Introduction

Transparency International (TI) has published its report for the City of London Corporation focusing on corruption risks in financial services firms and the potential impact of the Bribery Act 2010 on the sector once it comes into force.

According to TI:

“…there is no doubt that [the Bribery Act] significantly increases the legal liability of City businesses, especially those operating in high-risk environments”.1

A tough stance has already been taken in the financial services arena with the FSA’s £5.25 million fine in 2009 of Aon Limited for inadequate internal procedures to prevent corruption. Following Aon, the FSA produced a report on anti-corruption in insurance broking and has indicated that it may undertake further thematic reviews on anti-bribery and corruption elsewhere in the financial services sector.

Financial services firms cannot ignore the potential liabilities and significant reputational damage associated with bribery. With the enactment of the Bribery Act 2010, there is a strict liability corporate offence of failure to prevent bribery - the only defence is if the organisation had out in place “adequate procedures” to prevent incidences of corruption.

International financial services firms should bear in mind that it is not just UK based companies that are at risk under the Bribery Act. The Act’s extra-territorial reach is broader than that of the FCPA - for example, any international company, carrying on business in the UK, can commit the offence of failure to prevent bribery in relation to conduct outside the UK that is not connected with any business undertaken in the UK.

Overview

The report delivers TI’s findings following in-depth interviews with senior executives from a range of financial sector firms and an online survey. It provides an overview of corruption risk within the City of London and highlights the businesses considered to be at the greatest risk in relation to bribery and corruption.

High risk

  • Property and real estate
  • Maritime and shipping
  • Commodities trading
  • Hedge funds
  • Project finance

Medium risk

  • Private equity
  • Investment banks
  • Insurance
  • Accounting and auditing
  • Correspondent banking

Low risk

  • Asset management
  • Law firms
  • Retail banking

The findings from the survey suggest that there is a relatively high degree of complacency about corruption risks among financial services firms.

The report sets out:

  • four high-risk factors;
  • the types of business activity most likely to fall foul of the new legislation; and
  • how the Bribery Act is likely to be interpreted and enforced once it comes into force, applying its provisions to various scenarios that financial services firms may encounter.

It should be noted that the TI report overstates liability for the offence of failure to prevent bribery. The position is that such offence could render directors vulnerable to civil claims only, not imprisonment as stated in the report. However, individuals guilty of one of the principal bribery offences are liable on conviction to imprisonment for up to 10 years, or to a fine, or to both.

Key findings

Lack of awareness

Few firms appear to be aware of the wide ranging implications of the Bribery Act, with only 25% of respondents considering themselves well informed.

Deficient current compliance

Only 10% of respondents thought that current efforts by compliance departments and internal auditors were ‘very successful’.

Lack of third party due diligence

63% of respondents thought that levels of due diligence in respect of customers and business partners were inadequate.

Global competitiveness

TI has found that the Bribery Act is unlikely to deter foreign companies from doing business in the City.

High-risk factors

1. Operating in higher risk jurisdictions

Several financial service activities are exposed to risk e.g. commodities trading, project finance, real estate, hedge funds, insurance broking and retail/investment banking.

2. Interacting with public officials

E.g. obtaining approvals, permits, bidding for contracts in public tenders. However, firms should note that, unlike the FCPA, the Bribery Act is not just focused on bribery of foreign officials. Any bribe that is intended to induce the recipient (be it a public official or private individual) to perform their duties improperly is caught under the Act.

3. Providing services to high risk sectors such as defence, construction and natural resources

Banks and auditors, who regularly provide services to such sectors, need to be aware of the considerable reputational risk faced from appearing to be complicit in, or merely being associated with, corruption.

4. Using agents, counter-parties, relying on subsidiaries and entering into joint ventures

Firms are responsible for ensuring that third parties engaged to provide services are made aware of the zero tolerance culture of the organisation, have their own suitable policies and procedures in place and are subject to appropriate due diligence and monitoring.

Risky business

Activities which were not previously seen as corrupt could be interpreted as such under the new legislation. Facilitation payments which are made to speed up business transactions, no matter how small or routine, are illegal under the Bribery Act. This goes further than the FCPA, which makes an exception for small facilitation payments to smooth relevant processes of official actions. In addition, hospitality, donations to charity or political parties could be interpreted as bribes in certain circumstances.

The report observes that certain types or patterns of entertainment, such as lavish trips or giving small gifts on a regular basis, in conjunction with evidence of the company winning or retaining business, could be considered corrupt.

Growing focus

UK authorities have a range of tools with which to tackle allegations of bribery and there has been a clear increase in enforcement – see for example the Serious Fraud Office’s investigation of Balfour Beatty plc, the prosecution of Mabey and Johnson for foreign bribery, and the FSA’s fine of Aon Limited. Further, the judiciary is likely to take a strict approach on prosecution and fines in corruption cases - see the comments of Lord Justice Thomas in the Innospec case.

What next for firms?

Anti-corruption procedures need to be sufficiently robust to understand, identify and manage corruption risks.

All firms should:

  • assess the current risk of corruption and anti-corruption procedures in all areas of the business and potential exposure under the Bribery Act;
  • ensure that adequate procedures, tailored to the organisation’s risk profile, are documented and communicated to relevant staff;
  • properly train senior managers and employees on corruption risks and how to deal with difficult situations that may arise;
  • ensure that internal policies take a clear stance on what is acceptable conduct in respect of client entertainment, hospitality and political and charitable donations; and
  • carry out thorough due diligence on third parties and ensure that the relationship is continuously monitored.

We provide a Corporate Integrity Review which will take your organisation through a process designed to deliver an assessment of your governance and ethics culture and provide a benchmark to assess the delivery of that culture. Learn more. In addition, we have worked with the risk consultancy Maplecroft to develop a unique Legal and Regulatory Environment Atlas which enables businesses to assess and compare legal and regulatory risks across 172 countries.