Canada's New Debarment Policy – Increased Scope Paired With Increased Flexibility

Long-awaited changes to Canada's Integrity Regime - the suite of policies and contractual terms that underpin Canada's system to defend the integrity of the government procurement process and debar certain bidders from being eligible for government contracts - came into force on May 31, 2024. The Canadian government has established a new Office of Supplier Integrity and Compliance (the “OSIC”) as part of its overhaul to the old Integrity Regime, and to administer a revised Ineligibility and Suspension Policy (the “Debarment Policy”) which forms the core of the commitments and obligations of suppliers to maintain certain ethical standards.

The new Debarment Policy had its genesis in a proposal in 2018 to implement a Canadian deferred prosecution agreement framework that would be accompanied by a revised Integrity Regime. While the deferred prosecution agreement framework was implemented in the form of Remediation Agreements (discussed in our client alerts here, here and here), the Integrity Regime was left untouched. The new Debarment Policy implements this commitment and provides the government with significant new flexibility to consider the most appropriate sanction for a government supplier that has engaged in misconduct given the totality of the circumstances of any given case. This eliminates a source of friction within the law and places a greater emphasis on rewarding entities that exercise good behaviour and take proactive steps to fix shortcomings rather than trying to cover them up. We explore these changes in greater detail below.

Increased Flexibility

The Debarment Policy now vests the Registrar of Ineligibility and Suspension (the “Registrar”) with considerable additional discretion and authority when determining whether to declare a supplier ineligible or suspended under the policy. The Registrar is the entity which will be overseeing the Debarment Policy at a working level and will be conducting assessments regarding supplier compliance. The Registrar will have the delegated authority:

• to declare ineligible or suspend a supplier from award of a contract or real property agreement with Canada;
• to determine ineligibility and suspension periods, including reductions, stays and renewals; and
• to enter into administrative agreements with suppliers and prescribe terms and conditions.

However, it must make these determinations in accordance with the directions set out in the Debarment Policy. If it seeks to deviate from those directions, the Registrar must obtain explicit authorization from the OSIC.

While the requirement to seek authorization places an outer limit on the discretion of the Registrar, it has still been given substantial flexibility within its remit. No longer are debarment periods set automatically at ten years. Instead, debarment periods have a maximum of ten years, and the assessment is contextual and based on:

• The seriousness of the conduct, including the role of the supplier in the misconduct, the extent to which senior management participated, gains the supplier realized, the complexity and degree of planning/forethought, association with organized crime, the cost of enforcement by the authorities, and whether the supplier is a repeat offender.
• Remediation efforts, including disciplinary action taken against individuals involved; independent internal investigations and implementation of remedial measures; any civil or criminal compensation paid to the government and/or any parties injured in the wrongful conduct; adoption of or improvements to compliance regimes; and a strong culture of compliance from management.

This increased flexibility also extends to administrative agreements entered into by government suppliers in order to reduce their ineligibility period. These agreements continue to have requirements for remediation and third-party monitoring but will no longer automatically result in suspension of the supplier. These will be now adjudicated on a “case by case basis,” which is consistent with the general theme of flexibility running throughout the new Debarment Policy.

Increased Scope - New Material Events Triggering Debarment

At its core, the Debarment Policy provides a list of “Material Events” that trigger debarment. The most common Material Event is where an individual or entity is charged with, convicted of, or pleads guilty to one of the listed offences. In certain circumstances, debarment may also be triggered if a supplier's affiliate is convicted of or pleads guilty to one of these listed offences. A supplier may also be debarred if the supplier or its affiliate is convicted of or pleads guilty to a foreign offence that is substantially similar to a listed offence, or agrees to a statement of facts and the Registrar determines that the acts or omissions giving rise to that conviction or agreed statement of facts would likely lead to a conviction of certain listed offences, had those acts or omissions been committed in Canada.

Listed Offences

The earlier policy also contained a list of offences resulting in an automatic debarment. This list has been significantly expanded. The prior policy was focused on provisions specifically related to certain elements of public integrity. This included fraud against His Majesty under both the Criminal Code and Financial Administration Act, bribery and corruption offences under the Criminal Code  and Corruption of Foreign Public Officials Act, Competition Act offences related to bid rigging and conspiracies, forgery related offences, and lobbying offences. The newly listed offences include:

• Sections 83.02, 83.03 or 83.04 (Financing of terrorism), section 123 (Municipal corruption), section 279.01 (Trafficking in persons), section 279.011 (Trafficking a person under eighteen years), subsection 279.02(1) (Material benefits/trafficking), subsection 279.02(2) (Receiving benefit to facilitate child trafficking), subsection 279.03(1) (Withholding/destroying identity Documents to Facilitate Adult trafficking), and subsection 279.03(2) (Withholding/destroying identity Documents to facilitate child trafficking) of the Criminal Code.
• Section 463 (Attempts, Accessories), section 464 (Counselling Offence That is Not Committed) and section 465 (Conspiracy) of the Criminal Code, each solely to the extent that it relates to an offence listed under paragraph (1)(b)(i) of the appendix of Material Events provided in the Debarment Policy.
• Section 52.01 (False or misleading representation) of the Competition Act.
• Paragraphs 497(2)(a) (making contribution while ineligible); 497(2)(d) (exceeding contribution limits); 497(2)(e) (circumventing contribution rules); 497(2)(f) (concealing source of contribution; 497(2)(h) (entering into prohibited agreement); 497(2)(k) (making indirect contribution); 497(2)(l) (exceeding cash contribution limit); 497(2)(n) (making illegal loan); and 497(2)(o) (making indirect loan) of the Canada Elections Act.
• Paragraph 80(1)(b) (Defraud His Majesty) and section 81 (Bribes Offered or Accepted) of the Financial Administration Act.
• Section 117 (Organizing entry into Canada) and 118 (Trafficking in persons) of the Immigration and Refugee Protection Act; and
• Any offence under Part II or Part II of the Canada Labour Code.

One particular note is that one of the listed offences has been expanded rather than added. Previously, the Integrity Regime debarred suppliers for fraud convictions under section 380 of the Criminal Code, but only  where the fraud was committed against the Crown.

This was important in certain contexts; for example, the SNC-Lavalin plea agreement of December 18, 2019, discussed in our client alert here. As some may recall, a significant obstacle for any potential plea agreement for SNC-Lavalin in that case was that a guilty plea and conviction under the Corruption of Foreign Public Official Act (“CFPOA”) offences it was charged with would have resulted in immediate and mandatory debarment for ten years. SNC-Lavalin had sought, and been denied, a Remediation Agreement which would have forestalled the debarment. Instead, one of its subsidiaries, SNC-Lavalin Construction Inc. agreed to plead guilty to fraud against the government of Libya under section 380 of the Criminal Code  (we discuss the plea agreement and its ramifications in our client alert here). Under the Integrity Regime, as it then was, this did not trigger any potential debarment for SNC-Lavalin, as at that time fraud convictions under section 380 only led to debarment where the fraud was committed against His Majesty. Since the SNC-Lavalin fraud plea related to fraud against the government of Libya, rather than against His Majesty, it would not be debarred.

The Debarment Policy expands the scope here by adding section 380 fraud offences committed against persons other than His Majesty. This effectively captures all fraud within the scope of the Debarment Policy, which would include the offence to which SNC-Lavalin pled guilty. In addition, even if SNC-Lavalin had negotiated a Remediation Agreement in these circumstances, under the new policy as detailed below the agreed statement of facts pertaining to this newly listed offence could be sufficient to allow the Registrar to determine whether debarment was warranted. However, it is worth noting that for fraud committed against persons other than His Majesty, the Debarment Policy only applies if the conviction, plea, or the agreement to the statement of facts has occurred in the past three years.

Other Materials Events

While the prior Integrity Regime focused heavily upon whether a supplier had been charged or convicted of a specific list of offences, the Debarment Policy also identifies other Material Events that could lead to a supplier being debarred even though the supplier has not been charged, convicted, or pled guilty to any specific offence. These include where a supplier:

• Makes certain misleading statements that are of a “material respect,” a term that is not defined or discussed in the policy;
• Committed a similar provincial offence in the past three years;
• Is a designated or listed person under the United Nations Act, Special Economic Measures Act, the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law)or the Freezing Assets of Corrupt Foreign Officials Act or is owned or controlled by such a person;
• Has engaged in any activity prohibited under above sanctions legislation;
• Lacks business integrity or honesty in the judgment of the Registrar such that contracting with them would bring the procurement system into disrepute;
• Has, within the past three years been convicted of an offence that resulted in being listed on the Environmental Offenders Registry;
• Has within the last three years received a poor performance evaluation pursuant to PWGSC's Vendor Performance Management Policy; or
• Has an owner, trustee, director, manager or senior officer, that, in the past three years, has been convicted of or pleaded guilty to a listed offence.

These additional Material Events provide a much wider scope for a supplier to be debarred by the Canadian government than was previously the case. Suppliers must therefore conduct themselves more carefully and consider whether certain actions or behaviours that would have been acceptable under the prior Integrity Regime should instead be proactively disclosed to attempt to avoid or limit a debarment period.

There are two new classes of Material Events worthy of special attention.

The first regards the application of Canada's economic sanctions regime. It is now considered a Material Event if a supplier is a designated or listed person under the United Nations Act, Special Economic Measures Act (“SEMA”) the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) (“Magnitsky Law”)or the Freezing Assets of Corrupt Foreign Officials Act or is owned or controlled by such a person.

Although it will be clear whether or not a supplier is listed under the sanctions regime, it can be far less apparent whether they may be “owned or controlled” by a listed person. Both SEMA and the Magnitsky Law include a “deemed ownership rule” which sets out three criteria for determining whether an entity is controlled by another person such that that person will be deemed to own the property of the entity.¹ Although the Debarment Policy does not explicitly incorporate this deemed ownership rule, there is risk that the government will apply one or more of those control criteria in determining that a supplier is controlled by a listed person such that a Material Event is triggered under the Debarment Policy.

It is especially important to note that the Debarment Policy also classifies engaging in any activity prohibited under these sanctions laws as Material Events. This is not rooted in any conviction or guilty plea related to a sanctions breach; the Debarment Policy uses the expansive language of “engaging in any activity prohibited…” by sanctions legislation. This is necessarily broader in scope than if sanctions offences were included in the Debarment Policy's list of offences – for example, like CFPOA offences. There appears to be no knowledge requirement for this debarment criteria, and as such, an entity could be debarred even if they were not criminally charged or lacked the requisite intent in order for their acts to amount to an offence under sanctions legislation.

The second new Material Event of note relates to foreign and provincial offences, and agreed statements of facts that relate to certain listed offences.

A Material Event occurs where a supplier or affiliate has in the past three years

• been convicted of a Foreign Offence² or a Provincial Offence,³ or pleaded guilty to a Foreign Offence or Provincial Offence, or has been the subject of a foreign judicial determination whether civil or criminal that the Registrar determines in its discretion to be a Similar Foreign Offence⁴ or Similar Provincial Offence;⁵ or
• agreed to a statement of facts in relation to having committed an act or omission outside of Canada that would likely lead to a conviction for certain of the listed offences⁶ if it had been committed in Canada, or an act or omission in Canada that is a Provincial Offence, and the Registrar determines in tits discretion that such act or omission is similar to an act which would likely lead to a conviction for certain listed offences.⁷

The novel change here is the explicit capture of agreed statements of fact. Given that deferred prosecution agreements generally require agreed statements of fact that set out the acts or omissions of the entity entering into the agreement, it appears clear that such a deferred prosecution agreement could give rise to a debarment (this was not clear under the earlier Integrity Regime). As a result, Canadian suppliers must be vigilant where they or their affiliates are negotiating such agreements and consider whether any agreed statement of facts would give rise to potential debarment. They may also consider entering into concurrent negotiations with the OSIC and Registrar regarding any deferred prosecution agreements that may give rise to a debarment in order to attempt to limit the time frame and scope of any debarment arising out of such an agreement being made with a foreign government.

Anti-Avoidance Provisions

In addition to these new restrictions, the Debarment Policy introduces a new General Anti-Avoidance Procedure that attempts to prevent suppliers from avoiding a debarment by creating new entities that absorb the assets of the old.

This is a novel addition to the Debarment Policy to explicitly prevent entities from being able to make minor organizational or structural changes in order to avoid debarment.

Expanded Disclosure Obligations

The Debarment Policy also expands the scope of disclosure required by suppliers and potential suppliers as compared to the old Integrity Regime. It requires additional disclosure of “the names of all directors and the names of all individuals and entities that hold 5% or more ownership of a private corporation”.

It also includes a requirement to disclose the names of all directors of non-profit corporations, all the partners of general partnerships and all general partners in limited or limited liability partnerships, as well as the names of all trustees of any trusts.

New Procedures

In addition to the new substantive requirements, the new Debarment Policy introduces additional procedures to formalize the debarment process. This includes a formal Notice of Intention to Declare Ineligible that is provided to potentially debarred suppliers. This sets off a new regimented process that includes strict and short timelines for potentially debarred entities to provide evidence and argument to the Registrar as to whether debarment is warranted, and if so, the appropriate debarment period.

It will be important for suppliers to remain attuned to any such debarment communication. This is all the more so given that the grounds for debarment have been greatly expanded to include even non-criminal conduct, including a vague catch-all criteria of bringing the procurement system into disrepute.

Conclusion

The new Debarment Policy contains extensive changes and may require current and potential government suppliers to carefully review if they may now be ineligible. Especially considering the new flexibility in the process, it would be beneficial for suppliers at risk of debarment to consider proactively engaging with the new regime and making voluntary disclosures to the Registrar and OSIC to seek potentially lesser (or entirely suspended) debarment. McCarthy Tétrault's International Trade and Investment Law Group will continue to monitor the implementation of the Debarment Policy and provide updates on these and other key developments in government procurement and contracting.

Footnotes

1. The control criteria being if the person: holds 50% or more of the shares or ownership interests or voting interests in the entity; is able to change the composition or powers of the entity's board of directors; or can be reasonably concluded to be able to direct the entity's activities

2. Means a civil judgment, regulatory offence, decision, decree, directive, order or consent agreement or criminal judgment in a jurisdiction other than Canada or such other similar enforceable decision pursuant to the authority of such other jurisdiction.

3. Means a Provincial Offence, whether in the form of a civil judgment, regulatory offence, decision, decree, directive, order or consent agreement (which includes, without limitation, those pursuant to securities legislation), criminal judgment or such other similar enforceable decision pursuant to the authority of a Province.

4. Means a Foreign Offence which is similar to an offence listed in paragraphs (1)(a), (1)(b)(i), (ii), (iii), (iv), (vi), (ix) and (x) or (1)(c) of Appendix 2 of the Debarment Policy which sets out Material Events.

5. Means a Provincial Offence which is similar to an offence listed in section 239 of the Income Tax Act, section 327 of the Excise Tax Act, subsection 14(1), with respect to sections 5 and 7, of the Lobbying Act, and paragraph 80(1)(b) (defraud His Majesty), paragraph 80(1)(d) (False entry, certificate or return), section 81 (Bribes Offered or Accepted), subsection 80(2) (Fraud against His Majesty), or section 154.01 (Fraud against His Majesty) of the Financial Administration Act.

6. Offences listed in paragraph (1)(a),(1)(b)(i), (ii), (iii), (iv), (vi), (ix) and (x), or (1)(c) of Appendix 2 of the Debarment Policy which sets out Material Events.

7. Offences listed in paragraph (1)(a)(i), (1)(b)(iv), (v), and (ix), or (1)(c) of Appendix 2 of the Debarment Policy which sets out Material Events.

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