Managing competing legal risks when a corruption allegation is made in relation to a third party

In recent years, increased regulatory action in relation to bribery and corruption has been accompanied by an increase in civil claims by parties adversely affected by instances of bribery and corruption. Civil claims have been brought in England, the United States and many other jurisdictions against counterparties, third parties, competitors, employees and boards. Parties who feel they have been wronged by corruption – or who have made a bad bargain in a deal potentially tainted by corruption – are increasingly willing to pursue civil claims.

The prospect of civil litigation concerning corruption issues most commonly arises where a business becomes aware of corruption allegations in relation to a third party it has engaged (for example, an agent, distributor, brokeror consultant). In this scenario, the business faces a difficult balancing act between civil and criminal law risks. In-house lawyers and compliance officers seeking to manage these competing risks need tocarefully consider the strategy for dealing with a third party in these circumstances.

This article sets out some of the key legal issues that may arise when an allegation of corruption is made in relation to a third party, explains potential strategies that can be used to help navigate these issues, and provides guidance on how businesses can better structure third party engagement to equip themselves to deal with the situation if and when it arises.

While engagement of third parties is often essential, particularly in markets in which a business has no physical presence, third parties are a business’ single greatest corruption risk: the vast majority of prosecutions and regulatory settlements arise out of payments including third parties.

A business will often face competing civil and criminal law risks when an allegation of corruption is made in relation to a third party. On the one hand, suspending payments may breach the terms of the contract with the third party and lead to a civil claim; on the other hand, there is a risk that if the business continues to make payments it will be putting the third party in funds to pay bribes for which the business could be criminally liable under the UK Bribery Act 2010 or analogous legislation - and which could in turn raise money laundering issues.

The business will need to consider early on any self-reporting requirements under applicable financial regulation or money laundering legislation - and whether it will want to seek consent to deal in potentially tainted funds to provide itself with a defence to money laundering offences. If so, this is likely to impact on the company’s broader reporting strategy.

The business may also need to consider whether it has contractual obligations to disclose the potential issues to counterparties, particularly where the third party is engaged in relation to a contract with a specific counterparty. This is important because under English civil law, contracts procured by bribery are voidable. Accordingly, if a third party, which is deemed to be the company’s agent (whether formally engaged or not), has paid a bribe to secure a contract, that contract may be liable to be set aside by the counterparty. The business may also want to consider bringing claims in relation to the allegations (for example in relation to any employees involved or the third party concerned).

If a business is made aware of an allegation concerning a third party it has engaged, steps should be taken to quickly determine the scope and nature of the issue, identify upcoming payments (outgoing and incoming),ascertain its contractual rights (in relation to investigating the issue and suspending payments while doing so)and to preserve data as necessary. The business then needs to determine as quickly as possible whether there is any substance to the allegations and, more broadly, whether the compliance risks in relation to the third party are being effectively managed.

In considering whether payments should be suspended, the seriousness of the allegation and associated regulatory risks needs to be balanced against the commercial risks of suspending payments. It may be advisable, depending on the circumstances, to adopt a strategy of resisting making payments until they can be verified to be legitimate. This strategy could, however, ultimately lead to civil claims in a public forum, attracting the interest of regulators and any ultimate counterparties.

The position is often most difficult where, as is common, the business does not discover specific evidence of corruption but has residual concerns about the third party’s conduct either in relation to the allegations or generally. Hard evidence of corruption will rarely be unearthed during an internal investigation given the limitations on evidence-gathering. The business will need to determine the criminal, regulatory and reputational risks based on the weight of the evidence against the commercial risks and the civil risks of being sued.

If the business has residual concerns it is essential that it determines: (i) whether there is a legitimate business rationale for engaging the third party; and (ii) whether the third party has provided genuine services commensurate with the amount it is being paid. The business is also likely to want to run enhanced due diligence processes, which may include engaging a business intelligence service and, at an appropriate point, discussing with the third party the specific allegation and its management of corruption risk more generally. This process will help the business determine whether to continue with the relationship and the risks of making future payments.

If the business does continue to engage the third party notwithstanding its residual concerns, it should ensure that going forward it actively manages the risk of the third party paying bribes on its behalf and be able to evidence such management.

Terminating a relationship with the third party can present its own legal issues, even where the termination is designed to mitigate risk. Structuring any payment as a settlement does not in itself eliminate the risk of making the payment: what is important is the reality of the services for which payment is provided. Businesses need to exercise real caution in ensuring that such settlements are documented and that the rationale is accurately recorded. In some circumstances, it may be appropriate to simply refuse to pay.

There is no easy solution to the problems identified above, but there are certain steps a business can take when engaging a third party to help mitigate the risk of these issues arising or better equip the business in the event that such issues arise.

First - and fundamentally - the business needs to ensure that it completes substantive due diligence on third parties before it engages them and revisit this when there are any changes, e.g. in personnel or terms so that the business understands on an ongoing basis who it is dealing with and why. This due diligence should not only include background checks and screening but also an assessment of the substance of the engagement, for example the business rationale for the engagement and for the level of fees, commission or discount. Second, the business should seek contractual rights to audit and investigate issues and suspend payments while doing so. Third, the business should seek rights to terminate and withhold outstanding payments on the basis of non-cooperation or breach of the company’s ABC policy (as opposed to requiring evidence of breach of applicable ABC laws).