As the corporate risk landscape changes, companies need to conduct a risk assessment and implement a top-down culture and compliance program against bribery and corruption.
Companies often assume they are immune to allegations of corruption or bribery. But the landscape of corporate risk is changing as public scrutiny intensifies and regulations tighten worldwide.
Until recently, the US Foreign Corrupt Practices Act was the most stringent anti-corruption legislation in the world. On July 1, 2011, the UK enacted its new Bribery Act 2010, which significantly toughened UK law relating to foreign corrupt practices. By reason of the new law's extra-territorial reach, any company with a UK connection may now be subject to UK rules governing its business practices abroad.
Even existing anti-corruption laws are now being enforced more often in Western countries. A case in point is Canada's Niko Resources Ltd., an oil and gas company based in Calgary with international operations in South Asia and elsewhere. By pleading guilty under Canada's Corruption of Foreign Public Officials Act to bribing a public official in Bangladesh, the company received a fine of C$9.5 million and was ordered to implement a comprehensive compliance program. While the case itself is unfortunate, the prosecution and guilty plea are being viewed by legal commentators as a healthy development given Canada's history of relatively weak prosecution and enforcement.
Defining Bribery and Corruption
Definitions abound but generally bribery is agreed to be payment – in the form of a gift, loan, fee, reward or other advantage – as an inducement to do something dishonest, illegal or constituting a breach of trust in the course of business. Bribery typically goes hand-in-hand with corruption, which is the abuse of entrusted power for private gain.
As with most laws, jurisdiction matters. In Germany – now considered one of Europe's key champions against corruption – bribes were tax-deductible up until about a decade ago, just as they were in Canada until 1990. US and Canadian legislation largely focuses on corruption of public officials while the UK has extended the reach of its anti-corruption legislation to a broad range of purely private acts as well.
The US Foreign Corrupt Practices Act (FCPA) of 1977 (amended in 1988 and 1998) makes it "unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business." Not only does it regulate the behaviour of US citizens and companies, but also requires any company listed on a US securities exchange to keep accurate accounting records.
In Canada, the statute dealing with bribery of foreign government officials is the Corruption of Foreign Public Officials Act, S.C. 1998, c. 34 (CFPOA), which came into force on February 14, 1999. It implements for Canada the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the OECD Convention).
The CFPOA, in conjunction with Canada's Criminal Code, covers three offenses: bribing a foreign public official, laundering property and proceeds, and possession of property and proceeds. It also allows for prosecutions for conspiracy, aiding and abetting and counselling the commission of an offense.
Unlike the FCPA, the CFPOA does not have a record-keeping requirement and, until recently, Canadian prosecutors were not particularly active in enforcing its provisions. The RCMP recently stepped up its investigations of possible CFPOA violations and a number of prosecutions are rumoured to be imminent.
The UK's Bribery Act provides a new codified anti-bribery and anti-corruption regime. It and related legislation may create both civil and criminal liability for foreign companies and their officers and directors. Since many of its provisions go further than US and Canadian anti-corruption legislation, North American companies with connections to the UK should take note.
Protecting Against Accusations of Bribery
The attention companies devote to the topic of bribery generally relates to the type of jurisdiction in which they conduct business. In both the US and Canada, companies with largely domestic operations are often shocked when exposed for the first time to the lax attitudes displayed toward government corruption in many developing (and some developed) countries.
On the other hand, more sophisticated companies with operations in the developing world – particularly in high-risk industries such as mining, defense, contracting, public health, and oil and gas – well understand the issues that can arise in this area.
Regardless of the jurisdiction concerned, a robust system of internal corporate controls embodying clearly understood, transparent and enforced guidelines relating to good governance, anti-corruption practices and procedures, and appropriate due diligence and prudential measures in the company's foreign and domestic operations is essential. Most of these best practices are applicable regardless of the jurisdiction in which the company operates.
Prioritize Good Governance
Good internal policies in the area of corporate governance can help individuals resist internal or external pressures to engage in corrupt practices. Where such policies are clearly understood and applied by all employees and enforced by senior management with real sanctions for non-compliance, the potential for business behaviour that violates anti-corruption rules is significantly reduced.
Implement Clear Policies and Compliance Procedures
It is important to make clear to employees, shareholders and other stakeholders that the company does not condone, in any form whatsoever, corrupt practices, whether within national borders or outside them. Numerous templates exist for company policies in this area. Examples include Transparency International Canada's "Anti-Corruption Compliance Checklist" and the "2010 UK Bribery Act Adequate Procedures," published by Transparency International UK.
Implementation of anti-corruption compliance procedures should include training for all company officials potentially affected by such practices. The board of directors should ensure that senior executives oversee company performance in this area and report in a timely manner directly to the board on any actual or suspected contraventions.
Watch for Red Flags
In the US, the Securities and Exchange Commission has developed a list of "red flags" that serve as indicators of potential foreign corrupt practices.
These red flags include:
- whether the agent, if an individual, is a businessperson concurrently functioning as a government official
- the size of the payment made to the agent
- the nature of the payment made to the agent
- the nature of the services performed by the agent
- the country in which the payment is made
- the place, method and manner of the payment.
Due diligence – particularly focused on employees in high-risk roles (e.g., those on the front line of bids for government procurement contracts) as well as partners and other associated persons – will serve to help avoid the employment of individuals with past histories of improper business practices. Proof that adequate corporate due diligence has been undertaken in relation to company employees and agents may help to mitigate legal sanctions in the event of inadvertent involvement in foreign corrupt practices by foreign company agents or other individuals.
Be Cautious With Third Parties
When working with third parties or acquiring other companies, attention should be paid to potential corporate liabilities in relation to actions taken by agents, sub-contractors, foreign subsidiaries or joint-venture partners of other companies. Clearly worded and comprehensively enforced company guidelines covering agents' activities are essential. For example, a company should avoid at all costs instructing company agents to "do what is necessary" to obtain business.
Adequate due diligence in any cross-border M&A transaction can also help a company to avoid hidden liabilities in respect of foreign corrupt practices. Corporate counsel should examine warranties in respect of compliance with anti-bribery laws and determine who is to bear liability in the event of emerging problems in this area in the future. Other areas where caution is to be exercised include making anti-corruption compliance commitments to underwriters when involved in due diligence activities pursuant to an IPO.
Be Prudent With Facilitation Payments
The OECD has flagged so-called "facilitation payments" as an area of concern for years, although the OECD Convention still permits certain forms of such payments. Domestic anti-corruption-implementing legislation in countries such as the US and Canada allow for facilitation payments. By contrast, such payments have always been illegal under English law and now the Bribery Act makes them easier to prosecute, although the focus is likely to be on more serious or flagrant cases.
While facilitation payments are popularly understood to mean small payments made to secure the performance of routine governmental functions such as customs clearance or temporary police protection, it should be noted that there is no universally accepted understanding or definition of what constitutes a permissible facilitation payment.
Given the new legislation in the UK, recent crackdowns on customs agents and calls for greater transparency in business, it is wise to exercise caution when considering making a facilitation payment. In the US and Canada, the line between what constitutes a permissible facilitation payment and an illegal bribe may not be clear.
Responding if an Issue Arises
The proactive steps outlined in part I of this bulletin series can go a long way toward limiting a company's risk. But even a well-managed and ethical company can face false allegations, fall victim to the rogue actions of one individual or get ensnared in competing rules when crossing borders. In the face of an accusation or potential charge, a litigator experienced in anti-corruption cases can help prepare for a careful – and potentially lengthy – process to resolve the situation.
Address False Allegations
North American companies with international operations can fall victim to unfounded accusations of corruption and bribery, particularly in the difficult to police online environment of blogs and social media. Swift action can help protect the company's name and reassure jittery investors. In addition to launching a crisis communications campaign, it is advisable to seek legal counsel to assist in the event that legal action, such as defamation, is taken.
Prepare a Litigation Strategy
If an allegation has even a slight basis, it is wise to engage legal counsel immediately to map out an appropriate litigation strategy. Depending on the circumstances, this may result in a decision to plead guilty to the charges, as Niko Resources did earlier this year. Or it may be wise to defend against the charges. Either way, the company may want to introduce more stringent compliance policies and procedures.
In addition, if a company is facing allegations as a result of a whistleblower, it is essential to understand the local and international law applicable to whistleblowers before any hasty action is taken.
A company that can demonstrate it implemented clear policies and compliance procedures, paid attention to the "red flags," maintained strong corporate governance and was cautious in dealings with third parties will be better positioned to negotiate with prosecutors. In those cases it is important to get early advice on whether part of the company’s defense will be a "rogue employee" — that an employee acted on his or her own against company policy.
Unravel Jurisdictional Issues
As more countries exert extra-territorial power on the issue – most notably the US and now the UK – it is essential to know whose rules are in play.
Canada’s CFPOA has relatively limited reach with its claim to "jurisdiction over the bribery of foreign public officials when the offence is committed in whole or in part on its territory, provided that a significant portion of the activities constituting the offence take place in Canada and there is a real and substantial link between the offence and Canada." The UK and US versions have a much wider grasp.
All this means that a Canadian-based mining company with operations in Africa could potentially run afoul of in-country rules, Canada’s CFPOA, the US’s FCPA if it is listed on a US securities exchange and/or the UK’s Bribery Act if its business or personnel have a close UK connection. Acts amounting to bribery or corruption may create liability in more than one jurisdiction – and there are different subtleties to what is permitted under each regime.
Consider Defending Facilitation Payments
The key example of how each of the different anti-bribery Acts can operate is with respect to facilitation payments. Such payments seem likely to continue as a gray area of the law because of the varying views of each jurisdiction.
Canada’s legislation recognizes that in some countries, payments to foreign officials must be made simply to coax them into performing routine aspects of their jobs. It makes an exception for "facilitation payments" made to expedite or secure the performance by a foreign public official of any "act of a routine nature" that is part of the foreign public official’s duties or functions.
Specifically, Canada allows for two defenses for facilitation payments. The first is where the payment was lawful in the foreign state or public international organization for which the foreign public official performs duties or functions. If successful, this would be a full defense to the offense of bribing a foreign official. The second defense, intended to apply to relatively modest payment amounts, requires that the accused show that the loan, reward, advantage or benefit was made to repay a reasonable expense, incurred in good faith by or on behalf of the foreign public official and directly related to the promotion of the person’s products and services or to the execution or performance of a contract between the person and the foreign state of that official. The US’s FCPA also acknowledges the reality of facilitation payments, but as noted above, the UK’s Bribery Act now bans them.
International Criticisms of CFPOA
One peculiarity of Canada’s legislation – criticized openly by the OECD – is that it applies only to "for-profit" activities. The OECD continued to pressure Canada to change this distinction. But for now at least, there may be a potential loophole for individuals and companies accused of corrupt practices abroad if their activities relate to not-for-profit work, such as contracting to provide disaster relief or a business transaction that does not yield a profit.
The OECD is also critical of Canada’s decision to limit its extra-territorial jurisdiction to offenses that involve a "real and substantial" link to the territory of Canada. Given the high volume of work done internationally by Canadian companies, including in the developing world, the OECD argues that this limitation is not in step with the intentions of the OECD Convention. For now at least, this limitation provides the most significant potential defense, and obstacle, to prosecution in Canada.
Understand the Penalties
Canada has garnered negative attention for its lax penalties, but it is probably more accurate to point to its historically weak enforcement effort. Indeed, the penalties under Canadian law can be quite steep for contravening the CFPOA, including a five-year maximum term of imprisonment and/or fines. This ensures that such bribery is an extraditable offense. The amount of any fine would be at the discretion of the judge, and there is no maximum. As an indictable offense, no limitation period applies.
As a comparison, in the US, the FCPA allows for both criminal and civil penalties. As in Canada, individuals can receive up to a five-year jail term and/or fines or up to $100,000 and companies can receive fines of up to $2 million per offense. It is worth noting that the US has been stepping up its enforcement activities in recent years.
In the UK, civil or criminal proceedings may be taken with a potential 10 year jail term for individuals – or 14 years if the Proceeds of Crime Act aimed at money laundering comes into play.
The UK Act applies to the act of bribery or receiving a bribe. It applies to bribery of private employees and public officials – domestic or foreign. An intention to corrupt need not be shown. Non-UK companies may be exposed.
Be Aware of Who is Included
The Bribery Act applies to any bribery in or involving the UK; also to UK companies and individuals (resident or national) bribing a private employee or official anywhere. Further, it makes any UK company or foreign company, which carries on any business in the UK liable for the actions of "associated persons" anywhere in the world of which it was unaware, unless the company has in place "adequate procedures" (the so-called "Corporate Offense").
An "associated person" is any person providing or performing services on the company's behalf, be it an employee, agent, contractor, supplier or any other person.
Understand Who is Liable
The company will be liable, as may the individuals responsible. If the bribe is authorized, made or acquiesced in by a director or manager who is the "directing mind or will" of the company (i.e., a senior executive officer), the Bribery Act will fault the company itself — not just the individual.
Any senior officer (e.g., director, manager or board secretary) with knowledge of an offense is liable for the offense in the UK. For an overseas offence, any senior officer with a close connection to the UK (nationality or residence) is also liable jointly with the company if the offense was committed with his or her consent or connivance.
Under the “Corporate Offence”, a foreign company is liable for the actions of associated persons anywhere in the world if the company carries on a business or part of a business in the UK. There is still some disagreement as to which foreign companies are affected. According to the Ministry of Justice, merely listing stock on a UK stock exchange is not sufficient to create a place of business. But the Serious Fraud Office (the prosecuting authority) appears to be taking a more aggressive line, following more closely the US model that makes the FCPA applicable to any company listed on a US exchange. So for now at least, assume that a foreign company listed in the UK may be subject to the Bribery Act.
Understand the Offenses
The Bribery Act makes it an offense to offer any financial advantage to another person in two cases. First, if the intention is to induce or reward the improper performance of the recipient’s duties. Secondly, where the payor knows that accepting such a benefit is improper performance of a relevant duty or activity of the recipient. A function or activity is deemed to be “relevant” if it is a function of a public nature, an activity connected with a business, an activity performed in the course of the person’s employment or an activity performed on behalf of a body of persons (whether or not incorporated). It is deemed to be performed improperly if it is performed in breach of "relevant expectation", i.e. in breach of a duty of good faith or a duty to act impartially or in breach of a position of trust. The "reasonable expectations" are the standard in the UK.
Additionally, it is an offence to bribe a "foreign public official" which includes anyone holding a legislative, administrative or judicial position of any kind, whether elected or appointed, of any country outside the UK or any public agency or enterprise of that country, or an official of a public international organization. In the case of a public official, the performance need not be improper, but the benefit must be aimed at obtaining or retaining business. Unlike the US and Canadian law, facilitation payments are illegal under the Bribery Act.
The Act also makes it an offense to accept a bribe.
Application of UK Mores
Any company governed by the Bribery Act is required to disregard local customs unless a payment is permitted or required by the written law of the country in question, namely being in legislation or a written and published judicial decision. Otherwise, the test of what is proper or improper for overseas or UK is the same — what a reasonable person would expect in the UK.
Understand the Penalties
Under the Bribery Act, a company is liable to an unspecified fine and an individual is liable to a fine and/or imprisonment (up to 12 months for minor offenses and up to 10 years on indictment). A fine is likely to be calculated by reference to the benefit obtained, including "disgorgement of profits," which has been the feature of recent US prosecutions.
Since bribery is now a crime in the UK, the benefits obtained are therefore proceeds of crime and liable to forfeiture under the money-laundering laws. The Serious Fraud Office has signaled its intent to use all available laws to recover the proceeds of crime.
Additional penalties potentially include loss of any concession, license or contract obtained as a result of corruption; disqualification from public works under the EU public procurement and various national procurement rules; exposure to other anti-corruption laws; loss of export credit insurance cover and foreclosing on loans; risk of extradition; potential civil claims by competitors who lost out as a result of the corrupt act, class actions and shareholder actions (particularly in the US); and, of course, reputational loss.
If a company self-reports an issue, cooperates with the Serious Fraud Office and is found, on investigation, to have a serious anti-corruption ethos, the issue may be deemed an aberration. In such a case, the Serious Fraud Office may pursue a civil remedy aimed at disgorging the benefits of the corrupt act rather than exercising its option to pursue criminal charges.
The Serious Fraud Office has stated that it will use a wide range of intelligence-gathering techniques, including reports from embassies and local media, whistleblowers, sting operations and the full panoply of white-collar crime surveillance techniques to catch offenders. The richest source of intelligence is likely to be from whistleblowers within companies who suspect that the company is acting corruptly.
Protect Your Company
As tough as the Bribery Act is, it does in the limited case of the so-called "Corporate Offense" provide a solid defense for companies that don’t know about the bribery and take the issue seriously. As mentioned above, any UK business or any foreign business conducting any business in the UK is liable if an "associated person" bribes another person (public or private) in the course of its business. It is an absolute offense, but it carries an absolute defense — that the organization put in place adequate procedures to prevent this and the offense occurred without the organization's knowledge or acquiescence. The fact that the organization did not know of the actions of the associated person is not a defense if the organization does not have adequate procedures in place.
The headline-making cases against executives from a number of high-profile, multinational organizations, and the jaw-dropping settlements of $560 million and $800 million by Halliburton and Siemens for their respective breaches of the US's FCPA have underscored that enforcement authorities worldwide are now taking corruption seriously.
Most businesses with international activities are already accustomed to dealing with the FCPA and have created enterprise-wide systems to manage the risks posed by international corruption. The UK's Bribery Act poses new challenges by creating risks that are alarmingly open-ended.
The message to all companies is to conduct a risk assessment and put in place a top-down culture and compliance program against bribery and corruption to avoid potential liability of criminal prosecution.