slaughter and may article june 2011 With implementation of the Bribery Act 2010 on 1 July 2011 now imminent, Jonathan Cotton and Richard de Carle consider some of the remaining areas of uncertainty for businesses. The basic features of the Act are, by now, well known. By way of brief recap, the Act: replaces existing anti-bribery laws in the UK; comes into force on 1 July 2011, with no retrospective effect; creates four offences: bribing another (section 1); being bribed (section 2); bribing a foreign public official (section 6); and, for businesses only, an offence of failing to prevent bribery by a person associated with the business (section 7) (the corporate offence ); covers bribery not only of public officials, but also bribery of persons in the private sector; does not, unlike the US Foreign Corrupt Practices Act 1977 ( FCPA ), have any saving for so-called facilitation payments ; increases the maximum penalty for an individual to 10 years imprisonment; for businesses, the maximum penalty remains an unlimited fine, with the possibility of a conviction leading to a public procurement ban; gives worldwide jurisdiction to UK courts over the actions of, in broad terms, British citizens, ordinary residents of the UK and British corporate entities and, in respect of the corporate offence, worldwide jurisdiction over not only British corporate entities and British partnerships, but also over non-british companies and partnerships that carry on business, or part of a business, in any part of the UK; and provides only one defence to the section 7 failing to prevent offence, where the business can prove that it had adequate procedures in place to prevent bribery on its behalf. The Act has generated much comment and debate. On 30 March 2011, after a longer than expected consultation, the Ministry of Justice published the snappily titled Guidance about procedures which relevant commercial organisations can put in place to prevent persons associated with them from bribing (section 9 of the Bribery Act 2010), as required by section 9 of the Act (the Guidance ). Tellingly, the Guidance starts with a lengthy
explanation of some of the Act s key concepts. Although some uncertainties over the scope of the Act have been addressed, others remain. This is, in large part, due to the broad-brush wording used in the Act, which was designed to give prosecutors flexible tools as well as considerable discretion over who and what to prosecute. As a result, businesses are faced with the challenge of interpreting and applying the broad concepts in the Act to their individual circumstances in order to identify, and to tailor their anti-bribery compliance efforts to, their exposure. Scope of the section 7 failing to prevent corporate offence Under section 7, a relevant commercial organisation is guilty of an offence if a person associated with it bribes another, intending to obtain or retain business or a business advantage for the relevant commercial organisation. There is no knowledge requirement on the part of the relevant commercial organisation: it is liable simply as a result of the actions and intentions of another person. The corporate offence raises two key questions: who are associated persons and, for businesses-based outside the UK, to what extent are they or their subsidiaries relevant commercial organisations and thus subject to the worldwide jurisdiction of the UK courts in respect of this offence? Who is your associated person? The Act provides a definition of associated person in section 8: an associated person is one who performs services for or on behalf of the relevant commercial organisation. The section goes on to make it clear that this is a test of substance, not legal form, and that all the circumstances need to be taken into account while creating a (logical) rebuttable presumption that employees are associated persons of their employer. Oddly, for a piece of legislation, the Act also gives two non-exclusive examples of others who may be associated persons: agents and subsidiaries. The second example is particularly misplaced as the subsidiaries / parent relationship is not one of service provider to service recipient and whether particular subsidiaries actually provide services to their parent will be a question of fact based on the circumstances. The Guidance has recognised that mere ownership of a subsidiary and receipt of dividends and (if applicable) interest on inter-company debt is not sufficient in itself to establish an associate relationship. Given the wide range of business relationships and models used around the world, this broad test has caused concern. In describing the extent of this test, a number of ill-judged examples were given (including in the consultation draft of the Guidance) which implied that a particular relationship including joint ventures, joint venture and consortium partners, suppliers and the entire supply chain almost automatically led to a relationship of associated person. The Guidance recognises that the test in the Act must be satisfied on the facts of each case and that joint ventures and supply relationships do not automatically give rise to an associated person relationship. It acknowledges that participation in a joint venture alone does not open up liability for bribery by the joint venture partner or the joint venture itself (in the absence of a service relationship) or by the joint venture s employees or agents or by the employees or agents of another participant in the joint venture. It has also cleared up the confusion created by the consultation with regard to suppliers who provide only goods (rather than services), confirming that they will not be associated persons. With regard to the supply chain, it recognises that there may only be a contractual relationship with the direct service supplier and that an organisation s ability to control the acts of parties further 02 SLAUGHTER AND MAY
down the chain may therefore be limited to asking its direct supplier to adopt an appropriate anti-bribery approach with the next party down the chain, and so on. The commentary has sometimes overlooked the requirement of the corporate offence that the associated person pay the bribe intending to obtain or retain business or a business advantage for the relevant commercial organisation. Payment of a bribe by an employee or agent of a subsidiary that is not subject to the Act does not give rise to automatic liability for the parent or sister company simply because it may receive an indirect benefit from the bribe. There has to be a clear intention on the part of the associated person doing the bribing to obtain or retain business (or a business advantage) for the parent or sister company, rather than for the subsidiary itself: indirect benefits are insufficient. The Act does not create automatic group-wide liability. However, as a practical matter, it will be prudent in many cases to assume that anti-bribery procedures should be applied across the group as service relationships may exist between members from time to time and the offence is judged by reference to the facts and circumstances prevailing at the time the bribery occurs. When is a non-uk organisation carrying on a business in the UK? The question of the extent to which businesses based outside the UK are exposed to the Act is an important one. The Director of the Serious Fraud Office ( SFO ) has indicated on a number of occasions that he regards the global reach of the Act as an important tool and one that he is prepared, even keen, to use against foreign companies. The carrying on a business in the UK test within the definition of relevant commercial organisation in section 7 is key. If it is met, the UK courts will have jurisdiction over acts of bribery by the associated persons of the organisation anywhere in the world. The Guidance suggests that a common sense approach means that organisations that do not have a demonstrable business presence in the UK will not be caught. This can be criticised as substituting the broad wording of the Act for different, broad, wording in the Guidance. Again, a casespecific analysis of the facts of any particular business will be required to answer this important question. It is clear, however, that ownership of a UK-incorporated subsidiary is not enough, by itself, to mean that the parent is carrying on a business in the UK. The Act does not abolish the concept of the corporate veil. UK subsidiaries which operate as more-or-less stand-alone business entities, even with a degree of direct management from outside the UK, are likely to be considered independent of their wider groups (unless they provide services to the UK group) with the result that exposure to the Act will not leech upwards. However, in situations where the UK subsidiary is integrated into wider divisional structures or heavily managed from outside the UK, so that the UK subsidiary is little more than a booking entity, there will be a greater risk that the Act will cut across legal entity lines so that the wider group of which it forms part could itself be said to be carrying on a business in the UK. Scope of the section 6 foreign public official offence The section 6 offence has caused particular concern because there is no requirement to prove that the intention to influence the foreign public official is designed to make him act improperly (as is the case for the basic section 1 offence of bribery). Rather the requirement is merely to show an intention to influence him in order to obtain business or a business advantage. The concern has particular relevance to hospitality and promotional expenditure, which is discussed further below. However, the wide wording of the offence can also operate to catch tender-type situations where collateral 03 SLAUGHTER AND MAY
investment in the relevant country is offered (so-called off-set arrangements). Particularly in larger projects, the offer of investment in the local community, such as by provision of education, housing or medical facilities is sometimes expected or offered as part of a tender or contract negotiation. These activities are sometimes part of an organisation s corporate social responsibility efforts. Such arrangements will not be an offence where they are permitted by the local written law (for example, under local foreign investment control legislation or an arrangement akin to a section 106 agreement under the Town and Country Planning Act 1990 in the UK). However, where there is no such law, such arrangements may technically be an offence as they are offers of advantages in order to influence officials of the country to favour the bidder offering the collateral benefit to the community. The only comfort offered in the Guidance is that it may not be in the public interest to prosecute such cases. This provides little reassurance to law-abiding businesses and risks disadvantaging them and the countries and communities in which they may wish to invest. Corporate hospitality and promotional expenditure The aspect of the Act that seems to have attracted most comment is its application in the area of corporate hospitality and to other forms of promotional expenditure. The Guidance largely tackles this issue in the context of the lower threshold of influence in the section 6 foreign public official test. It is clear that bona fide business expenditure aimed at improving the image of a business, to present products or services or to establish cordial relations will not amount to an offence provided the hospitality is reasonable and proportionate. The obvious point is that the more lavish the expenditure, the greater the inference of a connection between the advantage and an intention to influence in relation to a business opportunity. Specific examples are given in the Guidance of hospitality at a Six Nations rugby match at Twickenham, tennis at Wimbledon and the Grand Prix as situations that are broadly likely to be acceptable in the absence of special circumstances. Norms in a particular industry sector are relevant, although hospitality in accordance with sector norms may still be found to constitute a bribe where those norms are extravagant. In this context, the fact that the per-head cost of many corporate hospitality events can amount to a significant percentage of many jurors annual salary is a sobering thought. In short, although the challenges presented by the Act in the arena of hospitality and promotional expenditure are ones that ought to be taken seriously, they do not represent the death knell for sensible corporate activities that some were predicting. Facilitation payments As with existing UK law and unlike the FCPA, there is no exception under the Act for facilitation payments (i.e. payments, which are often small, made to officials and others to secure the provision (or prompter, or less arduous, provision) of a service which they are often obliged to provide in any case). A facilitation payment is a bribe under UK law. However, there is a recognition in the Guidance and on the part of prosecutors that requests for facilitation payments are a global problem and that such requests are not going to come to an end on 1 July 2011 when the Act comes into force. 04 SLAUGHTER AND MAY
In this area more than any other under the Act, the concept of prosecutorial discretion comes to the fore. The Introduction to the Guidance says that prosecutors will have to consider very carefully what is in the public interest in any case involving facilitation payments. It seems likely that, in cases where the organisation has not already adopted an approach of zero tolerance of facilitation payments on its behalf, there will be a focus on whether the organisation can demonstrate that it has committed to move to a position of zero tolerance in a reasonable period of time. This commitment can be shown through the adoption of a policy on facilitation payments, including written guidance for employees as to what they should do when faced with such requests. Prosecutors are likely to expect a business suspected of having made facilitation payments to show that it is making real efforts to achieve that zero tolerance goal, for example through enforcement of its policy and procedures, the reporting of incidents (at least internally) and by engagement with the authorities (both in the UK and in the relevant country) and industry partners to work to eradicate such practices. Businesses which hope, by paying a degree of lip service to compliance with anti-bribery measures, to be able to continue to make facilitation payments on the basis that it s the only way to get something done over there or that they will lose money if they don t make them, will certainly be at risk of prosecution. And prosecutorial sympathy is not likely to run very deep, particularly where many businesses have already successfully adopted a zero tolerance approach. When will anti-bribery procedures be adequate? The Guidance promulgates Six Principles that should inform an anti-bribery compliance programme: (1) Proportionate Procedures; (2) Top-level Commitment; (3) Risk Assessment; (4) Due Diligence; (5) Communication; and (6) Monitoring and Review. Despite introducing these Principles with a statement that the Government considers that they must inform any procedures which a commercial organisation wishing to prevent bribery puts in place, the Guidance says that neither the Principles, nor the detailed procedures which follow each of them, are intended to be prescriptive. Neither do they provide any safe harbours; wholesale adoption of them is no assurance that a business has adequate procedures. As with so much else in the Act, an individual business will have to tailor its approach to its circumstances. The ostensibly non-prescriptive Guidance tells us that a robust and thorough initial risk assessment is an essential part of any anti-bribery procedures; these should be tailored in the light of that assessment to focus proportionately on identified risk areas. The enforcement landscape Since 2008, the SFO has demonstrated its commitment to tackling corruption through a number of well-publicised cases using the UK s existing anti-bribery law and tools. However, its desire to adopt a US-style self-reporting, self-investigation and settlement approach is one that faces a number of challenges. There has been considerable judicial resistance to such an approach, potentially weakening the incentive of a more lenient disposal for those businesses which co-operate. In addition, the SFO faces resource constraints at a time of public spending cuts and personnel losses, although its immediate future as an independent agency now appears more certain. Accordingly, until a clearer methodology for the prosecution of businesses emerges (something which may require primary legislation), it remains to be seen how enforcement of the Act will work in practice. One side-effect of this may be that clarification of some of the concepts deployed in the Act through prosecution and reported cases may not be forthcoming for many years, if at all. 05 SLAUGHTER AND MAY
Conclusion The Act is short on bright lines which delineate clearly the bounds of criminal conduct. Even with the clarification that has been given in the Guidance and elsewhere, the Act remains a series of broad tests that can only be applied to individual circumstances. Having said that, the tests themselves are now clearer and some of the wilder speculation as to the reach of the Act can be dismissed. The Act is a challenge, but one that in many cases can largely be surmounted by the application of common sense as suggested in the Guidance. Jonathan Cotton Partner, Dispute Resolution Richard de Carle partner, Corporate T 020 7090 4090 T 020 7090 3047 E jonathan.cotton@slaughterandmay.com E richard.decarle@slaughterandmay.com Slaughter and May 2011 This material is for general information only and is not intended to provide legal advice. For further information, please speak to your usual Slaughter and May contact. JCC31.indd611