The landscape of anti-corruption efforts in the UK has changed dramatically in light of the passage of the Bribery Act 2010 and a recent step-up in enforcement of anti-corruption laws in the UK.
The UK Bribery Act finally received Royal Assent on 8 April 2010 (the "Bribery Act"). After an initial delay to allow the preparation of formal guidance on corporate compliance programmes, the expectation is that it will come into force in April 2011.1 When it does come into force, the Bribery Act will radically overhaul the UK's outdated and discredited anti-corruption legislation and introduce a new regime which, in many respects, is more stringent than the US FCPA.2
Most significantly, the Bribery Act introduces a new strict liability offense of "failure to prevent bribery" by a "relevant commercial organisation." Where a bribe is paid for the benefit of a corporation, whether by an employee, agent, subsidiary or other representative, the corporation will automatically be guilty of a criminal offense itself. In a reversal of the usual burden of proof, the corporation will only be able to avoid conviction if it can prove that it had "adequate procedures" in place to prevent bribery, i.e., essentially that the incident was a one-off anomaly rather than the result of institutional or management failure.
The scope of the Act is also unprecedented. It applies not only to UK individuals and corporations, and to conduct which takes place in the UK, but to any foreign corporation or partnership which carries on business in the UK. In the case of the corporate offense, liability will arise even if the bribe is paid in an overseas jurisdiction by a foreign agent or subsidiary and with no connection at all to the UK. In addition, unlike the US FCPA, the Bribery Act applies to both the public and to the private sectors. It also contains no exceptions for either facilitation payments or certain promotional expenditures.
Added to this is the effort over the last two or three years by UK authorities to increase prosecution for bribery and corruption offenses, and to introduce something akin to US-style "plea bargaining". This has seen the introduction of serious penalties, cross-border cooperation and industry targeting. All this requires a new level of compliance from corporate entities.
Structure of the Bribery Act
The Bribery Act contains two basic offenses of offering/promising a bribe (section 1) and requesting/accepting a bribe (section 2). Both offenses are applicable equally to the private and to the public sectors. In addition, the Bribery Act also contains a specific offense of bribing a foreign public official (section 6).
The section 1 and section 6 offenses overlap in scope (the same conduct may be a breach of both provisions), but they are structured in different ways. Section 1 provides that it is a bribe to intend the offer, gift or promise of an "advantage" to influence someone to act contrary to their duties and, in particular, any duty that person may have to act impartially, in good faith or in accordance with a position of trust. As a result, it is a bribe to attempt to influence an employee to act contrary to his employer's interests, or an agent to act contrary to the interests of his principal, or a medical professional to act contrary to the interests of his patient. Unlike the US FCPA, there is no separate requirement of acting with a "corrupt" or "dishonest" state of mind.
The starting point for an offense under section 6 is the offer, gift or promise of an "advantage" together with an intention: (1) to influence a foreign public official; and (2) to obtain some form of business benefit. As with the section 1 offense, there is no requirement of a "dishonest" or "corrupt" state of mind. Nor is there any requirement that the influence or benefit being sought be improper or "undue". That said, an offense is only committed if the foreign public official was not permitted or required by the "written law" of his country to accept and be influenced by the "advantage" in question. As a result, liability will often turn on the local law applicable to the official. The use of the expression "written law" is intended to exclude reliance on informal custom or practice.
As there is no specific carve-out or 'safe harbor' for promotional expenditures under the Bribery Act, the wording of the section 6 offense has prompted concern that the legislation may effectively prohibit any hospitality for foreign public officials. We address the impact of the Bribery Act on corporate hospitality in more detail below.
Section 7 of the Bribery Act establishes a new offense of failure of commercial organizations (including corporations and partnerships) to prevent bribery. Very unusually, the structure of the offense dispenses with any requirement for the prosecution to prove intent, negligence or recklessness on the part of the organization itself.
The trigger for liability under section 7 is the payment of a bribe by an "associated person" of the commercial organization. A person is "associated" with the organization if they perform services for it or on its behalf. This will clearly encompass employees and agents (such as sales intermediaries or 'door openers'), and can also extend to other third parties such as subsidiaries, joint venture partners and potentially even suppliers and distributors (irrespective of whether the organization in fact has legal control over them). However, liability will only arise under section 7 if the "associated person" paid the bribe with the intention to obtain a benefit for the commercial organization itself, rather than simply for themselves.
The commercial organization also has a defence under section 7 if it can demonstrate that it had "adequate procedures" in place to prevent its "associated persons" from making improper payments on its behalf. In essence, the commercial organization has the opportunity to demonstrate that the bribe was a one-off, rather than the result of cumulative or systemic failures on the part of the organization itself. Very unusually, however, the burden of proof is on the Defendant (albeit only to the civil standard).
We address below the policies and procedures the authorities will expect to see as part of "adequate procedures".
The territorial scope of the section 7 strict liability offense for corporations is broad. It can be committed not only by UK-incorporated corporations (and partnerships), but also by foreign corporations which "carry on a business, or part of a business" in the UK (irrespective of whether they have a listing in the UK). Where that criterion is satisfied, the corporate can be liable for bribes paid by its "associated persons" anywhere in the world, notwithstanding the absence of any other connecting factor to the UK.
The precise meaning of "carry on a business" in this context is not yet clear. It is likely to be satisfied where the corporation has a fixed place of business in the UK. It is also likely to encompass situations where a corporation has an agent in the UK with authority to act, and contract, on its behalf. Based on Hogan Lovells' discussions with the UK authorities, we understand that they will not ordinarily treat a parent corporation as carrying on business in the UK simply by virtue of having a subsidiary in this jurisdiction. This may mitigate the significance of the Bribery Act for multinationals head-quartered outside the UK. Inevitably, however, this is a fact-sensitive issue which requires careful consideration of all the circumstances.
The definition of what may constitute a bribe under the Bribery Act is simply a "financial or other advantage." This is clearly broad enough to cover corporate hospitality (for which, as noted above, there is no specific carve-out or 'safe harbor'). Furthermore, it will usually be hard for a corporation providing corporate hospitality to argue that it does not want to influence the recipient in some way. Otherwise, why is the corporation incurring the expense? If that is the case then, any corporate hospitality for foreign public officials may arguably fall foul of the Bribery Act (depending on the "written law" applicable to the official).
The position taken by the UK Government throughout the legislative process was that the definition is indeed broad enough to cover corporate hospitality. However, the Government has routinely said that not all corporate hospitality should be prosecuted, and that the prosecuting authorities will use their discretion to decide when a corporation has over-stepped the mark.
In a recent speech, the Attorney-General said: "I am aware there has been some concern expressed about hospitality or promotional expenditure of commercial organizations. The starting point is that these activities are not illegal per se and the [Bribery] Act is not intended to clamp down on legitimate expenditure of this type. It is clear, however, that lavish hospitality and similar expenditure can be used as a bribe intended to induce a public official to award business. The [Bribery] Act must be capable of penalising such conduct. It will all depend on the particular circumstances. In practice, I do not believe it will be too difficult to distinguish what is bribery and what is not, but ultimately of course it will be a matter for the jury to decide".3 Similarly, the Director of the UK Serious Fraud Office (SFO), Richard Alderman, has recently said: "There are some who have said that the effect of the Bribery Act is to outlaw all promotional expenditure. I do not agree. Sensible, proportionate expenditure is not unlawful under the [Bribery] Act. But, of course, once the expenditure starts to be on a more lavish scale and is intended to influence decision makers in awarding contracts, then we do get into the area of criminal offenses. The Act seems to me to take a very sensible approach. And so the message from me is that sensible proportionate promotional expenditure remains perfectly lawful".4 This view has been further endorsed in recent discussions between Hogan Lovells and Mr. Alderman.
Whilst these comments are helpful, businesses are still left with the challenge of determining what they consider to be "legitimate" or "proportionate" hospitality (particularly in the case of foreign public officials). Inevitably, this is a fact-sensitive issue which will depend on all of the circumstances, including factors such as the role and seniority of the recipients, and the context in which the hospitality is provided.
Historically, UK anti-corruption legislation, unlike the US FCPA, has had no carve-out for facilitation payments. The Bribery Act continues this approach. Whilst facilitation payments are not specifically addressed in the legislation, the approach of the authorities is that they are covered (by both the section 1 and section 6 offenses).
Richard Alderman has indicated on a number of occasions that it is hard to imagine it being in the public interest to pursue a prosecution for a one-off small-scale facilitation payment. At the same time, however, he has emphasised that the authorities expect to see businesses striving to phase such payments out (if necessary over a period of time). They are not prepared to accept businesses treating such payments as simply an inevitable part of doing business in certain jurisdictions.
The UK Ministry of Justice (MoJ) has a statutory obligation under the Bribery Act to publish formal guidance on the meaning of "adequate procedures" for the purposes of the defence to the new corporate offense. The MoJ published draft guidance, and launched a consultation process in this regard, on 14 September 2010. The final statutory guidance is expected to be published in late January 2011 or early February 2011, but is not expected to differ materially from the draft guidance. At or around the same time, some additional guidance is expected from the UK prosecution agencies.
The draft guidance from the MoJ sets out six broad "management principles" which are intended to guide corporations in deciding what bribery prevention measures to put in place:
- Risk assessment - corporations should monitor the bribery risks associated with their market and their business model;
- Top level commitment - the anti-bribery 'tone from the top' must be clearly articulated both internally and externally;
- Due diligence - businesses should take steps to understand with whom they are doing business;
- Clear, Practical and Accessible Policies and Procedures - written documents should be readily accessible, and cover matters such as political and charitable contributions, gifts and hospitality, promotional expenses, facilitation payments and 'whistle-blowing';
- Effective implementation - policies need to be put into practice in all areas of the business, from recruitment to training and bonus structures; and
- Monitoring and review - auditing and financial controls should be put in place, and the corporation's procedures should be regularly reviewed, including externally, if appropriate.
These six principles are not intended to be prescriptive. The UK Government has specifically stressed that it is not possible to have a 'one-size-fits-all' approach to anti-corruption compliance, and the question whether a particular organization had "adequate procedures" in place will ultimately have to be resolved, in the context of a prosecution, by the court in the light of the particular facts and circumstances.
The onus will therefore be on corporations to judge for themselves what constitutes a proportionate approach with regard to the size and nature of their operations and the market environment in which they operate. All businesses are well-advised to act now to review and, as appropriate, update their compliance programmes. The UK authorities have stressed that, given the differences between the Bribery Act and the US FCPA, it cannot be assumed that an established FCPA compliance programme will meet the new standard set by the Bribery Act.
The Bribery Act increases the maximum penalty for a bribery offense to up to 10 years' imprisonment and/or an unlimited fine. As addressed below, there has recently been a strong steer from the UK courts that the financial penalties imposed ought to be on a par with those seen in the United States. In addition to fines, there is wide jurisdiction under the Proceeds of Crime Act 2002 to confiscate the proceeds of criminal conduct, including corruption. As addressed below, the SFO has increasingly sought to exercise these powers.
Aside from immediate financial penalties, a criminal conviction for corruption also results in automatic debarment from public procurements under European Union law.5 For many corporations, it is this prospect, rather than a fine or confiscation order, which may have the most significant impact on the business. As addressed below, a number of settlements with the SFO have been structured in such a way as to mitigate or avoid the effect of this rule. The UK Government has recently indicated that it is considering an amendment to UK public procurement legislation so as to provide that conviction under the new strict liability corporate offense does not trigger debarment. However, even if such an amendment is introduced in the UK, there will still be the prospect of debarment across the rest of the European Union.
Personal liability of directors
The Bribery Act also establishes a new basis on which directors and senior managers can be held personally liable for acts of bribery committed by the corporation (section 14). Such an individual will be guilty of an offense if they merely "consented" to or "connived" at the relevant conduct. Unlike the new corporate offense, there is no defence for the individual to show that the organization had in place "adequate procedures" to prevent bribery. As addressed below, the UK authorities have increasingly turned their sights on individuals, and this new provision in the Bribery Act will make it easier to hold senior management personally accountable for the corporation's conduct.
The UK enforcement record
Prior to 2008, the UK's enforcement record for corruption was poor. Amongst other things, there had never been a prosecution of a company for an overseas corruption offense, and corruption prosecutions of any kind were few and far between. Over the course of 2009 and 2010, there has been a steady increase in the number of cases coming to court.
The past twelve months saw as many as seven high profile corruption cases come before the courts. None of those cases resulted in an acquittal. The year also saw a number of high profile investigations and "dawn raids" by the UK authorities which may in due course yield further prosecutions. The SFO now claims that corruption cases constitute around a third of its total workload (which was reported to comprise approximately 80 cases in March 2010). As a result, 2011 is likely to witness a number of further cases, particularly if the Bribery Act comes into forcein April as previously announced.
In recent years, the UK SFO, under the leadership of its new Director, Richard Alderman, has been making a conscious attempt to overhaul the UK's previously poor enforcement record and to get the message across that it does now pose a genuine threat. At the heart of the strategy is a "carrot and stick" approach of offering leniency and certainty of outcome in exchange for "self-reporting" whilst, at the same time, threatening dire consequences for those who fail to come forward of their own volition.
In July 2009, the SFO published guidance outlining how it would deal with cases of overseas corruption by corporations. Essentially, the guidance sought to encourage corporations to "self-report" incidents of corruption in exchange for leniency. In those circumstances, the SFO said that, wherever possible, it would seek a civil settlement rather than a criminal prosecution. This is potentially significant as a civil outcome avoids the mandatory debarment from public procurements which, as addressed above, results from a criminal prosecution. The SFO also intimated that, even if a criminal prosecution were brought following a voluntary disclosure, there would still be some scope for negotiation as to the charges and extent of the penalty to be imposed. It was also stressed that this would help the corporation to manage the associated disruption and publicity.
This new approach by the SFO marked a significant departure from established practice in the UK, and owes much to US-style "plea bargaining". Real "plea bargains" are, however, unknown in English procedure, and the change in approach from the SFO was not without its critics. Although the new SFO policy was introduced in 2009, it was not until 2010 that the first cases came before the courts.
In R v Innospec in March 2010, the Crown Court strongly criticised the terms of a "plea agreement" entered into by the SFO, and held that no such agreements should be entered into again. In the subsequent case of R v Dougall, the Court of Appeal took a similar approach, dealing a significant blow to the SFO's attempts to foster a culture of self-reporting. At the very end of the year, in December 2010, the Crown Court ultimately upheld the terms of the global settlement reached with BAE Systems, restoring some much needed confidence in the ability of the Serious Fraud Office to negotiate settlements, including global settlements, of this kind. We look briefly at these cases below.
- Innospec Limited
Innospec Limited (Innospec) was charged with corruption offenses by both the UK and US authorities relating to the payment of bribes in Indonesia. Following negotiations on both sides of the Atlantic, a "global settlement" was brokered, subject to court approval in each jurisdiction, pursuant to which Innospec would pay an agreed amount by way of fines. The UK fine amounted to US$ 12.7 million.
Whilst court approval was expected to be little more than a formality, the settlement provoked a hostile reaction from the Crown Court. In a strongly worded rebuke, the Judge held that "the director of the SFO had no power to enter into the arrangements made and no such arrangements should be made again". He emphasised that "the imposition of sentence is a matter for the judiciary."6 The Judge also addressed the SFO's proposals for the use of civil settlements instead of criminal prosecutions. He held that it would "rarely be appropriate for criminal conduct by a corporation to be dealt with by means of civil recovery order... It is of the greatest public interest that the serious criminality of any, including corporations, who engage in the corruption of foreign governments is made patent for all to see by the imposition of criminal and not civil sanctions." The Judge even criticised the SFO for agreeing on a press release with Innospec, noting that it would be "inconceivable" to agree on a press statement with a burglar or rapist.
Despite the strong criticism, the Judge ultimately upheld the fine agreed by the SFO recognising, amongst other things, that the settlement had been the subject of protracted negotiation, had already been approved by the US court, and that there had been full cooperation by the new management of Innospec (who were seeking to ensure the survival of the corporation and thereby to protect its innocent employees and other stakeholders). Nevertheless, the clear message was that "no such arrangements should be made again."
- Robert Dougall
The subsequent case of R v Dougall saw a similar approach from the Court of Appeal.7 Mr Dougall was formerly the marketing director of Depuy International Limited (Depuy) and was prosecuted in relation to so-called "Professional Education" payments made to Greek surgeons to incentivise them to use Depuy's orthopaedic devices. In the light of Mr Dougall's full cooperation, and the fact that he derived little if any personal benefit from the wrongdoing, the SFO entered into a plea agreement in which it recommended merely a suspended sentence. When the case first came before the court, the Judge dismissed the SFO's recommendation and sent Mr Dougall to prison for 12 months.
The Court of Appeal subsequently freed Mr Dougall, reinstating the suspended sentence recommended by the SFO. Nevertheless, the Court of Appeal emphasised that this followed from its own independent assessment of the proper penalty. Endorsing the Innospec decision, the Court of Appeal emphasised that any "agreement or bargain between the prosecution and the defence in which they agree what the sentence should be, or present what is in effect an agreed package for the court's acquiescence is contrary to principle."8
- BAE Systems PLC
It was not until the settlement with BAE Systems (BAE) finally came before court in December 2010 that additional clarification was provided on these fundamental issues of policy.9 Under the terms of the "global settlement" reached with both the US and UK authorities BAE agreed to plead guilty, in the UK, to an offense of failing to keep reasonably accurate accounting records in relation to historic activities in Tanzania (under section 221 of the Corporations Act 1985). BAE entered into an agreement with the SFO pursuant to which it would pay a total of £30 million comprising a penalty to be determined by the court and with the balance to be given as an ex gratia payment for the benefit of the people of Tanzania.
The specific offense charged by the SFO related to payments of some $12 million to a "marketing adviser" which had inaccurately been recorded as being in respect of "Technical Services". At the hearing before the Crown Court, the SFO suggested that "lobbying" might have been a more appropriate term for the services provided. Under the terms of the settlement, BAE accepted that there was a "high probability" that part of the $12 million "would be used in the negotiation process to favour British Aerospace." Nevertheless, the SFO stressed that it was not part of the Crown's case that the money was used for a corrupt purpose. A key element of the deal was that BAE avoided a corruption charge which, in the event of conviction, would have resulted in debarment from public procurements.
In a lengthy hearing, the Judge expressed dissatisfaction with the basis on which he was being asked to sentence the corporation. He suggested that the obvious inference was that the agent had been given "free reign" to make whatever payments he considered necessary and commented that it was "naïve in the extreme to think [he] was simply a well-paid lobbyist". The Judge therefore challenged the notion that he should sentence on the basis of a technical accounting failure. He noted that, if the corporation's only failure was to describe PR services as "Technical Services", the fine would amount to just £5,000.
The Judge ultimately accepted that he could not "sentence for an offence which the prosecution failed to charge", i.e., for an offense of corruption, and that it was not within his remit to challenge the SFO's decision not to press a corruption charge. He noted that an attempt by the Campaign Against Arms Trade to judicially review the SFO's decision not to charge a corruption offense had been rejected by the court earlier in the year.10 Nevertheless, the Judge also rejected the notion that only a nominal penalty should be imposed given the purely technical nature of the charge. Implicitly, it was necessary to take into account the apparent purpose of the accounting irregularity. At the same time, however, the Judge considered himself to be under "moral pressure" to keep the sentence to a minimum in order to ensure that the majority of the £30 million settlement agreed with the SFO would be received by the people of Tanzania, as the victims of any improper conduct. The Judge therefore fixed the fine at £500,000 (plus £225,000 costs).
In contrast to the Innospec and Dougall cases, the settlement with BAE took a different approach of charging a lesser, book-keeping, offense and agreeing a "top-up" to the penalty to be imposed by the court. In other words, the settlement did not seek to tie the court's hands or to impose a relatively lenient sentence for the offense charged. Whilst the Judge in the BAE case was clearly still uncomfortable with aspects of the settlement (including a widely drafted indemnity in relation to further prosecutions), his verdict ultimately upheld the deal which had been negotiated.
The outcome of the BAE case restores some much needed confidence in the SFO's ability to reach a negotiated settlement with corporations, including as part of a global deal. This certainty of outcome is essential if the SFO is to succeed in its attempts to encourage corporations to come forward and "self-report" issues of corruption. The BAE verdict also demonstrates that, in an appropriate case, it is possible to reach a negotiated settlement with the SFO which avoids the more serious risks associated with a corruption charge, such as debarment from public procurements.
There has been a dramatically increased focus from the SFO on asset recovery. At the beginning of 2009, the SFO had a team of just two focussed on asset recovery, whereas this is now a major strategic focus with a dedicated Proceeds of Crime Unit comprising 17 specialists. As addressed above, the Innospec strongly disparaged the use of civil recovery orders, as opposed to prosecutions, to deal with corruption cases. This does not, however, preclude the use of the SFO's asset recovery powers in conjunction with a criminal prosecution (i.e. the use of a forfeiture or confiscation order in conjunction with a fine).
In December 2010, Scottish engineering corporation Weir Group Plc (Weir) was fined £3 million after pleading guilty to two offenses involving the payment of more than £3 million in "kickbacks" to Saddam Hussein's government under the United Nations Oil For Food Programme. The offenses were charged under the Iraq (United Nations Sanctions) Order 2000. In addition, Weir was subject to a confiscation order for £13.95m (under the Proceeds of Crime Act 2000). This figure was intended to represent Weir's profit from the transactions in Iraq, and is the largest confiscation order ever made by a Scottish Court.
Each of the Innospec and BAE cases referred to above involved a global settlement, pursuant to which penalties were imposed on both sides of the Atlantic. The Dougall prosecution was also prompted by a referral from the US authorities (a spin-off from the Department of Justice's investigations into the healthcare industry). The SFO states that it is now in routine daily contact with the US authorities. This dialogue between different jurisdictions has significant implications for any decision to make a voluntary disclosure and corporations are increasingly likely to be faced with parallel investigations in different jurisdictions.
It is not, however, just the US authorities with whom the SFO is in regular communication. In October 2010, Julian Messent, a former director of London-based insurance business PWS International Ltd was sentenced to 21 months' imprisonment after pleading guilty to two counts of making corrupt payments to Costa Rican officials in the state insurance, national electricity and telecommunications corporations. The case was brought after the Foreign and Commonwealth Office was tipped off by the Costa Rican authorities, and is further evidence of the increasing cooperation between authorities in different jurisdictions. As addressed below, Mr Messent was sentenced to 21 months' imprisonment.
Similarly, 2010 saw a number of high profile search and arrest operations conducted by the SFO following referrals or requests from other jurisdictions including, for example, a joint investigation with the Australian police into Securency International PTY Limited.
Individuals being targeted
It is notable that both the Dougall and Messent cases concerned individuals (who derived little, if any, personal benefit from the wrongdoing). The SFO clearly recognises the deterrent effect of personal prosecutions and the Dougall case, in particular, makes clear that individuals cannot expect immunity, or even the most favourable sentence, simply by virtue of "blowing the whistle" or by providing full cooperation.
In the Innospec case, the Judge emphasised that corruption is at the "top end of serious corporate offending" and, as noted above, suggested that the fines in the UK ought to match those imposed in the US. In the short period since the Innospec case, there have already been a number of examples of tougher financial and custodial sentences being imposed by the UK courts.
In the Messent case, the Judge was careful to stress that, although the actual sentence imposed amounted to just 21 months, the offenses would ordinarily warrant a 4 to 5 year prison sentence. In that case, the Judge gave significant credit for Mr Messent's early guilty plea and the fact that he was a family man of previously good character. Nonetheless, he was also ordered to pay £100,000 compensation to the Republic of Costa Rica, failing which he would serve an additional 12 months' imprisonment. In addition, he was debarred from serving as a director for five years.
By contrast, in June 2010, a number of individuals were jailed for their roles in a contract-rigging ring involving training and skills education operated through the UK Learning Skills Council (LSC). Three of the defendants worked for the LSC, which awarded contracts to local training providers. The other two defendants were suppliers of training services. Paul Kent, who was a senior official at the LSC, received the highest sentence of four and a half years' imprisonment reflecting his personal benefit from the kickbacks. This must rank as one of the longest custodial sentences imposed for a corruption offense.
2010 also witnessed, for the first time, something approaching a sector-wide investigation by the SFO. In September 2010, five individuals were charged with offenses of conspiracy to corrupt following a two-year investigation into multi-million pound engineering contracts in the energy sector. The charges relate to the disclosure of confidential information to corporations bidding for contracts in exchange for a percentage of the contract value. The case is expected to come to trial during 2011. This industry wide approach mirrors that often used tactic in the United States and may be a mark of things to come.