Canada has joined the United States and two other countries in sanctioning corrupt officials of foreign governments and violators of international human rights. On October 18, Canada enacted the Justice for Victims of Corrupt Foreign Officials Act, also known as the Sergei Magnitsky Law.

The new law enables the government to impose sanctions against foreign nationals responsible for gross violations of international human rights and significant corruption by preventing their entry into the country, freezing their assets, and restricting their financial transactions.

Magnitsky background

The United States passed similar legislation in 2012 targeting Russian individuals, and expanded the reach of that law in 2016 to include individuals all over the world. Forty-four people have been banned from the United States under the 2012 authorization. Similar laws permitting asset recovery or banning entry to human rights abusers exist in the United Kingdom and Estonia.

Sergei Magnitsky was a Russian tax lawyer who, while conducting investigations on behalf of his UK client, the Hermitage Capital Fund—once the largest private equity firm investing in Russia—uncovered over USD 230 million in corporate tax fraud. The fraud—carried out with the help of government officials—was accomplished by illicitly taking ownership of several of Hermitage’s Russian investment holding companies, then surreptitiously using them as vehicles for fraudulent tax rebate claims. After testifying against the government officials involved in the scheme, Magnitsky was arrested, denied medical care, beaten, and died in prison in 2009.

Targeted sanctions being imposed

The Russian government has called the new law “a deplorably confrontational act blatantly interfering into Russia’s domestic affairs,” and has promised retaliatory measures, including travel bans on certain Canadian nationals. But the law’s scope is not limited to Russia: the Justice for Victims of Corrupt Foreign Officials Act recognizes the global scope of corruption and human rights violations, and is therefore global in reach.

Sanctions may be imposed on any foreign national who has grossly violated the human rights of those who seek to expose illegal government activity, or who fight for their human rights and freedoms.

Sanctions may also extend to foreign nationals who act on behalf of a foreign state “in a matter relating to” such human-rights violations. The law also targets government officials and their agents for acts of significant corruption, including bribery, as well as those who provide assistance or support for such activities. The Governor-in-Council can issue orders or regulations to identify specific foreign nationals and to effectuate the seizures, prohibitions, and restrictions allowed under the Act.

Canada has since imposed targeted sanctions on 52 individuals, including 30 Russian nationals and Venezuelan President Nicolas Maduro.

Canadian companies advised to ‘due diligence’

As individual foreign nationals are formally identified, engaging in proscribed transactions with any of them—including transactions involving property, finance, or financial services—can give rise to criminal liability, including imprisonment for up to five years or a fine of up to $25,000. Companies should also keep in mind that the group of foreign nationals covered by the new law (and others like it) extends beyond Russia to other countries where violations of international human rights have occurred.

This new law, which has received cross-partisan support in Parliament, is a clear demonstration that Canada takes any and all necessary measures to respond to gross violations of human rights and acts of significant foreign corruption. – Minister of Foreign Affairs Chrystia Freeland

In conducting compliance-related global due diligence, Canadian companies should therefore be attentive not only to the potential for corrupt activity, but also to whether the person or entity in question has had any involvement in human-rights violations carried out by government officials, their agents, or other individuals.

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For all of the benefits international trade can bring—profit, stability, development, peace—it can also serve as a channel for humanity’s worst impulses. This happens, for example, when the legitimate apparatus of trade is hijacked for personal gain by public officials who hold the keys to market access, and who are willing to condition that access on the payment of a bribe.

From low-level customs officials guarding the ports of entry, to high-ranking government ministers able to effect preferential policies quid pro quo, the political leadership and the civil service of a country have a tremendous capacity to influence trade. They can either help the market system operate freely and fairly, or subject it to devastating exploitation by criminals and kleptocrats.

Those who engage in international trade need to understand the different political and social environments in which they operate—including the varying likelihood of being confronted with corrupt demands by public officials.

For reasons both ethical and pragmatic (given the severe legal consequences of paying a bribe), business organizations need to be prepared to resist such demands. And adequate preparation requires knowledge of the nature and extent of the specific risks in each country.

A tool for understanding business bribery risk

The 2016 TRACE Matrix is the latest tool businesses should have in their arsenal to understand and confront the challenges of fighting bribery in international commerce. It provides a snapshot of the factors that make it more or less likely that someone doing business in a given country will be asked by a government official to pay a bribe.

The combination of these factors can be thought of as reflecting a kind of public-sector commer­cial health for the country—just as an individual’s health might be reflected in a chart of his or her vital signs. The relevant numbers (e.g., body tempera­ture, pulse rate, etc.) are measured objectively, but care must be taken in deter­mining their significance, reaching a diagnosis, and setting an approp­riate course of treatment.

The TRACE Matrix groups its bribery-related “vital signs” into four domains:

1. The first domain includes factors directly affecting companies’ engagement with public officials: the amount of government contact typically required in conducting busi­ness, the degree to which bribes are considered a normal part of the process, and the extent of business regulation. The numeric values associated with these factors can give you an indication of the opportunities, expectations, and leverage that govern­ment officials are likely to have in seeking illicit payments from your company and its representa­tives.
2. The second domain gauges the government’s own efforts to rein in corruption, addressing the extent to which bribery is legally proscribed and the effectiveness with which those laws are enforced.
3. The third domain addresses government transparency, both in terms of legislative and executive processes, and financial disclosures required of government officials and civil servants. The issue is whether information is available that would allow the public to monitor official behavior and thereby discourage improper rent-seeking.
4. The fourth domain speaks to the ability of the public to make use of such transpar­ency, as gauged by factors such as press freedom and the strength of civic institu­tions.

These four interlocking domains present a picture of the various conditions that keep corruption in check or allow bribery to thrive.

They do not provide certainty about whether or how bribery demands will be encountered, any more than an annual physical check-up will tell me with certainty whether I’m going to suffer a heart attack in the coming year. But, when carefully interpreted, they can clarify what areas might warrant particular attention and preventive measures.

How the TRACE Matrix works

The Matrix arrives at its numbers by aggregating information from a variety of reliable sources, including surveys conducted by institutions such as the United Nations and the World Bank. The inputs are standardized, a series of comparative and predictive statistical techniques are applied, and the results within each domain are expressed on a scale of 1 to 100. An overall risk score for the country is then calculated based on a combination of the four domain scores.

This objective approach to calculation yields numbers of a certain precision. But the significance of those numbers needs to be understood in context, and they require a certain amount of interpretation to be truly meaningful—just as with an individual’s precise blood pressure, cholesterol level, or body-mass index. In general, lower numbers represent a lower bribery risk than higher numbers. But, one shouldn’t be preoccupied with small differences at the expense of attention to the story the collection of numbers can tell.

How does Canada score?

As an encouraging example, we can look at the 2016 Matrix report for Canada.

The coun­try receives an overall score of 28 out of 100, which is considered low-risk. But what accounts for that low risk? With respect to companies’ engagement with domestic officials in Domain 1 (score: 28), the Matrix reveals “a low degree of government interaction, very low expectation of bribes, and a low regulatory burden.”

The anti-corruption legal regime of Domain 2 (score: 20) is characterized as providing “a very high quality of anti-bribery laws and a moderate quality of anti-bribery enforcement.”

The transparency reflected in Domain 3 (score: 30) skews in favor of procedural openness, with “very good governmental transparency and [only] moderate civil-service transparency/health.”

The country’s outstanding capacity for civil oversight in Domain 4 (score: 13) is derived from its “very high degree of media freedom/quality and a very high degree of social development.”

Comparing overall risk scores across different countries can give you a rough sense of which ones carry more or less bribery risk.

Examining the reasons for the risk scores is more likely to give you a meaningful understanding of the actual conditions you are likely to face there.

Used judiciously, the TRACE Matrix can help you take appropriate precautions to avoid becoming complicit in bribery wherever you may trade.

The TRACE Matrix is publicly available here.

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