In March the OECD Working Group on Bribery in International Business Transactions produced its Phase 4 Report on the UK’s implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and related instruments (the Report). In the Report, the Working Group (WG) evaluated the UK’s progress on the recommendations made in its Phase 3 Report in 2012 and made further recommendations for the UK going forward.
We address below some of those key findings and recommendations below.
The WG noted that corporate self-reporting is a major source of detection of foreign bribery for UK authorities, which has recently been bolstered by the use of DPAs (or civil settlements in Scotland). However, the WG identified a few concerns with the use of DPAs:
- While the Judges interviewed considered construction of DPAs in the UK to be “quite robust” and “proportionate”, they also commented that DPAs do not focus on the responsibility of individuals, which would normally be focused on by judges in a trial.
- As DPAs may be offered to companies that have not self-reported, and a corporate may still be granted a high discount if it cooperates with the SFO, corporates may be encouraged to take the risk and wait to see if wrong doing is detected.
- Self-reporting will also only be a productive source of detection of bribery offences if the SFO is proactively investigating bribery offences and is perceived to be doing so – which, the WG fears, may not be the case.
The comment about lack of focus on the responsibility seems an odd one, given that one of the factors to be considered when granting a DPA is whether the company has provided cooperation which would enable the authorities to pursue prosecutions of individuals.
The WG welcomed the UK’s efforts since Phase 3, which included the launch by the SFO of the revised confidential reporting portal “Make a Report” in January 2016, which has led to an increased number of bona fide whistle-blower reports.
However, during the WG’s evaluation law enforcement raised the concern that the whistle-blower protections in the UK (currently provided under the Public Interest Disclosure Act 1998) may not be sufficient to protect whistle-blowers who still face significant stigma and the risk of being blacklisted in some industries.
While the UK Government has resisted calls for reform of the whistle-blower regime for several years, particularly calls for the UK to adopt the US approach of paying high rewards to incentivise and support whistle-blowers, the UK will look at this issue again as part of the anti-corruption strategy to be published later in 2017.
While the SFO can now access SARs with the support of the UK Financial Intelligence Unit (UKFIU), there is no record of any SFO foreign bribery investigation being generated by information provided by the UKFIU.
The SAR regime has also been subject to much criticism in recent years, particularly in relation to the quality of reports as a proportion of the volume received (we recently commented on SARs here).
One of the ways the UK is seeking to improve the quality of SARs is through the Criminal Finances Bill introduced in October 2016. Under this Bill, the UKFIU should be able to direct regulated bodies to disclose additional information on the basis of a SAR or following a request from a foreign FIU.
The opacity of beneficial ownership information remains a barrier for the detection and prosecution of bribery both within the UK and worldwide. One of the steps the UK has taken to improve this is the introduction of the PSC register in 2016 which we previously reported on.
The UK’s overseas territories and crown dependencies have also committed that by June 2017 they will have put in place secure central registers or similarly effective systems for the recording of beneficial ownership information of companies incorporated within those jurisdictions. The UK and its law enforcement authorities will also have the right to access that information.
While these are considered to be steps in the right direction, concerns were noted in the Report that neither the PSC nor the overseas territories/crown dependencies’ systems would effectively deal with the opacity of ownership structures such as trusts. There is also not currently a straightforward way of assessing the accuracy of the information contained in these registers.
During the WG’s evaluation, HMRC confirmed that is notified by the SFO when it opens or concludes a foreign bribery enforcement action. While HMRC has the power to review the tax returns of the subject of that action to recover unpaid tax or any applicable penalty, it did not provide the WG with statistics or examples of when it had in fact done so.
The WG was of the view that HMRC could be more proactive at identifying potential bribery payments during its tax assessments and informing the SFO of its suspicions. In order to encourage such cooperation, the WG made a number of recommendations including that HMRC should be under a mandatory obligation to report any suspicions that arise to the SFO.
The Bribery Act 2010
Section 7 of the Bribery Act 2010 (the Act) was considered by WG to be a very effective incentive for companies to adopt adequate corporate compliance measures and internal controls. However, the WG noted that a number of recommendations made in its Phase 3 Report with regard to the implementation of the Act remain outstanding.
The WG continues to recommend that the Ministry of Justice’s Guidance to the Act (the Guidance) be amended in order to provide clarity in respect of the following:
- Hospitality expenditure - of particular concern to the WG were examples within the Guidance of the payment of travel, accommodation and entertainment for foreign officials as part of the arrangements for business meetings which the WG would consider high risk but which were not identified as such in the Guidance.
- Small facilitation payments - the WG highlighted that while the SFO introduced further guidance in October 2012 regarding its approach to such payments, there is still not one agreed definition of facilitation payments applied by UK prosecutors.
- Indirect benefits - Liability under section 7 arises only if the “associated person” committing the primary offence intended to obtain an advantage for the organisation. The Guidance provides that, “the fact that an organisation benefits indirectly from a bribe is very unlikely, in itself, to amount to proof of the specific intention required by the offence”. It is not therefore clear how the SFO will approach cases where the company has benefitted from an act of bribery carried out by an associated person but indirectly.
In terms of adopting clearer guidance on what would be deemed “adequate procedures” under the Act, the WG raises the following suggestions:
While the adoption of anti-corruption compliance measures is well advanced amongst larger corporations, research conducted by the Ministry of Justice and the Department for Business, Innovation and Skills found that over half of the 500 participating SMEs did not have bribery prevention procedures in place and only a quarter were aware of the Guidance.
The WG also highlighted that SMEs may be at greater risk of liability as authorities are more likely to be able to establish corporate liability against an SME under the identification doctrine since the “directing mind” of an SME is generally easier to identify than that of a larger company with a more complex management structure. Going forward, the WG recommends that the UK focus on providing SMEs with more targeted information on setting up tailored anti-bribery compliance measures.
As noted in the Report, public procurement should be a significant incentive for companies to avoid a conviction for bribery. However, at present, a conviction under section 7 of the Act is only a discretionary ground for exclusion. DPAs/civil settlements are also not mandatory exclusion events because they do not result in a “conviction” for the corporate defendant.
The UK government has sought to improve this by committing to put in place a system by which contracting authorities can check criminal records. However, the WG recommends that the UK go further by implementing a system which would enable authorities to access information on companies which have been sanctioned for bribery either by way of a court order, or a settlement such as a DPA (which we assume is intended to work in a similar way to the register under consideration in Germany).
This does seem to us to overlook the fact that avoiding conviction, and therefore avoiding disbarment from public contracting, is intended to be a major incentive to corporates to seek a DPA, and therefore to the corporates self-reporting and cooperating with the authorities.
While there are a number of agencies and law enforcement bodies within the UK responsible for investigating and/or detecting bribery, the WG considers the SFO to be the leader amongst them, having had responsibility for 8 of the 12 foreign bribery cases finalised since Phase 3. The WG also praised the SFO’s multidisciplinary investigatory model (known as the Roskill Model) as being highly effective.
However, the WG warns that in order for the SFO to maintain this position, its role as lead agency needs to be made clear. One such way of doing this would be within the memorandum of understanding (MOU) in place between the various agencies for the assignment and allocation of bribery cases.
In addition to the multiplicity of agencies, a significant factor which could threaten the effectiveness of the SFO is its financing. The SFO’s core budget at the time of the Phase 3 Report was £33.9million1. During the Phase 3 evaluation, the SFO reported that it did not have the resources to investigate every allegation and therefore had to take a balanced approach. Further, during the time of the UK’s written follow up in 2014, the WG noted that the SFO’s foreign bribery enforcement levels had decreased appreciably.
Despite those concerns, last year’s budget remained at a similar level of £33.8million2. Leaving aside the accessibility of blockbusting funding, the fact that the SFO’s budget has not been increased since Phase 3 and, according to the Report, is actually set to decrease slightly over the next few years, has not allayed the WG’s concerns regarding the SFO’s ability to effectively investigate and prosecute allegations of bribery and corruption.
The SFO continues to face tough critics. Despite there not having been any significant increase in its budget, it continues to come under pressure regarding its conviction rates as compared to its expenditure. When you compare the two on an annual basis, the SFO’s conviction rates are rather low. For example, the SFO’s total expenditure (including blockbuster funding3) has risen from £40.9 million in the year 2012-2013, to £61.2 million last year. Over roughly the same time period, conviction rates have decreased from around 85% to 32%4.
The SFO argues that these figures do not present a true picture of its effectiveness since the cases it is now prosecuting are higher value and more complex, with substantially longer trials. Looking at conviction rates over a longer period of say, 2012 to 2016, the SFO’s conviction rate was a healthier 65% by defendant and 81% by case5. Notwithstanding this, the WG remains concerned that due to a lack of resource the SFO is not currently able to investigate every allegation it receives and a number of allegations are not assessed until years after they come to light.
The WG is not alone in its calls for the SFO to be allocated an increased budget (we have long been advocates of this). Further, at a time when the SFO is seeking to avoid costly trials by securing more DPAs, unless the government proves its commitment to the detection and prosecution of bribery offences by allocating sufficient funds to SFO for the task, corporates are unlikely to be sufficiently fearful of the SFO to self-report.
Assuming the SFO is here to stay, the Report sets out a number of ways in which its powers might be strengthened going forward:
- The SFO’s corporate internal investigation process could be reformed in line with the FCA model. Under section 166 of the Financial Services and Markets Act 2000, the FCA can commission a skilled person’s review, usually carried out by a law firm or accountancy firm, of a business’s activities if they are a cause for concern. It is not clear, however, what the threshold would be for such an appointment, absent a self-report from a corporate or a whistle-blower report.
- Under the Criminal Finances Bill, the SFO could be granted direct access to the investigative powers under the Proceeds of Crime Act 2002.
- As set out above, the UK Government intends to extend the scope of corporate criminal offence of “failure to prevent” to other economic crimes such as money laundering. This is likely to enable the SFO to prosecute corporates for alternative offences in circumstances where certain elements of the bribery offence are difficult to establish.
There is much to commend the WG’s approach here, but it is important to remember that the SFO’s future is not assured. At the time of writing there is yet another of the periodic reviews underway by the UK Government into the organisation of its economic crime-fighting capability. This is despite the fact that the SFO has in the first three months of this year generated over £500 million in fines and penalties under the DPA regime.
International cooperation has been identified by the UK as one of the main challenges it faces in investigating and prosecuting foreign bribery.
While the SFO has not yet had to drop any case due to a lack of assistance, non-assistance causes significant challenges. The SFO has also cited double jeopardy as a reason for failing to launch certain prosecutions for bribery. The Report notes that there has been an increase in the number of global settlements which is one way of dealing with this issue but requires a significant level of international co-operation.
The UK’s participation in the EU criminal and policing arrangements and networks is also reported to have boosted enforcement in the UK of foreign bribery generally. For example, it is noted that although the UK is not a party to all of the EU’s law enforcement policies, it has implemented the European Arrest Warrant and laws providing for the mutual recognition of assets and freezing orders. The UK has also been keen to participate in the sharing of information with European agencies such as Europol and Eurojust.
Now that Article 50 has been triggered, will have to wait and see whether Brexit will have a significant impact on the UK’s cooperation with the EU and other jurisdictions. We would hope that it would not since such cooperation is, in our view at least, mutually beneficial (you can read our views on the impact of Brexit on corporate crime and fraud).
Although not so far away geographically, the practices and frameworks for foreign bribery enforcement in Scotland still vary from those within England and Wales. The WG recommends that Scotland’s regime be brought in line with that of England of Wales and that there is better communication between the two jurisdictions generally.
While the UK has made progress, the number of cases relative to the UK economy is considered to be low. The WG therefore recommends that the UK seek to sustain its efforts in order to achieve stronger enforcement going forward.
The UK will submit a report in 2 years time on its implementation of the recommendations in the Report. A number of developments are already in progress such as, the Criminal Finance Bill, and we will continue to monitor these. It will also be interesting to see which, of any, of the WG’s ideas noted above are put into place during that time.