Canada: Bill 1 Becomes Law: Doing Business With The State Is Now A Privilege That Requires Prior Authorization

On December 7, 2012, the Quebec National Assembly unanimously adopted the Integrity in Public Contracts Act, creating a system to ensure the integrity of enterprises even before they can bid on or enter into public contracts.

From now on, any enterprise that wishes to enter into a contract with a public body (including government-owned corporations, cities, towns and municipalities, the healthcare and education systems, as well as provincial ministries and government bodies), directly or through a subcontract, must first obtain authorization from the Autorité des marchés financiers (AMF), which will work closely with the Unité permanente anticorruption (UPAC). The authorization granted by the AMF will be valid for three years. A new public register of authorized enterprises will be created.

As a transitional measure, the requirement to hold such an authorization will come into force on January 15, 2013 for construction and service contracts that involve an expenditure of $40 million or more and for which the award process is under way on or begins after January 15. The requirement will progressively extend to other contracts subject to the Act.

What contracts does the Act apply to?

The Act applies to the following contracts and subcontracts, if they involve the expenditure of public funds: construction, service or supply contracts (including contracts for the purchase or lease or rental of movable property). The Act also applies to public-private partnerships and any other contract determined by government regulation, whether or not they involve the expenditure of public funds.

Extra-provincial enterprises will also have to obtain authorizations. They may be exempt from this requirement if the contract is performed outside Quebec and the enterprise has no establishment in Quebec.

How are authorizations granted?

To apply for the issuance or renewal of an authorization, an enterprise must submit an attestation from Revenu Québec stating that it has no overdue account payable and that it has filed the returns and reports required under fiscal laws. The enterprise must not have been refused an authorization in the 12 months preceding its application.

If these conditions are satisfied, the AMF will ask the Associate Commissioner for Audits appointed under the Anti Corruption Act (Associate Commissioner) to conduct an audit. The Associate Commissioner will provide an advisory opinion on the enterprise to the AMF, stating the grounds for any recommendation that an authorization be refused or not be renewed.  In conducting the audit, the Associate Commissioner will consult the Sûreté du Québec, Revenu Québec, the Commission de la construction du Québec, the Régie du bâtiment du Québec and the ministère des Affaires municipales, des Régions et de l'Occupation du territoire. The Associate Commissioner will have broad powers of investigation to audit enterprises that wish to obtain an authorization or, in the case of enterprises that are already registered, at any time during their registration.

In certain cases, the AMF may revoke an authorization during its validity period.

Before refusing to grant or renew or before revoking an authorization, the AMF will give the enterprise an opportunity to make observations in writing and to provide documents to complete the file.

In what circumstances will an authorization be automatically refused, not renewed or revoked?

The AMF will refuse to grant or renew an authorization or will revoke an authorization if the enterprise, one of its shareholders (holding 50% or more of the voting rights) or one of its directors or officers has been found guilty, in the preceding five years, of any of the offences listed in Schedule I to the Act.

The offences listed in Schedule I are numerous and include offences under the Criminal Code (e.g., fraud, insider trading, participation in activities of a criminal organization, municipal corruption); the Competition Act (e.g., conspiracies, bid-rigging); the Income Tax Act (e.g., false or deceptive statements in a return; evading or attempting to evade the payment of income taxes); the Act respecting contracting by public bodies (e.g., making false or misleading statements in connection with a bid governed by the Act respecting contracting by public bodies or to the AMF in order to obtain an authorization); the Securities Act and other laws and regulations.

In what other circumstances can an authorization be refused, not renewed or revoked?

The AMF may refuse to issue or to renew an authorization or may revoke an authorization if the enterprise does not meet the high standards of integrity which the public is entitled to expect from a contractor. The AMF will examine the integrity of the enterprise and its shareholders, partners, directors or officers and that of any person or entity that has direct or indirect legal or de facto control over the enterprise (Concerned Persons and Entities).

For an enterprise that is a public corporation, a person holding 10% or more of the voting rights attached to the shares of the enterprise is considered to be a shareholder for purposes of these provisions.

Factors that the AMF may consider in examining the integrity of an enterprise or that of a Concerned Person or Entity include:

• whether the enterprise or a Concerned Person or Entity maintains connections with a criminal organization;
• whether the enterprise or a Concerned Person or Entity has, in the preceding five years, (i) been prosecuted for any of the offences listed in Schedule I or (ii) been found guilty of or been prosecuted for any other criminal or penal offence committed in the course of the enterprise's business;
• whether another enterprise (or a director, partner, officer or shareholder of that other enterprise) or a person or entity that has legal or de facto control of that other enterprise:

• whether the enterprise is under the direct or indirect legal or de facto control of another enterprise that has, in the preceding five years, been found guilty of an offence listed in Schedule I or whether any of the directors, partners or officers of that other enterprise or a person or entity that had direct or indirect legal or de facto control over that other enterprise was under such control at the time the offence was committed;*
• whether the enterprise or a Concerned Person or Entity has repeatedly evaded or attempted to evade compliance with the law in the course of the enterprise's business;
• whether a reasonable person would conclude that the enterprise is the extension of or is lending its name to another enterprise that would be unable to obtain an authorization;
• whether the enterprise's activities are incommensurate with its legal sources of financing; and
• whether the enterprise's structure enables it to evade the application of the Act.

The AMF may also consider whether a person in authority acting on behalf of the enterprise has, in the preceding five years, been found guilty of or been prosecuted for an offence listed in Schedule I.

When must the enterprise hold the required authorization?

An enterprise that enters into a contract or subcontract must hold the authorization on the date the contract or subcontract is entered into. In the case of a call for tenders, the enterprise must hold an authorization on the date it submits its bid, unless the call for tenders specifies a different date which precedes the date the contract is entered into.

In the case of a consortium, each enterprise must hold an authorization.

The authorization must be maintained throughout the contract or subcontract. An enterprise which is in the process of performing a contract or subcontract, but no longer holds an authorization because it expired or because the AMF revoked it or refused to renew it, is deemed to have defaulted on the contract or subcontract on the expiry of a period of 60 days after the date the authorization expired or the AMF notified its decision.

What are the penalties for an offence under the Act?

The Act provides that the following acts are offences: making a false or misleading statement when submitting a bid or when applying to obtain, renew or keep an authorization; submitting a bid or entering into a public contract without holding an authorization; entering into a subcontract with an enterprise that does not hold an authorization; failing to provide certain information to the AMF or to notify the AMF of any change to any information previously provided; helping or, by encouragement, advice, consent, authorization or command, inducing another person to commit any of the above offences.

In the event of an offence, fines are between $2,500 and $30,000 for a natural person and between $7,500 and $100,000 in other cases. The minimum and maximum fines are doubled for subsequent offences.

What will happen to the Register of enterprises ineligible for public contracts (RENA)?

RENA, which has been operational since June 2012, will be partially maintained for a while, but will eventually be abolished. Enterprises that were registered due to an offence that is not included in Schedule I to the Act will no longer be listed in RENA. Enterprises that were registered in RENA for offences that are included in Schedule I to the Act will continue to be listed in RENA for the duration of their ineligibility period. Enterprises that are found guilty of an offence listed in Schedule I to the Act after the coming into force of the Act will be listed in RENA for a period of five years from the final judgment.

It should be borne in mind that enterprises that are listed in RENA may no longer do business directly or indirectly with the State during the ineligibility period provided.

Conclusion

From now on, it will be essential to obtain and maintain an authorization from the AMF in order to obtain and perform any public contract or subcontract to which the Act applies. Thus, it will be important for enterprises whose revenues depend on such contracts to adopt best practices and ensure that the conduct of their directors, partners, officers, shareholders and any person or entity under whose direct or indirect legal or de facto control they operate is beyond reproach. To this end, they should ensure that they have policies and codes of ethics that satisfy the highest standards of integrity, that they provide training to their employees and that they implement all necessary preventive or corrective measures to comply with the Act.

*We have reproduced the wording of section 21.28(4) of the Act exactly as written.  However, the wording of this provision could potentially be confusing and it will be interesting to see how it is interpreted by the courts. In addition, there are discrepancies between the French and English versions of the provision.

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