Bribery Library Blog - Commentary on the UK Bribery Act and Its Impact on International Business

In the report of the International Development Committee published yesterday, evidence was given to the committee by a number of witnesses including government ministers, Transparency International and other NGOs and the Director of the Serious Fraud Office, Richard Alderman QC. The report is well worth a read although much of it centres on the BAE Systems corruption investigation and the delay in it paying the agreed sum of £30m to the people of Tanzania.

The Chair of the committee Malcolm Bruce, appeared to take a dim view of the conduct of BAE itself  in its conduct and words AFTER the deal with the SFO had been struck in late 2010, in particular what he saw as the very late payment to the people of Tanzania of the agreed sum. At Question 92 of the transcript of evidence there are exchanges in oral evidence between Mr Alderman and the committee on the subject of BAE's perceived poor attitude.

Later on the committee asked Mr Alderman how he thought the possibility of plea bargaining, much criticised by the court and the court of appeal in the last year or so in the context of a number of corruption cases which came before the court, could be improved. Mr Alderman said:

"Q105 Hugh Bayley: You told us earlier this morning that you had great difficulty with the antiquated law under which this case had to be brought. You say in your written submission that you would not want to see the current Bribery Act amended. If you do not amend the Act what needs to be done to make the current arrangements for plea bargaining more transparent, and to enable payments of this kind, where a compensation payment is made to a third party, another country, more easily enforceable?

Richard Alderman: Perhaps I may take that question in two parts. First of all, the antiquated law was really about what was needed to be able to establish a charge of corruption. In those pre-Bribery Act days we needed to establish that what is called the directing mind of the corporation was involved in the illegal activity. Basically, that meant that we had to prove that the board of BAE, or people very close to it, were involved in the corrupt payments. I have made no secret of the fact that that test may well be suitable in terms of very small organisations but it is totally unsuitable for a modern globalised corporation. That is why the Bribery Act is such a big improvement. We no longer have to prove that the directing mind was involved in orchestrating and directing the corruption. We have to prove that there was a failure to prevent corruption and that there were not adequate procedures to prevent it. That is a very different test, and one that in my view is a very, very significant advance. Plea bargaining needs to retain and obtain public confidence if it is to be successful, and it must have judicial confidence. We are now dealing with a range of cases, particularly involving very large global corporations, where there are parallel investigations in other jurisdictions. The question arises: how are these cases to be brought to an end, given the particular issue of double jeopardy that I have mentioned? There are very difficult issues here. In my view, the corporations want certainty before the criminal justice system starts, and that is a legitimate request. On the other hand, we have to ensure that what we do has public and judicial support. My view is that that can be obtained only through having a judicial ruling before the agreement can be reached and charges are brought. If for one moment I take as an example the scenario of the BAE case, agreement was reached at about half-past 10 on a Thursday night, after lengthy negotiations. In the United States, the Department of Justice was going to go into court at about nine o’clock their time, two o’clock our time, to announce a settlement relating to eastern and central Europe and Saudi Arabia. That would have an impact on our case. My view has always been that if I had had the opportunity to take my agreement to a judge on the Friday morning it would have been a far better system.

Q106 Hugh Bayley: Forgive me; you have made this point twice. You are saying that the Bribery Act does not need to be changed but some bit of law does, I guess, in order to have the ability to go to a judge earlier in proceedings.

Richard Alderman: That is right.

Q107 Hugh Bayley: Could you possibly send us a note to explain which Act needs to be changed?

Richard Alderman: I can certainly do that. This is a criminal justice issue about the ability of a judge to be involved in a criminal case before any criminal charge is brought."

We at the Bribery Library agree with Mr Alderman's approach as set out in his evidence and consider that a change in the criminal justice system is over due. Change is needed in order to deal with the situations which arise in the very high value, international and often very complex cases such as corruption prosecutions which frequently take place in many countries in parallel. The UK court's reactions so far to the sort of bargains which the SFO has tried to reach with defendants have been reactionary and discouraging to the criminal justice process. These deals were plainly done in the best interests of encouraging defendants to come forward at an earlier stage, and to saving the enormous legal costs of a trial and yet the courts have been very prickly.  Courts in the UK need to stop thinking parochially about their own coveted powers and start thinking globally about how to stamp out international corruption where frequently one case affects many countries. There needs to be much more pragmatic thinking in the UK, of the kind seen much more often in the US criminal justice system.  If prosecutors are not allowed to reach agreements with defendants, then of course more of them will contest their charges, and this is something which the SFO and the court system simply cannot afford, with budgets being ever more tightly squeezed due to the current unparalled crisis in public expenditure funding. These are very different times, so we all need to develop different ways of thinking.

We will blog further on the debate about plea bargaining as it develops. If it is anything like the current debate on deferred prosecution agreements, it is likely to be some years before anything actually gets changed.

As we have reported in a previous post, on 6th June 2011, section 92 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) amended the Securities Exchange Act of 1934 by adding (amongst other things) securities whistleblower incentives and protections.  Section 21F directs the Commission to make monetary awards to eligible individuals to provide voluntarily original information that leads to successful Commission enforcement actions resulting in the imposition of monetary sanctions over $1 million, and certain related successful actions.  Awards are required to be made in the amount of between 10% and 30% of the monetary sanctions collected.

The Dodd-Frank Act requires the Commissions Office of the Whistleblower to report annually to Congress on its activities, whistleblower complaints and the response of the Commission to such complaints.

In its first report, just published, it is stated that the Office of the Whistleblower, in the Division of Enforcement, currently consists of six attorneys and one senior paralegal.

Since the whistleblower hotline was established for members of the public to call with questions about the program, the Office has returned over 900 phone calls from members of the public.

During this period the Whistleblower’s Office has been busy publicising the new program actively through participation in webinars, presentations, press releases and other public communications, and also conferring with regulators from other agencies’ whistleblower offices including the Internal Revenue Service, Commodity Futures Trading Commission, Department of Justice, and Department of Labour to discuss best practices and experiences.

The Whistleblower's Office reports that because the Final Rules only became effective on 12 August 2011, in fact only seven weeks of whistleblower tip data is available for the fiscal year 2011.  Notwithstanding that, within that period 334 whistleblower tips were received which break down into different categories as follows:

• Manipulation – 16.2%
• Offering fraud – 15.6%
• Trading and pricing – 5.1%
• Insider trading – 7.5%
• Corporate disclosure and financials – 15.3%
• FCPA – 3.9%
• Municipal securities and public pension – 2.7%
• Unregistered offerings – 5.4%
• Market event – 3.3%
• Other 23.7%
• Blank (nothing specified by the caller) – 1.5%

Although this is, of course, only a short period of statistical samples, it puts the issues with the FCPA into context with all the other types of SEC violations, at approximately 4% of the total.

Geographically the whistleblower submissions arise from individuals in 37 states within the United States, as well as several foreign countries of which China at 10 callers and the United Kingdom at 9 callers were by far the highest.

The SEC concludes that as a result of the very recent launch of the whistleblower program and because of the small sample size, it is too early to identify any specific trends or conclusions from the data collected to date.

The SEC further reports that on 12 August 2011 the Office of the Whistleblower posted notices of covered actions for the 170 applicable enforcement judgments and orders issued from 21 July 2010 to 31 July 2011 that included the imposition of sanctions exceeding the statutory threshold of $1 million.  The 90 day deadline for all applications for the initial list of covered actions is 11 November 2011 and because the 90 day application period had not passed with respect to any notices of covered actions as at the end of the fiscal year (which the report covers), applications for awards have not yet been processed: therefore the Commission has not paid any whistleblower awards during the fiscal year 2011.

Presumably when the SEC produces its annual report at the end of the fiscal year for 2012, there will be a great deal more information and, we assume, a significant number of whistleblower awards will have been paid.  The analysis should then be much more informative and interesting.

We, at the BriberyLibary, follow this new program with great interest as we are of the view that financial incentives and compensation designed to encourage people with knowledge and evidence to come forward to blow the whistle on corporate corruption (and other legal wrongs) should be seriously considered in the UK without further delay. As we have previously posted, in the competition context, on 3rd August 2011, rewards for whistleblowers already exist in the UK in the competition context and are payable by the Office of Fair Trading, although they are not on the scale potentially foreseen by the SEC’s own program but are limited to £100,000 (which may not be enough to compensate someone whose career might be damaged by speaking out). As always, the US leads the way in developing intelligent "heat seeking" legal strategies and methods to root out serious and systemic crime. Even taking into account the greater size of the US economy, in terms of enforcement it is far ahead of all other developed economies in rooting out large scale national and international bribery and corruption.

The political will to eradicate corruption is growing in many countries, but there are decades of catching up to be done to get to the same level of enforcement with the US.

Pfizer Inc has agreed to pay more than $60 million to settle investigations by the US Securities Exchange Commission and the US Department of Justice in connection with “potentially improper payments” made by units of Pfizer and Wyeth which Pfizer acquired in 2009 for $68 billion.

It is reported that Pfizer and its rival Johnson & Johnson, which itself settled a bribery investigation earlier this year, have provided US authorities with information about widespread industry practices that could violate the FCPA.

The Department of Justice has previously reported that Johnson & Johnson had received a $17 million discount on its $21.4 million criminal fine for “substantial assistance in the prosecution of others”.

This latest settlement is part of an industry focus by the SEC and the DOJ on the pharmaceutical and medical device industry globally (something which my colleague, Patrick Gilfillan, has previously blogged on), including financial arrangements with foreign doctors some of whom may be regarded as foreign public officials under the FCPA

The global accounting firm Deloitte LLP has published its 2011 anti-corruption practices survey.

Deloitte reports that companies have increased their focus on preventing and detecting corrupt activities and their global operations in response to the increase in prosecutions under the US Foreign Corrupt Practices Act (FCPA) and the increased size of penalties.  However, only 29% of the 276 executives surveyed by the Deloitte Forensic Centre were very confident that their company’s anti-corruption program would prevent or detect corrupt activities.  Deloitte concludes that this low level of confidence indicates that many companies may need to evaluate and upgrade their anti-corruption efforts.

A combination of the increased enforcement of the FCPA, and the increase in the size of penalties over the last few years, together with the coming into force of the new UK Bribery Act 2010 means that organisations all around the world are re-examining their anti-corruption compliance programs.  Indeed several we at the Bribery Library have spoken to over the past year have no anti-corruption controls in place at all, which is perhaps surprising when you realise that they are entities with turnovers of $billions.

Some other interesting statistics from the Deloitte report:

• 90% of executives said their company had an anti-corruption policy (one wonders precisely who Deloitte were surveying, because this is not necessarily our experience).
• Only 45% of the companies surveyed had a stand alone anti-corruption policy, while the remaining companies have a policy that was part of a broader code of conduct.  Deloitte offer the commentary that in their experience anti-corruption issues may not receive adequate attention unless they are addressed by the policies specifically focussed on corruption, is a view with which we agree.
• Although roughly 80% of executives said their company conducted internal audits of its foreign operations to identify corrupt activity, only 32% said these audits were conducted annually or more often.

Third party risks

• 52% of executives see the activities of third parties as the greatest source of corruption risk.
• 43% of executives considered that identifying and managing third party relationships was a significant challenge, more than for any other issue.
• Despite these concerns, only 41% of executives said their company regularly conducted due diligence on third parties in foreign countries that interact with foreign government officials.
• 9% of executives said that they conducted very detailed monitoring of third parties to ensure that they are complying with the company’s anti-corruption requirements.  This statistic certainly is in line with our experience of talking to clients and contacts.
• When conducting anti-corruption internal audits, only 50% of executives said that their company’s audits covered foreign sales agents.

Increased corruption risk in emerging markets

• 55% of executives said their company was extremely concerned about the potential impact on their business of corruption in China.
• 43% had the same view about Russia.
• 39% had the same view about India.
• 26% had the same view about Brazil.

“Tone from the top”

• 80% of executives said that their board of directors received updates on the status of their anti-corruption compliance program, and roughly two thirds said that they received updates annually or more often.
• However 32% of executives from smaller companies (with less than $1 billion in annual revenues) said that their board of directors did not receive any updates on their compliance programs.

Assessing risky activities

• Approximately one third of executives considered that customs clearance and importation of goods, and entertainment or business development expenses related to government business or to government relations, presented a significant corruption risk for their companies.
• 20% or more of executives felt that a number of other activities pose a significant risk including bribes, gifts to foreign government officials, expenses incurred in connection with sponsored travel and lodging for foreign government officials and facilitating payments.
• 63% of executives at larger companies believe that the use of third parties posed a significant risk, compared to 33% of those at smaller companies.
• 35% of executives from larger companies received a significant risk from entertainment or business development expenses related to government business or to government relations, while only 19% of those at smaller companies shared that concern.
• 58% of executives said that their companies relied extensively on internal risk assessments and past experience with corruption issues.
• One third of executives said that their companies relied extensively on industry information or on the ratings of the Transparency International Corruption Perceptions Index.
• In spite of the very significant financial incentives arising out of the Dodd-Frank SEC whistleblower provisions, 37% of smaller companies and 20% of larger companies said that they were not likely to re-evaluate their anti-corruption programs in light of these new rules.

Training and communication

• 73% of executives said that their companies provided anti-corruption training, of whom 64% said that they trained select employees such as those in higher risk positions.  However, many executives said that their company cast a much wider net for anti-corruption training.
• Half of the executives said that their company trained all international employees, while 44% said that they trained all domestic employees.
• Roughly one third of executives said that their company also trained members of its board of directors on the company’s anti-corruption policy.
• Only 26% of executives said that their company trainer third parties on anti-corruption requirements which, Deloitte comment, is surprising given the general concern over corrupt activities involving third parties.

Personally, we are surprised at the low level of training revealed by this survey and feel certain that this must increase rapidly and extend to all staff if companies are to meet the UK Bribery Act Guidance published on 30 March 2011.

Deloitte conclude that while training is important in helping all employees understand the legal requirements and company policy on what constitutes corrupt activity and its consequences, it is unlikely to be enough.  Anti-corruption training programs should be supplemented by a robust monitoring programme throughout the year, and by an effective approval process for transactions and for the use of third parties.

In conclusion, this survey is a stark reminder that there is a great deal more work to be done by companies all around the world, including those in countries where there is already medium or high levels of enforcement, to deal with the risk of corruption and to meet the expectations of regulators, especially in the US and the UK.

Shares in the Brazilian based airplane manufacturer, Embraer S.A. have declined substantially since the US Securities Exchange Commission recently announced its investigation into Embraer for possible violations of the US Foreign Corrupt Practices Act.

Embraer is listed in San Paolo, on Brazil’s benchmark Bovespa index as well as on the New York Stock Exchange.

The FCPA prohibits companies which are listed in the United States from bribing foreign government officials or making other illegal payments to obtain or retain business.  Sanctions include criminal fines, civil disgorgement and possible debarment from public procurement contracts with the US government.  In addition, executives may be sentenced to 5 years in prison.

Embraer itself has revealed that it has hired external lawyers to conduct an internal investigation into transactions in several countries. Embraer is quoted as saying:

“The company is unable to foresee the duration, the scope or the results of the investigation”.

This statement is very telling and, in our view, accurate: once you are being investigated by prosecutors you need to be prepared for a very long haul (possibly several years), high legal costs and a great deal of management time will be incurred, not to mention the intense media interest and damaging headlines.  Further, you will be totally unable to predict the end of the investigation.  It can take many years for it to be completed, especially if it involves investigations and prosecutions in other jurisdictions.

In addition, of course, a company’s share price may become depressed, because the market and especially the analysts fear that large and costly fines may be imposed on the company by different regulators or courts around the world.

Your employees can form a vital line of defence against corruption, but only if they know what to look out for and how to respond appropriately.  The insidious nature of corruption often means that employees themselves become unwitting facilitators.

If you consider a scenario of a foreign third party agent who pays a bribe to advance your business e.g. a bribe to a port official in return for overlooking inadequacy in customs documentation, the agent in that scenario is most unlikely to absorb the cost of that bribe, it will ultimately be paid by your organisation.  An unsuspecting back office employee will process an invoice for that agent and the bribe will be reimbursed. 

To adequately prevent bribery and to ensure training on anti-corruption policies and procedures is effective your employees should be trained to identify the ways in which corruption can be hidden, funded and facilitated.  Corruption indicators, also known as “red flags”, are numerous and those who use corrupt methods are constantly devising new ways to continue their corrupt practices without detection.  Such training is particularly useful for employees in countries where corruption is less common and team members might be more naïve about corruption risks.

By way of example, here are some red flags that would be relevant to your accounts payable team:

• Euphemistic or poor descriptions of services in invoices e.g. “special handling fee” or “miscellaneous fee”.
• You are in country ‘A’.  Your agent is providing services in country ‘B’, but requests payments be made to an account in country ‘C’.
• Requests for payments to be made to shell companies or to numbered bank accounts.
• Requests for abnormally high commission payments.
• Pressure for payments to be made, before services are provided.

You should consider red flag training for all relevant departments, in particular finance and accounts, sales and marketing, tendering and contracts and any employee dealing with third parties that provide services for your organisation.

If you are unfamiliar with corruption risks and needs some tips on what to look out for, you could start by taking a look at the non-exhaustive list of corruption indicators that can be found on the SFO website. 

Although France has ratified and implemented various international conventions against corruption (OECD and UN Conventions on Bribery and Corruption), it is disappointing to note that there have been only two minor convictions in France in relation to corruption of foreign public officials over the last ten years compared to 42 in Germany .

A report published by Transparence Internationale (French branch of Transparency International)  portrays a rather bleak state of affairs for the Judiciary in France in charge of cases relating to corruption (justice financière) which appears to be unable, due to a serious lack of resources, to investigate and pursue corruption matters properly.

In particular, this report shows that:

• Both the police and the judiciary are understaffed and lack experienced investigators to deal with complex issues relating to corruption.  Between 2009 and 2011, the number of judges within the Financial Crime Section at the Tribunal de Grande Instance of Paris dropped from 46 to 39. 
• The small number of successful prosecutions is due to the increased role played by the government at the investigation stage of corruption cases.  Prosecutors in France receive instructions from the government and are not independent.  The hierarchy which exists in France between the prosecutors and the Ministry of Justice has been criticised by the Council of Europe and was also condemned by the European Court of Human Rights (Medvedyev v France 10 July 2008) which held that French prosecutors “lack in particular of independence towards the Executive” and as a result cannot be considered to be a judicial authority which can guarantee the rule of law. 
•  French Judges lack the power to prosecute the corruption offences when such offences have been committed abroad.  Under the current legislation, French judges only have jurisdiction in respect of corruption offences where either the offender or the victim is a French national and the facts relating to the offence also constitute an offence in the country where they were committed.  Further, prosecutors have exclusive jurisdiction as regard investigations of corruption of foreign public officials outside the European Union.

Transparence Internationale recommends:

• The creation of a “Prosecutor General of the Nation” which would be independent from the Ministry of Justice and the executive and would be in charge of overseeing prosecutors’ activities for a period of five to six years.
•  A review of the French Official Secrets Act, which has been used recently by the Executive in connection with corrupt matters being investigated to prevent disclosure of classified information.
• The introduction of plea bargaining agreements in order to speed up the resolution of corruption cases.

It is hoped that the coming presidential election in 2012 will enable candidates and political parties to put forward proposals in line with Transparence Internationale recommendations to ensure that the fight against corruption in France is not mere lip service.

A motion has recently been voted at the European Parliament in Strasburg with a view to encouraging the European Commission to prepare a directive to fight against international organised crime (mafia) throughout the European Union. 

This proposal was initiated by the Italians Sonia Alfano and Antonio Di Pietro (former prosecutor in Italy).

In their report to the European Commission, the motion suggested the creation of new offences relating to organised crime with a view to seize offenders’ assets which are proceeds of crimes and to creating a temporary commission within the European parliament to fight organised crime. 

We will blog again on this topic as and when the motion has been considered by the European Commission.

On 1 November 2011, the SFO launched a confidential hotline (called “SFO Confidential”) together with an online reporting form to facilitate reporting suspected fraud or corruption.  

The SFO Director, Richard Alderman, said:

“I want people to come forward and tell us if they think there is a fraud or corruption going on in their workplace.  Company executives, staff, professional advisers, business associates of various kinds or trade competitors can talk to us in confidence.”

The SFO’s whistleblowing hotline is aimed not at victims of serious or complex fraud , but at those who want to give information about serious or complex fraud or corruption on the understanding that their identity will not be inappropriately disclosed. The service is confidential and the SFO has agreed that it will only reveal the whistleblower’s identity on a strictly “need-to-know basis” or if a Judge orders the SFO to do so.  The information provided will be stored centrally by the SFO and any information sent via the SFO’s website will be encrypted immediately.  Such information will be handled by trained staff at the SFO.

However, it remains to be seen whether the SFO whistle blowing hotline will increase the number of corruption offences enforced by the SFO.  In the US, the Dodd-Frank Act of 2010 provoked a large number of investigations by the Department of Justice (DOJ) and by the Securities and Exchange Commission (SEC), due to the rewards provided to whistleblowers who can be entitled to a maximum of 30% of monetary sanctions exceeding US$1m that the government recovers as a result of their assistance.

For example, in March this year, the sum of US$96m was paid to Cheryl Eckard under the Dodd-Frank Act as a reward for acting as a whistleblower at the conclusion of a US$750m settlement with GlaxoSmithKline. 

For further information on this topic, please read the blog of my colleague Adam Greaves posted on 23 October 2011.