Commentary: Fulfilling CSR goals without violating anti-corruption laws

Corporate social responsibility (CSR) is increasingly important to successful business operations. Yet CSR initiatives are often developed without attention to possible liability under anti-corruption laws. 

CSR once referred primarily to a company’s voluntary philanthropic projects, such as donating to a local charity or building a school. While these types of projects are still important, today the term CSR refers more broadly to a corporate responsibility to understand and address the various impacts a company’s operations may have on its stakeholders in the economic, social and environmental spheres, as well as their relationships in the workplace, the marketplace, the supply chain, the community and the public policy realm.

An example of this newer concept of CSR is set out in the widely endorsed UN Guiding Principles on Business and Human Rights. These “Guiding Principles” state that businesses have a responsibility to respect all internationally recognized human rights by avoiding infringement on the human rights of others, conducting due diligence to monitor rights impacts and addressing adverse human rights impacts that may arise out of their operations.

CSR and anti-corruption initiatives are often approached differently both conceptually and within companies, yet they are linked. CSR considers the economic, social and environmental impacts of a company’s operations, and all of these spheres may be negatively affected by a company’s corrupt activities. 

Socially, corruption undermines the rule of law and the legitimacy of public office, and creates an obstacle to democracy. Economically, corruption depletes national wealth, leads to the misallocation of scarce resources, can hinder the development of fair market value structures, distort competition and deter investment. Environmentally, corruption can contribute to environmental degradation, the exploitation of natural resources and insufficient regulation or enforcement to protect the environment.

Presenting or preventing corruption risk?

Corruption risk varies depending on the CSR approach a company takes. Corruption risk ought to decrease when a company is using the newer concept of CSR embodied in the Guiding Principles. Best practices in anticorruption compliance require policies, codes of conduct and due diligence to prevent and detect corruption, all of which are required by the Guiding Principles in respect of human rights. The steps required by the Guiding Principles can be integrated into a company’s overall compliance processes, and can dovetail with existing anti-corruption policies, procedures and due diligence. This new “due diligence” approach to CSR, when followed, can provide additional feedback to help companies prevent, identify and remediate corruption.

In a project-based approach to CSR, companies need to remain vigilant about corruption. CSR projects are often designed to mitigate challenges in getting businesses up and running, particularly in developing countries. Not only must a number of approvals must be obtained from foreign officials in the regulatory area, but it is also often necessary to obtain more community approval — or “social licence” — from affected local peoples for proposed projects. As a result, companies, particularly in the extractive sector, engage in activities such as investing in local infrastructure (improving roads, building hospitals and schools, and improving water systems), and providing training and support for local projects, charities and initiatives. Similarly, companies in the retail sector are encouraged to contribute to occupational health and safety initiatives in manufacturing countries, while pharmaceutical companies often donate projects or services to contribute to community health.

Involvement in these initiatives is often beneficial to local groups, and practically essential in order to establish a business. Without precautions, however, these projects may expose a company to significant corruption risk, as illustrated in the case described below. 

Blackfire’s example

Blackfire Exploration Ltd. is a Calgary-based, privately owned junior company with operations in the southern Mexican state of Chiapas. In July 2011, the RCMP executed a search warrant at Blackfire’s Calgary offices, alleging Blackfire paid $20,000 into a local mayor’s personal bank account to “keep the peace and prevent local members of the community from taking up arms against the mine.” According to the RCMP, when the mayor’s requests became more exorbitant and sleazy, including demands for airline tickets and prostitution, the company complained to the Mexican government that they were being subject to extortion. 

Blackfire, in a 2011 statement, stated that it never knowingly paid bribes to anyone, and that it was under the impression that the money transferred to the mayor was for the benefit of the citizens of the local small town, destined for fair and public works. Blackfire said that when it learned the funds were possibly being used for other purposes it took immediate steps to stop the payments. The mayor subsequently stopped supporting the mine, and protestors took over the site. Ultimately three men, including a Blackfire employee, were arrested for the shooting death of a local anti-mining activist.

While charges have not been laid in the Blackfire case, it provides a Canadian example of the need for controls to be in place when making payments relating to CSR. In this instance Blackfire stated it believed the money paid to the mayor was to benefit the local community. However, there were apparently no systems in place to track how the funds were actually spent after being directed to the mayor. The company was therefore exposed to liability for bribery. The company also apparently failed to obtain “social licence” from the spending, as it appears that the money benefitted only the corrupt mayor, and was not effective in addressing any local community concerns.

Controls needed

To make sure that CSR projects remain corruption-free, due diligence and controls are essential. In addition to other anti-corruption compliance measures, these may include the following steps: 

• Prepare internal guidelines on CSR spending, and ensure compliance with them so that CSR-related payments are not viewed as reactive or designed to influence specific official action.

• Ensure that CSR spending is never exchanged for official action or inaction.

• Exercise great caution if the payment is being made at the request of a foreign official. Consider: is the foreign official associated with the recipient or beneficiary? Can the foreign official influence decisions regarding your business in that country? 

• Undertake and document due diligence on the recipient to confirm: that the recipient is a bona fide organization or charity; that no individuals involved with the recipient are foreign officials, or have a close connection to foreign officials; or if they are, ensure those individuals have no influence over decisions regarding your business in that country.

• Obtain a written agreement from the recipient: restricting the use of funds for agreed-upon stated purposes; requiring that the recipient provide audited financial statements throughout the term of the project; requiring certifications from the recipient regarding their compliance with anti-corruption laws and implementation of anti-corruption compliance measures; allowing for ongoing monitoring and auditing of the recipient’s use of funds and effectiveness of the project or program, if appropriate
; and prohibiting compensation to certain individuals.

• Arrange phased payments to the recipient contingent on meeting audited targets, or confirmation that recipient commitments are met before disbursal of funds.

• Ensure the CSR spending is performed transparently, and properly booked in company records.

— Mark N. Sills and Jennifer L. Egsgard are partners in Sills Egsgard LLP, a Toronto law firm specializing in international trade and investment, and related regulatory compliance issues. Visit www.lexmercantile.com for more information, including the unabridged version of this article, which contains more examples of CSR-related corruption settlements and opinions in the U.S., as well as detailed footnotes.