In a recent survey by accountants Ernst & Young, it is reported in HR Magazine they found that around half of British employers are failing to vet their suppliers for compliance with the Bribery Act.  This is surprising to anticorruption practitioners, taking into account that the Bribery Act provides strict liability for the acts or omissions of associated parties, including suppliers, in the situation where adequate procedures were not in place. One of those adequate procedures would be to vet your suppliers adequately.

Other revealing statistics from the E&Y report:

• 60% of firms with a turnover between £5 and £50m vet their suppliers to assess whether their businesses comply with the Bribery Act (hence 40% do not)
• 16% of these midmarket firms would do nothing if their suppliers failed to comply (so one asks oneself: why bother asking them whether they do comply? )
• Among the 40% of firms which do NOT vet their suppliers, 60 % reported that they were not planning to implement any anti-bribery provisions in the future;
• Of the larger firms (turnover in excess of £50m) only 40% would terminate their suppliers if they failed to comply with the Act.

So one can conclude from these statistics that many British firms have either missed the point of this legislation altogether or are making a positive decision to run a the risk of not being caught, perhaps based on their belief that the Serious Fraud Office and other prosecutors have insufficient resources to discover the fraudulent conduct.  We at the BriberyLibrary wonder whether business managers would be quite so cavalier about not insuring their offices and factories against the risk of fire and flood? The potential disaster which can befall a company which is the subject of an investigation and then a prosecution is not so well known on this side of the Atlantic.  But just look at the examples of Siemens and Innospec, to name but two companies which suffered very significant financial and reputational damage from their prosecutions in the US and other countries. 

The head-in-the-sand approach, which this survey seems to suggest is taking place in many British companies, risks, amongst other things:-

• an unlimited fine for the company,
• a serious prison term for the directors or senior managers who permitted illegal acts to carry on or turned a blind eye to them,
• possible debarment from public procurement tendering in many parts of the world,
• very large legal costs
• consequential civil claims from competitors or others who claim to have lost business as a consequence of illegal acts committed by the company’s associated persons
• a fall in share price for publicly quoted companies

In stark contrast with the Ernst & Young report which suggests not enough is being done, in fact many British businesses are complaining that they feel “hampered” by the Bribery Act and that the Act is unduly restrictive of British trade abroad. This other point of view is summarised, by way of example in a letter in the Financial Times online on 17 March 2013:

“As a businessman I can testify to the shameful cost in executive time that it has caused British companies. In addition it has had an entrepreneurial cost as non-executive directors are understandably anxious about its implications”. 

We at the BriberyLibrary can certainly understand that the Bribery Act will add a certain layer of cost, particularly initially, in order to make sure that you have a robust anticorruption compliance programme, but once it is on its feet, depending on the size of your business and how much you rely on overseas sales, it should not be especially expensive to maintain.  The costs of ensuring that you do not become involved in arrangements which might involve bribing and corrupting others will pale into insignificance when compared with the costs of being prosecuted (see the list of bullet points above).

The Daily Telegraph reported recently that

“…Crispin Simon, a senior executive in UK Trade and Investment, the Government’s export agency, disclosed the move when he gave evidence to the House of Lords committee on small and medium-sized enterprises. He said there was a “desire” that the Bribery Act should be tested by the Crown Prosecution Service to provide a “better sense of where it stands”, and acknowledged it was “possible” that the legislation had resulted in the loss of some business….”

The House of Lords committee, however, believes that there should be some urgent scrutiny of the Act, which in its view has put British business at a disadvantage in the BRIC countries where trade involved  “challenging questions”,  which one assumes means repeated requests for bribes, although it is not entirely clear.

The Daily Telegraph report continues

“Tony Shepherd, of Alderley Group, told the committee: “The existing Act is virtually impossible to operate as far as a UK company is concerned. You cannot really take someone out to dinner without committing a crime. I am extremely in favour of trying to eliminate bribery, but to have a situation where we are subject to a law that is much more severe than anywhere else in the world is not good.”

It should be said that the Serious Fraud Office, which will be the principal prosecuting body for offences under the Bribery Act , has made it clear on many occasions since the Act was passed in April 2010 (and also in the Government’s Guidance on the Bribery Act in March 2011) that it will not be prosecuting defendants for dinners and other reasonable entertainment. So there seems to be a certain amount of misunderstanding amongst business managers.

The United States has been enforcing its anticorruption laws (under the Foreign Corrupt Practices Act) against American corporations and individuals as well as foreign corporations and individuals (who are subject to its very low jurisdictional hurdles) for many years now.  So in fact the UK is merely playing catch up with one of its allies and competitors in terms of both its laws and its attitude to proper enforcement.

No one case being prosecuted will be able to test all parts of the  Bribery Act.  It may take several such cases to go through the courts (if they do not reach a civil settlement before any trial) to test all parts of the Act.  If the UK’s experience turns out like the United States’ experience, it could take many years, even decades, for enough cases to go through the courts for the law to be clarifies by the judiciary. We all await the first corporate prosecution under the Act with great interest, but we might have to wait some time longer yet as the Act has only been in force for some 21 months, and it takes time for acts and omissions to be reported to or discovered by the investigators, and then more time for a decision to prosecute, and then to go through the justice system.  In the meantime in our opinion, there really is no alternative for British business other than putting in place a robust compliance programme so that the company is best protected against rogue employees or others associated with the company.

The new FCPA guidance ("Resource Guide") states that the FCPA’s anti-bribery provisions can apply to conduct both inside and outside the United States and that issuers and domestic concerns (as well as their officers, directors, employees, agents or stockholders) may be prosecuted for using the US mails or any means or instrumentality of interstate commerce in furtherance of a corrupt payment to a foreign official.

The FCPA defines “interstate commerce” as:

“trade, commerce, transportation, or communication among the several States, or between any foreign country and any State or between any State and any place or ship outside thereof…”

The term also includes the intrastate use of any interstate means of communications or any other interstate instrumentality.  The guide explains that by way of example placing a telephone call or sending an email, text message or fax from, to, or through the United States involves interstate commerce as does sending a wire transfer from or to a US bank or otherwise using the US banking system, or travelling across state borders or internationally to or from the United States.

This is very interesting, because clearly very little indeed needs to be done in order for the United States’ courts to take jurisdiction over foreign defendants.  The jurisdictional hurdle is so low that defendants can pretty much fall over it without even realising!

By way of comparison with the UK Bribery Act, section 7 (which deals with the failure by commercial organisations to prevent bribery) applies to foreign corporations and partnerships which carry on

 “a business, or part of a business, in any part of the United Kingdom”.

The British government’s Guidance on the Bribery Act, dated 30 March 2011, provides at paragraph 35:

“…the Government expects that whether such a body or partnership can be said to be carrying on a business will be answered by applying a common sense approach…”.  The BriberyLibrary thinks that that particular piece of guidance is challenging in its vagueness, as we find that common sense is not something everyone shares, and even those who do possess it, may find that there is not an entirely common standard of it.  The UK Guidance points out that, of course, the courts will be the final arbiter as to whether a business was being carried on in the United Kingdom “however, the Government anticipates that applying a common sense approach would mean that organisations that do not have a demonstrable business presence in the United Kingdom would not be caught.  The Government would not expect, for example, the mere fact that a company’s securities had been admitted to the UK Listing Authority’s Official List and therefore admitted to trading on the London Stock Exchange, in itself, to qualify that company as carrying on a business or part of a business in the UK and therefore falling within the definition of a “relevant commercial organisation” for the purposes of section 7.  Likewise, having a UK subsidiary will not, in itself, mean that a parent company is carrying on a business in the UK, since a subsidiary may act independently of its parent or other group companies”.

There are some anti-corruption practitioners (including those blogging at the BriberyLibrary), however, who believe that the courts, when these issues are put before it in the future, may take a different view to the government’s Guidance and that the fact that a foreign company has agreed to abide by the rules and laws of the United Kingdom in relation to the listing of its securities on the London Stock Exchange means that it should also be expected to adhere to the laws in the Bribery Act.

Further, in relation to the parent-subsidiary relationship, where a parent has a controlling interest, it does by definition control the subsidiary, so the subsidiary could in our view never be regarded as acting truly independently: this is something else for the court to consider in due course.

We would not necessarily expect the British courts to go to the same lengths of finding that merely placing a telephone call in the United Kingdom (perhaps while passing through the UK on your way to another country) means that one is necessarily doing business here, but the court might find, for example, that foreign businesses which sell goods into the United Kingdom via a website, which are paid for from the United Kingdom by the purchaser using a Sterling bank account, and which are delivered into the United Kingdom means that even if the seller has no physical presence and no employees in the United Kingdom, that nevertheless it is clearly doing business in the UK and is susceptible to the Bribery Act’s provisions.

The FCPA Guidance continues that a foreign national or company may also be liable under the FCPA if it aids and abets, conspires with, or acts as an agent of an issue or domestic concern, regardless of whether the foreign national or company itself takes any action in the United States.

In truth, it is increasingly likely that two or more foreign prosecutors could simultaneously have jurisdiction over a defendant, due to the international nature of many illegal transactions, and the increasing globalisation of trade generally.  This may lead to related (but not identical) charges being pursued in several jurisdictions, although it is unlikely there would be direct overlap because of the double jeopardy rule (which many countries adhere to, although not always in the same way).  We blogged on Transparency International’s publication “Deterring and Punishing Corporate Bribery” on 30 January 2012.  Recommendation 7 sets out TI UK’s position on double jeopardy.  For its part, the SFO currently regards the double jeopardy rule as applying across borders.

In practice we suspect that the SFO will probably only prosecute if British interests are adversely affected by a rigged competitive bid process abroad, and not on a pure jurisdictional hurdle test of any calls made in the UK etc.

In the US, the SEC and the DOJ have been negotiating civil settlements with defendants for violations of the FCPA for several years, raising plenty of revenue for the US government in the process. The SFO’s last director, Richard Alderman, has followed the same path during his four year tenure at the SFO - all of the corporate defendants who were charged with corruption in recent years agreed to a civil settlement instead of defending the charges at trial. This chosen path has been repeatedly criticised by the new Director, David Green QC, who took up office in April 2012. In his public speeches since April, Mr Green has made it clear that while civil settlements remain an option for the SFO, in cases where there has been a systemic and major breach of corruption laws, it is more likely to be in the public interest to prosecute, and that is precisely what he will do. His view is that settlements are for corporates which are less culpable, either because the conduct wasn’t systemic, and/or that it was the result of the misconduct of one or two rogue employees, rather than being an institutional issue. It will be remembered that the courts, and in particular Sir John Thomas (the President of the Queen's Bench Division), was very vocal in his criticism of the SFO’s so-called "private deals" with defendants, not least because in his view the jurisdiction of the judges was being usurped.  

Nevertheless the SFO’s resources to try cases are very limited,  due to government cutbacks, so whatever the strong words of Mr Green about bringing more prosecutions, the reality is that the SFO does not have the funds or people to pursue to trial more than one or two large corruption cases in any year.

One of the more serious consequences of the many civil settlements in the US has been that there is almost no FCPA jurisprudence at all in the US, despite the Act being 35 years old. This fact is particularly surprising when you remember that due to the size of the country and its litigious culture, for most areas of law disputed before the courts there is a huge and almost overwhelming volume of case-law: so much so that one can often find lines of legal authority going in opposite directions in different courts around this huge country.

The paucity of case-law means that it is difficult for corporates, individuals, defendants and their lawyers to know or to advise with particular certainty on specific provisions of the FCPA. This was itself one of the many complaints made in the letter which was sent jointly to the SEC and the DOJ in February 2012, and on which we posted a blog here on 23^rd February 2012.  The absence of authority means that many terms of the FCPA eg the definition of “foreign official” or “instrumentality”, or the way in which successor liability would be treated in mergers and acquisitions are still, many decades after the FCPA was enacted, ambiguous.

It seems highly probable that the same thing will happen in the UK – namely, that if only 1 or 2 corruption cases are pursued to trial by the SFO per year, as seems likely, then ten years from now, there will be only 10 or 20 authorities, or maybe a lot fewer if the US experience really rings true in the UK.

One of the ways in which the US system has addressed this problem, whether intentionally or not, is by the DOJ’s opinion procedure. This is dealt with at Chapter 9 of the new FCPA Guidance, from pages 86 to 88 which can be found here.

“DOJ’s opinion procedure is a valuable mechanism for companies and individuals to determine whether proposed conduct would be prosecuted by DOJ under the FCPA.398 Generally speaking, under the opinion procedure process, parties submit information to DOJ, after which DOJ issues an opinion about whether the proposed conduct falls within its enforcement policy. All of DOJ’s prior opinions are available online.399 Parties interested in obtaining such an opinion should follow these steps....”

The Guidance then outlines the formal requirements and steps to obtain an opinion. It continues:

“DOJ will evaluate the request for an FCPA opinion.410 A party may withdraw a request for an opinion at any time prior to the release of an opinion.411 If the request is complete and all the relevant information has been submitted, DOJ will respond to the request by issuing an opinion within 30 days.412 If the request is incomplete, DOJ will identify for the requestor what additional information or documents are required for DOJ to review the request. Such information must be pro­vided to DOJ promptly. Once the additional information has been received, DOJ will issue an opinion within 30 days of receipt of that additional information.413 DOJ’s FCPA opin­ions state whether, for purposes of DOJ’s present enforcement policy, the prospective conduct would violate either the issuer or domestic concern anti-bribery provisions of the FCPA.414 DOJ also may take other positions in the opinion as it con­siders appropriate.415 To the extent that the opinion concludes that the proposed conduct would not violate the FCPA, a rebuttable presumption is created that the requestor’s con­duct that was the basis of the opinion is in compliance with the FCPA.416 In order to provide non-binding guidance to the business community, DOJ makes versions of its opinions pub­licly available on its website.”

So although the opinion is to be regarded as non-binding guidance, it is nevertheless still hugely useful to parties all across the US, to enable them to understand the US government’s position on many issues under the FCPA. Here is a link to the opinion releases on the DOJ’s website.

By way of example, here is a summary of one dated 14^th June 2004 taken from the DOJ's website here:

“2004-03

June 14, 2004

Background: Requestor, a U.S. law firm, proposed to sponsor a trip to the U.S. for twelve Chinese officials. On the trip, the officials would meet with U.S. public sector officials to discuss U.S. regulation of employment issues, labor unions, workplace safety, and legal institutions and procedures regarding workplace conflict resolution. The firm intended to pay for travel, lodging, meals, and insurance for the twelve officials and one translator during the ten-day, three-city trip.

Decision: DOJ explained that it did not intend to take enforcement action based on the disclosed facts and circumstances, including that:

(1) the firm had no business before the entities that might send officials;

(2) the firm obtained written assurance the visit would not violate any PRC laws;

(3) the foreign Ministry would select the officials participating;

(4) the firm would pay all costs directly to providers; and

(5) the firm would not pay expenses for spouses, family, or other guests.”

 

The full text of it is also available although it is still only a couple of pages.

By way of contrast, in the UK there is no such formal procedure and therefore no body of opinions available for parties or adviser to access. It may not have been widely known that the SFO did have, under Mr Alderman's directorship, an option whereby a party and/or its lawyers could approach the SFO and ask for informal guidance on a particular situation, either anonymously or otherwise, and the SFO would give its view – orally,  face to face.  This was not as useful, however, as it was not in writing and it was not published anywhere for others to see. That option was effectivley removed by Mr Green on his arrival  at the SFO, however, who has said publicly that it is not the SFO's job to advise companies on their future conduct and that there is plenty of guidance "out there already", the inference being, clearly, that a request for a face to face meeting will no longer be granted.

Our proposal at the Bribery Library is that the US DOJ opinion procedure should be adopted in a similar way in the UK. It will greatly assist companies which are still struggling with understanding and complying with the new laws, but it will also serve UK society well in that it will assist in making the Bribery Act effective by preventing bribery. Ultimately, the government’s aims are to reduce the amount of corruption both domestic and overseas, not to raise money by fining large corporations. This is unlikely to be an unduly burdensome additional task for the SFO because it could pick and choose which requests it actually answers, those which it feels will be widely read and considered. If the SFO is worried about costs, it could consider charging companies for the privilege of obtaining an opinion? If the new Director's concerns are not about costs, it would be interesting to know his views on the US opinion procedures, and why his position on opinions should differ.

The SFO has today published new guidance on self-reporting, business expenditure and facilitation payments.  The new Director has made it all a lot simpler, and in effect the guidance is that the Bribery Act itself is what people should consider and not any government guidance. It is almost startling in its brevity, and rather refreshing, as a consequence!   We have blogged on the previous guidances for these subjects on several occasions including here, here and here.

The SFO’s press release and the new guidance is very short so, for ease of reference for the reader, we will quote from it all in full:

“The Serious Fraud Office has reviewed its policies on facilitation payments, business expenditure (hospitality) and corporate self-reporting.  The purpose is to:

1. restate the SFO's primary role as an investigator and prosecutor of serious or complex fraud, including corruption;
2. ensure there is consistency with other prosecuting bodies; and
3. meet certain OECD recommendations.

The Director of the SFO, David Green CB QC, wishes to re-emphasise that all decisions to prosecute unlawful activity will be governed by the Full Code Test in the Code for Crown Prosecutors and the applicable joint SFO/CPS prosecution guidance.

Self reporting corruption

Whether or not the SFO will prosecute a corporate body in a given case will be governed by the Full Code Test in the Code for Crown Prosecutors, the joint prosecution Guidance on Corporate Prosecutions and, where relevant, the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010.

If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. The fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the Guidance on Corporate Prosecutions. That Guidance explains that, for a self-report to be taken into consideration as a public interest factor tending against prosecution, it must form part of a "genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice". Self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts.

In appropriate cases the SFO may use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution; see the Attorney General's guidance to prosecuting bodies on their asset recovery powers under the Proceeds of Crime Act 2002. If the SFO uses its powers under proceeds of crime legislation, it will publish its reasons, the details of the illegal conduct and the details of the disposal.

In cases where the SFO does not prosecute a self-reporting corporate body, the SFO reserves the right (i) to prosecute it for any unreported violations of the law; and (ii) lawfully to provide information on the reported violation to other bodies (such as foreign police forces).

This statement of policy has immediate effect. It supersedes any statement of policy or practice on self-reporting previously made by or on behalf of the SFO.

Business expenditure

The Bribery Act 2010 came into force on 1 July 2011.

Bona fide hospitality or promotional or other legitimate business expenditure is recognised as an established and important part of doing business. It is also the case, however, that bribes are sometimes disguised as legitimate business expenditure.

Whether or not the SFO will prosecute in respect of a bribe presented as hospitality or some other business expenditure will be governed by the Full Code Test in the Code for Crown Prosecutors and the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010. Where relevant, the Joint Guidance on Corporate Prosecutions will also be applied.

If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. In appropriate cases the SFO may use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution; see the Attorney General's guidance to prosecuting bodies on their asset recovery powers under the Proceeds of Crime Act 2002.

This statement of policy has immediate effect. It supersedes any statement of policy or practice on business expenditure previously made by or on behalf of the SFO.

Facilitation payments

The Bribery Act 2010 came into force on 1 July 2011.

A facilitation payment is a type of bribe and should be seen as such. A common example is where a government official is given money or goods to perform (or speed up the performance of) an existing duty. Facilitation payments were illegal before the Bribery Act came into force and they are illegal under the Bribery Act, regardless of their size or frequency.

Whether or not the SFO will prosecute in respect of a facilitation payment (or payments) will be governed by the Full Code Test in the Code for Crown Prosecutors and the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010. Where relevant, the Joint Guidance on Corporate Prosecutions will also be applied.

If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. In appropriate cases the SFO may use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution; see the Attorney General's guidance to prosecuting bodies on their asset recovery powers under the Proceeds of Crime Act 2002.

This statement of policy has immediate effect. It supersedes any statement of policy or practice on facilitation payments previously made by or on behalf of the SFO.”

Clearly the new Director believes that there was previously too much guidance and that the combination of the Bribery Act (and other relevant criminal justice statutes)  together with the Code for Crown Prosecutors, the Joint Prosecution Guidance and the Joint Guidance on Corporate Prosecutions was more than enough, and to have additional detailed guidance would only serve to confuse businesses, defendants and their advisers.

Also, the guidance reinforces a widely held belief by the legal profession that Mr. Green is likely to prove to be a much tougher prosecutor than his predecessor Richard Alderman, who had (perhaps a little unfairly) acquired a reputation for seeking civil settlements with corporate defendants rather than prosecuting them through to trial.

In relation to self-reporting,  some corporates may feel that the SFO's latest pronouncement is hardly likely to encourage potential defendants to come forward and self-report, with the risk that the SFO may refuse to agree to a civil settlement, and prosecute the corporation anyway.

In response to speculation as to whether corporate hospitality involving tickets to the recent London Olympic Games might result in prosecutions under the Bribery Act, Serious Fraud Office Director David Green QC has stated:

We are not interested in that sort of case. We are interested in hearing that a large company has mysteriously come second in bidding for a big contract. The sort of bribery we would be investigating would not be tickets to Wimbledon or bottles of champagne. We are not the "serious champagne office".

This sort of common sense statement will come as some relief to organisations that have recently been wrestling with their corporate hospitality policies.  No doubt the large numbers of empty corporate seats at the Games, particularly in the first few days, will fuel questions as to whether the Bribery Act deterred British businesses from making the most of this unique opportunity to entertain guests in an environment that brought out the best of Britain.

As we have debated in previous postings on the Bribery Library, it has never been the intention of the Bribery Act to undermine the British corporate hospitality industry.  Such hospitality, when used to foster legitimate business relationships, should not be problematic.  It is only when corporate entertainment is manifestly disproportionate that eyebrows will be raised.  Good compliance policies will therefore not seek to ban or unduly limit hospitality, but will ensure that there are processes in place for approving and monitoring it.

The message from the SFO has never been that it regards corporate hospitality to be a form of bribery; what is important is that businesses remain vigilant to ensure that the veneer of hospitality is not used to disguise what are actually corrupt payments. 

Transparency International UK (“TI-UK”) recently published this guidance relating to mergers and acquisitions, private equity investments and other forms of investment.

As reported by the Ernst & Young 2011, 11^th Global Fraud Survey:

“Despite the many recent examples of the perils of ignoring the fraud and corruption dimension of these assessments, a fifth of companies still do not consider it as part of M&A due diligence and a quarter never consider it in a post-acquisition review”.

TI-UK says that the guidance has been provided in the context of three considerations:

• Anti-bribery due diligence should be applied to all investments, but on a risk-based approach, with the level of due diligence being proportionate to the investment and the perceived likelihood of risk of bribery.
• In many cases the necessary information for due diligence may not be accessible such as in acquisition of public companies, hostile takeovers, auctions or minority investments.  This does not obviate the need for anti-bribery due diligence, but has an effect on the timing i.e. it may need to be undertaken post closure.
• A good practice approach characterises ethical and responsible businesses but is also the most effective means for companies to manage bribery risks across multiple jurisdictions and in a changing legal and enforcement environment.

What to look for in anti-bribery due diligence

• Has bribery taken place historically?
• Is it possible or likely that bribery is currently taking place?
• If so, how widespread is it likely to be?
• What is the commitment of the board and top management of the target to countering bribery?
• Does the target have in place an adequate anti-bribery programme to prevent bribery?
• What would the likely impact be if bribery, historical or current, were discovered after the transaction had completed?

One startling statistic reported by TI-UK is that almost 50% of US corruption – related prosecutions in 2007 were connected to M&A transactions.

TI-UK say that the broad principles and approaches to anti-bribery due diligence apply to both M&A transactions and private equity investments, and this guidance is therefore written for both audiences.  However, the type of transaction and the size of the stake will clearly have an effect on the purchaser’s ability and resources to undertake due diligence, its assessment of investment risks accruing from bribery, and its ability to access and influence the target company. 

 “This guidance provides a generic frame work for applying due diligence, but purchasers will need to decide in each case what level of due diligence is appropriate.  Some targets will be judged to present low risks and to require lower levels of due diligence whereas others will have higher risks.  The size of investment should not be a determining factor as small investments can carry disproportionate risks; and moreover the material risks attached to bribery may not necessarily reflect the size of the bribe...”.

TI-UK refers to the facts that the Serious Fraud Office has already made several statements about the responsibilities and liabilities of private equity and institutional investors including in January 2012 when the SFO said

“Shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in...  It is particularly so for institutional investors who have the knowledge and expertise to do it.  The SFO intends to use the civil recovery process to pursue investors who have benefited from illegal activity.  Where issues arise we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect”.

The report goes on to suggest that the purchaser’s board members, senior management and investment committees should seek to develop a full understanding of bribery risks related to target companies during transactions in order to understand the investment risk.  The nature of the investment risk from bribery falls into four broad areas:-

• Financial:  The financial data may be distorted or falsified e.g. the target’s sales figures may be inflated by contacts obtained through bribe paying;
• Legal:  There may be inheritance of legal risks e.g. the purchaser may incur liability leading to fines and regulatory action;
• Reputational:  For example, the purchaser may find that owing to publicity surrounding a poor acquisition, it is regarded that the less favourable partner or investment vehicle by others including institutional investors; and
• Ethical:  Purchasing companies, or requiring individuals within those companies that are willing to engage in bribery, risks and infecting the ethical culture of the purchaser and having a deleterious effect on the organisation.   A corrupt target may introduce dishonest and corruption to the purchaser’s own activities. 

All in all this is a very useful guide which TI-UK has produced.

Those involved in mergers and acquisitions or institutional investors, and their advisors, will find this a very useful resource.

The report can be found here.

The OECD have published a detailed Report on the evaluations and recommendations of a Working Group on the UK’s implementation and enforcement of the OECD Anti-Bribery Convention. The Report provides a valuable critique of the Bribery Act 2010 and on the UK’s recent record on enforcement of existing corruption laws.

Its principal findings and recommendations may be summarised as follows:

1. The UK is encouraged to continue providing adequate resources and support to the Serious Fraud Office and other relevant law enforcement agencies so that they may continue improving their record of enforcement.
2. The UK is commended for publishing the Guidance to Commercial Organisations regarding ‘Adequate Procedures’.
3. Concern is expressed that to settle foreign bribery-related cases, UK authorities are increasingly reliant on Civil Recovery Orders ‘which require less judicial oversight and are less transparent than criminal plea agreements’.
4. It is observed that the low level of information on settlements made publicly available by the UK authorities often prevents a proper assessment of whether the sanctions imposed are effective, proportionate and dissuasive.
5. Concern is expressed that in some cases the SFO has entered into confidentiality agreements which prevent the disclosure of key information after cases are settled.
6. There is a need for clarification regarding references in the Guidance to ‘reasonable and proportionate’ hospitality and promotional expenditures, including the reference to industry norms.
7. UK policy should ensure that companies effectively move towards ‘zero tolerance’ of facilitation payments.
8. The UK is commended for the substantial efforts which it has made to raise awareness of the Bribery Act and the foreign bribery offence.
9. While noting the UK’s approach of requiring companies to compensate the country of a bribed official, it recommends further refinements.

These comments and suggestions reflect much of the useful debate which has centred around many of these issues over recent months. They provide food for thought both on the part of the Government and the relevant law enforcement agencies.

The Daily Telegraph reported on 15^th March that last week the Chief Executive of BP, Robert Dudley, received a letter from a whistleblower describing himself as a BP employee alleging that corruption has been going on at BP over the last five years.  As reported, the allegation centres on the relationship between a senior BP employee and one of the company’s suppliers.

The author of the letter, who does not identify himself or herself, apparently sets out precise details of how the bribes were paid.  The writer also offers to supply BP with further evidence to back up these allegations once BP has launched an internal investigation.

The Daily Telegraph reports that the central allegation is that there was chartering of tankers at preferential terms for the supplier in return for cash payments to the senior BP employee.

What is certain is that BP will be communicating with the SFO and that BP will conduct its own internal investigation, most likely with the assistance of external lawyers.

The issue of self-reporting does not arise here as the SFO has already been made aware of the allegations as they had been sent a copy of the whistleblower’s letter by the whistleblower himself.

If these allegations turn out to be correct, it may well be that they are capable of being prosecuted under both the old corruption legislation and/or the Bribery Act 2010, if some of the instances of the alleged corruption have taken place since 1 July 2011, when the Bribery Act came into force.

As we understand them, the allegations made to date centre on the receipt of bribes by a BP employee, which on its own would not give rise to an offence by BP under section 7 (“failure to prevent bribery”).  Section 7 is only concerned with the active offence of giving bribes, it does not cover receipt.  There may, however, be grounds for prosecution under Section 2 (the offence of being bribed), although unlike Section 7, this would require a far greater hurdle for the SFO to overcome in order to secure a conviction against the company itself.  While we are not aware of any allegations that BP employees have been paying bribes, should such allegations emerge it may be that Section 7 will become relevant, as will the question of whether BP has failed to put in place "adequate procedures".

The SFO has repeatedly said that it has been looking for a large, high profile international company to pursue in order to send a message around the world that it is serious about its enforcement under the Bribery Act.  Could this be one of those cases?  Is this the one they have been waiting for? We will have to wait and see. We will return to this story as and when there is any further news.

For those reading this blog site outside the United Kingdom, it may interest you to know that the Leveson Inquiry into culture, practice and ethics of the press rolls on and on.  It is now in its second phase or “module”:

“The relationships between the press and police and the extent to which that has operated in the public interest”. 

If you are interested in following the inquiry you can watch it live from your computer by clicking on the link on www.levesoninquiry.org.uk under “latest news”.

More and more evidence is emerging from the inquiry which indicates that there was wide spread corruption of the police and other public servants by representatives of the media.  The evidence of corruption by the press has spread beyond the News of The World, the defunct news publication that was closed down by Rupert Murdoch last year and now it also allegedly stretches to The Sun, another of the tabloid newspapers within Mr Murdoch’s stable of UK publications.

It seems fairly certain that there will be a string of prosecutions over the coming years of members of the media and police officers and other public servants who are apparently involved in this growing scandal.

It seems likely that if these allegations are proved in court that it will demonstrate that the UK is a much more corrupt country than many of us had all previously assumed.  One consequence will be that the UK will slip further down the Transparency International index, which is published annually, notwithstanding the Government’s best efforts to put in place the tough, gold plated, Bribery Act 2010 which came into force on 1 July 2011.

In fact, it is a great shame that the events which are currently being investigated by the Leveson Inquiry did not take place after 1 July 2011, for it would have given the Government and the UK courts a good opportunity to test the Bribery Act and to send out strong messages under the Bribery Act across the UK and also around the world’s business community about the UK’s determination to stamp out corruption.

As it is, the trials which will take place following the Leveson Inquiry will, we assume, be prosecuted under the old corruption laws, some of which date back to the late 19^th century and early 20^th century, and other related offences (e.g. misconduct in public office) will also, likely, be prosecuted.

It has been suggested in the press just this week that the Serious Fraud Office is already considering some investigations under the Bribery Act, which must, by definition, be for offences which have taken place since 1 July 2011.  This is good news.  The quicker the Serious Fraud Office can bring a prosecution of some large scale, high profile corruption, the better it will be for publicising the Bribery Act and its effects around the world.  We believe that many companies around the world, whilst aware of the Bribery Act, are still in denial that it might apply to them.  Our perception is that certainly in some countries very little is being done to comply with the Act, notwithstanding the obvious application of the Act, jurisdictionally, to those particular international companies.  By analogy, it is rather like when the law was introduced many years ago compelling car passengers to wear seat belts: people didn’t wear them because they always assumed the car crash happened to someone else, and never to themselves.  The enforced use of seat belts in fact prevented many injuries and saved lives.  Likewise a robust compliance programme will save companies from financial and reputational damage, but, some will only spend the money on compliance when they see their competitors being prosecuted.

In the meantime, in the last week, it has been announced that the Serious Fraud Office itself is being investigated by the much larger Crown Prosecution Service which prosecutes all other crime i.e. not serious economic crimes.  The CPS is the body that the Home Secretary planned to reverse the SFO into but was “persuaded” by a number of people within the legal establishment in the UK that this would not be beneficial and that the timing was poor, particularly at a time when the SFO was trying to promote and broadcast the effects of the new Bribery Act on businesses around the world.

It must be particularly galling, however, for the SFO to be investigated by the CPS.  One can’t help wondering whether the CPS might make some self-serving findings in their report as to the way in which the SFO is working if the CPS believes that it would be better off having the SFO merged in with it.

One can’t help also feeling, despite the official denials, that the investigation by the CPS into the SFO is linked with, amongst other things, the news story that the SFO has had to apologise to the billionaire Tchenguiz brothers whose offices the SFO raided in a high profile operation in March 2011 for alleged fraud involving the now defunct Kaupthing Bank.  The Tchenguiz brothers were both arrested although one year on neither has been charged.

The SFO has now admitted that information was put before the court (in order to obtain the search warrants) which was not accurate.  The court was misled due to a number of “human errors”, according to the Director of the SFO, Richard Alderman.  Human error when conducted by a professional sounds to us to be professional negligence, so it is not altogether a surprise that the Government ordered the CPS to conduct an investigation.  It might suggest that Theresa May’s original plans are merely on hold.

This story will continue for a while, despite the SFO’s apology, because the Tchenguiz brothers will be pursuing the Serious Fraud Office not only for their costs, but also, we understand, for damages.  Ultimately, though, that cost will not fall upon any individuals at the SFO but will have to be borne by the taxpayer which funds the SFO.

But back to News International which launched a new British newspaper this week, The Sun on Sunday.  Whilst the timing of the launch of this new publication seems particularly dubious during the second module of the Leveson Inquiry, it is reported by Mr Murdoch that its first edition was very successful and that the number of copies sold beat expectations at 3.26m copies.

However, the news is not all good for News International because one of the MPs at the heart of the campaign for an investigation into the media, Chris Bryant MP, the Shadow Justice Minister, has been speaking out again.  He claimed this week at a private members debate held in Westminster Hall that the phone hacking scandal will be the single largest corporate corruption case for 250 years.  He has also claimed that the cover-up extended to James Murdoch, the former Chairman and Chief Executive of News Corporation, something which James Murdoch has strenuously denied when giving evidence to the House of Commons Culture, Media and Sport Committee.  One can only assume that Mr Bryant’s comments are covered by parliamentary privilege.  On 29 February James Murdoch resigned from any further involvement with News International’s British newspapers, perhaps fearing further criticism of his stewardship of News International.

As News Corporation, the parent company of the News of the World and The Sun, is US based, stories surface upon time to time as the whether US prosecutors will pursue an FCPA investigation.  The signs seem to be, for the moment, that the US prosecutors will let the British prosecutors have the first run at it all, which makes sense as it does seem to be a British problem, even though, technically, some of the alleged offences may also constitute offences under US law.

All in all, the last week’s news has been quite hectic and disturbing, particularly under the themes of wide scale public corruption and the perceived (but unrelated) problems within the Serious Fraud Office itself, the main prosecuting body charged with pursuing corruption in the UK.  Let’s hope the SFO stays focussed.  The new Director, David Green, takes up his position in April.

Of course, we will continue to keep you posted on developments on these interesting stories.

The British Bankers’ Association (BBA) has published its own guidance for the banking sector as to how to comply with the Bribery Act 2010.  This guidance (entitled “Guidance on compliance: Practical implementation issues for the banking sector”) is intended to cover both the requirements of the Act and Financial Services Authority (FSA) regulatory obligations. It supplements, rather than replaces, the Ministry of Justice’s (MOJ) existing Guidance and that from financial services regulators and prosecutors.

The BBA guidance is intended to form part of a collaborative process between the banking sector and its regulators in combating corruption as Angela Knight, its Chief Executive, makes clear in the foreword:

“In order to ensure the UK’s anti-bribery system is proportionate and effective, an ongoing and frank dialogue between the government, regulators and the private sector will be essential. The BBA was pleased to contribute to the Ministry of Justice consultation on the Act and the accompanying guidance and we will continue to proactively engage with the authorities on behalf of our members so that the views of the banking sector can inform future policy making.”

The BBA guidance recognises that the UK Bribery Act arguably represents “the toughest legal regime against bribery anywhere in the world” and is divided into chapters addressing: 

1. Overview of the Bribery Act
2. Comparison of obligations under the Act and the US Foreign Corrupt Practices Act (FCPA)
3. The MOJ’s six Principles
4. Specific BBA guidance in relation to Principles 2 – 6
5. Additional guidance: Gifts, corporate hospitality and promotional expenditure
6. Additional guidance: Incident management and reporting

The focus is on Chapter 4, where advice specific to the banking sector is given in relation to the MOJ’s Principles 2-6. Whilst it is probably fair to say that little of the material will be new to those who are already familiar with the MOJ Guidance, the BBA does highlight a number of crossovers between regulatory regimes, for example noting that under FSA rules a bank’s failure to adequately address the risk of associated persons offering/receiving advantage corruptly could constitute a separate systems and controls failing.  The BBA guidance recognises that banks will likely treat financial crime risks together and therefore leverage the same procedures and controls in relation to, for example, bribery and money laundering risks.

When it comes to dealing with corporate hospitality (Chapter 5), the BBA guidance takes a fairly relaxed view, emphasising at 5.2.2-5.2.3:

“The intention of the legislation is to catch hospitality and promotional expenditure which is really a cover for bribing someone. As the government has made clear, it is not the intention that genuine hospitality or reasonable and proportionate business expenditure should infringe the legislation... A bank is therefore unlikely to face prosecution for providing reasonable and proportionate levels of hospitality as part of competing fairly in the international arena.”

As with previous guidance, no attempt is made to suggest limits on hospitality or means by which it can be determined whether hospitality is in fact reasonable and proportionate; an approach involving “common sense and flexibility” is recommended.

The Swiss Federal Prosecutor has fined Alstom Network Schweiz AG SFr 2.5 million and ordered it to pay SFr 36.4 million in compensation in relation to three cases where it had failed to prevent the bribery of foreign officials in Latvia, Tunisia and Malaysia.

It is reported today that this punishment follows investigations into Alstom’s actions in 15 countries, which were reopened in 2008.  The investigation concluded that Alstom had failed to enforce a compliance policy with the “necessary persistence”.

It is further reported in the media that third parties engaged by Alstom had sent some of their success fees to foreign decision makers which had influenced decisions in favour of Alstom.

The Swiss prosecutor states that it had detected some breaches of internal compliance methods in the other twelve countries, but no additional acts of bribery.

Alstom itself has made a statement that the Swiss prosecutors office had not found any evidence of systemic corruption within the company and that in two of the three cases where it was found to be at fault Alstom was itself a victim of the actions of some of its employees while in the third case Alstom was “simply a subcontractor of a consortium”.

Of course, were Alstom to have been tried under the new UK Bribery Act 2010, the employees and the consortium partners would all very likely be found to be associated persons within the meaning of the Act and therefore the section 7 corporate offence of failing to prevent bribery would be established against Alstom if the court found that its compliance program was inadequate, a finding which seems to have been made in Switzerland.

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. 

It was today reported by the Telegraph that, in the wake of the recent News International phone hacking scandal, a new policy has been implemented by Rupert Murdoch's News Corp as part of a fresh crackdown on "illegal activities".

Apparently, the new six-page policy is particularly strict on the bribing of public officials and notes that: "Gifts and hospitality that may be perfectly acceptable among private parties can be completely forbidden when the other party is a government official."

The policy, which has been circulated to all staff, also goes on to stress that employees are obligated to report any suspicious behaviour, "... to the legal department of the business unit or of News Corporation, or to the News Corporation alertline."  Presumably, there is no danger that employees’ calls to the ‘alertline’ will be hacked.

The issue of whistleblowing has been previously addressed, both from a UK and a US perspective, by the Bribery Library here, here and here. 

Yesterday, 21^st July, Willis Limited, the insurance brokers, were fined £6,895,000 for potentially corrupt practices by the UK Financial Services Authority (FSA), the regulatory body for the financial services industry. This was a penalty for breaches of the FSA’s Principles for Businesses and Rule SYSC 3.2.6 R of the FSA’s Senior Management Arrangements, Systems and Controls Handbook. The breaches occurred in the period 14 January 2005 and 31 December 2009. This report is important not least because Willis is one of the largest insurance and reinsurance brokers and risk management firms in the UK. The penalty levied on Willis is the highest such penalty so far by the FSA in relation to financial crimes systems and controls. There are lessons to be learned for all businesses in the FSA’s 24 page report. 

Principle 3 of the FSA’s principles for Business states that: 

“A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems” 

Rule SYSC 3.2.6 R of the FSA’s Senior Management Arrangements, Systems and Controls Handbook states that: 

“ A firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be sued to further financial crime”. 

In the “Final Notice” on the investigation by the FSA, it reported that because the FSA had agreed to settle at an early stage in the investigation and had therefore earned a discount of 30% - the penalty would otherwise have been £9,850,000. 

The complaint was that Willis did not take reasonable steps to establish and maintain effective systems and controls for countering the risks of bribery and corruption associated with making payments to overseas third parties who helped Willis win and retain business from overseas clients. 

The FSA found that:- 

• Willis failed to ensure that it had established a commercial rationale for using overseas agents;
• Willis’ policies did not provide any written guidance on the amount of detail required to justify using overseas agents;
• In the case of nearly half of the agents in high risk countries who introduced business to Willis in this period, the reasons for using them were inadequately recorded;
• Without adequate documentation, Willis could not adequately monitor the effectiveness of its procedures;
• Willis did not ensure that adequate due diligence was carried out on overseas third parties to evaluate the risk of doing business with them;
• In relation to the overseas agents on whom they had carried out due diligence, in nearly all cases it was insufficient to address the risk that the overseas third party may have been connected to the insured, the insurer or public officials;
• Willis did not adequately monitor its staff to ensure that an adequate commercial rationale for hiring overseas agents was recorded and that sufficient due diligence had been undertaken;
• These failures contributed to a weak control environment giving rise to an unacceptable risk that payments made by Willis to overseas agents could be used for corrupt purposes;
• In August 2008 Willis introduced improved policies and guidance aimed at mitigating its bribery and corruption risks – however, Willis failed to implement them adequately.
• The Board of Willis did not receive adequate management information which would have allowed them to assess whether bribery and corruption risks were being mitigated effectively; 

After the FSA investigation into Willis began, Willis started its own internal investigation and identified a number of suspicious payments made to overseas third parties. It reported these matters to the Serious Organised Crime Agency (SOCA). Willis ended up making two suspicious activity reports to SOCA. 

Even though the FSA had written to all CEOs of wholesale insurance broker firms in November 2007, including Willis, and even though the FSA had fined Aon, another large insurance broker firm, in January 2009, Willis’ steps, which they took in 2007 and 2008, to review the adequacy of their policies, were insufficient and their implementation continued to have substantial failings. 

Enhancement of systems and controls 

Willis has taken on board the criticisms of the FSA and has put in place: 

• A committee for the approval of third party introducers;
• Enhanced monitoring, capable of ensuring Employees’ consistent adherence to Willis’ policy;
• Improvements in the practical application of Willis’ policy;
• Consistency in the business unit compliance officer’s understanding of Willis’ policy and how this translates into their work with account executives;
• Increased accountability for each of the account executive, business unit compliance officer and managing director responsible for the third party proposal before the committee;
• Enhanced production of specific relevant management information through the committee’s direct reporting to the board of directors;
• Better retention of documentation;
• The business unit compliance officer now reports to group compliance and his/her budget now falls under group compliance and not under its own business unit;
• Willis now prevents any entry being placed on its books until the third party approvals process has been completed;
• Willis has updated its systems so that it can identify and categorise payments made with greater specificity;
• Training has been enhanced so that annually employees have to confirm that they have read all of Willis’ policies including the Group Anti Bribery & Corruption Policies and Procedures. This includes completing an electronic questionnaire relating to those policies and procedures. Those in the bottom 10% in the training are recommended to receive enhanced training;
• Further workshops to help identify the different categories of third party relationships and extra training for divisions of the company operating in high risk industries;
• Training by an external law firm on the new Bribery Act 2010;
• A review of past payments to overseas third parties, to identify any inappropriate past payments;
• A commitment by top management (CEO) downwards to ensure that here is a culture of compliance. 

So, another large insurance broker has been publicly criticised and fined. In this case there was no finding of actual corruption, although it is possible that further proceedings could take place involving one of the UK's other prosecutorial bodies, but the fine related to Willis' inadequate bribery and corruption prevention systems.  According to the FSA, this was avoidable as Willis knew what they had to do in terms of compliance and they knew the risks to their business in relation to bribery and corruption, but it appears that their compliance was inadequate in several different respects. What is not very clear is whether this was the fault of the compliance units within Willis not doing their job properly or whether it was a lack of interest and investment in the compliance programme by the firm’s management, or a combination of the two. In any event, it has been an expensive lesson for Willis, but others in the insurance broking industry and indeed in other industries will learn from Willis’ experiences. This will all be to the good as it should lead to many more companies all over the UK ramping up their compliance programmes and ensuring that they are active, thoughtful and tailored compliance programmes and not just paper tigers. 

As mentioned in a previous blog, the FSA is now working through its lengthy review of the banking industry. I predict further such reports and fines from the FSA as a consequence as it is clear that even very large and well organised companies like Willis are unable to get their compliance systems right first time. The banks would do well to read the Willis report very carefully.

We are often told, particularly by American clients, that their organisation is already FCPA compliant, “so isn’t that enough for the Bribery Act?....what more do we need to do, if anything?”. To understand what more needs to be done necessarily requires understanding the key differences between these two world-leading anticorruption statutes.  Once you have understood those differences, it follows that it is likely that your compliance programme may require some consequential adjustments to reflect some of these differences in order to bring your existing FCPA programme up to speed with the new UK Act. Some of it will require changes to your anticorruption policy and your gifts and hospitality policies. Much of it will  also need to be reflected in your training and education materials and computer based training modules, but also in other parts of your compliance programme, discussed below. And don’t forget that the people you should be getting involved with your compliance programme are not just your own staff but also any person “associated with” your organisation i.e. performing services for it. This could include contractors, advisers, joint venture partners and a whole list of other categories of persons with whom your organisation may have a relationship. See earlier blog posts in the BriberyLibrary for more detail, in particular my own post of 14th February 2011. 

The principal differences between the FCPA and the Bribery Act include: 

• The Bribery Act is wider in scope than the FCPA as it covers all corruption, including by and of the private sector, and not just corruption of foreign public officials. You may well need to amend and broaden the policy definitions of corruption and of “public officials” so that it covers all sorts of government and other public officials. There is also case law  in developing the US as to how the DOJ and the SEC are pressing the courts to interpret “foreign public official” more widely.
• The Bribery Act prohibits both payment and receipt of bribes i.e. active and passive offences. You will need to ensure that both sides of the corruption coin are captured by your programme and also to update your training documents. 
• A business nexus is not required for Bribery Act general offences under sections 1 and 2 of the Act although it is under the FCPA. Required action includes amending the wording of policies and training documents.
• The wider scope of the Section 6 strict liability corporate offence under the Bribery Act. You’ll probably need to amend the wording of your policies and training documents to ensure that the corporate liability is properly understood.  This is the offence that causes most risk to the organisation itself.
• There is no “adequate procedures” defence under the FCPA. The differences should be addressed in the training sessions. In both jurisdictions, having no adequate procedures will give you an enhanced risk of liability.
• The Bribery Act does not allow facilitation or grease payments. In fact the SFO are constantly at pains to point out that the old law never did, either, but one might be forgiven for thinking otherwise for I am not aware of any prosecutions of facilitation payments. Please email me if you know of any in the UK. Some US corporates’ policies ban facilitation payments altogether, to make life simpler and to avoid this exception being misconstrued in any way which might then “cross the line”.  Other companies stick to the FCPA allowance of them (because this suits their business and presumably because they believe that they have to pay them from time to time). This is clearly not in tune with the Bribery Act, so this aspect should be looked at very carefully and discussed with the business people in the organisation. Training should be given urgently to employees or others associated with your organisation who habitually pay facilitation payments. Also I would draw your attention to a recent blog post by my colleague, Rose Parlane, on the new guidance by the Serious Fraud Office specifically on how to try to stop paying facilitation payments, and how British prosecutors will regard such payments if you have continued to pay them. One point is that you should keep a log of such payments and a note of why they were paid and why you think that they were unavoidable. So the payment should be transparent. To do otherwise makes the payment look awkward and wrong.
• There is no express bona fida business expenditures defence under the Bribery Act. In practice, the Serious Fraud Office will look at the facts of every case.  Put simply: either they are bona fida or they are not. You do need to keep a log of your expenses and their justification.
• Penalties are more severe under the Bribery Act both in terms of financial penalties and in terms of length of prison sentence. This should be covered in the policy and training, so that staff are fully aware.
• Debarment from public contract tendering differs between the US and the EU. If you sell into the public sector, these provisions alone ought to give you real concern. My colleague Mathieu Doublet has blogged on it previously on 27^th April 2011. I also touched on  The Bribery Act 2010 (Consequential Amendments) Order 2011 in my blog of 17 June 2011.  Section 1 and Section 6 offences lead to automatic debarment. It appears that Section 7 will not lead to automatic debarment, according to the Lord Chancellor, but it remains to be seen how the courts actually treat such offences. In any event, these provisions tend not be very well known but since they may be catastrophic for your business, it would be as well to spend some time educating your staff and other associated persons about them. The severity of the debarment provisions tends to lead to plea bargaining – for example, agreeing to a books and records offence in the US and paying a hefty fine.
• Which brings me on to the fact that there is no books and records offence under the Bribery Act as there is under the FCPA but there is an equivalent provision in the UK in a different statute: Section 386 to 389 of the Companies Act 2006.
• Although the six principles for “adequate procedures” are surely familiar throughout the compliance world generally, in the US a prosecutor would see a proper risk assessment report merely as a mitigating factor to sentencing (rather than as one element of a potential complete defence to the Section 7 offence under the Bribery Act). If you can’t show the prosecutors how you have been through each of the six principles and how you have addressed them properly, then your procedures are unlikely to be seen as adequate and you will then open yourself up to a hefty fine, and the other associated consequences (public procurement debarment, civil suits etc)
• As in the UK, there is no positive obligation on an organisation in the US to undertake a risk assessment.  Speaking with many clients over the past year or so since the Bribery Act was passed has alerted us to the fact that many large global companies have never done a proper corruption risk assessment, believing (wrongly) that they don’t really need to do one as “we know the risks of our businesses perfectly well”. Apart from any other reasons, and there are several, it misses the point that you are potentially liable for your “associated persons” under the Act i.e. persons performing services for your organisation who may be external to it. You need also to be able to show how you undertook your risk assessment of them, of the countries they operate in, of the people with whom they interact, of the things they are doing or selling on your behalf,  and of the industries they operate in: and, after you have assessed and ranked all these factors, and audited their systems and training programmes, you need to be able to demonstrate that you calculated all these factors and made a proper decision as to whether you deemed them sufficiently high risk to justify additional due diligence, or whether you need to self-report any suspicious behaviour.
• I would say that the biggest problem so far of companies which are trying to get to grips with the compliance regime under the Act is that many if not most are either not doing risk assessment at all or they are not doing it properly.  Potentially, if you are a large multi-national, it is a very large undertaking which could take many months or even a year or more to complete.  We have noticed from our many conversations with clients and contacts around the world  (and also from shared experiences with anticorruption practitioners in other law and accountancy firms) that there seems to be a real issue of a lack of will at board level to spend the resources, combined with a lack of comprehension about how a risk assessment report will actually help you properly appreciate your internal risks and  to spend your limited compliance budget appropriately and in a tailored way. This reluctance is even more pronounced in the organisations which are medium sized (and so less well resourced generally) and which sell overseas. Banks, for example, are about to have a whole new layer of regulation and compliance loaded onto them. Hence one often reads of “compliance fatigue”.  

Global organisations must of course ensure compliance with all anti-bribery laws that are applicable to the jurisdictions in which the organisation or its associated persons operate. As the Bribery Act has set a very high bar in terms of the law itself, compliance with it will more or less mean that it will act as compliance for other anticorruption laws around the world: it should reduce your exposure to prosecutions in most other countries. But we mustn’t forget that each country may have a myriad of other laws which  may also be relevant – e.g. the books and records provisions under the UK Companies Act, as noted above. Companies may find themselves being prosecuted under more than one statute, and indeed in more than one country, simultaneously. We will blog separately in the future on the subject of “double jeopardy” as between different countries. In short, however, it appears that the Serious Fraud Office’s view is be that where the defendant has been convicted by another country for the same set of facts, it will not pursue the same or a similar case against the same defendants: so, whatever the legal position, it is not interested in pursuing the defendant again in the UK if it has been convicted in another jurisdiction. 

So, whilst on the face of it the changes which need to be made to ensure that your FCPA compliance programme is also Bribery Act compliant may appear to be minimal at the policy level, in reality the task may be a whole lot larger, depending on how well you undertook your FCPA compliance in the first place. Our partners in the US often say that they never cease to be amazed that decades after the FCPA became law, not all American companies have a compliance programme. The principles in the Government’s Guidance dated 30^th March are a good starting point for understanding what needs to be done, although the Guidance doesn’t actually tell you how to go about establishing your programme. We will all learn what the Serious Fraud Office are really expecting to see in a compliance programme as cases start to be brought before the court, and jurisprudence begins to develop. My best guess is that this will be some time from 2012 onwards.   

The UK Financial Services Authority (“FSA”) revealed last week that it is launching an investigation into the way in which banks do business. The FSA will be looking specifically at whether the banks have taken steps to protect against the risk of bribery and corruption, especially with the advent of the UK’s new Bribery Act 2010 which comes into force in a few days time on 1^st July 2011. This was revealed last week at a financial crime conference in London.  It was reported in Bloomberg News on 22^nd June that the UK’s Serious Fraud Office has never prosecuted an investment bank for overseas corruption. 

You may recall that the FSA has already conducted an investigation into the UK’s insurance broking industry.  The investigation took 18 months or so to complete. This report was published in June 2010. The FSA found many problems across the industry (too numerous to list here but some of them mind bogglingly daft by their very simplicity, but a recommended read nevertheless, as it gives us all a clear steer as to where things can so easily go wrong – none of it rocket science).  Here are a few of examples of criticisms, quoted directly in the FSA's own words:

• Weak governance of anti-bribery and corruption efforts and a poor understanding of bribery and corruption risk among senior managers
• Some firms awarded their brokers large bonuses directly related to the income or profit they generated. This could encourage risk-taking and negligence, and increase the risk of bribery and corruption, particularly where brokers use third parties to win business.
• Very weak due diligence on, and monitoring of, third party relationships and payments with a worrying lack of documentary evidence of due diligence taking place
• Although payment authorisation controls appeared generally adequate, virtually no firms took steps to identify unusual payments to third parties. As a result, some firms failed to report suspicious activity until after our visit or follow-up work
• Weak vetting of staff compared with other financial sectors, with a heavier reliance on personal referrals and market gossip than usual.
• Although controls over staff expenses and accounts payable generally appeared to be effective, some firms gave large cash advances to staff to assist travelling in higher risk countries where they said credit cards were not readily accepted.

I view the FSA’s findings as generic to the administration of commercial organisations of any industry and not just insurance broking. I predict that a similarly lengthy and critical report will be published on the banking industry in due course (probably next year if the last report is anything to go by) and that the faults will look remarkably similar in many respects.  I seriously doubt that the banks’ anticorruption systems will survive the FSA’s scrutiny any better. 

Banks are, of course, already heavily regulated around the world and they are familiar with undertaking compliance and spending money on it. However, we at the BriberyLibrary have detected from some of the banks which we have spoken to a degree of compliance fatigue, leading to a lack of internal will and enthusiasm to get to grips properly with the Bribery Act. In addition, banks are cutting costs like most other organisations in order to try to turn a profit and because of the legacy of problems from the banking crisis which started in 2008.  Its a fact that many global banks still don’t see the immediate benefit of spending large sums of money (and time) on anticorruption compliance. That’s almost certainly due to the fact that they have not previously been investigated/prosecuted in the UK, so you could say that the SFO is partly at fault because of their historical failure to pursue banks for corruption. Its not just the law that people pay attention to – its also enforcement i.e. the risk of actually getting caught. 

Many of the banks will be (or ought to be) FCPA compliant already so they ought in theory not to have to do a great deal more in order to be compliant with the Bribery Act, but actually its not necessarily as simple as that. I will post more on the question of “does my FCPA compliance programme hold good for the Bribery Act as well?” soon. Its a question we are almost always asked as many of our firm’s clients are either American or have a sufficient interest in the US to need to be compliant with the FCPA. 

In the meantime, some of the several hundred foreign and UK banks which are doing business in the UK should brace themselves for a visit from the FSA and should be prepared for them to interrogate their systems and question their staff. 

In January 2009 the American broking firm, AON, was heavily fined for its corrupt activities.  I quote from the FSA’s press release dated 8^th January 2009: 

"The Financial Services Authority (FSA) has today fined Aon Limited (Aon Ltd) £5.25 million for failing to take reasonable care to establish and maintain effective systems and controls to counter the risks of bribery and corruption associated with making payments to overseas firms and individuals.

Between 14 January 2005 and 30 September 2007, Aon Ltd failed to properly assess the risks involved in its dealings with overseas firms and individuals who helped it win business and failed to implement effective controls to mitigate those risks.  As a result of Aon Ltd’s weak control environment, the firm made various suspicious payments, amounting to approximately US$7 million, to a number of overseas firms and individuals...... The involvement of UK financial institutions in corrupt or potentially corrupt practices overseas undermines the integrity of the UK financial services sector.  The FSA has an important role to play in the steps being taken by the UK to combat overseas bribery and corruption.  We have worked closely with other law enforcement agencies in this case and will continue to take robust action focused on firms’ systems and controls in this area." 

The FSA’s initiative, whilst strengthening the banking sector’s attitudes towards compliance and financial crime, is a good indication that the new Bribery Act applies to everyone in every sector, both public and private, including industries once thought to be pillars of the City, the powerful financial district of London. 

We will return to this subject when the FSA reports next, possibly in 18 months time !

Recently the UK’s Serious Fraud Office (“SFO”) started a major new investigation into allegations of corruption involving one division of European Aeronautical Defence and Space (“EADS”). It is alleged that EADS’s subsidiary paid millions of dollars to win a multi-billion contract from Saudi Arabia.  Specifically it is alleged that EADS gave cars, jewellery and cash to win a £2bn contract to upgrade the satellite systems of the Saudi National Guard.

This is not the first time that the UK has been involved in allegations of high value bribery in recent times. In fact, in 2007, under pressure from the Saudi Government (which threatened to withdraw from an intelligence sharing agreement with the UK), the then UK Prime Minister, Tony Blair, ordered the SFO to drop an investigation into the alleged corruption by British Aerospace of a Saudi prince who was also a Saudi government minister.  The very wide and stinging international criticism and damage that Mr Blair’s decision caused to the UK’s reputation as a fair and transparent place to do business led him to order UK government lawyers to draft a new and robust 21^st century anticorruption law, the Bribery Act 2010.  It took three years for the new Act to be drafted, negotiated in parliament and then finally passed.  It only comes into force on 1^st July 2011.

The SFO’s new investigation into EADS was sparked by a whistleblower’s report to the SFO by Lt. Col. Ian Foxley, a former employee of GPT Special Project management (“GPT”), which won the contract. GPT is ultimately owned by EADS.

If Lt Col. Foxley had still been an employee of GPT, under UK law Lt. Col. Foxley  would have been protected from any dismissal or disciplinary proceedings by the Public Interest Disclosure Act 1998 (“PIDA 1998”) as a consequence of making such disclosure. . Section 1 of the PIDA 1998 inserted some new provisions into the Employment Rights Act 1996 (“ERA 1996”). The relevant one is 43B which provides:

“In this Part a “qualifying disclosure” means any disclosure of information which, in the reasonable belief of the worker making the disclosure, tends to show one or more of the following-

(a)    That a criminal offence has been committed, is being committed or is likely to be committed.....”

 

Section 43F of the ERA 1996 deals with disclosures to a “prescribed person”

“A qualifying disclosure is made in accordance with this section if the worker—

(a)makes the disclosure in good faith to a person prescribed by an order made by the Secretary of State for the purposes of this section, and

(b)reasonably believes—

(i)that the relevant failure falls within any description of matters in respect of which that person is so prescribed, and

(ii)that the information disclosed, and any allegation contained in it, are substantially true.

(2)An order prescribing persons for the purposes of this section may specify persons or descriptions of persons, and shall specify the descriptions of matters in respect of which each person, or persons of each description, is or are prescribed.”

The Public Interest Disclosure (Prescribed Persons) Order 1999 (S.I. 1999/1549, the “1999 Order”) includes amongst many regulatory bodies the SFO as a prescribed body. This order has been amended by the Public Interest Disclosure (Prescribed Persons) (Amendment) Order 2010 which will add the Pensions Regulator to the list of prescribed bodies.

Helpfully, for employees who are in a dilemma about what to do but don’t have access to a lawyer, there is a useful website run by a UK charity called Public Concern at Work which advises employees of their rights and protections as whistleblowers www.pcaw.co.uk 

Anyway, the PIDA 1998 is all about protections for workers. It also overrides normal express and implied contractual duties of confidentially but of course does not apply to lawyers if they received the information in a legally privileged manner from a person who was obtaining legal advice.

PIDA 1998 does not provide for rewards for the whistleblower.

Compare this with the new US legislation for whistleblowers which has just been finalised. One of our US colleagues, Kurt E Wolfe, has produced a comprehensive paper on the new SEC “Whistleblower Incentives and Protection Program” which was published on 25^th May 2011.  The SEC’s new rules are implemented under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (known as the Dodd-Frank Act). Kurt Wolfe’s paper sets out in some detail the provisions which reward whistleblowers in the US.  The provisions are reasonably complex (so I commend Kurt’s paper to be read in full) in order to avoid abuse of the new system, so I will just summarise them here: in short, the new SEC rules provide a bounty or reward for a whistleblower who meets the following requirements:

 The whistleblower voluntarily comes forward to the SEC;

1. With original information about a violation of the federal securities laws;
2. That leads to a successful judicial or administrative enforcement action by the SEC;
3. In which the SEC obtains monetary sanctions totalling more than $1m.

Many people have been surprised to learn that the SEC may award between 10% and 30% of the total monetary sanctions collected by the SEC. With many sanctions now stretching into the $100s millions, some will justifiably see this as a “get rich quick scheme” for employees who are aware of their company infringing laws, and the floodgates will open for the SEC.

Its clear that these new SEC rules ought to really scare corporates into cleaning up their act quickly as corporates now all effectively have a workforce of potentially very well rewarded employee-informants, who are protected by the law from any punishment if they breach confidentiality by reporting their employers’ illegal conduct to the SEC.

The sort of people who cannot benefit from the bounty scheme include:

•  Anyone with a pre-existing legal, contractual or judicially mandated duty to report to the SEC potential violations of federal securities laws.
• External and in-house counsel who attempt to make whistleblower claims based on information obtained from attorney-client relationship.
• Exceptions exist where disclosure of the information is permitted under SEC or state bar rules.
• People deemed by a U.S. court to have obtained information by illegal means.
• Foreign government officials.
• Officer, directors, trustees or partners of an entity who learn of the alleged misconduct from another person, or who learn the information through the company reporting or compliance processes.
• Compliance and internal audit personnel.
• Public accountants, if the information relates to potential violations by the engagement client.

So for those companies who need to be FCPA compliant, particularly regulated entities, they may need to take another look at their existing compliance programmes especially the whistleblower parts of it.

Sources close to the UK government insist that the Dodd-Frank Act will not be mirrored in the UK. It seems that the general establishment feeling is that this type of legal device, which is intended to bring crime out in to the open, is far too mercenary an approach and that it would give rise to all sorts of ethical concerns. For my part, I am more open minded about whether the UK should adopt similar provisions in the future. The US has been at the anticorruption game a lot longer that the UK, and they are far more active prosecutorially than the UK. The US has learned a lot along the way over the past 15 years or so since they have been actively been pursuing the FCPA.

For example, the use in the US of deferred prosecution agreements and also binding plea bargain agreements are very useful legal devices to secure settlements and or convictions more often and more cost effectively . Such things don’t exist yet in the UK and after stinging rebukes of the SFO by the UK Court of Appeal, our so-called plea bargains cannot be properly agreed until the “deal” eventually comes before the judge, who only gets involved far later in the process in the UK, so the defendant doesn’t really know from the outset whether he has a proper deal or not. This is very unsatisfactory and isn’t likely to encourage UK defendants to do deals.

Returning to the new SEC rules on rewarding whistleblowers, I believe that we in the UK should watch what happens in the US before simply dismissing it out of hand as an odd American idea that we couldn’t possibly replicate here in the UK. Corruption is very much a crime carried out in secret and across borders, so inevitably the evidence is much harder for prosecutors to find or obtain.  The new SEC rules will encourage those individuals with evidence to come forward much more quickly and more frequently than previously, and now whistleblowers have a real incentive/reward for taking the risk of damaging their personal career prospects (whatever the built-in employment protections), and also to reflect the risk of the inevitable unpleasantness of him/her becoming involved possibly in lengthy criminal and civil proceedings.

As to Lt Col Foxley in the new EADS investigation, if he had reported these allegations in the US, and were the new SEC rules in force at the time, then he may well have benefitted very substantially, in time, from the information he gave to the prosecutors.  He must be kicking himself as to his bad luck.

I will return to the subject of whistleblowers and their new rewards as the jurisprudence develops in the US under the new SEC rules. I think a few of us are now expecting some whistleblowers to become instant lottery winners!

A few days ago Ernst & Young published their latest report “European Fraud Survey 2011” . If you haven’t read it, it is salutary reading, and probably in fact essential reading for business leaders and compliance managers who are trying to decide whether they should invest their organisation’s time and money in developing a new, up-to-date, robust anti-bribery compliance programme. If justification for investing in your organisation’s defences and safeguards against a damaging and costly prosecution were ever needed, here it is in this report.

The Survey used researchers who spoke to a total of 2,365 people in 25 European countries in both developed and developing economies.

I will cite a few of the report’s findings:

• Almost 1 in 5 of company employees, regardless of grade, consider it to be acceptable to pay bribes to win or retain business. (That could amount to an awful lot of prosecutions, if they actually behave like this).
• 59% of those interviewed expect management to cut corners in order to achieve targets and half of management agrees.
• Two thirds said that bribery and corruption are widespread in their country and according to 40% of them has become worse during the economic downturn.
• Only 56% are aware that their company has an anti-corruption policy.
• 53% think that bribery and corruption are too widespread to be tackled.
• More than one third of all respondents are willing to offer cash payments, gifts or entertainment to win business.
• Less than one third of respondents believe that their company had increased its efforts to combat fraud.
• Only half say that employees in their company comply with its code on anti-bribery and anti-corruption.
• Less than half of German correspondents believe that there is a commercial advantage to ethical behaviour.
• 43% could not identify who they should contact within their company if they had concerns about impropriety.
• 75% believe that there is a commercial advantage to ethical behaviour.

 Ernst & Young’s conclusions are nothing short of damning:

1. “Management is failing to set a strong tone at the top of many organisations and, in many cases, is prepared to do whatever it takes to succeed ”

 You may recall that this is the 2^nd principle which was set out in the British Government’s recent  “Guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing (section 9 of the Bribery Act 2010)” .  You may also recall an earlier post by one of my colleagues, Rose Parlane, on the Guidance, on 30^th March 2011.

It should also be recalled that if the company or an associated person commits an offence under the Bribery Act, the individuals and the company itself and any directors or officers of the company who knew of or connived in the offence may be liable to prosecution.

 2.    “A persistently high level of employees are willing to behave unethically”.

The message seems to be that this is because employees are desperate to land new business in the current difficult economic environment, and are willing to take risks. Well that’s human nature I suppose, but I wonder if they aren’t really aware of the stringency and tough penalties of international anti-corruption laws such as the Bribery Act and the FCPA. This may be a direct result of the failures reported by E&Y in their third conclusion, below.

 3.    “Companies are not doing enough to implement and communicate anti-fraud and anti-corruption measures”.

Communication is the 5^th principle in the Guidance. This takes the form of developing policies and procedures and then incorporating them into all your contractual relationships and then training all those people who are “associated persons” under the Act i.e. those performing services on behalf of the organisation. This would be not just employees, although they are a major and obvious category, but also consultants, contractors, joint venture partners, distributors and so on (see older posts on this blog site with “associated persons” as a tag line).

I fully concur with E&Y’s several key recommendations on how organisations can respond to these problems but the one  I would most highlight, and which organisations seem, in my experience, to be most reluctant to get to grips with is the need to conduct at the outset a fraud, bribery and corruption risk assessment and to then to take a risk-focused approach to who should be trained, on what, in which manner and how often. My experience to date has been that in order to comply with the new Bribery Act companies want to start training their staff as soon as possible, and to begin with their UK based staff. This focus on the UK first appears to be due to the belief that UK prosecutors would focus on the UK operations, but this is in my view a mistaken belief. I believe UK prosecutors who decided to commence an investigation would probably start with the view that in all likelihood the UK operations and business would be low risk, so, on the contrary, they would ask the company for details of their foreign operations, evidence of their internal risk assessment report, details of the training in any high risk countries, and a copy of due diligence reports in those countries on associated persons. 

To put in place policies and procedures and to undertake training without carrying out a detailed risk assessment would be to miss the point of the risk-based approach to implementing a compliance programme, and without that risk assessment, the prosecutors may well decide that the company hadn’t taken seriously its obligations to prevent bribery and corruption. They could take the view that the compliance programme was merely a paper tiger and that it has no teeth, and that therefore it would not constitute a defence to the section 7 corporate liability offence.

Some organisations appear to think that the cost of internal risk assessments is unnecessary as they think they know their own risks, and what’s more they don’t want to spend the money in these economically lean times, but of course, as noted above, it seems to be the leanness of the current times which is leading people to being unethical, cutting corners, committing offences and trying to boost their organisation’s incomes. So protecting your organisation now is more important and imperative than ever.

The game changer will be when the UK Serious Fraud Office starts to prosecute British and foreign companies under the new Act. This won’t start for a while yet as it will only be for offences committed on or after 1^st July 2011 (offences committed up to 30^th June will be under the existing hotch-potch of law), so there will be a time lag of a few months at least before prosecutions commence. Once a few companies and directors have been dragged into the dock, other companies will start to realise the need and benefits of undertaking compliance programmes properly.  

In the concluding words of E&Y’s report, with which I completely agree:

“It may not be easy to embed the necessary changes to internal corporate culture required to mitigate the challenges posed by unethical conduct. Our survey has indicated that companies struggle to ensure that what they have in place on paper is actually reflected in the underlying behaviour of their staff.

It is only through a concerted, risk-focused effort that targets areas of potential exposure that firms will be able to meet the expectations of regulators and, ultimately, their shareholders”

As can be seen from a recent post by my colleague, Adam Greaves, the general worth of the Guidance, which was published by the Ministry of Justice on 30 March 2011, has been called into question.  However, with regard to certain specific issues, the Guidance does provide some 'useful' commentary on the wording used in the Bribery Act and the way in which it is to be interpreted by the Serious Fraud Office (the “SFO”). 

One such issue is the potential liability of companies involved in joint ventures; whether operating through separate legal entities or through contractual arrangements.

In the case of a joint venture operating through a separate legal entity, the Guidance states that a bribe paid by that separate legal entity may lead to liability for a company that is involved in the joint venture if: the joint venture is performing services for that company; and, the bribe is paid with the intention of benefiting that company.  However, the mere existence of such a separate legal entity will not, in itself, mean that it is “associated”, for the purposes of the offence, with any of the companies which are involved in the joint venture.

Where a joint venture is conducted through a contractual arrangement, the Guidance identifies the determining factor as being that of control.  Specifically, the level of control that a company has over the relevant contractual arrangement will be considered by the SFO in deciding whether a person, who paid a bribe in the conduct of the joint venture business, was “performing services for or on behalf of” that company.  Consequently, an employee or agent of a company who has paid a bribe in order to benefit his employer will not be automatically regarded by the SFO as a person “associated”, for the purposes of the offence, with all of the other companies that are involved in the joint venture.

Whether a joint venture operates through a separate legal entity or through a contractual arrangement, to bring a prosecution the SFO will have to show the required intent on the part of the person who paid the bribe.  Therefore, even if it can properly be said that an agent, a subsidiary, or another person acting for a company that is involved in a joint venture was also performing services for all of the other companies involved in that same joint venture, an offence will only be committed if that agent, subsidiary or person intended to “obtain or retain business or an advantage in the conduct of business” for those companies.  Therefore, the fact that companies involved in a joint venture benefit indirectly from a bribe will not, in itself, amount to proof of the specific intention required by the offence.  

In specifically addressing the potential liability of companies that are involved in joint ventures in the way that it has, and identifying the actions such companies should take to enable them to rely on the “adequate procedures” defence, the Guidance appears to have severely restricted the basis upon which the SFO can seek to bring a prosecution against a company which has 'wilfully shut its eyes' to the corrupt activities of its joint venture partner.  Is this a further example of the corporate offence being watered down under the guise of providing clarity?

The Government has released Guidance on the Act, which is intended to help organisations understand how the Act will operate and how to deal with the risks of bribery.  The Guidance gives insights into how the Act might be interpreted, but does not give assurances.  It suggests procedures that might be adequate, but does not set down rules. 

In the Guidance and its associated Quick Start Guide you will find:

• Answers to some FAQs on the Act and its application.
• Overview of ss. 1, 2, 6 and 7 offences and what the prosecutor must establish to secure a conviction.
• The six principles of bribery prevention: (1) proportionate procedures, (2) top-level commitment, (3) risk assessment, (4) due diligence, (5) communication and (6) monitoring and review.  The Guidance includes commentary on each and suggested procedures.
• Case studies demonstrating how the six principles of bribery prevention might be applied in practice.

KEY POINTS TO TAKE FROM THE GUIDANCE

Gifts and hospitality

• Reasonable and proportionate expenditure is not prohibited by the Act.
• Intention is the key to prosecution i.e. intention to induce improper performance (general (s.1)) or intention to influence and secure business or a business advantage (public official (s.6)).

Is my organisation "carrying on a business in the UK"?

• If an organisation engages in commercial activities, it does not matter if it pursues purely charitable or educational aims or purely public functions; the purpose for which profits are made is irrelevant.
• Whether an organisation carries on a business in the UK remains a question for the courts, which the Government anticipates will take a common sense approach. Organisations that do not have a demonstrable business presence in the UK are unlikely to be caught.  For example, simply being listed on the London Stock Exchange would not be sufficient, likewise, having a UK subsidiary will not automatically deem the parent company to be carrying on a business in the UK as the subsidiary may act independently of the parent or group.

Associated persons

Any person who performs services for or on behalf of an organisation is potentially an “associated person”, but:

• The Courts will take into account all of the relevant circumstances, not just the nature of the relationship.
• The key is the performance of services in business, therefore, an organisation is unlikely to be liable for the actions of a person who simply supplies goods to the organisation.
• Without intention, receiving an indirect benefit from a bribe paid by an associated person is unlikely to result in prosecution. 
• The degree of control over the bribe payer will be taken into consideration.

Over the coming days and weeks we, at the Bribery Library, will be commenting on these and other aspects of the Guidance.

A couple of weeks back the Guardian newspaper reported on a leaked draft of the Guidance, the final version of which will be published by the UK's Ministry of Justice prior to the Bribery Act coming into force later this year.  The report focused on the proposal that overseas companies that list on the London Stock Exchange to gain access to London's capital markets, but which have no actual presence in the UK, should be exempt from the terms of the Bribery Act. 

Following my colleague, Adam Greaves, having commented on this in his post on 16 March 2011, we have learned from sources involved in the drafting of the Guidance that such an exemption for overseas companies is proposed by government ministers.

However, according to a follow-up article that appeared in the Guardian on 25 March 2011, it appears that Richard Alderman, the head of the UK’s Serious Fraud Office (the "SFO"), has spoken out against there being any exemption for overseas companies. 

Image © Crown Copyright 2011

At a recent anti-corruption conference in Russia, Richard Alderman emphasized the need for the Act to have a "wide jurisdiction", allowing the SFO to pursue overseas companies listed in the UK, even if they have no actual presence in the UK, whenever it is in the public interest:

"UK companies want to know what the SFO will do in order to support them in doing business in challenging environments throughout the world when their business rivals seek to obtain a competitive advantage over them by using corruption.  My concern is with bribes that put ethical UK companies at a disadvantage, with the consequential effect on their employees.  That seems to me to be a very clear example of where the UK public interest is engaged.  I need to be able to support companies in those circumstances where they are at a disadvantage."

Richard Alderman went on to give the following example to his Russian audience:

"It could be for example, that a foreign company pays a bribe to obtain a contract that would otherwise have gone to an ethical UK company. The ethical UK company in those circumstances has to close one of its operating subsidiaries with the loss of many jobs. There is an immediate impact on the employees of the subsidiary, their families and surrounding communities. There is a very clear nexus in my view to the UK in those circumstances and I believe that it is important and in the public interest that I am able to take action."

What these comments make clear is that companies, whether based in the UK or overseas, need to be mindful of the fact that the Guidance will not actually form part of the legislation.  Therefore, while compliance with the Guidance will take companies a long way towards compliance with the Act, it will not be a complete defence in circumstances where the SFO has taken the decision to prosecute.  Consequently, whenever it is eventually published, the Guidance will need to be treated with caution by companies seeking to comply with the Bribery Act.

I want to quote more or less verbatim a “litigation release” dated 18^th March 2010 from the U.S. Securities and Exchange Commission (SEC) website. On that date it charged International Business Machines Corporation (“IBM”) with

"violating the books and records and internal control provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) as a result of the provision of improper cash payments, gifts, and travel and entertainment to government officials in South Korea and China. [Note: there is no comparable provision under the Bribery Act]

As alleged in the SEC’s Complaint, from 1998 to 2003, employees of IBM Korea, Inc., an IBM subsidiary, and LG IBM PC Co., Ltd., a joint venture in which IBM held a majority interest, paid cash bribes and provided improper gifts and payments of travel and entertainment expenses to various government officials in South Korea in order to secure the sale of IBM products.

It was further alleged that, from at least 2004 to early 2009, employees of IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd., both wholly-owned IBM subsidiaries, engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials.

Without admitting or denying the SEC’s allegations, IBM consented to the entry of a final judgment that permanently enjoins the company from violating the books and records and internal control provisions of the FCPA, codified as Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. IBM also agreed to pay disgorgement of $5,300,000, $2,700,000 in prejudgment interest, and a $2,000,000 civil penalty”.

Previously, in 2004 the former head of IBM Korea and two other high-ranking IBM officials were jailed by a court in Seoul after a corruption scandal there.

Jang Gyeong-Ho was IBM Korea's executive director until January 2004 when he was dismissed after accusations of bribing government officials. The court found that Jang had helped IBM partner firms LG IBM and Winsol to secure up to 66 billion South Korean won (€44m) of hardware supply contracts to five public agencies, including the tax service.

What would be IBM’s predicament in the UK on these same facts if the Bribery Act had been in force at the time that the offences (or alleged offences) had taken place.

IBM is a huge global company operating in over 170 countries with, according to its website, around 400,000 employees globally and its revenues are approaching $100billion. It has around 20,000 employees in the UK alone. It is therefore doing business in the UK for purposes of Section 7 of the Bribery Act. It is likely that IBM would be found to be doing business both through the parent company and through its UK subsidiary, so both companies are liable to prosecution, in theory anyway. The offences as reported seem to have been perpetrated by employees of IBM’s South Korean subsidiary i.e. through “associated persons”.

It follows, therefore, that unless the company had in place “adequate procedures” under the Bribery Act (that is, a robust anti-bribery compliance programme), it would be strictly liable for the corrupt activities in which it engaged in South Korea, even though they took place outside the UK, due to Section 12 (5) :

“(5) An offence is committed under section 7 irrespective of whether the acts or omissions which form part of the offence take place in the United Kingdom or elsewhere”.

This could mean unlimited fines for the company.

The IBM employees who committed the offence(s) in South Korea would only be liable under the Bribery Act if they were either British or had a close connection to the UK (broadly speaking were usually resident in the UK).

So if these offences had taken place in 2012, for example, (by which time we consider it is safe to assume that the UK’s Ministry of Justice would have brought the Act into force), IBM could well have been facing a third prosecution in the UK on the same set of facts, in addition to the two prosecutions that took place in South Korea and the US respectively, as cited above.

But would the Serious Fraud Office have pursued IBM when it had already been prosecuted/pursued in South Korea and the US already? It is not clear whether the SFO would want to use its resources in this way. Their attitude towards such circumstances may (I say may, not will) become clearer when the government’s guidance is published soon, or in any event when they start to prosecute foreign companies under the Bribery Act. If it doesn’t become clear, we shall invite the SFO to comment, either directly by blogging here if they agree to do so, or we will blog further here on any comments they have made to us or publicly.

A Bribery Act policy will be necessary when tendering for public sector contracts.

Article 45 of the EU Public Procurement Directive 2004, enacted in the UK through regulation 23 of the Public Contracts Regulations 2006, provides the basis for debarring, or mandatorily excluding, companies convicted of corruption, fraud, money laundering and participation in criminal organisations from public contracts.  As regards those companies involved in the pharmaceutical or defence industries, to name but two, such debarment or exclusion could mean the death of the company.

In light of this Directive, it is likely that a company convicted under section 7 of the UK Bribery Act 2010 (failure to prevent bribery), will be debarred from tendering for future public contracts.  The reason for this is straightforward: if section 7 does not lead to automatic debarment under article 45 then, in practice, companies convicted in the UK will be beyond the Directive's reach and the major deterrent value of it will be lost.   

To those who suggest that this is going too far, they should keep in mind that there is a defence available to companies where they are able to show that they had in place adequate procedures designed to prevent persons associated with them from undertaking conduct prohibited by the Bribery Act.  This introduces a form of proportionality in that only companies that have clearly failed to introduce adequate procedures, where there is major wrongdoing and systemic failure, are likely to be prosecuted.

The next logical step is for public bodies to require companies to already have in place adequate procedures (in other words, a Bribery Act policy) before they are even allowed to tender for public sector contracts.  If no such procedures are in place, it will become the norm to ask: why not, what has that company got to hide?  Also, given the issues previously raised by my colleague, Adam Greaves, regarding the liability of "associated parties", such public bodies, and those working for them, will want to protect themselves from any potential exposure to those involved with bribery and corruption.

Does the lone voice in the Board room speak with a British accent?

For those British directors who have found themselves on the Boards of foreign companies doing business in the UK, I can imagine you are having a few sleepless nights at the moment.  For those of you whose companies do not trade in the US and have never been FCPA compliant, you may not be getting any sleep at all.

The new UK Bribery Act poses some difficult challenges for you and your fellow Board members, particularly if your organisation has not paid much attention to anti-corruption compliance in the past.

Unlike your fellow directors, by virtue of your "close connection" with the UK, you might be held personally liable for your organisation's breaches of the new Act. 

The Serious Fraud Office has made no secret of the fact it intends to follow the same enforcement trends in respect of the Bribery Act as the US Department of Justice has been doing in respect of the FCPA.  The pursuit and conviction of senior individuals is one such trend, evidenced in late February by the prosecution of three Mabey & Johnson executives.

If you do one thing tonight before you go to bed, add "Compliance Programme" to your next and all subsequent Board meeting agendas and start reading up on the Act.  You may be the lone voice in the Boardroom, but with some skin (literally) in the game you have no choice but to get informed and speak up.