The push and pull between the terms of the Bribery Act and the demands on British business abroad

Posted on March 19, 2013 by Adam Greaves

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.

 

BP receives whistleblower letter alleging corruption in its tanker division

Posted on March 16, 2012 by Adam Greaves

The Daily Telegraph reported on 15th 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.

Innospec Ltd: Former executives charged with fraud and corruption offences

Posted on October 28, 2011 by Patrick Gilfillan

Following the news that a former Business Unit Director of Innospec Ltd, David Turner, appeared before Westminster Magistrates' Court on Tuesday, charged with conspiring to make corrupt payments to public officials in Indonesia and Iraq, the Serious Fraud Office (“SFO”) announced yesterday that two further Innospec executives have now been charged with associated corruption offences.

Along with Turner, it is alleged that Dennis Kerrison and Paul Jennings, both former CEO’s of Innospec, gave, or agreed to give, corrupt payments to public officials and other agents of the Governments of Indonesia and/or Iraq as inducements to secure, or as rewards for having secured, contracts from those Governments for the supply of products, including Tetraethyl Lead, by Innospec.  The alleged offences took place variously between 2002 and 2008.

Turner and Jennings are additionally accused of conspiracy to defraud Ethyl Corporation by making payments to public officials and other agents of the Government of Iraq as inducements to ensure that tests on MMT, a competitor product manufactured by Ethyl Corporation, conducted by or on behalf of the Government of Iraq concluded with an ‘unfavourable’ assessment of that product.

Last year, Colorado based Innospec agreed to pay the U.S. authorities $27.5 million and the U.K. authorities $12.7 million, and pleaded guilty to 12 U.S. criminal counts (including violations of the Foreign Corrupt Practices Act (“FCPA”)), having admitted to bribing Iraqi oil officials, defrauding the United Nations through its Oil for Food Program and selling chemicals to Cuban power plants in violation of a U.S. embargo.  Earlier this year, Jennings also settled charges brought by the U.S. Securities and Exchange Commission ("SEC"), without admitting or denying the allegations that he had authorised the speciality chemicals company to pay bribes to Iraqi and Indonesian officials.

The cases have been sent to the Crown Court at Southwark, where Turner will appear on 2 November 2011 and both Kerrison and Jennings will appear on 6 January 2012.   

UK Financial Services Authority fines Willis Limited, insurance brokers, for failures in its anticorruption compliance programme - some sobering lessons for all companies

Posted on July 22, 2011 by Adam Greaves

Willis and Lloyds BuildingsYesterday, 21st 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.

D&O Liability Insurance: The impact of the Bribery Act

Posted on May 23, 2011 by Patrick Gilfillan

Lloyds Building

Directors and Officers ("D&O") Liability Insurance is insurance cover available to the directors or officers of a commercial organisation, or to the organisation itself, for investigation or defence costs or damages incurred in respect of an investigation, prosecution or civil claim for alleged wrongful acts (while acting in their capacity as directors or officers of a commercial organisation).

The Bribery Act may impact on D&O Liability Insurance in a number of respects.  In the first instance, it should be noted that, while it will depend on the specific terms of the D&O policy in question, claims where fraud or dishonesty has been proven (or admitted by the director, officer or commercial organisation) will usually be excluded.  Further, criminal fines or penalties, along with associated costs that are considered to be against public policy to insure, are also usually excluded from D&O policies.  Consequently, given the nature of the crimes dealt with by the Bribery Act, it is questionable whether D&O cover will ever extend to breaches of its provisions.

That said, the terms of D&O policies differ as between commercial organisations, due to their different risk profiles and requirements (in this regard, in deciding whether to insure the directors and officers of a commercial organisation, underwriters carry out a similar exercise to that discussed in my previous post, which deals with internal risk assessment).  Therefore, the advent of the Bribery Act may well lead those purchasing D&O cover to (re)negotiate with underwriters to obtain specific cover for any investigation, prosecution or civil claim under the Bribery Act. 

Where such cover is obtained, it will need to address the possibility of senior officers of a commercial organisation being found liable under section 14 the Bribery Act (which requires the “consent or connivance” of the senior officer(s)).  This offence relates to circumstances where the commercial organisation in question is guilty of one of the three 'individual' offences: bribing another person (section 1); being bribed (section 2); or, bribing a foreign public official (section 6). 

The cover will not, on the face of it, need to take into account the corporate offence of failing to prevent bribery (section 7).  However, it is arguable that, where a company is unable to prove that it had in place adequate procedures to prevent bribery (effectively, the defence to the corporate offence), this could be viewed as a corporate governance failure.  This may, in turn, lead to a civil claim being made against the director(s) by the company’s shareholders.

Therefore, with those purchasing D&O cover being keen to insure for breaches of the Bribery Act, underwriters are likely to require commercial organisations to have adequate compliance procedures in place before issuing, or renewing, D&O Liability Insurance policies.  At the very least, the absence of such compliance procedures will increase the premiums that will be demanded by underwriters.  At most, D&O cover may not be available at all. 

The availability of D&O Liability Insurance is, therefore, yet another reason why compliance officers need to now take a good hard look at their company’s compliance programmes.

British directors face prosecution under Bribery Act

Posted on March 03, 2011 by Rose Parlane

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.

Mabey & Johnson: three executives sentenced to imprisonment

Posted on February 24, 2011 by Rose Parlane

Following in the footsteps of the US Department of Justice, the SFO has made no secret of its intention to prosecute senior executives in relation to corruption offences and the trend continued to gain momentum in February as three more executives were added to the SFO’s tally.

On 23 February 2011 the Southwark Crown Court sentenced two Mabey & Johnson executives, Charles Forsyth and David Mabey, to imprisonment after they were found guilty of bribing Iraqi Government officials in order to secure a contract for the supply of 13 modular bridges in 2001/02 in breach of United Nations sanctions.  A third executive, Richard Gledhill, who had pleaded guilty to sanctions offences at an earlier hearing and given evidence for the prosecution, was also sentenced to imprisonment.

As the former Sales Manager, Gledhill had negotiated the contract with the Iraqi Government and sought Forsyth and Mabey’s approval for the payment of a 10% kickback to secure the contract, which was paid through a local representative.

Forsyth was sentenced to 21 months imprisonment and ordered to pay prosecution costs of £75,000.  Mabey was sentenced to 8 months imprisonment and ordered to pay prosecution costs of £125,000.  Both were disqualified from acting as company directors for five years. 

Gledhill was also sentenced to 8 months imprisonment, which was suspended for two years.

As quoted in the SFO's press release, SFO Director Richard Alderman said: "This shows that the SFO is determined to go after senior corporate executives who break the law. I am pleased with the result. It sends out a very strong message from the courts on this type of offending."

Will more executives be joining Messrs Forsyth and Mabey to be held at Her Majesty’s pleasure once the Bribery Act comes into force?  The new Section 14 offence of consenting to or conniving in an offence by the company will make prosecution of senior executives much more straightforward for the SFO.   However, with the SFO having no power to determine sentencing, it remains up to the Court whether HM will need to make up more beds.