Fraud Lawyer Dan Hyde of Cubism Law is interviewed by The Lawyer Magazine about the new Bribery Act

Published on 27 Apr 2010 under category: cubism

By Dan Hyde, Consultant at Cubism Law

As published in The Lawyer, April 27th 2010

The existing bribery and corruption laws were not built with the modern globalised corporate entity in mind. As such, they have proved inadequate in dealing with the more sophisticated bribery cases that have emerged over the past decade. The new Bribery Act aims to bring UK legislation up-to-date and, as part of this, will introduce new responsibilities for corporate directors and swingeing penalties for failing in those responsibilities. What strategies therefore will businesses need to adopt to accommodate the new act?

The existing laws have been in place since before World War I. Much of bribery and corruption is pursued under legislation from 1889 with further statues in 1906 and 1916. "The language is outmoded," says Dan Hyde, consultant specialising in white collar crime at Cubism Law. "It didn´t foresee the sophistication of current business practices, with overseas subsidiaries and agents."

This has been a particular problem in cases such as that of BAE Systems. "The Serious Fraud Office (SFO) was dealing with this ancient legislation," says Hyde, "which required it to prove a ´directing mind´ at board level. There had to be a connection between the board and the person with the cash-filled envelope. It was very difficult to show an evidential link."

Easy Ride

Although the BAE case may have further to run, the outcome to date has shown the relative weakness of UK legislation versus the US Foreign Corrupt Practices Act (FCPA), which was established in the 1970s. In response to some serious bribery allegations, the UK authorities imposed a fine of £30m for failure to keep proper accounts, while the US authorities imposed $400m (£263.63m). The FSA also failed in recent attempts to impose a multimillion-dollar fine on an insurance company.

The UK was severely criticised by an Organisation for Economic Cooperation and Development (OECD) working group in 2008 for not doing more to comply with the 1997 OECD Bribery and Corruption Convention. This should be seen in the context of the US authorities pursuing cases with greater vigour and an increasing global focus on bribery and corruption issues. Although there have also been enforcement issues, the legislation has played a crucial part in the weakness of the UK´s record in pursuing bribery and corruption cases.

The Bribery Act has been brought in to address these issues. For company directors and management, the new corporate offence will have the most impact. It imposes a strict liability on companies for bribery and corruption that takes place on their behalf. Failure to prevent bribery will now be a criminal offence and the Government has removed the necessity to prove negligence.

Roger Best, a partner who specialises in regulatory enforcement at Clifford Chance, says: "If your employee bribes someone in a South American country, and a public official is convicted of having received a bribe from your company or one of its agents, it´s a primafacie offence by the company."

Agent Provocateur

The issue of who is an ´agent´ of a company remains open. Paul Lomas, litigation partner at Freshfields Bruckhaus Deringer, says that the new legislation has deliberately avoided defining ´agent´ and how this will extend to joint ventures. It will certainly include all subsidiaries and will necessitate greater due diligence on joint venture partners, takeover targets and outsourced partners.

In the US the Department of Justice will now give pre-deal opinions where there is insufficient time to do due diligence, but this is likely to depend on the company being proactive and coming forward as soon as it recognises there might be a problem. There is no indication as to whether UK authorities will be willing to follow a similar regime.

The company will have a number of defences against a charge of bribery, but the most important of these is that it had sufficient procedures in place.

Directors will no longer be able to claim ignorance of the murky dealings of their offshore subsidiaries - it will be their responsibility to police activities and they will be held criminally liable for not doing so.

Lost in Translation

What will constitute ´sufficient procedures´ is still open to debate. The Government is to issue guidance but it is likely to be principles-based rather than prescriptive. Lomas says: "These procedures will almost certainly not be a check-list because the authorities want to change corporate behaviour at a deep level. This will not happen with a tick-box approach."

This will have to entail more than simply having a policy in place, something that companies should have anyway. Auditing will become more important than ever, with firms having to do more than simply set up a compliance programme and assume that the matter is taken care of; the onus will be on management to police it too.

This is especially true for companies that operate across a number ofjurisdictions; there is no point in having a compliance policy in place if the fine print gets lost in translation or does not seem relevant to certain cultures.

Morality Bites

Lomas suggests that the authorities are likely to want to see evidence of the right incentives on employees. They will want to ensure that employees are not remunerated simply for winning business so that they might accept a corruption risk, but that they are rewarded for ethical behaviour, even if that means turning down business. They will want to see a history of enforcing ethically acceptable procedures, and evidence that business opportunities have been forsaken rather than engaging in poor corporate practice. They will also want to see proper accounting systems that make it possible to detect payouts

He adds: "Companies will need to be very clear in their communication. They´ll need to show examples of changes in their behaviour - such as ´we didn´t pick up this contract in Philadelphia because of moral issues´. They´ll need to show that employees are rewarded by management for identifying problem areas rather than taking on business that brings ethical risk."

Ironically, the blue-print for the type of procedures to be put in place may come from Siemens and BAE Systems, where independent monitoring has been imposed.

BAE Systems has said that it will implement the recommendations issued in Lord Woolf´s 2008 report in full within three years. Transparency International has called this a ´gold standard in anti-corruption procedures and policies´.

Code of Conduct

The Woolf report makes 23 recommendations. These include the establishment of an ethical business conduct project, which incorporates a code for all employees. It will have one global contract for all external advisers. The overall aim is to embed ethical business in its culture. Siemens, for its part, has mounted a clean-up campaign costing approximately €1.8bn. Staff have been through intensive compliance training and interviews, and ´unethical´ contracts have been turned down.

There are a number of grey areas. Facilitation payments and when these are deemed to constitute a bribe remain an issue. Hyde says: "There is also recognition in the US that facilitation payments need to be made when dealing in certain jurisdictions. The US recognises that these have to be made and do not constitute a bribe as such. The UK legislation is wider and includes any bribe made anywhere and doesn´t exclude facility payments."

While it is difficult to envisage it ever being in the public interest to prosecute a one-off facilitation payment, particularly where it was effectively extorted in an overseas jurisdiction, such payments will remain illegal and the SFO has signalled that it expects commercial organisations to strive to eradicate them.

Criminal vs Civil

There are areas where the Government has hinted that it will exercise discretion. The US legislation just focuses on the bribery of public officials whereas the new UK legislation focuses on all corporate dealings and includes corporate hospitality. As such, there has been a good deal of speculation that the new act will scupper all forms of corporate hospitality. However, the Government´s response to the Parliamentary Joint Committee´s Report in November suggested that principles of proportionality in prosecutions would apply in practice. That said, it did not offer further guidance. Linklaters, for example, suggests clients seek advice before embarking on significant corporate events.

The punishments for non-compliance with the act are different from those in the US. Hyde points out that, firstly, the jail terms are longer in the UK. In the US, a prosecution under the FPCA brings a maximum jail term of five years (though this can be extended for multiple violations), while the new UK legislation will bring a maximum of 10 years.

As convictions may be easier to secure and the authorities have better bargaining power, companies may face heavier fines and costs even if corporate directors are not sent to jail. They could also be blacklisted from public procurement projects around the world. Part of the point of the new legislation is to give the SFO and others the legal framework to pursue criminal cases rather than civil cases. However, without a shift in the enforcement regime, prosecutors may not have the muscle to prosecute all but the most serious criminal cases with all the time and expense that incurs.

There is debate as to the extent to which the new legislation will change the number of cases that are settled on a civil basis. Nick Cox, a civil recovery expert at 4 Stone Buildings and a member of the Chancery Bar Association, says that the Bribery Act simply gives the UK authorities more criminal legislation to work with, but it doesn´t address the funding and enforcement issues that have driven cases to be settled on a civil basis in the past.

The Cost of Compliance

Clearly there is also a cost of compliance, as Siemens´ depleted balance sheet attests. These bribery laws are now among the strictest globally and there are potentially competitive implications for UK companies from the new legislation. Does the new legislation substantially change the competitive landscape for UK companies?

Certainly there is evidence that companies forced to clean up have lost business on the back of it. Insiders at Siemens, for example, have suggested that contracts have been lost that would put them at risk.

However, the act may not have the effect that many believe. The Government has indicated that the new legislation will only cost taxpayers an additional £2m per year and the resources available to the Director of Public Prosecutions, the SFO and Revenue and Customs may already be quite stretched.

Not Enough Stick?

In spite of having new powers to obtain criminal prosecutions, the SFO is likely to continue with the more pragmatic approach it has used under Richard Alderman. It has suggested that companies that self-report may receive more lenient penalties, subject to independent monitoring, for example, or clear evidence that administrative procedures have changed. The SFO may have the legislative muscle, but it still will not have significant enforcement muscle and will continue to look for quick wins to demonstrate to the OECD and others that it is doing what is necessary to bring about a change in corporate behaviour. In practice, there is likely to be more carrot than stick.

It has been suggested that a whole industry may grow up on the back of the new act as corporates hire well-vetted outsiders to check they are compliant. With penalties hitting eight or nine figures, companies are worried they could be tagged with the behaviour of their affiliates in Africa or elsewhere and are instigating corruption ´health-checks´. This involves sending people out to find out what is going on in their subsidiaries and checking that they really know the rules and the corporate policies.

Aon´s corruption case with the FSA was a case in point. Aon was rapped for not doing an effective job of training people on the front line who were selling policies in places such as Africa and Thailand.

The new act will bring new responsibilities for corporate directors and new penalties for non-compliance. Questions remain concerning how much will change in the way cases are pursued by the SFO and other authorities. Without any significant increase in funding, the SFO may continue to focus on civil recovery rather than criminal prosecutions in spite of the new law.

Either way, corporations are entering a new business climate on bribery and corruption and will need to ensure they have adequate procedures in place.