projects range from between 10% – 30% of project costs.
In February 2014, Canada’s former Finance Minister, the late Jim Flaherty, said that infrastructure in Canada had “fallen prey to corruption” and with respect to the billions of dollars approved for infrastructure projects in Canada, stressed that the federal government did not want any “corruption” or “inappropriate behaviour” with respect to infrastructure in Canada.
The statement was impactful because normally governments do not pinpoint certain sectors, such as infrastructure in which they are participants, as prone to financial crime and moreover, countries, as a matter of reputational management, tend to focus financial crime incidents on individual bad actors, not on the country.
The Charbonneau Commission releasedÂ a copy of several versions of a contract allegedly entered into between SNC-Lavalin and a company registered in a tax haven shielded by beneficial ownership laws allegedly controlled by Dr. Porter for the payment of $30 million to secure deals. Despite the alleged illegal nature of the contractual arrangement, the contract specifically referenced theÂ Corruption of Foreign Public Officials ActÂ and the prohibition against accepting bribes. In an appendix to the contract, it was represented that the contractor was not a politically exposed person in government.
Politically exposed person
However, Dr. Porter and his spouse lied. They were politically exposed persons inside and outside of Canada under anti-money laundering law by virtue of Dr. Porter’s position as head of Canada’s SIRC, and as special ambassador to Sierra Leone. As a result, the $22 million allegedly wired to Dr. Porter’s company in the tax haven should have been subject to an alert and a suspicious transaction report by Canadian banks and the bank in the Bahamas that allegedly received the funds.
Under the FAFT Recommendations, politically exposed persons (“PEP“) include, inter alia, close associates, leaders of political parties, members of government, family members and spouses.
Financiers are required to conduct due diligence to determine politically exposed persons in financial transactions and monitor their financial behavior. In cases where a politically exposed person’s wealth is not explainable by normal employment or other legitimate sources, financiers are required to secretly report suspect financial transactions. PEP laws are designed to ensure that the financial system is not used to facilitate the flow of illicit funds. In this case, the PEP laws appear to have been overlooked in Canada and in the recipient jurisdiction, the Bahamas.
Pressure on politicians to approve contracts
According to testimony of Normand Bergeron, the former president of Infrastructure QuÃ©bec, formerly PPP QuÃ©bec, there were financial crime red flags in respect of the MUHC project, starting with what he described as enormous pressure placed on him and other government agencies to approve SNC-Lavalin as the proponent by Dr. Porter and a Canadian senator. An executive at SNC-Lavalin allegedly earlier told the Charbonneau Commission that the engineering firm secretly obtained copies of the competitor’s drawings in advance to prepare a better bid.
Lawyers from the Charbonneau Commission questioned Infrastructure QuÃ©bec on transparency in the P3 process, and in particular, this case.
Infrastructure QuÃ©bec says it used to believe P3 projects were corruption-free
Mr. Bergeron testified that Infrastructure QuÃ©bec believed that P3 infrastructure projects were corruption-free. Commission President Charbonneau had this to say:Â “Avec touteÂ l’experience que vous aviez au sein de la fonction publique, vous trouviez pas qu’il yÂ avait quelque chose qui tournait pas rond?Â â€¦Vous [Infrastructure QuÃ©bec] Ãªtes quand meme gardien desÂ rÃ¨gles et du processus.”
Mr. Bergeron said that Infrastructure QuÃ©bec assumed that Dr. Porter had integrity because he appeared to be a knowledgeable expert who was fully engaged in the procurement process with political connections.
Ironically, as described below, some of those characteristics may present a heightened financial crime risk.
According to research from, inter alia, OECD and FATF, P3 infrastructure projects with the following characteristics are more prone to corruption:
- Lack of due diligence by financiers on, inter alia,Â financial crime including involvement of politically exposed persons, domestic and foreign.
- Large projects with greater complexities or novel features.
- Lack of transparency in the process.
- Too much discretionary decision-making authority exercisable by several officials.
- Unclear rules and regulations in respect of financial control and audits.
- Lack of awareness of financial crimes or enforcement in respect thereof, in particular lack of resources to prosecute financial crimes.
The FATF has determined, with respect to PEPs, that there is a greater risk with persons involved in the following:
- Public procurement;
- Energy, construction, gaming, mining and defense sectors;
- Large infrastructure projects; and
- Financing of government projects.
And those who have political connections.
Canadian companies more risky for financial crime?
Whether Canada’s infrastructure sector really has “fallen prey to corruption” as the federal government stated a few months remains to be seen but there is no doubt Canada’s reputation for business ethics has diminished on the world stage as a result of the MUHC case and other high-profile cases.
Canadian companies dominate the World Bank’s corruption list of companies banned from obtaining funding by the World Bank and the Basel Institute on Goverance ranks Canada as more risky than Egypt, Peru, Romania, Hungary Chile and Jamaica for a range of financial crimes factors, including money laundering and corruption.
The Charbonneau Commission is expected to issue recommendations to mitigate against corruption in Canada next year which is expected to help rebuild Canada’s reputation.Â In the meantime, monitoring for the red flags above, having transparency and a regulatory framework that all parties can trust would mitigate against financial crime.