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.

The resolution of cases involving corporates is guided by the Principles of Federal Prosecution of Business Organisations, set out in the U.S. Attorney’s Manual.

This recognises that the resolution of cases by means other than indictment, including non-prosecution and deferred prosecution agreements, may be appropriate in certain circumstances.

Nine factors are identified as being relevant to such a determination:

1. the nature and seriousness of the offence;
2. the pervasiveness of wrongdoing within the corporation, including management        involvement;
3. the corporation’s history of similar misconduct;
4. the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to   cooperate in the investigation of its agents;
5. the existence and effectiveness of the corporation’s pre-existing compliance programme
6. the corporation’s remedial actions;
7. collateral consequences; 
8. the adequacy of the prosecution of responsible individuals;
9. the adequacy of remedies such as civil or regulatory enforcement actions  

In deciding what, if any, action to take, both the DOJ and the SEC place a high premium on Self-reporting:

• Cooperation       
• Remedial action
• Effectiveness of a company’s pre-discovery compliance programme

Most, if not all, of these considerations will be relevant factors also for the SFO, when considering whether to pursue a criminal investigation in any given case.

The clear articulation of these matters in the Resource Guide provides a useful template for use by those corporates which might be exposed to the UK Bribery Act.

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 guidance is quite a tome at 120 pages, including the appendices, and is around 3 times longer than its UK Bribery Act counterpart, itself dated 30 March 2011. It is divided into the a number of chapters. This is what is inside:

1. Introduction
2. The FCPA: anti-bribery provisions
3. The FCPA: accounting provisions
4. Other related US laws
5. Guiding principles of enforcement
6. FCPA penalties, sanctions, and remedies
7. Resolutions
8. Whistleblower provisions and protections
9. DOJ opinion procedure
10. Conclusion

We will be working our way through it methodically over the next few days and will provide some initial thoughts on it as we proceed. A comparison with the UK Bribery Act guidance may be informative.

We do notice, however, that, like the UK version of the guidance, it is not intended to have legal effect, and so therefore will not bind any court or indeed any prosecutor.

Also, we do not know whether the guidance has addressed the many concerns which corporates and practitioners have been voicing about the FCPA.  A comparison with the February letter may also indicate whether these concerns have been adequately addressed.

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.

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.

Mr Alderman also reports that the approach taken by the British Government in enacting the Bribery Act 2010, as regards facilitation payments, has also been positively received abroad.  He comments that

“one of the big challenges for the future concerns what to do about the demand side of bribery…tackling the demand side is partly, of course, about prosecutions of officials who take bribes and cooperation between countries so that evidence can be provided.  But a successful approach needs more than this.  We also need to see proper salaries for public officials in countries where these payments are common.  I come across cases where the public officials are paid nothing or very little and are expected to make money to support their family by taking bribes…a successful approach on the demand side also involves education.  The most successful anti-corruption agencies worldwide devote a lot of time to this even, for example, starting by conducting sessions in kindergartens about ethics and the difference between right and wrong”.

Mr Alderman goes on to say, quite rightly, that the Bribery Act is now being regarded, together with the Ministry of Justice Guidance on the Bribery Act, as being the gold standard that there is internationally for what is to be expected of corporations in dealing with anti-corruption.  Mr Alderman also recognises, very realistically, that not everyone wants to get to the gold standard.

Turning to enforcement, the director reported that there is internationally increasing respect for the United Kingdom’s robust approach in dealing with corruption cases.  He said that when he arrived at the SFO [four years ago] there were

 “no convictions for corruption and of course the UK was best known for BAE and Saudi Arabia.  Of course we are still known for BAE and Saudi Arabia.  This regularly comes up in my discussions with foreign corporations and law enforcement officials.  Indeed a few months ago I gave a presentation to senior judges in another jurisdiction.  Towards the end one of them said “this is all very well Richard but tell us about BAE””.

Mr Alderman went on to say that the decision to stop the investigation into BAE’s alleged corruption in Saudi Arabia, despite the support of the House of Lords, “caused the UK great reputational damage” (this shows of course that a damaged reputation can take many years to repair).  On the other hand, he reports, there are many others who recognise that the UK’s enforcement record has been transformed over the last three to four years as a result of [increased] enforcement action and the passing into law of the new Bribery Act and that, in terms of enforcement, there are NGOs who say that the UK is a close second to the US Department of Justice in this area (personally, I find this a little hard to accept since I heard the Department of Justice saying at a conference that they have over 150 “open” corruption cases and the SFO on its own admission has a small fraction of this number).

Although there are large corporations who are stepping up to the plate and will endeavour to reach the gold standard set by the new Bribery Act and the Government’s guidance, there are others who plainly will not.  Mr Alderman says that by definition the way they carry out their corruption activities is often hidden and using complex international structures and that this takes some time to detect and unravel, but the SFO has very good international contacts which are “…essential in order to be able to investigate and prosecute these cases”.

Mr Alderman then listed a few challenges for the SFO, which I paraphrase below, as follows:

• Getting money back to victims:  He praises the International Development Committee which decided to look at this issue in the context of the BAE payment to Tanzania.  He reports that this has taken longer than he anticipated but following guidance from the IDC, the SFO needs to reflect on what they should be doing as regards restitution in the future.  Mr Alderman wholeheartedly believes that financial settlements should go to the victims of the crime of corruption.
• Civil Recovery Orders:  He reports that whilst the use of CROs is controversial, they do have their place and the IDC has accepted that a judge needs to be involved earlier in the discussions in order to be able to give any views he/she may have about a proposed settlement.  He offers the view that this should not be a choice between a civil recovery order and a criminal trial, but in the past it has often been the difference between there being a civil recovery order or nothing happening at all due to the inadequacies of the existing corruption laws.
• Deferred prosecutions:  Mr Alderman is very supportive of the Solicitor General, Edward Garnier QC MP who is trying to introduce deferred prosecutions into the criminal justice system’s armoury and he believes offers prosecutors and courts an alternative to the current choice between civil recovery and no criminal action.
• Full public and parliamentary discussion:  Mr Alderman said that it needs to be understood and discussed as to the circumstances in which society feels there should be a full prosecution, or when there should be a deferred prosecution and indeed when a civil recovery may still be appropriate.

He concludes by saying that bearing in mind that he is leaving his position as director of the SFO in April, a number of the challenges that he had outlined in this speech will have to be left to his successor David Green CB QC to follow through, so this may in effect be Mr Alderman’s “valedictory” speech.

The full text of the director’s speech is here.

The prosecutors made a court filing in which they stated “the government has carefully considered (1) the outcomes of the first two trials…(2) the impact of certain evidentiary and other legal rulings in the first few trials and the implications of those rulings for future trials…and (3) the substantial governmental resources, as well as judicial, defence and jury resources, that would be necessary to proceed with another four or more trials…in light of all the foregoing, the government respectfully submits that continued prosecution of this case is not warranted under the circumstances”.

In a separate but well-timed move the US Chamber of Commerce has published its own strong objections to the way in which the FCPA is being enforced and its effect on corporate America in terms of both the added expense of compliance and also its ability to win business overseas.  On 21^st February 2012 the US Chamber of Commerce and 36 other business organisations and professional associations across America sent a joint letter to Lanny Breuer, the Assistant Attorney General at the DOJ, and Robert Khuzami, the Director of Enforcement at the US Securities and Exchange Commission, requesting guidance to “address several issues and questions of significant concern to businesses seeking in good faith to comply with the FCPA.

The signatories to the letter claim to represent more than 3 million businesses and organisations.

The letter is 10 pages long and too detailed to do justice to in this blog post but you can read it here.

In summary, the issues which the senders of the letter have asked for guidance include:

• Definitions of “foreign official” and “instrumentality” under the FCPA

The letter states that “without a clear understanding of the parameters of “instrumentality” and “foreign official”, companies have no way of knowing whether the FCPA applies to a particular transaction or business relationship, particularly in countries like China where most, if not all, companies are at least partially owned or controlled by the state.  The result of these circumstances has been a chilling effect on legitimate business activity (as companies perceive a real risk of prosecution even in scenarios involving only the most remote and attenuated connection to foreign governments) and a costly misallocation of compliance resources…”

By comparison Section 6 of the Bribery Act deals with bribery of a foreign public official section 6(5) defines foreign public official as meaning an individual who (a) holds a legislative, administrative or judicial position of any kind, whether appointed or elected of a country or territory outside the United Kingdom; (b) exercises a public function (1) for or on behalf of a country or territory outside the United Kingdom or (2) for any public agency or public enterprise of that country or territory or (c) is an official or agent of a public international organisation.

Although the definition in the UK law is reasonably clear, there is bound to be debate when this section and definition first comes before the courts, whenever that is, whether it is one year or ten years from now.

• Consideration of compliance programs in enforcement decisions

The letter continues that under the current FCPA enforcement regime the business community lacks confidence that the DOJ and the SEC will give sufficient consideration to potential defendant companies’ strong, pre-existing compliance programs when making enforcement decisions.  Although the DOJ and the SEC recommend that prosecutors should consider a company’s compliance program when making enforcement decisions, the letter suggests that the guidance given is presented in a manner which is so general that it provides little concrete aid to companies attempting to implement or enhance compliance programs.  It goes on to suggest that the guidance should establish standards that businesses may adopt and incorporate as part of their compliance programs, and identify the specific components that the DOJ and the SEC consider to be essential to a robust FCPA compliance program.

By comparison, of course, under UK law the British government issued a 40 page Guidance on 30 March 2011 pursuant to section 9 of the Bribery Act.  Even though that guidance is not prescriptive, it does offer some considerable assistance to corporations which are trying to comply with the Bribery Act.

The letter also suggests that the DOJ and the SEC should describe in the guidance how they would factor companies’ voluntary disclosures of FCPA violations by their employees into enforcement decisions.

• Parent-subsidiary liability

The letter continues that the FCPA itself does not set out circumstances when a parent company may be held liable for a foreign subsidiary’s violations of the anti-bribery provisions of the FCPA.  It points out that the approach taken by the DOJ and by the SEC are not identical.  It continues

“in the absence of any judicial guidance on the contours and the limits, if any, of this potential parent-company liability, it remains a source of significant concern for US companies with foreign subsidiaries.  Accordingly, we respectfully request that the forthcoming guidance clarify and confirm that both the Department and the SEC consider parent-company liability under the FCPA’s anti-bribery provisions to extend only to circumstances in which the parent actually authorised, directed or controlled the improper activity of its subsidiary…”

Under the UK Bribery Act, by comparison, the issue of the liability of a parent for its subsidiary is addressed in the Guidance at paragraph 36 “…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…”

Under paragraph 42 of the same Guidance, it states that, in describing the liability for associated parties under the Bribery Act

“…so, for example, a bribe on behalf of a subsidiary by one of its employees or agents will not automatically involve liability on the part of its parent company, or any other subsidiaries of the parent company, if it cannot be shown the employee or agent intended to obtain or retain business or a business advantage for the parent company or other subsidiaries.  This is so even though the parent company or subsidiaries may benefit indirectly from the bribe.  By the same token, liability for a parent company could arise where a subsidiary is the “person” which pays a bribe which it intends for result in the parent company obtaining or retaining business or vice versa…”

• Successor liability

Under the FCPA, a company may be held liable for the actions of a company that it acquires or merges with, even if those actions took place prior to the acquisition or merger and were entirely unknown to the acquiring company.  While a company in certain circumstances may mitigate its risk by conducting due diligence prior to an acquisition or merger (or, in certain circumstances, immediately following the transaction), such due diligence is only a factor that the DOJ or the SEC may consider when deciding whether to exercise their discretion not to prosecute or file claims.  The letter continues to say that the

 “threat of successor liability even if a thorough investigation is undertaken prior to a transaction has had a significant chilling effect on mergers and acquisitions, and therefore clearer parameters for successor liability under the FCPA are needed…”

It points out that although the DOJ addressed this topic in Opinion Release 08-02, the Department’s guidance required the company in question to conduct due diligence on a scale equivalent to a massive internal investigation in order to avoid prosecution for any FCPA violations committed by the acquired company prior to the transaction.  The letter concludes on this topic that the sweeping expectations set out in Opinion Release 08-02 are unrealistic and unduly punitive and merit thorough reconsideration.

In relation to the Bribery Act, by comparison, the UK Guidance offers no comment in relation to due diligence on mergers and acquisitions.  Cautious purchasers will ask their lawyers to establish that there are “adequate procedures” in place at the target company prior to its acquisition and will demand suitable warranties and indemnities.  In practice if the purchasing company later discovers that offences have taken place at the acquired company, the SFO will look much more favourably on the purchaser if it approaches the SFO to discuss circumstances as quickly as possible.  This can be done confidentially and the SFO will offer guidance very quickly.

• De minimis gifts and hospitality

The DOJ has stated that it does not prosecute conduct involving de minimis gifts and hospitality to foreign officials although it states that in fact such gifts and hospitality remain subject to prosecution at the whim of the government.

The letter points out that compliance officers of corporations are routinely called upon to address questions relating how much can be spent on a meal; how many meals in a year may an official be invited to attend and similar issues.  The letter concludes that in the absence of any guidelines from the government regarding the threshold below which it ordinarily would not bring such cases has resulted in a serious misallocation of compliance resources to detect and address potential breaches that should fall below any reasonable threshold.

By comparison, the UK Guidance under the Bribery Act gives many examples of and “case studies” for gifts and hospitality.  Again, whilst they are not wholly prescriptive, they do give a good indication of the reasonable approach that UK prosecutors will take in considering such circumstances.

Indeed, the letter concludes on this topic “As you know, the UK Ministry of Justice already has provided such Guidance regarding the application of the UK Bribery Act” and it cites from the UK guidance and concludes “similar concrete examples in your forthcoming Guidance would be extremely useful to the business community”.

• Mens rea standard for corporate criminal liability

Although the FCPA expressly limits an individual’s liability for violations of the anti-bribery provisions to situations in which the individual has committed those violations “wilfully”, it does not contain any similar language with regard to corporate criminal liability.  The letter continues “this inconsistency in the statutory language appears to expose companies to criminal penalties for violations of the FCPA even if there is no identifiable person of authority who knew that the conduct was lawful or even wrong…”

By contrast of course the corporate liability offence in the UK Bribery Act, in Section 7, is a strict liability offence so no knowledge of any person of authority in the company is required.  The UK legislative intention by making it a strict liability offence was to put a very heavy burden on the organisation to put in place adequate procedures in order to protect itself from the risk of committing an offence under Section 7, in other words failing to prevent bribery.  The strict liability offence also addressed the considerable difficulties in securing convictions of corporate defendants on the “controlling mind” theory in the UK.

The letter concludes by requesting that the formal guidance which the DOJ and SEC are to issue in 2012 should have the same force as other policies of the DOJ and the SEC and that to ensure uniform policy it should be issued by or adopted by both agencies.

We will blog further on this subject should either of the agencies respond to the letter publicly or indeed when the guidance which has been promised by them in 2012 is issued.

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.

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

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

Some other interesting statistics from the Deloitte report:

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

Third party risks

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

Increased corruption risk in emerging markets

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

“Tone from the top”

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

Assessing risky activities

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

Training and communication

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

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

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

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

As explained in the Forward by Richard Alderman, Director of the SFO, the primary purpose of this new guide is to give board-level readers in the U.K. and international businesses "informed commentary"on the impact of anti-fraud and anti-corruption legislation, including the Bribery Act 2010. 

Throughout its 36 chapters, the guide deals with the issue of serious economic crime from both a national and global perspective, outlines the main offences and the investigation of these offences and gives special focus to some of the issues that have recently given businesses cause for concern.  As a supplement to the commentary already available from the Bribery Library, it is certainly a worthwhile read.

The guide can be accessed via this link and is available in PDF, iPhone/iPad and Kindle editions.

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.   

Our sources at the SFO have informed us that the SFO will be looking to see:

1. whether the company has a clear issued policy regarding such payments;

2. whether written guidance is available to relevant employees as to the procedure they should follow when asked to make such payments;

3. whether such procedures are being followed by employees;

4. evidence that all such payments are being recorded by the company;

5. evidence that proper action (collective or otherwise) is being taken to inform the appropriate authorities in the countries concerned that such payments are being demanded;

6. that the company is taking what practical steps it can to curtail the making of such payments.

There remains a number of grey/ challenging areas.  Where is the line between "small" payments and payments which the SFO would condemn?  How many small payments collectively amount to a significant breach of the Bribery Act?  If you have a zero tolerance policy, but payments are still being approved, what message is being given to your employees and business partners?

For those organisations that are doing their best to avoid making facilitation payments, but are finding it difficult to stop making them altogether, this insight into the SFO's thinking will offer some limited breathing room.  However, the clear message from these six points is that the SFO will be expecting to see a positive approach by organisations towards the goal of eradicating such payments from their operations.

Certainly the suppliers of facilitation payments can make efforts to avoid being in situations where they are susceptible to demand for payments, but long term eradication must surely rest as much on inroads being made into the demand side itself.  Organisations are encouraged to take collective or other action to inform authorities that demands are being made, but pressure also needs to be applied at government level.  Will we see the UK Government supporting British organisations to take a stand against facilitation payments by working with foreign governments to tackle the issue of demand?

In the meantime, it will be interesting to see in 2 years time whether the SFO's tolerance with respect to facilitation payments has changed.

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”

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 Bribery Act, as passed by the last Parliament, is one of the best anti-bribery laws in the world. But the Guidance will achieve exactly the opposite of what is claimed for it. Parts of it read more like a guide on how to evade the Act, than how to develop company procedures  that will uphold it.

‘It is deplorable that changes made to the draft Guidance since late last year, and now enshrined in the published version, depart from international good practice in several areas. The Ministry of Justice has exceeded its brief with this final Guidance which undermines the Act and will limit its effectiveness.  There is now a significant risk that bribery will go unpunished.”

Paragraph 21 of the Guidance gives as an example an invitation to a rugby match at Twickenham as part of a public relations exercise “designed to cement good relations and enhance knowledge of requirements in the organisation’s field” is “extremely unlikely” to engage Section 1 as “there is unlikely to be evidence of an intention to induce improper performance of a relevant function”.

I am intrigued as to whether attendance at a rugby match would actually enhance people’s knowledge of an organisation’s requirements.  Sporting matches are typically where people enjoy the sport itself, and for many people to enjoy (often excessive amounts of) food and alcohol.  People are more likely to get to know each other as people and just enjoy one another’s company. Technical and detailed discussions about a company’s goods and services are likely to be discussed on another date at a formal meeting.

The very point of much expensive hospitality that goes on in the UK is to get to know people, to show off your company’s generous hospitality and to try to encourage someone to buy your goods or services.  Whether that amounts to an intention to induce improper performance of a relevant function is of course something for the jury to decide, but the Government seems to be giving a clear steer to prosecutors that all sporting matches are ok,  that prosecutors shouldn’t go near them, and that the UK corporate hospitality industry should continue unabated.

That’s quite curious from an anti-bribery lawyer’s perspective because some of these events can cost many hundreds or even thousands of pounds per guest, and this has helped grow a huge and very profitable industry in the UK over the past few years. Presumably this industry, amongst others, was one of those that protested and lent on the government over the past few months after the Act was passed on 8^th April 2010, to prevent damage to the value of their services.

But how are companies meant to interpret this Guidance? When setting an internal corporate gifts and entertainment  policy, is £500 per person per event an acceptable level? How about £1,000 ? and £5,000?  No-one knows.  Not even the legislators and prosecutors, it seems. It appears to us that what the Government’s Guidance is really saying is that the Serious Fraud Office just won’t prosecute anything except the very largest and most blatant examples of corruption. But that isn’t what the Act itself says, and the Guidance is, as it says, only guidance, and not the law, but none of the less-than-blatant but still-intending-to-influence levels of hospitality will ever see a court room, because the Act requires the Director of the SFO or the Director of Public Prosecutions to consent to a prosecution under the Act, and this Guidance makes it clear that they have been told by the government not to go there.

Actually, if you were to ask the ordinary man or woman in the street (who would form part of any 12 person jury) whether they thought that spending £500 per head on someone on an event was likely to influence someone in their decision-making processes I believe that they would indeed find that this level of expenditure was excessive or even grossly excessive (especially when most working class and middle class people’s disposable incomes are declining for the first time in 30 years, and ordinary people are struggling with normal living expenses - see the Guardian newspaper story on 29 March 2011).  

Getting to know a client or customer’s business can be achieved without vast expenditure, and certainly not at the levels of cost charged for major sporting events, so I feel that the Guidance has really fudged the issues, and is using the “getting to know you” reason as a justification to keep the sporting events and hospitality industry out of the reaches of prosecutors. This is not what the Act intended. Hence the reason for Transparency International’s complaint.

Interestingly, under the Section 6 offence of bribing foreign public officials, the Guidance suggests that “Flights and accommodation to allow foreign officials to meet with senior executives of a UK commercial organisation in New York as a matter of genuine mutual convenience , and some reasonable hospitality for the individual and his or her partner, such as fine dining and attendance at a baseball match are facts that are, in themselves, unlikely to raise the necessary inferences”. “Unlikely” is not a word worthy of crystal clear advice. Also, those 12 men and women of the jury on mainly ordinary incomes may well think that an invitation to you and your partner to dinner and/or to a baseball match was probably intended to cause some influence on the public official in his capacity as a foreign public official. Many of us would find the funding of a spouse or partner to be at odds with modern thinking about appropriate levels or types of hospitality.

Later on in the same paragraph the Guidance goes on to say that a five star holiday would  be “far more likely” to be an offence under section 6. We find it surprising that the Government found the need to fudge it by stating “far more likely”, as it is really difficult to envisage in which circumstances the provision of a five star holiday to a foreign public official would not be improper. All in all, on hospitality alone, one wonders whether the Guidance is at all helpful or clear, or whether in fact it is possibly even misleading, and gives a false sense of security, as it seems to be at odds with the wording of the Act. It seems to be a long and windy (the Guidance itself is far longer than most people would have expected, at about five times the length of the Act) way of saying that the only cases which the SFO will prosecute will be huge and extreme examples, rather than the lower value, but higher-in-number cases which persist around the world. 

But for companies trying to devise gifts and hospitality policies which do not breach the Bribery Act, the option of doing nothing, or setting no maximum level of expenditure, sends out the wrong signals to your staff about how you regard your risks and liabilities.  It is my view that if the SFO did investigate your company, you would be in a considerably weaker position to defend allegations of improper influence if you had set no expenditure limit, or had set a very high limit, than if you had set a limit at a more modest level.  Safer to ignore the Guidance and pay attention to the law in the Act.

As a footnote and to refer back to earlier posts on the Olympics: I doubt very much that the extremely high costs of corporate entertainment which will take place at the 2012 Olympics in London will attract any prosecutorial interest, on purely political grounds, even though such levels would very probably be regarded by 99% of the people in the UK as extremely high and disproportionate and intended to influence improperly. Of course, if that prediction is wrong, I will post on it !

What I hear clients asking for is the government's practical guidance on the types and wordings of policies and procedures - but the Guidance is more or less silent on truly practical stuff. So companies worldwide with business in the UK will still need to do a lot of work to put in place "adequate procedures", whatever the Government claims to the contrary!

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.

This morning, the Justice Secretary, Ken Clarke, announced the publication of the Guidance and confirmed that the Bribery Act will come into force on 1 July 2011.  Mr. Clarke explained that the delay in its publication had enabled him to listen to business groups to make sure the legislation was implemented in a “workable, common sense” way:

 "Some have asked whether business can afford this legislation - especially at a time of economic recovery. But the choice is a false one. We don't have to decide between tackling corruption and supporting growth. Addressing bribery is good for business because it creates the conditions for free markets to flourish."

In a press release by the Confederation of British Industry ("CBI"), Katja Hall, the CBI's Chief Policy Director, confirmed that its members strongly support the principles behind the Bribery Act and welcomed the much-improved final guidance:

"The Government has listened to concerns that honest companies could have been unwittingly caught out by poorly-drafted legislation and has clarified a number of important areas. These include the extent of liability through the supply chain, joint ventures, due diligence and corporate hospitality. Businesses now need to use the next three months to revise their anti-bribery policies ready for the Act’s implementation.

Meanwhile, the Serious Fraud Office must take a common-sense approach to enforcement, ensuring it is reasonable and risk-based. This will help avoid creating a culture of fear that could undermine UK competitiveness."

We, at the Bribery Library, will be commenting further on the details of the Guidance, and its implications for companies (whether based in the UK or overseas), in the coming days and weeks.  In the first instance, we will be publishing a short briefing note later today.

Image © Crown Copyright 2011

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.

Under Section 7 (5) of the Bribery Act such companies would ordinarily have been caught by the Act’s provisions and would be subject to the jurisdiction of the British courts: 

“relevant commercial organisation” means—

(a)   a body which is incorporated under the law of any part of the United Kingdom and which carries on a business (whether there or elsewhere),

The Guardian further reports that pressure has been brought to bear on the government to make changes, presumably by the City institutions, as this provision, if left untouched, would dissuade foreign companies from coming to London to list, and the City’s bankers, accountants and lawyers would lose out on substantial revenue, as these companies would look to other jurisdictions to do their listing.

From a practical viewpoint this seems to make sense: if a company that had no physical presence here at all was involved in bribing people abroad, how would the British prosecutors gain access to the evidence necessary to prove it? And how would they compel witnesses and obtain documentation? Some countries’ prosecutors may cooperate but others may chose not to work alongside British prosecutors.  The practical and logistical difficulties of such prosecutions would be enormous and expensive, and it would be difficult in truth to justify them on public interest grounds (setting aside whether the Serious Fraud Office has the resources to pursue them). In our view, foreign companies with no presence here and who are not committing crimes here should properly be dealt with by the countries in which they are doing business.  When do the extraterritorial provisions of the Bribery Act become an invasion of another country’s sovereignty?

If this report is accurate, it is not clear how this change will be brought about as it would seem to involve a departure from the wording of the legislation itself. We suppose that the prosecutors may be told not to pursue such cases, rather than the government get involved in amending the primary legislation.

More will be revealed shortly, we are told: the Guardian has predicted that the guidance may be published in the week commencing 21^st March. If not, watch this space.