2014 has been an active year for the prosecution of corruption cases.
In Singapore, the Court of Appeal in PP v Teo Chu Ha  4 SLR 600 and PP v Leng Kah Poh  SGCA 51 made it clear that it would take a comprehensive approach in examining the substance of any corruption allegation under the Prevention of Corruption Act (PCA), Chapter 241. An agent or employee cannot hide his corrupt act behind a corporate structure. In the UK, the English courts clarified 2 controversial areas of the law. In FHR European Ventures LLP v Cedar Capital Partners  3 WLR 535 (FHR v Cedar), the Supreme Court held that principals have a proprietary remedy against agents who accept bribes and secret profits. This ruling has an impact on the standing of such bribes and profits in insolvency situations. In addition, the High Court in UBS AG (London Branch) & Anor v Kommunale Wasserwerke Leipzig  EWHC 3615 (UBS v KWL) addressed the civil consequences when the bribe is paid by an intermediary who had acted, in essence, for both parties to the contract. THE SINGAPORE DECISIONS In PP v Teo Chu Ha, the accused, Teo Chu Ha, hatched a scheme to award trucking contracts to a company, Biforst Singapore Pte Ltd (Biforst), which was to be incorporated by a co-conspirator. Teo would then be permitted to purchase 20,000 shares in Biforst for $6,000 and would receive dividend payments out of the profits derived from the trucking contracts. The Prosecution’s case was that Teo’s gratification consisted of i) the Biforst shares and ii) the dividend payments. The High Court acquitted Teo as it was not convinced that he had obtained a gratification or a bribe since he ostensibly purchased the shares (at seeming value) – and therefore any future right of dividend payments. On criminal reference to the Court of Appeal, the Court of Appeal held that the opportunity to purchase the Biforst shares and/or the assistance rendered in purchasing the shares, together with the shares, alone could constitute gratification.1 In essence, the Court of Appeal was able to find a link between the intention to award the trucking contracts and the purchase of shares in Biforst and earning of dividends in Biforst. No doubt the fact that Teo paid S$6,000 for the shares and received over S$500,000 over 11 dividend payments were also factors taken into account by the Court of Appeal. Your Stamford Contact: Daniel CHIA, Director DID: +65 6389 3053 [email protected] smart. We have what it takes DISPUTE RESOLUTION 0 _________________ The Court of Appeal highlighted the fact that corruption schemes had grown more sophisticated and stressed the need to root out such corruption. It emphasised that putting more hurdles in the Prosecution’s way would be inconsistent with the “broader spirit and policy of the PCA – which is to prevent corruption in its various forms”.2 In PP v Leng Kah Poh, the accused, Leng Kah Poh, was charged with accepting bribes to the disadvantage of his employer – Ikea. Leng had conceived a scheme to award food contracts to two companies and, in return, he would be paid a portion of the profits from the food contracts. The High Court initially acquitted Leng holding that (i) since Leng was the mastermind of the scheme he was not “induced” by others; and (ii) the profits Leng received were in reality payments made to himself as part of a profit-sharing scheme (perhaps illegal) and not gratification from a third party. The Court of Appeal, in criminal reference, disagreed holding that (i) an employee, who initiated/master-minded/co-conspired in the payment of a gratification to himself, may be regarded as being corruptly induced; and (ii) such an act which conflicts with the interests of his principal, may be regarded as being corruptly induced. The Court of Appeal highlighted certain important principles: (i) a determination of whether an objective corrupt element exists, is not dependent on who initiated the promise of the gratification but whether there was a promise of gratification; (ii) the doctrine of separate legal entity for incorporated companies applies equally in the context of the PCA. Thus, the agent’s ownership of the company does not detract from the fact that the company is a ‘third party’ for the purposes of the PCA unless the corporate veil was pierced; and (iii) in considering whether a corrupt element exits, it was important to balance the fact that the agent may be entitled to profits made by a beneficially owned company, with other facts which might show that an objective corrupt element is still present. A court must make an inquiry into the “true nature” of the arrangements between the agent and the beneficially-owned third party company. The relevant considerations that the court raised include: 1) workings of the scheme; 2) how the secret profits were derived; 3) how the third party company was incorporated, among others. smart. We have what it takes DISPUTE RESOLUTION 0 _________________ DEVELOPMENTS IN THE UK Moving on to the UK, the Supreme Court clarified the area of civil liability in corruption through the decision of FHR v Cedar making clear that a principal has a proprietary remedy against an agent with respect to the bribe monies and secret profits. The court acknowledged that there were two competing line of authorities. The Privy Council in Attorney General of Hong Kong v Reid  1 AC 324 (AG v Reid) concluded an agent always held bribe monies on trust for his principal and these could be traced to his properties. Whereas, the English Court of Appeal in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd  Ch 453 (Sinclair v Versailles) took the position that bribe monies could not be said to be the property of the principal, thus the principal should not be entitled to a proprietary remedy. Lord Neuberger concluded that the issue had to be decided in accordance with principle and practicality. The court favoured the approach in AG v Reid for several reasons. First, it had the merit of simplicity.3 Whereas, the approach in Sinclair v Versailles would lead to uncertainty because there are various ways of arguing whether the secret profits or bribe monies could have formed part of the principal’s property. Second, from an economic perspective, a bribe will very often have reduced the benefit which the principal could have obtained from the transaction; and therefore the bribe can fairly be said to be the principal’s property.4 Third, from a policy perspective, the law should be “particularly stringent” in relation to such claims because bribery is an “evil practice” and secret profits “tend to undermine trust in the commercial world”.5 Fourth, such a rule would not prejudice the agent’s unsecured creditors.6 This is because the bribe or secret profit should not form part of the agent’s estate in the first place and the bribe should be seen as part of the principal’s property. This decision aligns the UK’s approach to civil liability in bribery cases with that in Singapore and other common law jurisdictions such as Australia.7 It is also highly suggestive that the position adopted by the Singapore Court of Appeal in Thahir Kartika Ratna v PT Pertambangan Minyak dan Gas Bumi Negara  3 SLR(R) 312 – that the principal is entitled to a proprietary remedy against bribe monies - is likely to remain unchanged. Rounding off a year of significant developments in the law of corruption was the closely monitored case of UBS v KWL (which was covered in the December 2014 issue of the Chronicle). The case arose from the aftermath of the 2008 financial crisis and involved a series of complex derivate financial instruments called Single Tranche Collaterialised Debt Obligations (STCDOs). smart. We have what it takes DISPUTE RESOLUTION 0 _________________ Value Partners Group AG (VPG), who acted as financial adviser to KWL, brokered several STCDOs between KWL and several banks including UBS. As a result of the financial crisis, several entities in the STCDO portfolio defaulted. Consequently, KWL became liable to the banks to the tune of hundreds of millions of dollars. In its defence, KWL sought to void the STCDOs on the ground that they were procured by bribes paid by VPG, acting as agents of UBS, to one of the managing directors of KWL. The English Court held that the STCDOs were voidable. One of the key issues was whether VPG was an agent of UBS or KWL. The English Court held that VPG was, in substance, acting as agent of both KWL and UBS in arranging and facilitating the signing of the STCDOs and therefore the corrupt acts of VPG could be attributed to UBS. Lessons Learnt There are several important lessons to be distilled from the above cases which compliance officers should be aware of: 1) an agent can still be guilty of receiving a bribe if the benefit is given in another form – including the opportunity to purchase shares or receive dividends from those shares. It would not matter even if the agent had purchased the shares at market value; 2) an agent cannot hide behind a corporate structure to shield or hide the fact that a bribe was taken. A court would look into the “true nature” of the transaction in accessing whether a bribe had been paid; 3) the bribe would be recoverable by the principal as a propriety remedy. The recognition of such a propriety right has implications in the event of any insolvency of the agent and would permit the principal to trace the proceeds of such payments into other assets owned or gifted by the agent; 4) an intermediary may be an agent for both parties to a transaction and therefore the bribe paid by an intermediary could undermine the entire transaction regardless of who the initiator of any litigation is; 5) finally, as may be seen from UBS v. KWL, there may be significant civil consequences (such as the voiding of commercial contracts) in the event a corporation has become the victim of a corrupt act of an intermediary even if the corrupt act was committed without the knowledge of anybody within the corporation. smart. We have what it takes DISPUTE RESOLUTION 0 _________________ 1  PP v Teo Chu Ha 2  PP v Teo Chu Ha 3  FHR European Ventures LLP and others v Cedar Capital Partners 4  &  FHR European Ventures LLP and others v Cedar Capital Partners 5  FHR European Ventures LLP and others v Cedar Capital Partners 6  FHR European Ventures LLP and others v Cedar Capital Partners 7  FHR European Ventures LLP and others v Cedar Capital Partners In the current climate, it is even more important for compliance teams to implement stringent compliance policies to ensure that their companies are not exposed to an agent’s corruption. Such compliance policies should also not simply be limited to employees, but must also be extended to the company’s agents and other intermediaries who may be acting in the capacity as agents. The focus is not merely to put in place policies to satisfy minimum compliance standards but to actively prevent corrupt acts by requiring employees, agents and intermediaries to actively disclose the true workings of a transaction.