The UK government is set to introduce a new bill targeting corrupt business practises. Maurice Kenton and Peter Flint at international law firm BLG look at the implications of this pending legislation for exporters, investors and their insurers.
With a few high-profile exceptions, European companies investing or exporting abroad have been able, with reasonable confidence, to identify what commercial activity is outlawed and provide assurance that they do not engage in it. The same companies would no doubt have also confirmed that they hope and expect their foreign agents to employ the same standards, but how many actually know that to be the case?
The potential exposure may be more serious than expected as is suggested by a 2008 survey of executives carried out by Ernst & Young. The survey reports that one in four respondents indicated that their company had experienced an incident of bribery or corruption in the past two years.
It also seems businesses in certain sectors, especially those that depend on intermediaries, appear to suffer enhanced risk.
Indeed 47% of those involved in the mining industry, 41% of those in the insurance industry and 31% in the banking and energy industries say that bribery was prevalent, especially in countries outside Europe. Well-publicised investigations in the defence sector suggest that it too is not immune to these pressures.
Against that backdrop, the government of the UK, which has been much criticised for its inadequate response to corrupt business practices, is set to introduce a new bill this year. Its objective will be to enhance its anti-corruption powers and impose new obligations, with serious consequences for companies – particularly those engaged in export and foreign investment. These companies, as well as their directors and officers, are advised to ensure they implement appropriate strategies to meet the risks posed by the proposed legislative change.
A changing landscape
Historically, the UK’s legislative response to bribery, in particular its response to payments that may have incentivised foreign officials, has been condemned as both unfit for purpose and riddled with uncertainty, while the Serious Fraud Office’s (SFO’s) prosecution record has been heavily criticised. As recently as October 2008, the OECD working group, which brings together all 37 countries that are parties to the OECD anti-bribery convention, issued a report stating that it was “disappointed and seriously concerned” about the UK’s failure to address deficiencies in its laws on bribery.
Times are, however, changing rapidly, as is apparent from the regulator’s new appetite for aggressive intervention. One need look no further than the £5.25mn fine on Aon by the Financial Services Authority (FSA) in December 2008 for Aon’s failure to take reasonable care to establish and maintain effective anti-bribery and corruption systems and controls, to understand that companies that are regulated by the FSA will, in future, be expected to operate to higher and more exacting standards than have been acceptable in the past.
On November 20, 2008 the Law Commission published its final report on reforming bribery laws in the UK and the government is expected to bring forward legislative proposals, reflecting the recommendations contained in the report, later this year.
It comes as little surprise that offering, giving, requesting or accepting bribes will continue to be an offence. However, bribery does not generally take place in open view and companies will continue to grapple, in a new and more rigorous enforcement environment, with the significant difficulties that arise in identifying improper payments, often hidden in commissions payable to intermediaries or packaged in the form of excessive hospitality or gifts. Notably, because the Law Commission’s recommendations also extend the territorial reach of UK regulation – no part of the prohibited conduct need take place in England or Wales provided that it is done by a UK-incorporated company, British citizen or someone ordinarily resident in the UK – British companies will be expected to ensure their operations abroad are similarly policed.
Of potentially greater importance, however, are two further recommendations that, if implemented, will combine to raise the stakes for UK exporters, investors and their insurers when doing business, particularly via third parties, abroad. These would make it an offence to:
1. Bribe a foreign public official with the intent of influencing them in their official capacity in order to obtain or retain a business advantage.
2. Negligently fail to prevent bribes being given or offered on behalf of a company or limited liability partnership.
To underline the seriousness of its proposals, the Law Commission has suggested that, upon conviction for a bribery offence, individuals should receive either a fine or a prison sentence of up to 10 years, and that companies or LLPs should be punished by a fine which may be unlimited in amount.
The possibility of criminal liability attaching to a company’s negligent failure to prevent corrupt activities by its employees or even third parties, presents serious regulatory, financial and reputational risks for companies and their management.
In addition, as any contract that owes its existence to bribery will almost certainly be voidable and unenforceable between the parties, inadequate supervision at the point of customer contact poses a significant commercial risk for businesses. Furthermore, as any such corruption is likely to taint attempts to lay off the resulting risk to export trade and political risk insurers, rendering those insurances equally unenforceable, global businesses will wish to focus their efforts on ensuring they do not fall victim to the rogue middleman.
However, were additional incentives required to encourage management to address these challenges, the Law Commission has recommended that its proposals apply not only at corporate level but also to the individuals that control or acquiesce in a company’s behaviour.
The imposition of a positive obligation on management to take action to prevent bribes being offered means that directors and officers who consent or turn a blind eye to the commission of these offences are likely to be charged with the principal offence alongside their employer. As the consequences of breach include imprisonment for up to ten years, managers will be motivated to implement controls and procedures to ensure their own and their employer’s compliance.
Businesses and individuals seeking guidance on how to navigate through the altered environment will be interested in the Law Commission’s recommendation that it will be a defence to a charge of failing to prevent bribery if the company can demonstrate that it had adequate procedures in place to prevent such offences being committed.
Pre-emptive action involving an early review and overhaul of existing management controls and procedures therefore looks set to deliver advantages, provided that where inadequate controls are identified, procedural changes capable of demonstrating enhanced oversight and control are implemented as a priority. Looking forward, interventionist management and whistle-blowing is likely to become more prevalent while managerial incompetence and inaction will be subject to hostile review by regulators and peers alike.
As to the standards against which companies might measure their controls and procedures, there are no definitive tests but, preliminary guidance may be found, for example, in the recommendations of the Woolf Committee’s report on BAE Systems, entitled “Business ethics, global companies and the defence industry”. While these recommendations were produced for a particular audience and met specific objectives, they nonetheless cover a range of issues common to most businesses that transact and invest across borders. They provide particularly useful guidance on the tools available to companies to minimise the risks posed by intermediaries, including, for example:
1. Hints, tips and ‘red flags’, such as requests for urgent or cash payments, requiring settlement of commissions before or immediately upon signature of a contract, lack significant business presence or experience in the territory or sector in question, when performing due diligence on intermediaries.
2. The role of in-house lawyers in vetting intermediaries whose activities require interaction with potential customers.
3. Ensuring the process for selecting, appointing and managing intermediaries is fully and properly documented and that appropriate guidance and training in the process is given to all relevant employees.
Companies may also consider implementing policies and procedures which demonstrate a commitment to high ethical standards by, for example, adopting a code of business conduct, establishing a corporate responsibility committee, and adopting rules to control the circumstances in which gifts and hospitality may be offered. While such measures often suffer a sceptical reception and, indeed, are insufficient to eradicate corruption alone, they provide an effective means of demonstrating the company’s commitment to best practice and thereby reduce the risk that the company and its senior managers will be regarded as having consented to or connived in the commission of any offence committed in breach of the policy.
The legislation proposed by the Law Commission will, if implemented as expected, force companies to take a more active role in policing the activities of their employees and intermediaries abroad. While some may choose to adopt a wait-and-see approach, the FSA’s recent fine against Aon suggests the time for action and creating the infrastructure necessary to demonstrate commitment to the prevention of offences is already here. Certainly any decision to defer making changes to existing practices in the current environment may carry with it significant corporate and personal risks in businesses where controls across borders are based on hope and expectation, rather than full enquiry and considered procedures.
Maurice Kenton and Peter Flint are partners and Andrew Wanambwe is an associate in the commercial litigation and international arbitration groups in the London office of Barlow, Lyde and Gilbert (BLG) LLP.