Legal Briefing

‘Adequate procedures’ and the Bribery Act

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Crime, fraud and licensing | 01 November 2010

As explained in earlier briefings, the Bribery Act 2010 (the 2010 Act) introduces the new corporate offence of failing to prevent bribery but provides for a defence if the organisation can show that it has ‘adequate procedures’ in place to prevent bribery.

There was much debate over how an organisation could show that its procedures were adequate as the 2010 Act made its way through Parliament. Such was the strength of feeling about how to interpret this phrase that a new section was introduced requiring the Secretary of State to produce guidance on the issue.

What might constitute adequate procedures has also been widely debated within the business and legal communities while they have waited for the Ministry of Justice (MoJ) to issue the guidance.

The first draft of the guidance was published on 14 September 2010 and the MoJ opened an eight-week consultation to allow all interested parties to give feedback. A final version has to be published before the 2010 Act comes into force in April 2011.

Consultation

The MoJ is seeking the views of businesses and any other interested parties. In his introduction, Lord Chancellor and Secretary of State for Justice Kenneth Clarke states:

‘In deciding what bribery prevention measures best suit their particular circumstances, commercial organisations should be assisted by the guidance published under s9 of the Act. It is essential that any guidance the government publishes is informed by the wealth of knowledge, experience and expertise to be found outside government, in for example the business community and non-governmental organisations.’

The consultation documents include:

  • a questionnaire for interested parties comprising five specific questions;
  • draft guidance focusing on six key principles;
  • additional commentary on specific issues, such as facilitation payments; and
  • five illustrative examples (which are not part of the guidance), focusing on key risk areas, such as hospitality.

Although the MoJ welcomes any input on the draft guidance, it has asked five key questions:

  1. Are there any principles not covered by the draft guidance that are relevant and important to the formulation of bribery prevention in commercial organisations? If so, what are they and why are they important?
  2. Are there any procedures not covered by the draft guidance that are relevant and important to a wide range of commercial organisations? If so, what are they and why are they important?
  3. How could the format of the draft guidance could be improved to more effectively assist commercial organisations in determining how to apply the guidance to their particular circumstances?
  4. Are there any principles or procedures that are particularly relevant and important to small and medium-sized enterprises that are not covered by the draft guidance as they should be? If so, what are they and why are they important?
  5. How could the principles in the draft guidance be improved to more effectively assist small and medium-sized enterprises in preventing bribery?

The consultation documents and questionnaire can be found on the MoJ website. The consultation closes on 8 November 2010 and the MoJ expects to publish the final version in early 2011.

For those who have been following the development of the Act, the draft guidance does not contain any real surprises. It offers broad principles that businesses should try to follow.

Draft guidance

The guidance on adequate procedures is not intended to be prescriptive and does not recommend any particular practice or procedures. The draft is based around the following key common sense principles of good compliance that apply to all relevant commercial organisations, whatever their size or business sector.

  1. Risk assessment: knowing and keeping up to date with the bribery risks in your sector and market.
  2. Top-level commitment: establishing a culture across your organisation in which bribery is unacceptable; and sending out a clear, unambiguous and regularly repeated message to all staff and business partners.
  3. Due diligence: knowing who you do business with; knowing why, when and to whom you are releasing funds and seeking reciprocal anti-bribery agreements; and being in a position to feel confident that business relationships are transparent and ethical.
  4. Clear, practical and accessible policies and procedures: applying them to everyone you employ and business partners under your effective control, covering all relevant risks. This includes political and charitable contributions, gifts and hospitality, promotional expenses and responding to facilitation demands or allegations of bribery.
  5. Effective implementation: going beyond ‘paper compliance’ to embed anti-bribery in your organisation’s internal controls, recruitment and remuneration policies, operations, communications, and training on practical business issues.
  6. Monitoring and review: auditing and financial controls; regular review of your policies and procedures; and determing whether external verification would help.

The fact that the principles take a broad-brush, rather than a prescriptive, approach has advantages and disadvantages. On the one hand, the avoidance of a tick-box approach means that large multinational companies will retain the flexibility to reassess their existing compliance regimes and develop procedures that are proportionate to their current risk profile. On the other hand, smaller companies, which may be considering anti-bribery compliance for the first time, may find that the guidance is too general for their needs. They might find the best practice guidance published by Transparency International more useful.

Has the draft Guidance provided further clarity?

Beyond the six key principles, the draft guidance also touches on some of the more difficult issues raised by the 2010 Act, including the bribery of foreign public officials, facilitation payments, hospitality and promotional expenditure, and prosecutorial discretion.

The guidance provides some interesting commentary on the following issues:

    • Bribery of foreign public officials (s6):

‘“Offset” arrangements, under which additional investment is offered or required as part of an organisation’s tender are unlikely to give rise to any difficulties under s6 where such arrangements are subject to legislative or regulatory provision.’

    • Facilitation payments:

‘Small bribes paid to facilitate routine government action – otherwise called “facilitation payments” are likely to trigger the s6 offence and the s1 offence (where there is an intention to induce improper conduct, including where the acceptance of such payments is itself improper).’

    • Hospitality and promotional expenditure:

‘Reasonable and proportionate hospitality or promotional expenditure, which seeks to improve the image of a commercial organisation, better to present products and services, or establish cordial relations, is recognised as an established and important part of doing business.’

  • Prosecutorial discretion:

‘The more serious the offence, the more likely it is that a prosecution will be required in the public interest. In cases where hospitality, promotional expenditure or facilitation payments do, on their face, trigger the provisions of the 2010 Act the exercise of prosecutorial discretion provides the degree of flexibility required to ensure the just and fair operation of the 2010 Act.’

One notable exception is the extent to which businesses could be held liable for the activities of third parties and subsidiary companies, which is an issue of concern for larger firms with overseas interests. It is possible that a company may have adequate procedures in place but will still face liability if an ‘associated person’ is shown to have paid a bribe in connection with its business. This may cause particular difficulties for UK companies or the UK subsidiaries of foreign companies with operations in high-risk jurisdictions.

Further guidance may emerge on these issues when the joint legal guidance for prosecutors is issued in early 2011. In England and Wales, the Director of Public Prosecutions and the Director of the Serious Fraud Office (SFO) are already drawing up joint legal guidance for prosecutors. This will foster a consistency of approach among the police, the Crown Prosecution Service (CPS) and the SFO. Scotland and Northern Ireland will also be taking similar steps. The purpose of this guidance will be to ensure that prosecutors have a clear, comprehensive and consistent guide to the law and relevant public interest considerations. This guidance will be made available to the public in the same way as the Code for Crown Prosecutors.

Illustrative scenarios

There is also an annex to the draft guidance that sets out five senarios illustrating typical high-risk situations that companies may encounter when doing business overseas. Each one deals with a different issue:

  1. intermediaries and agents;
  2. hospitality and promotional expenditure;
  3. business partners (including in relation to joint ventures and consortia);
  4. facilitation payments; and
  5. political and charitable donations.

These scenarios do not form part of the draft guidance and the jury is out on whether they will actually help companies to understand how the guidance will help them to shape their policies and procedures. Each one is followed by a question-based analysis of how the principles should be applied to the facts. The introduction explains that the questions:

‘Are not intended to provide an exhaustive or prescriptive list of the factors that organisations might consider if faced with similar circumstances but rather as illustrative context to the six principles. The government believes that this illustrative context can assist commercial organisations in deciding what procedures to prevent persons associated with them from bribing on their behalf might be most suitable to their needs.’

However, their usefulness to businesses is questionable. There is no guidance to what would be the right answers to the questions posed or the likely outcome of the scenarios referred to. It is more likely that prosecutors will use them as a guide to the type of questions they should ask when deciding whether or not to bring charges for the corporate offence.

Commentary

The government is trying to avoid a one-size-fits-all solution and believes that the principles-based approach allows for more flexibility. It has accepted that the anti-bribery procedures appropriate for a large multinational organisation will be different to those appropriate to a small or medium-sized domestic business.

Businesses are already identifying the areas that will potentially cause them problems in complying with the 2010 Act, especially issues such as corporate hospitality, on which the 2010 Act is silent. The guidance’s broad-brush approach means that there are still some areas of uncertainty and, until there is relevant case law, it will be difficult for a company to be entirely confident that their procedures measure up. Some obvious difficult issues are raised for companies that invest in other businesses but play no part in their running. There is a risk for equity houses that have a minor stake in companies that do not have adequate procedures in place, which will substantially extend the due diligence that has to be done before an investment is made.

Another potential area of difficulty is facilitation payments. The SFO was recently reported as saying that it would prosecute ‘serious’ facilitation payments. This is at odds with previous policy guidelines from the CPS, which indicated that it would rarely be in the public interest to prosecute those who made facilitation payments. As ever, it is a question of degree, but it immediately shows the friction between adherence to the 2010 Act and the US Foreign Corrupt Practices Act (FCPA) 1977. Those with compliance programmes based on FCPA 1977, which allows facilitation payments to be made, will need to amend them by April 2011. There are several differences between FCPA 1977 and the 2010 Act that will need to be taken into account, and compliance programmes will have to be modified to cover the broader obligations imposed under UK law.

However, no-one expects anti-bribery programmes to be perfect. A good compliance programme will minimise the risks of bribes being paid but there will always be rogue employees, agents and suppliers. The corporate offence only comes into play once there is evidence that a bribe has been paid by someone acting on behalf of the company. When considering whether to prosecute a company for failing to prevent bribery, prosecutors will examine whether it has taken appropriate steps in accordance with the spirit of the principles in the draft guidance. Effectively, they will ask whether the bribe has been paid, despite the best efforts of the company, and in breach of its policy and procedures.

The guidance is advisory and there is no regulatory requirement to implement the principles. At a recent anti-corruption conference, the UK attorney general, Dominic Grieve, stated that the government’s objective is to:

‘Ensure that the guidance supports businesses in determining the sorts of bribery prevention measures they can put in place, if they choose to do so.’

Nevertheless, prosecutors will use the guidance as their yardstick, so all businesses need to take stock of the general principles and examine their anti-bribery compliance programmes. It is unlikely that there will be any radical amendments to the draft and in-house counsel need to be aware that once the final guidance is issued there will be as little as three months before the 2010 Act comes into force. The clock is ticking and businesses need to act now.

By Jo Rickards, partner, and Robert Wardle, consultant, DLA Piper.