On December 18, 2018, the Ontario Securities Commission (OSC) approved a settlement with Katanga Mining Ltd. (Katanga) in relation to misleading disclosure. Although many of the disclosure violations at issue are related to Katanga's accounting policies and procedures, the company also settled violations related to the adequacy of its foreign corruption risk disclosure. For issuers that have significant operations abroad, this case highlights the importance of regularly conducting foreign corruption risk assessments and carefully considering whether existing risk disclosures are adequate.
The Katanga Settlement
Katanga is an Ontario reporting issuer that operates large-scale copper and cobalt mines in the Democratic Republic of the Congo (DRC). The company operates the mines pursuant to a joint venture agreement with a DRC state-owned enterprise (SOE). Under that agreement, Katanga is obligated to pay the SOE a fixed entry premium and royalties based on mine production.
Between 2012 and 2017, at the direction of the SOE, Katanga made over US$146 million of entry premium and royalty payments due to the SOE instead to an entity associated with Israeli businessman Dan Gertler. The company also separately paid associates of Gertler to represent Katanga in a wide variety of dealings with the DRC government. During that time period, however, Gertler was alleged in media reports to be possibly involved in corruption in the DRC and Katanga's Board and senior management understood that he was identified by the U.S. Department of Justice as being implicated in bribery and corrupt acts in the country.
Despite these red flags, between 2012 and 2016, Katanga's annual information form contained only a boilerplate foreign corrupt practices risk disclosure. That disclosure stated that the company may be subject to foreign corrupt practices laws and, despite efforts to comply with those laws, there could be no assurance that it would be in compliance with those laws at all times.
The OSC found that the boilerplate risk disclosure was insufficient because it "failed to adequately describe the heightened risks" presented both by the company's operations in the DRC and the company's relationship with associates of Gertler. By failing to reference the "elevated risk of public sector corruption in the DRC" and "the nature and extent of [Katanga's] reliance on" associates of Gertler, the OSC concluded that the company's annual information forms during the time period were materially misleading.
In the wake of the Katanga settlement, issuers that operate abroad should consider whether it is appropriate to update their existing risk disclosures. Any issuer that has significant operations in a country with an "elevated risk of public sector corruption" should consider including that fact in its risk disclosures if it does not do so already.
In addition, issuers that operate abroad should make it a practice to regularly conduct foreign corruption risk assessments. While a company may have determined that exposure to foreign corruption risk was minimal when it began operating abroad, over time that risk could materially change. For example, the company's local joint venture partner or a critical local consultant could have become the subject of corruption allegations, or the company could have entered a new line of business in the foreign country that significantly raises the risk of a foreign corrupt practices law violation. If the company identifies any red flags in its foreign corruption risk assessment, it should carefully consider whether its existing risk disclosures are adequate.