Corruption risks facing franchisors

4 minute read
01 April 2015

Over the past few years, Canadian companies have become increasingly aware of potential civil and criminal liability arising from improper business practices abroad. Specifically, companies are increasingly aware that they are liable under the Corruption of Foreign Public Officials Act (CFPOA) and the U.S. equivalent, the Foreign Corrupt Practices Act (FCPA) if they are engaged in "direct or indirect" bribery of foreign officials. Under the CFPOA, companies can face unlimited fines and individuals can face up to 14 years in jail.

While it has become quite commonplace for parent companies to be aware of their liabilities with regards to their subsidiaries under the CFPOA and FCPA, liability of franchisors for franchisees' actions has garnered less public attention but remains equally important.

International franchising models differ (i.e. master franchising, direct unit franchising, area development franchising) but they all serve the same purpose of increasing a brand's presence in a foreign country and entail a level of risk of liability. This risk is often assessed based on the control a master franchisor is said to exert over its franchisees.

The main foreign bribery risk facing a franchisor is potential vicarious liability for the actions of its "agents" abroad. Agents can represent franchisees as well as sales brokers, distributors, preferred vendors and others connected to the franchisor acting in another country. Many of these agents must interact with government officials in order to advance the franchisor's and/or franchisee's objectives, including dealing locally with health and wage compliance officers, intellectual property officers, utility officials, taxation officials, customs officials and procurement officials.

Vicarious liability does not require the franchisor to have actual knowledge of a bribery or corruption scheme. Under Canadian criminal law, even if a company and its employees did not actually know that a third party agent was engaging in bribery, legal principles allow the court to infer knowledge, and thus impute liability, through wilful blindness. Liability through wilful blindness is engaged where it can be shown that a franchisor had suspicions of possible illicit activity on the part of the franchisee, but consciously avoided asking questions or taking steps to confirm or deny knowledge about the illicit activity. The potential for liability through wilful blindness is obviously influenced by the level, degree and control a franchisor exerts over its foreign business representatives (i.e. franchisees). Notwithstanding, it is not a defence to claim one did not know if one ought to have known or was purposefully oblivious to illicit actions.

The opportunities for Canadian franchisors to be found criminally liable for franchisees and their agents abroad should not be underestimated. Franchisors expanding internationally, especially into markets that have a reputation for corruption or bribery, must undertake critical risk identification and mitigation and carry out precautionary measures to ensure it remains out of the government's crosshairs. These might include:

  • partnering only with reputable, trusted franchisees;
  • conducting tiered, risk-based due diligence on new partners abroad;
  • including appropriate anti-corruption contractual obligations with all franchisees;
  • requiring annual compliance certifications from franchisees;
  • monitoring the business activities of franchisees; and
  • where appropriate, insisting on a right of audit of the financial records of franchisees.

Franchisors should also require franchisees to adopt a compliance program as well as provide regular oversight and training to its own representatives or employees to ensure ongoing compliance.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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