Governance: It could be you...

T om Wilson, the chief executive of a health equipment supplier, is attending a board meeting in the City when police arrest him. He is relieved to hear the charge: they are trying to pin liability on him for the actions of a company agent in Mozambique. This agent has paid financial gifts to Mozambican customs officials to smooth deliveries of the firm’s equipment through the notoriously sluggish warehouses of Maputo.

Wilson says: “What does it concern me that an agent paid a bribe to an official somewhere I have never been, and in a place where these kinds of payments are made all the time by companies trying to keep ahead of the game?”

But he and countless other directors will have to think again, because such an arrest will become a real concern after the beginning of July 2011, when the UK Bribery Act comes into force. The act is significant for company directors because they can be held accountable for management lapses amounting to ‘commercial failure to prevent bribery’.

One of a series of international laws designed to combat cross-border corruption, the new act follows in the wake of the 1977 US Foreign Corrupt Practices Act (FCPA), which makes it possible to prosecute companies in the US courts for paying bribes to foreign officials, even if the offence took place abroad.

A tough act to follow

Enforcement of the FCPA is tough, as Paris-based telecoms firm Alcatel-Lucent found this year when it paid $45m (€31.2m) to the Securities and Exchange Commission (SEC) and $92m to the US Department of Justice to settle charges that it bribed foreign government officials to win contracts in Latin America and Asia.

The Bribery Act will catch situations where someone ‘offers, promises or gives a financial or other advantage to another person’ with a view to inducing them to ‘perform improperly a relevant function or duty’. Obvious examples in a business context include payments to government officials to obtain contracts, or to secure a reduction in customs or tax duty.

The new law covers payments to both public officials and representatives of private companies in the UK and abroad. The inclusion of private sector bribe recipients means that it goes further than the FCPA, which only covers bribes to foreign officials.

Bribes may be paid both directly and indirectly, for example, through a company’s agents and commercial representatives. This is an essential principle that is also in the FCPA and is important because most foreign bribery cases involve payments made through intermediaries.

In the past, it was commonplace for companies to avoid blame for bribes paid by their agents using part of their commissions. The UK authorities were already trying to put an end to the practice.

In September 2009, engineering company Mabey & Johnson was fined €6.6m for bribes paid through commercial agents in Ghana and Jamaica. This case was brought under the old corruption rules in the UK, so prosecutors are likely to make the most of their new powers since the new law specifically outlaws such third-party payments.

It also prohibits ‘facilitation payments’ – small payments to officials to speed up routine actions such as customs clearances – which are not illegal under the FCPA, so smaller as well as larger payments will now count as bribes.

Applying to companies incorporated in any part of the UK, the offence of failure of commercial organisations to prevent bribery applies whether the company’s acts or omissions take place in the UK or elsewhere, giving the UK very wide jurisdiction. The penalties for individuals include a fine or imprisonment or both; the potential penalty for a company convicted of bribery, or failure to prevent bribery, is an unlimited fine. But the act protects companies that have taken risk assessment and compliance seriously.

Failure of compliance systems has long been the target of anti-bribery rules. SEC director of enforcement Robert Khuzami said of the Alcatel case that “it was the product of a lax corporate control environment at the company”. There is a defence in the new law for companies that have ‘adequate procedures’ to prevent bribery. If an individual employee pays a bribe, such companies will be able to argue that this was a personal aberration, and not the result of a systemic failure.

What exactly constitutes ‘adequate procedures’ to prevent bribery is not defined by the act, but new guidance has been issued by the Ministry of Justice. Ernst & Young consultant John Smart says: “The tone of the document will be a welcome relief for some as it advocates proportionality and reasonableness in its guidance in parts of the act rather than strict interpretations and enforcement.”

All corners of the globe

Certainly those companies implementing a management plan along the lines recommended (see box, right) will be well prepared for the act. One of the biggest challenges facing companies will be assessing each territory where they operate.

As our map on indicative risk across the world shows, the 10 most corrupt countries – including Nigeria and the Democratic Republic of Congo – come as little surprise. But there remains an extreme and high risk of corruption across the most of the globe. This includes the world’s fastest-growing developing countries: Brazil, China and India – jurisdictions ambitious companies cannot ignore. The Chinese government has made efforts to tackle the problem, pursuing a concerted anti-corruption drive. However, corruption is prevalent in activities linked to government agencies such as public procurement, where the potential for gain is often the greatest.

High-risk sectors include construction, natural resources, banking and finance, and healthcare. Maplecroft chief executive Professor Alyson Warhurst says: “Monitoring corruption risks and government enforcement in supply chains, as well as ensuring compliance and preventative mechanisms are in place within one’s own operations, would seem prudent.”

How to manage bribery

1. Ensure senior management articulate their personal commitment to high standards of business integrity.

2. Back this up with effective training and communication at every level of the business.

3. Compliance programmes that look good but are not backed up in practice will count against the company if it ever comes under investigation.

4. Risk assess each territory where the company operates.

5. Specific transactions – for example, negotiating for planning permission or importing expensive technical equipment – should also be individually risk assessed.

6. Subject new business contacts, prospective joint venture partners, or commercial agents to rigorous integrity with due diligence.

7. Split gifts and hospitality into three categories: generally acceptable (pens and mugs), acceptable subject to senior management approval (corporate entertainment), and never acceptable (bribes).

8. The act does not apply retrospectively and it may be some time before the first cases are brought. Monitor any developments as it beds down to ensure good practice is up to date.

Key points

01: The Bribery Act makes directors accountable for commercial failure to prevent bribery

02: Facilitation payments are prohibited, as is using an intermediary to pay bribes

03: Penalties for individuals failing to prevent bribery are imprisonment or a fine, and companies can receive an unlimited fine

04: Corruption is known to be prevalent in the emerging markets of Russia, China and India