Private equity investors carrying on business in the United Kingdom could be prosecuted for bribes paid anywhere in the world by directors and employees of the companies they own or have significant control over, a risk emphasised in a recent speech by Richard Alderman, the director of the Serious Fraud Office (SFO).
The Bribery Act 2010 came into force on Friday 1 July 2011. It provides a comprehensive scheme of bribery offences that will apply to private-sector to private-sector bribery, as well as to corruption of public officials, including some officials of state-owned companies. The Act's general offences apply to the activities of British companies and individuals anywhere in the world.
The Act also introduces a new offence of "a failure by a commercial organisation to prevent bribery", applicable both to organisations incorporated or formed in the UK, and to foreign organisations which carry on any business in the UK. Here, an organisation may be liable for a bribe paid anywhere in the world by a person associated with it, unless it can demonstrate that it had implemented adequate procedures designed to deter and detect bribery. The intention is to require companies to assess the bribery risks they face, and to implement, maintain and enforce effective anti-bribery policies, systems and controls.
In relation to foreign entities, the term “carrying on any business” in the UK is undefined by the legislation. Guidance accompanying the Act suggests that a commonsense approach should be taken to its meaning, although this does not assist in difficult cases. The offence would apply to funds run by UK entities or foreign funds managed in the UK. It could also extend to foreign funds investing in the UK, depending on the extent to which the fund is involved in the management of the entities in which they are investing. Simply holding an interest, without more, is unlikely to engage the Act.
A person is associated with a commercial organisation if he or she performs services, in whatever capacity, for or on behalf of the organisation. This is wide in scope. The definition necessarily includes directors and employees, but extends much further to include a wide-range of third parties.
So could private equity funds and or their investors be criminally liable for bribes paid by a company in which they invest? The extent of involvement in the running of an investment or portfolio company will be critical. If there is no involvement, there is unlikely to be liability under the Act for the actions of the company or its management. However, that position would clearly be different where investors are running the company, or are actively involved in its management. Investments of this type will need scrutiny.
Further, the Act makes directors, company secretaries and managers personally criminally liable if they consent to or ignore bribery. That offence could apply to representatives of private investors sitting on boards or otherwise involved in management.
Given the wide-range of models of investment and management by private equity investors and portfolio companies, it will be a fact-dependent question whether a private equity fund or investor has a sufficient role in management to have criminal exposure for the wrongdoing of others. However, it is clear that the starting point of the SFO will be that private equity investors are well informed and active investors with a high degree of knowledge of what happens in the companies in which they invest. The SFO has stressed the responsibility of investors and owners of companies to ensure proper standards of governance and a proper anti-corruption culture.
Government guidance has described the principles of the anti-bribery systems, procedures and controls that constitute “adequate procedures”. These are expected to be proportionate to the bribery risks faced by an organisation. They include a demonstrable commitment of top-level management to prevent bribery; a comprehensive assessment of the risks of bribery; procedures designed to deter and detect bribery; due diligence on those performing services on behalf of an organisation; communication of policies and procedures and training of employees; and regular review.
Risk is not confined to the Bribery Act. Money laundering legislation may also be engaged. Revenues or profits deriving from criminal conduct are criminal property. That includes revenue or profits from contracts obtained by bribes. Any dealings with those funds, with knowledge or suspicion that they represent criminal property, could constitute a money laundering offence. The only defence to a money laundering charge is for a report to be made to the Serious Organised Crime Agency disclosing the payment of bribes. As a consequence of disclosure law enforcement agencies may try to forfeit revenue or profit from a tainted contract as the proceeds of crime. In addition, competitors that have lost contracts to bribes may make claims for the profits that would have been earned had the contracts been fairly awarded. Accordingly, even if liability for an offence does not flow directly to a private equity fund or its management the consequences for its underlying investment can be significant.
Private equity funds and investors will need to be familiar with the Bribery Act. Implementing their own adequate procedures will require assessment of their investments, particularly foreign investments in countries with high levels of corruption and fraud, and particularly when working with public officials and officials of state-owned companies in countries prone to corruption. Effective due diligence of bribery risks faced by target companies, and their management, is likely to be required, certainly where investors will play an active role in management. Consideration will need to be given to the commercial arrangements in place with the management of companies in which investments are made. Are, for example, incentives available to management that encourage unethical behaviour?
Another important issue will be discovery of corruption or bribery issues during due diligence before an acquisition, or after the acquisition has taken place. To what extent will the company be penalised for the misdeeds of the previous management?
The Director of the SFO stated in a recent speech that “as a matter of policy it is beneficial overall if good ethical companies take over companies with a poor record for ethics and governance and bring them up to a much higher level. This is something that we would want to see and I do not want the SFO to do anything that stands in the way of that”.
In these circumstances, it is therefore likely that the target company will not, post-acquisition, face prosecution for bribery and corruption by the previous management, providing that the SFO see genuine commitment from the new owners to stopping the unethical practices of the past and sorting out inherited problems. A similar approach is likely when bribery or corruption is discovered after an acquisition, and stopped.
Indeed, the SFO has published guidance encouraging self-reporting of bribery and corruption. The advantage to self-reporting is that the preferred approach of the SFO is to deal with self-referrals through civil penalties, although any decision to self-refer is clearly a difficult one for any company to take. In addition, the SFO offer to provide guidance during mergers and acquisitions on their likely response to corruption issues that are discovered in the target company.
The danger of not engaging with the SFO is an intrusive criminal investigation if the bribery or corruption is discovered by the SFO through other means, and a higher risk of prosecution. In this regard, it must be remembered that auditors and other professionals may have an obligation to report suspicion or knowledge of wrongdoing, unless that information is given in legally privileged circumstances such as to lawyers asked to advise on the discovery of bribery. However, the downside of self-reporting may be that it provides material that may be used in a criminal investigation, or eventually by competitors to bring a civil claim.
Bribes are not confined to the payment of money, and extend to non-financial advantages, including, for example, unduly lavish hospitality or gifts. There has been much media attention that hospitality will be treated as bribes, much of which exaggerates the risk. Government and prosecutors have given assurances that the Act is not intended to criminalise ordinary and established corporate hospitality intended to build and maintain relationships, such as invitations to sporting and cultural events, and fine-dining. The question is whether the hospitality is reasonable and proportionate. Clearly lavish hospitality such as flying decision-makers first class to luxury hotels to tropical islands for long periods to win business will be a different matter. In most cases, the dividing line is clear.
In assessing the reasonableness of the hospitality and spend, regard can be paid to the nature of the individuals that are entertained and their leading role in major sources of funds. A good practical question is whether the hospitality is something the recipient could easily afford from their own resources, or whether you would feel embarrassment if the hospitality became a media story.
In addition to due diligence, investors will be looking to obtain warranties and indemnities from sellers and management. That, of course, will also apply when exiting an investment. Prospective purchasers will conduct due diligence and will themselves need assurances of ethical behaviour and warranties relating to such behaviour and associated procedures. Selling may be difficult, or selling prices reduced, where there are ongoing problems or a lack of adequate procedures. Buyers may themselves seek guidance from the SFO in these circumstances, triggering an investigation into previous management.
The Bribery Act will have a significant impact on private equity investors, particularly in investments in countries or industry sectors prone to bribery and corruption. Before investing, private equity funds are likely to want to assess during due diligence what bribery risks the target presents, and the existence and adequacy of existing anti-bribery and corruption systems, controls and procedures.
For further information no the Bribery Act 2010, click here.