Recent times have seen an increase in the criminal accountability of companies and their boardrooms. Organisations, particularly those with global operations, are increasingly at risk of investigation and prosecution as the UK begins to follow in the footsteps of the US in the fight against fraud, cartels and corruption. Senior management may be personally accountable, and at risk of criminal and regulatory sanctions, in a way not previously anticipated or understood.
The impetus for much of the world’s anti-corruption legislation stems from the Organisation for Economic Co-operation and Development (OECD). Bribery and corruption have been on its agenda since 1989. The OECD believes that ‘corruption threatens good governance, sustainable development, democratic process and fair business practices’. The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the Convention) was signed on 17 December 1997 and entered into force on 15 February 1999. The Convention requires each of the current 37 countries party to it to adopt the necessary national legislation to criminalise the bribery of foreign public officials.
Legislation at home…
The UK ratified the Convention on 14 December 1998 and in compliance introduced the Anti-terrorism, Crime and Security Act (ATCSA) 2001, which came into force on 14 February 2002. Under ATCSA 2001 UK companies can be prosecuted for bribery and corruption committed abroad by their employees, and could face an unlimited fine. According to KPMG’s ‘Overseas bribery and corruption’ survey, published in December 2007, nearly one-third of company secretaries and heads of legal departments at FTSE 350 companies admitted that they had taken no steps to communicate the significance and implications of ATCSA 2001 to their employees while nearly one in five were not aware of the provisions of the Act at all.
… and abroad
It is not just domestic legislation that could bite UK companies. The US Foreign Corrupt Practices Act (FCPA) prohibits the bribery of foreign officials or political parties in an attempt to obtain or retain business. Individuals convicted of such an offence face imprisonment of up to five years and a maximum fine of $100,000. Companies risk a fine of up to $2m. The offences under the FCPA are however within the ambit of the US Alternative Fines Act, which allows a fine to be imposed of up to twice the benefit intended to be obtained by the corrupt act. The FCPA also requires companies whose stocks trade on US exchanges to have internal controls and to maintain accurate books and records.
The US has taken a far tougher line on corruption yet many UK companies remain unaware of the potential risks they face. The KPMG survey revealed that 46% of FTSE 350 companies believed that the FCPA did not apply to their company or that it was immune from its provisions. This is a worrying figure, as the FCPA has far-reaching jurisdiction: the US authorities can prosecute an FCPA violation against any foreign company that is traded or raises capital in the US. The US also has jurisdiction over foreign concerns if any act in violation of the FCPA occurs in the US. This does not require a physical presence in the US but can be done by an electronic action such as payments made through a US bank.
The US Department of Justice (DoJ) and the Securities and Exchange Commission (SEC) have been extremely active in prosecuting companies under the FCPA. 2007 saw 38 enforcement actions commenced, double the 2006 number. There was no let up in 2008, with 16 enforcement actions commenced by the end of June.
In December 2008 the German industrial giant Siemens AG reached a $1.6bn agreement to settle a long-standing corruption investigation by both the German and US authorities. It was alleged that from the 1990s until 2007 Siemens engaged in a systematic and widespread effort to make and to hide hundreds of millions of dollars in bribe payments across the globe. In the plea agreement reached, Siemens pleaded guilty to one count of failure to maintain internal controls and one count of books and records violation under the FCPA. Three Siemens subsidiaries in Bangladesh, Venezuela and Argentina pleaded guilty to conspiring to violate the provisions of the FCPA. Under the terms of the plea agreement, Siemens agreed to retain an independent compliance monitor for a four-year period to oversee the continued implementation and maintenance of a robust compliance programme.
The $1.6bn agreement included the largest criminal fine in FCPA enforcement history of $450m; the SEC portion of $350m in disgorgement of profits is the largest settlement obtained to date by the SEC under the FCPA. The DoJ has described the case as its furthest-reaching foreign corrupt practices trial.
UK plays catch-up
The UK’s record on prosecuting corruption is poor in comparison, but it will not be long before it begins to catch up with the US. The tide is already turning.
The government is under renewed pressure from the OECD to improve the UK’s anti-corruption measures. The OECD’s review of the UK’s application of the Convention, published in October 2008 (see ‘Reference point’, below), expressed concern that ‘the UK’s continued failure to address deficiencies in its laws on bribery of foreign public officials and on corporate liability for foreign bribery has hindered investigations’.
Law Commission Report
In November 2008 the Law Commission announced its long-awaited report on corruption, ‘Reforming Bribery’, proposing a new Corruption Bill that would repeal the common law offence of bribery and the three anti-corruption statutes (see ‘Reference point’, below). In their place would be two general offences, relating respectively to the giving and taking of bribes, applying both to the private and public sectors. The Report also proposed a specific offence of bribing a foreign public official and, significantly, a further offence, applicable to companies, of negligently failing to prevent bribery by an employee or an agent. Finally, the Bill, if passed, would extend the law of bribery to foreign nationals residing and conducting business in the UK. The maximum sentence increases to ten years from the current statutory maximum of seven.
The extra-territorial provisions of ATCSA 2001 are included to continue the jurisdiction to prosecute acts constituting an offence pursuant to the Bill if committed overseas by British nationals or UK companies.
The proposed new corporate offence is likely to be the focus of keen interest. The offence only requires negligence on the part of a company, which is not a concept generally associated with the criminal law and is clearly a lower threshold than the intent normally required to establish criminality. As with health and safety prosecutions, there may be compelling policy reasons for imposing a lower threshold for corporate liability. Such a low threshold will be welcomed by many anti-corruption organisations. However, a conviction for a corruption-related offence, on the basis of negligence rather than intent, might then render a company liable to mandatory, and indefinite, exclusion from tendering for public contracts pursuant to the Public Contracts Regulations 2006.
New broom at the Serious fraud Office
A further sign of the changing tide is the clear message being received from the relatively new director of the Serious Fraud Office (SFO), Richard Alderman. Since his appointment in April 2008 he has made plain his commitment to tackling bribery and corruption. In November, during a speech to an anti-corruption and bribery conference in London, Alderman announced that the SFO was re-allocating more resources to combat overseas corruption. He said that the number of investigators dealing with anti-corruption work would increase from 65 to around 100. Further, in October, the SFO announced its recruitment of Keith McCarthy as the new head of anti-corruption. This is a significant appointment by the SFO. McCarthy has worked for many years in the anti-corruption area, including representing the UK in respect of evaluations and work undertaken by the Financial Action Task Force and the OECD Working Party on Tax Crimes and Money Laundering.
Alderman has also made clear that his vision for the future of the SFO includes adopting a more American approach. He has emphasised on many occasions the importance of companies approaching the SFO as soon as they discover a problem. He wants corporates to let the SFO know at an early stage what they have uncovered and what measures they propose to put in place to sort matters out.
That vision has been affirmed by the SFO’s recent groundbreaking civil recovery order with Balfour Beatty. Rod Fletcher and Jeremy Summers of Russell Jones & Walker’s business and regulatory investigations department led the team that acted for Balfour Beatty throughout the three-year SFO investigation. The civil recovery order related to certain payments in respect of the execution of Balfour Beatty’s joint venture contract to build the Bibliotheca Alexandrina library in Egypt. Balfour Beatty carried out its own internal investigation and self-reported the findings to the appropriate authorities, including the SFO, in April 2005. The SFO investigation ultimately determined that there was a failure to keep accurate records within a subsidiary of Balfour Beatty in respect of the contract. No proceedings were issued against any individual or corporate body, as the matter was deemed suitable for civil resolution. Under the civil recovery order Balfour Beatty agreed to pay £2.25m. It also voluntarily agreed to introduce certain compliance systems and to submit these systems to external monitoring for an agreed period of time.
There is no doubt that the Balfour Beatty case will provide a template for future enforcement action in appropriate circumstances. Alderman said that ‘this is a highly significant development in [the SFO’s] efforts to reform British corporate behaviour’.
FSA and others get in on the action
It is not just the SFO that has begun to flex its muscles in its commitment to combat corporate misconduct. On 8 January 2009 the Financial Services Authority (FSA) announced that it had imposed a £5.25m fine on AON Ltd for its failure to ‘properly assess the risks involved in its dealings with overseas firms’. This is the largest financial crime-related fine imposed by the FSA to date. AON was found to have breached Principle 3 of the FSA’s Principles for Business by failing to take reasonable care to implement adequate risk management systems to organise and control its affairs responsibly and effectively. Between 14 January 2005 and 30 September 2007 66 suspicious payments amounting to approximately $2.5m and €3.4m were paid to nine overseas third parties. AON self-reported these payments following an internal investigation. To AON’s credit, the company treated the matter with the utmost seriousness upon discovery of the problem. The FSA considered that the proactive determination of AON’s current senior management to identify past issues and improve systems and controls in this area to be a model of best practice to adopt.
In the same way, Balfour Beatty was praised by the SFO for its ‘transparent and responsible approach in self reporting this issue’. Balfour Beatty was able, as was AON, to demonstrate that its current senior management had a desire to address the issues and had taken steps to review and improve the company’s control processes.
In response to the AON fine, Margaret Cole, the FSA’s director of enforcement, said: ‘It sends a clear message to the UK financial services industry that it is completely unacceptable for firms to conduct business overseas without having in place appropriate anti-bribery and corruption systems and controls.’ She added: ‘The FSA has an important role to play in the steps being taken by the UK to combat overseas bribery and corruption.
’ Other law enforcement agencies, such as the Office of Fair Trading (OFT), have also been imposing substantial financial penalties. Anti-competitive behaviour is prohibited under the Competition Act 1998 and businesses that fail to comply with competition law are likely to feel the full force of the OFT’s w rath. Cartel behaviour has been a criminal offence in the UK since the introduction of the Enterprise Act (EA) 2002, which came into force on 14 July 2003. British Airways was fined £121.5m by the OFT and $300m by the DoJ for price-fixing passenger fuel surcharges on long-haul flights. As part of the same inquiry, in August 2008 the OFT brought criminal charges under the EA 2002 against four current and former British Airways executives. Those proceedings are currently ongoing and if convicted these individuals could face a sentence of up to five years’ imprisonment.
The clear message being delivered by law enforcement agencies is that organisations must implement effective controls to mitigate the risk of corporate misconduct. UK legislation does not itself require companies to put in place such compliance procedures. Some regulators, such as the FSA, have regulatory requirements for such procedures to be in place. Whether your organisation is required to have a compliance programme or not, the existence of compliance measures will be treated by regulators and prosecuting authorities as a substantial mitigating factor.
The AON case, in particular, highlights the danger of neglecting the risk and the consequences of a ‘weak control environment’. Specialist legal advice as part of a compliance risk strategy should be sought to ensure that the control environment is sufficiently strong to cope with the changing enforcement landscape. The time is ripe for a detailed and thorough review, which should reflect the particular areas of risk involved in specific industry sectors.
Any compliance programme implemented by companies to address areas of corporate misconduct should contain the following key features to ensure that it works effectively:
- appropriate policies and procedures (for example, ensuring that the company’s payment procedures require adequate levels of due diligence);
- the provision of clear guidance and regular training to employees;
- regular evaluation, monitoring, review and assessment to ensure that risks are being managed effectively; and
- the support of senior management.
Not only must such programmes be in place, but organisations must also ensure that procedures are being followed. The fact that Balfour Beatty and AON first self-reported and, secondly, were able to demonstrate their willingness to improve the systems in place were important factors in the outcomes of these investigations.
In recent times UK law enforcement agencies and regulators have demonstrated that, like their American counterparts, they are not afraid of using their full powers against companies and individuals. The existence and enforcement of compliance programmes should put an organisation in a much stronger position in the event of an investigation.
Any organisation, particularly one that has global operations, cannot afford to ignore this changing corporate landscape of more prosecutions, tighter controls and heavier fines. The cost of an investigation, coupled with the damage to an organisation’s reputation that such investigations bring, will far outweigh the cost of implementing and enforcing an effective compliance programme. It really is your best defence.
By Rod Fletcher, partner, and Shula de Jersey, solicitor, in the business and regulatory investigations department at Russell Jones & Walker. E-mail: i.r.fletcher@rjw.co.uk; s.d.jersey@rjw.co.uk.
Reference point
The Organisation for Economic Development’s ‘Report on the Application of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the 1997 Recommendation on Combating Bribery in International Business Transactions’ for the UK is available online at: www.oecd.org/dataoecd/23/20/41515077.pdf
The Law Commission’s report on corruption, ‘Reforming Bribery’ (LC313), is available online at: www.lawcom.gov.uk/docs/lc313.pdf
