New Federal Consumer Protection Legislation in Force Soon

J. Bruce McMeekin, Markham

The Consumer Product Safety Act (“CPSA”) received Royal Assent in December 2010 and will be proclaimed into force on June 20, 2011.

Intended to protect Canadian consumers from consumer products which pose a risk to human safety or health, the CPSA repeals and replaces Part I and Schedule I of the Hazardous Products Act and creates new and substantial sources of regulatory liability for the manufacturers, importers, advertisers and retailers of consumer products.

Jurisdiction

“Consumer product” is defined widely in the Act to mean a product and its components which could reasonably be expected to be obtained by individuals for non-commercial purposes. Packaging is specifically included in the definition. The legislation also specifically exempts the products listed in its Schedule 1 (for example, ammunition and other products subject to regulation elsewhere) from the requirements of the Act, and specifically includes other products listed in Schedule 2 (for example, liquids containing PCBs).

New Sources of Penal Liability

The CPSA creates four key statutory duties of care/strict liability offences for business organizations, their directors, officers, employees and other representatives, preventing:

• the manufacture, import, advertisement or sale of consumer products listed  in Schedule 2 (section 5);
• the manufacture, import, advertisement or sale of a consumer product that does not meet the requirements set out in the regulations (section 6);
• the manufacture, import, advertisement or sale of a consumer product which is a danger to human health, the subject of a recall order or voluntary recall, or the subject an order requiring remedial measures which remain outstanding (section 7); or
• the packaging or labelling of a product in a manner – including one that is false, misleading or deceptive – that may be reasonable expected to create an erroneous impression as to its safety or in manner that is false, misleading or deceptive as to its certification related to safety or its compliance with a safety standard or the Act (section 9).

The exercise of reasonable care or due diligence by the business organization is a full defence to breaches of any of these provisions.

The legislation also prohibits outright advertising or selling a consumer product if the business through its one of its senior officers knows the product is a danger to consumers, or the subject of a recall order, a voluntary recall, or other orders with which compliance is outstanding, and permits the advertising or sale (section 8/section 22.2 of the Criminal Code).  Also prohibited is the sale of an improperly packaged or labelled product when one of its senior officers knows there is non-compliance with section 9 of the Act. It is also an offence to knowingly provide the Health Canada with false or misleading information relevant to the CPSA (section 11).

Due diligence is not a defence to these charges in that the Crown would be required to prove beyond a reasonable doubt that the wrongful act was committed with the requisite guilty knowledge of a senior officer.

The theoretical liability for breaches is substantial. On summary conviction the strict liability offences are subject to maximum fines of $250,000 for a first offence and $500,000 for second and subsequent offences. Individual offenders are also subject to imprisonment for up to 6 months for a first offence and 18 months on a second or subsequent offence. If the Crown proceeds by way of indictment the maximum fine increases to $5 million with the possibility of imprisonment of up to two years.

For the prohibitions, on summary conviction the maximum fines are higher ($500,000 for a first offence/$1 million for a second or subsequent offence) as are the maximum periods of imprisonment (18 months for a first offence/2 years for a second or subsequent offence). On indictment the fines are unlimited and the maximum period of imprisonment increases to 5 years.

Documentation, Reporting and Recalls

Parallel to any applicable common law product liability duties of care, the effect of the statutory duties of care is to require manufacturers, importers, advertisers and retailers to take reasonable steps to ensure that their products do not pose a danger to consumers. Section 13 and the regulations are intended to scope out the level of required documentation that the manufacturers, importers, advertisers, retailers, and product testers will be required to maintain.

In the event there is an “incident” meaning that an unsafe product is available for sale or has been subjected to a recall in a foreign jurisdiction, documentation relating to the incident must be produced to Health Canada within two days of the incident having come to the attention of the holder. Within ten days manufacturers and importers must follow up this initial report with a written report about the details of the incident and the product involved.

Health Canada is empowered to issue recall orders for products that, on reasonable grounds, pose a danger to consumers. Health Canada may also make orders requiring “any measure” that it considers necessary to remedy non-compliance with the Act. Knowingly or recklessly breaching an order is an offence liable to the same sanctions available for breaches of the prohibitions. Less egregious breaches are subject to administrative monetary penalties.

Many of the compliance details will be contained in the regulations. Look to see these promulgated shortly after the Act comes into force.

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Offshore Tax Crimes: It's Coming to a Canadian Court Near You!

David W. Chodikoff, Toronto

Private companies and high net worth individuals should be on high alert as the Canada Revenue Agency steps up its enforcement campaign. A significant collection of resources has been deployed to unearth information regarding the proper reporting of the tax affairs of corporations and individual taxpayers in Canada.

These activities are a direct by product of the global effort to crackdown on tax evasion and tax under reporting by both companies and individuals. These global pressures continue to mount on First and Second world jurisdictions where the evidence of success in the form of convictions and the resulting fines and/or incarceration are visibly lacking in countries such as Canada.

Unquestionably, the record of success in the United States should cause Canadians some real concern as it is likely that while our system of justice is less severe, enforcement authorities are no less committed than their US counterparts to ensure that justice is "served" or "done".

While many cases are still pending, the recent record stemming from the crackdown on Americans evading tax by using primarily Swiss banks and other financial institutions has been quite impressive. For example, this crackdown in the US has led to criminal charges against no less than UBS, the largest Swiss bank, 24 former UBS clients, four former bankers and two banks. More specifically, in February 2009, UBS agreed to pay $780 million to prevent its prosecution for aiding tax evasion by American clients. The bank conceded that its bankers helped wealthy Americans evade taxes from 2002 to 2007. UBS admitted that it had set up sham offshore companies in tax havens such as the British Virgin Islands, Panama and Hong Kong. The bank also confirmed that it created misleading information forms indicating that those sham companies, not taxpayers, were the beneficial owners.

In so far as the outcome for these Americans for their misdeeds is concerned, former UBS banker and whistleblower, Bradley Birkenfeld, was sentenced in Florida to 40 months in prison for pleading guilty to helping wealthy Americans evade taxes. Federico Hernandez pleaded guilty in April 2010 in New York. He agreed that he set up sham accounts in the British Virgin Islands and Panama. In September 2010, he was sentenced to 1 year in prison, fined a total of $29,000 and ordered to pay restitution of $84,423 to the Internal Revenue Service. Jack Barouh, the former owner of a watch company plead guilty in February, 2010 for failing to disclose about 10 million in offshore assets and was sentenced in Miami in April, 2010 to 10 months in prison. He was also fined $5,000. In April 2010, Paul Zabczuk of The Woodlands, Texas, plead guilty in Fort Lauderdale to charges that, inter alia, he did not disclose his UBS account. He was sentenced in July 2010 to one year of home detention and fined $25,000.

There are many other US taxpayers who have either been indicted and their cases are pending or are waiting for the outcome of sentencing. Still, there are other U.S. citizens that have been charged and have subsequently been declared fugitives.

To date, there have been no convictions in Canada related to the crackdown on tax evasion that began in earnest with the UBS affair. However, this situation could change and the time is fast running out for Canadians to take action before the Crown comes knocking. Simply put, Canadians with overseas accounts should seriously consider dealing with those accounts by revealing their existence to the Canadian tax authorities. Failure to take action could result in all sorts of nasty surprises such as the imposition of civil penalties, the prospect of a criminal conviction and resulting hefty fine and/or some form of imprisonment.

If the Canada Revenue Agency ("CRA") quest for information starts before a company or an individual takes action then the battle to defeat the imposition of fines and prison becomes that much harder. The easiest way out is to initiate a Voluntary Disclosure and this process should be engaged by using legal counsel so as to afford the taxpayer the protection of solicitor client privilege. The Voluntary Disclosure process is not arduous and can be managed on a very cost effective basis.

There are four basic requirements for an application for the Voluntary Disclosure Program. First, the applicant must make the voluntary disclosure. The CRA considers a disclosure to be voluntary if there is no enforcement action, or if an action exists, the applicant has no knowledge of it. Second, the disclosure must be complete. The applicant must supply the CRA with all material information related to the omission- whether, for example, the omission concerns an issue of inaccuracy, incompleteness or the failure to report income. If there are significant omissions and/or even errors in the application, it is possible that the application will not qualify as a valid disclosure. Small problems or errors are typically overlooked, provided, of course, that the Voluntary Disclosure office concludes that the application is substantially complete.

The third requisite for a complete Voluntary Disclosure application is that the applicant must be subject to at least one penalty. There are both discretionary and non-discretionary penalties. It is more than likely that a taxpayer would easily meet this condition for the Voluntary Disclosure Program. Finally, the disclosure must involve information that is at least one year past due or at the very least, if the disclosure is in respect of a matter that is less than one year past due then the disclosure must concern the correction of a previously filed return or where the information contains information that also includes prior year information.

If your company or you are in the situation as described in this article then you should seek legal advice as soon as possible. Unnecessarily paying gobs of money to the 'tax man' and spending any time behind bars are two lifetime experiences to avoid.

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Developments in Foreign Anti-Corruption Enforcement

J. Bruce McMeekin, Markham

Canada

In our May 2008 issue we reported on the creation of the RCMP’s International Anti-Corruption Unit which was dedicated to the investigation and enforcement of corruption offences contrary to the Corruption of Foreign Public Officials Act (“CFPOA”).  Passed in 1999, CFPOA is intended to meet Canada’s treaty obligations under the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the U.N. Convention Against Corruption.  The OECD monitors the enforcement track record of all signatories, and, in March, released its most recent evaluation of the RCMP’s efforts.  The results were mixed.  Although the working group was impressed with the creation of the RCMP unit, it was concerned with the low number of prosecutions (one completed and one underway).  It also made recommendations for the amendment of the CFPOA including enhancing the extra-territorial application of the statute permitting the prosecution of Canadian nationals for the bribing of foreign public officials abroad.  The Report can be found here.

United Kingdom

In our September 2010 Newsletter, James Klotz summarized the U.K. Bribery Act enacted in April 2010.  Pending the release of guidance about procedures which relevant commercial organizations can put into place to prevent persons associated with them from bribing, the Act has remained not-in-force.  The guidance document was finally released by the U.K. Secretary of State for Justice on March 30 and the Act is expected to come into force on June 30.

In relation to the section 7 statutory duty of care placed on relevant commercial organizations to take steps to prevent foreign corruption by an associated person, the guidance document provides six principles which the Ministry of Justice considers should inform any anti-bribery compliance procedures adopted by the commercial organizations:

1. The procedures should be proportionate to the bribery risk faced and the nature, scale and complexity of the organization’s activities.  The procedures should be clear, practical, accessible and effectively implemented and enforced.
2. Management must be committed to preventing bribery by persons associated with the organization.  Management must foster a compliance culture.
3. The organization should regularly assess its exposure to the risk of bribery offences and documents the process.
4. The organization should exercise due diligence to assess and mitigate the risk of non-compliance.
5. Proportionate to the risk of non-compliance, the organization should ensure its bribery prevention policies and procedures are embedded and understood throughout the organization.
6. The organization should regularly monitor and review its compliance progress and makes improvements when necessary.

The guidance document also dealt with two sensitive topics for British and foreign commercial organizations:

• When is a foreign business carrying on business or part of a business in the UK and therefore subject to the section 7 duty of care?
• Are hospitality, promotional and other business expenditures bribes for the purposes of sections 6 and 7 of the Act?

The guidance document specifically states that although the test is ultimately for the courts to decide, the government, applying a common sense approach, anticipates that organizations that do not have a demonstrable business presence in the U.K. would not be subject to prosecution under sections 6 and 7.

 As to hospitality, promotional and other business expenditures, the guidance document states that it is not the intention of the Act to criminalize bona fide expenditures which are intended to improve the image of a commercial organization, present products and services, or establish cordial relations with others.

The guidance document can be found here.

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