Bribery Act 2010 - when an associate can land you in hot water

The Bribery Act (the Act) obtained royal assent on 8 April 2010 and will come into force in April 2011. Arguably, the most controversial offence under the Act is the new corporate offence of “failure to prevent bribery” under section 7. This new offence goes much further than a prohibition on committing bribery - it makes it an offence for a “relevant commercial organisation” to fail to prevent bribery by an “associated person”, regardless of whether the commercial organisation knew of the bribery in question.

This is a strict liability offence, to which the only defence available is if the commercial organisation can prove that it had in place adequate procedures designed to prevent corrupt practices committed for the commercial organisation’s benefit by the associated persons (such as employees, other members of the group, business and JV partners, agents and counterparties).

This briefing sets out the key elements of the new corporate offence, including an outline of available guidance as to what is meant by the term “associated persons” for the purposes of the Act. It also considers measures that may need to be adopted by relevant commercial organisations to protect themselves against corrupt practices committed for their benefit and without their knowledge.

The offence can only be committed by a “relevant commercial organisation” (which the Act refers to as C), namely companies and partnerships that are either: (a) incorporated or, in the case of partnerships, formed in the UK; or (b) incorporated or formed elsewhere, but carry on a business or part of their business in the UK.

The expression “carries on a business, or part of a business” is not defined, but it is intentionally wide in order to preserve prosecutorial discretion as much as possible. For example, if an international corporation based abroad was to have a branch office in the UK, it would likely satisfy the “carrying on business” requirement since the branch is part of the same legal entity. Although having a UK subsidiary, which is a separate legal entity, would not necessarily amount to the non-UK based parent company carrying on business in the UK, much would depend on whether the activities conducted by the subsidiary form part of the parent’s business and the degree of control exerted by the parent over the UK incorporated subsidiary.

For example, if an overseas parent company was a manufacturer and the UK subsidiary’s business was to sell those manufactured products into the UK, then the parent company is clearly carrying on a business in the UK. If, however, the UK subsidiary operates independently of its parent and, for instance, does not refer to the parent for direction and instruction and simply remits dividends back to the parent, it may be difficult to argue that the parent is carrying on business in the UK.

Similarly, in the context of an international joint venture involving a UK company, the question of whether there is a UK connection for the purposes of the Act will depend on the facts of the relationship between the parties, particularly the level of control exercised by the non-UK joint venture partner over the UK joint venture company.

To be guilty of the section 7 offence, the associated person of C must have committed an offence of bribing another person (active bribery) or an offence of bribing a foreign public official, the standard of proof for which is a criminal standard - i.e. beyond reasonable doubt.

What the prosecution will need to prove, other than the commission of the underlying offence, is that the person who paid the bribe:

1. was a person associated with C; and
2. intended to obtain or retain business for C or to obtain or retain an advantage in the conduct of the business of C.

As this is a criminal offence, this intention to bribe will be proved if the prosecution can show that the act was performed deliberately and, in effect, will most likely be proved in a situation where the bribe paid actually does result in the award of business to C.

In contrast, the standard of proof for C to show that it had adequate procedures in place to prevent bribery by associated persons is a civil one - i.e. on a balance of probabilities.

An offence is committed irrespective of whether it takes place in the UK or abroad and it is not necessary for the associated person to have been prosecuted or convicted for the underlying offence anywhere first (that person just needs to have committed it). Furthermore, the person committing the offence is not required to have a connection to the United Kingdom. Rather, so long as C (the defendant entity), falls within the definition of “relevant commercial organisation” that should be enough to give the UK Courts jurisdiction.

Section 8 of the Act defines an “associated person” (which the Act refers to as A) as a person who “performs services” for or on behalf of C. The capacity in which such services are performed does not matter. The definition specifically refers to such categories of associated persons as employees, subsidiaries and agents, but makes it clear that this is not an exhaustive list. There is also a presumption (albeit rebuttable) that an employee of C performs services on behalf of his employer.

There is little guidance currently available on the meaning of “performs services”, but it is clear that whether or not A is a person who performs services for or on behalf of C is to be determined by reference to all the relevant circumstances (which may or may not include the degree of control exercised by C over A depending on the circumstances). Ultimately, it will be a matter for the courts to determine on a case by case basis.

Members of the group performing services

The definition of “associated person” makes it clear that where group companies provide services to their holding company or other companies in the group, they will be considered to be associated persons. It is therefore likely that group companies providing “back office” services, such as internal audit or company secretarial services or hosting an IT server, will be associated persons for the purposes of section 7 of the Act.

However, whether or not an offence has been committed will depend on whether that group company has bribed another in order to obtain or retain business for the group. If , for example, the only service which the group company is providing is the provision of an IT server to the wider group, the circumstances in which that group company might pay a bribe in order to obtain or retain business for its group are, arguably, very limited. If, however, a group entity is acting as the distribution or sales agent for its group in a particular country, the risk of that group entity committing a bribe is probably much greater.

Members of the group not performing services

The Act is uncertain as to whether it would apply to a subsidiary which is on the face of it not providing any services to its parent company, for example, where the only link to the parent is the payment of dividends. Where a subsidiary is a separate business managed on a stand-alone basis, it should not generally be considered to be providing services for and on behalf of the parent simply by virtue of the group relationship.

Joint ventures

A view expressed by some is that, as a joint venture vehicle is intended to act on behalf of its owners, the starting position is that any corrupt activity by that joint venture vehicle will be carried out on their behalf.

Ensuring the effective implementation of anti-bribery procedures in a joint venture is key to minimising liability for any corruption offences committed by the joint venture entity. This will inevitably be harder to achieve where C does not exercise a sufficient degree of control over the joint venture or investment entity. For example, in certain jurisdictions foreign investors are not permitted to hold a controlling stake in a local enterprise. The fact that those same jurisdictions are often those characterised by higher risks of corruption presents an obvious risk to a minority foreign investor.

Not having a controlling stake in an entity may not be a defence (although it may be a relevant factor) and whilst it is arguably less likely that liability for a commercial organisation will arise in respect of the actions of its joint venture partners, ultimately the courts will have a wide discretion in determining whether a joint venture vehicle or a joint venture partner is an associated person, taking into account “all relevant circumstances”. These circumstances may include:

1. the degree to which A was able to act independently from C; and
2. the particular facts of any joint venture or consortium arrangements, both documented and arising by virtue of the parties’ conduct, between A and C.

Amongst the other relevant factors, as mentioned in the parliamentary debates at the time the Act was passing though Parliament, the following could also be taken into account: “whether the loss or harm can be described as minor; whether it was a single incident; whether it was a matter of misjudgement; or whether the offence was committed as a result of a genuine mistake or misunderstanding.”

Agents and third parties

Third parties include a broad range of entities and individuals that act on an enterprise’s behalf, including agents, consultants, representatives, resellers, sub-contractors, franchisees, advisers or similar intermediaries. A commercial organisation may use third parties for marketing or sales or as subcontractors in the supply chain, in the negotiation of contracts, the obtaining of licences, permits or other authorisations, or for any other actions that benefit the commercial organisation.

Often, these third parties may not be subject to effective anti-bribery laws, but C may well be liable for any corrupt practices employed by such third parties on C’s behalf and for C’s benefit, regardless of knowledge, if those parties are not carefully selected or are inappropriately managed.

There may be instances, particularly in high risk jurisdictions, in which the distribution channels employed by C may make these relationships more complex and more difficult to control. For example, a counterparty may only be willing to work with C if a certain agent is involved and in practice this agent may have wide discretion as to how its services are provided, leaving C with little or no control over the agent’s conduct and therefore potentially exposed.

Although the scope of who is an “associated person” is wide and encompasses suppliers, the risk of commercial organisations finding themselves liable under section 7 of the Act because of a supply relationship is comparatively more limited since the risk only materialises if the supplier commits a bribery offence for the benefit of the commercial organisation. For example, if a supplier of goods to a commercial organisation pays bribes in order to speed up a customs process for the advantage of the commercial organisation (rather than the supplier’s own advantage), the commercial organisation would be potentially liable under section 7.

As is the case with subsidiaries and joint venture entities, a lack of control over an agent or a third party will not necessarily extricate C from potential liability for the bribery by agents or other third parties acting for C, although it may be a relevant factor to be taken into account, amongst others.

The Act gives corporate entities no statutory defences, save for that of having “adequate procedures” in place. The meaning of “adequate procedures” is not defined in the Act. The formal guidance under section 9 of the Act on the extent and meaning of “adequate procedures” (Guidance) is expected to be published in late January 2011. In the meantime, the Ministry of Justice has published a draft guidance note (Draft Guidance) as part of the consultation procedure, which can be accessed here.

The Draft Guidance is formulated around “Six Principles for Bribery Prevention”, which are further explained in the Norton Rose publication on adequate procedures.

The Guidance to be published is intended to supplement other bribery prevention guidance published by industry or sector representative bodies or by non-governmental organisations. Of particular note are the Business Principles for Countering Bribery, published by Transparency International, which provide a framework for companies to develop comprehensive anti-bribery programmes.

A commercial organisation found guilty of a section 7 offence, which can only be tried on indictment, is liable to pay an unlimited fine.

In addition, the commercial organisation may face the prospect of having the proceeds of its criminal conduct confiscated under the UK Proceeds of Crime Act 2002. There is also the possibility that a commercial organisation convicted of this offence would face automatic debarment under the EU Public Procurement Regulation 2004/18/EC.

Where a commercial organisation is found guilty, an individual who has had involvement with the transactions giving rise to the corporate offence may be at risk of conviction of an offence as an accessory in addition to any individuals who have committed one of the primary offences. A charge against someone as an accessory is usually brought where that person assists in the commission of the crime, but does not actually participate in the illegal acts. The Act does not contain any specific penalty applicable to an individual as an accessory but liability as an accessory may arise under other legislation.

Directors may face additional exposure. If a commercial organisation charged with the section 7 offence cannot prove that it had adequate procedures in place to prevent bribery, this could be seen as a corporate governance failure which may then give rise to a separate liability for the directors as individuals for a breach of their fiduciary duties.

As international anti-corruption policies impact increasingly on global companies and their dealings with other companies, a system of “corporates policing corporates” is beginning to emerge. In order to protect themselves from liability attaching to them from other potentially corrupt business entities, commercial organisations are increasingly requesting details of the anti-corruption policies and procedures of the companies with which they enter into business relationships. This is intended to enable them to show, for example, that they have adequate procedures in place. Companies which do not have satisfactory anti-corruption procedures may not only lose out on business, but may even be reported to the authorities and then face lengthy and costly investigative processes.

Crucially, this means that commercial organisations are becoming increasingly concerned with compliance with the Act and other jurisdictions’ anti-corruption legislation, even if those laws do not directly apply to them.

Commercial organisations should not wait until the official Guidance is published or the Act comes into force before implementing adequate procedures. Commercial organisations should review their existing policies and procedures and consider how these may need to be revised in the light of available guidance, as well as be diligent in their implementation and monitoring.

In terms of how far organisations should go in implementing adequate procedures, context is paramount. The standards that are expected in practice of a small private company will not necessarily be the same as those expected of a large multi-national. The Guidance should not in any event be viewed as prescriptive, but should be adapted to the specific organisation, given its size and the risks associated with the business sector in which it operates.

Employees

All employees should be made aware that no advantages should be offered, promised or given to third parties (or indeed received from third parties) if such advantages may be construed as bribery. This would include guidance on acceptable levels of corporate hospitality, which should be neither lavish nor disproportionate in the context of the transaction in question.

Third parties

In particular, it is important that C should undertake risk assessment and due diligence exercises on its current business partners and arrangements. Whilst it may not be possible to carry out such process on each of the agents, suppliers and other third parties which provide a service to C, the assessment should at least be consistent with C’s resources and its general approach to checking the risks involved in entering into new transactions.

Please note that it is not currently clear how the Draft Guidance on adequate procedures, which recommends that commercial organisations conduct due diligence on their suppliers and contractors, will interact with the scope of liability of the commercial organisation if one of those suppliers or contractors has committed an act of bribery.

Based on the results of the risk assessment carried out on its agents and suppliers, in an extreme case it may be appropriate for C to terminate an existing relationship or avoid dealing with organisations known to pay or suspected of paying bribes. Terminating relationships may not always be possible however where a counterparty is an important or sole supplier. In such circumstances, Transparency International recommends that C makes its no-bribes policy clear to the third party and thereafter takes precautions to monitor and ensure that the third party behaves in accordance with that policy. Many global commercial organisations will already have in place similar policies to verify their supply chains.

Contractors

C should pay particular attention to contractors who perform work on its behalf, such as accounting and payroll. If the contractors already have anti-corruption policies in place these should be aligned to or matched with those of C and C should ensure that the employees of the contractor understand the policies, for example by inviting them to joint training sessions.

M&A Targets and investments

One of the key procedures to follow to ensure compliance is to undertake a robust due diligence programme when undertaking M&A, when entering into joint ventures and consortiums or when appointing agents, contractors and other third parties to perform services on behalf of C. See the Norton Rose publication on anti-corruption due diligence for further information.

As an extreme measure, where there are particular concerns that a subsidiary or a business associate is implicated in corrupt practices, C may need to contact law enforcement agencies and/or to withdraw from the proposed transaction.

Joint ventures

Depending on whether it has effective, or for the proposes of the Act, a sufficient degree of, control, C should either implement procedures or make known its own compliance programme and procedures to the other entities in the joint venture. C should also actively encourage them to adopt a programme for the joint venture that is consistent with its own, regardless of the location of the joint venture or the nationality of its decision-making management. Where appropriate, the relevant joint venture agreement can provide sanctions (including termination rights) for failure to comply with these procedures.

If a relationship already exists, C should make every effort possible to address any concerns about the other party and maintain thorough records of doing so as it will be left to the prosecutors to decide whether liability will attach to C. Where none of this is possible, C should have a plan to exit from the joint venture if bribery or corruption is shown to have occurred or there are reasonable grounds to suspect bribery or other corrupt activities.