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backGLOBALtalk April, 2012

UK Bribery Act

Turning Prevention into Effective Compliance.

Does your company have compliance programs in place to not only detect unethical conduct, but also to reasonably prevent its occurrence?

Companies across the globe have come to grips with a new reality as the U.S. government increases its enforcement of anti-corruption laws. Of the 10 largest corporate fines in the history of the U. S. Foreign Corrupt Practices Act (FCPA), eight occurred in 2010. Yet, even greater challenges may lie ahead for multinational companies, as enforcement of the UK Bribery Act, commonly referred to as the “FCPA on steroids,” takes shape.

Considered by many to be the new benchmark in global anti-corruption laws, the UK Bribery Act took effect in July 2011. The new law replaces an antiquated one dating back to World War I and arguably imposes stricter guidelines for companies than does the FCPA. The UK Bribery Act has broad jurisdiction and covers four main areas: giving a bribe, receiving a bribe, bribing a foreign public official, and failing to prevent bribery.

And while several of these provisions are likely to draw attention in corporate boardrooms, it is also becoming increasingly apparent that the UK Bribery Act may represent an opportunity for companies. Those that take the necessary steps to prevent bribery may be able to develop a competitive advantage. They may also be well-positioned to fend off potential violations that can result in sizable fines, damages to their reputation, and distractions from normal business operations.

PREVENTING BRIBERY:THE BAR MOVES HIGHER

With the advent of the UK Bribery Act, a company is no longer liable solely for engaging in bribery. Further, a company need not be aware nor have the intention of committing bribery in order to be liable. Companies may also be culpable for failing to prevent an associated person from obtaining or retaining business or other advantages on the company’s behalf. Associated persons may include employees and others, such as consultants, service providers, and distributors that may be connected to the company.

The Act’s provision requiring companies to prevent bribery carries with it strict liability, and may be especially challenging for boards. Companies now face the burden of being able to demonstrate that they have adequate systems in place to prevent bribery. To do so, they must ensure that their anti-bribery policies and procedures are sufficient in protecting it against bribery committed by an employee or agent. The presence of such programs will not only help mitigate the risk of occurrence, but may also serve as a defense and limit damage in the event that an offense occurs. If convicted under the “failure to prevent bribery” provision, a company may face criminal action including steep fines or imprisonment.

INCENTIVES AND EFFECTIVE COMPLIANCE PROGRAMS

Unlike the FCPA, the UK Bribery Act contains a compliance defense that may enable a company to avoid strict penalties even when a violation occurs. To do so, a company must demonstrate that it has an effective compliance program in place. Under the Act, a company may be protected if it has ‘adequate procedures’ designed to prevent bribery. As outlined by the UK Ministry of Justice, adequate procedures consist of six main areas:

- Proportionate procedures – actions taken to prevent bribery should be propor tionate to the risks a company faces

- Top-level commitment – the board and company management are best positioned to prevent bribery and must be committed to doing so

- Risk assessment – companies must assess the risks associated with entering new markets and exposure via employees and third par ties

- Due diligence – companies should know who they are doing business with and account for these risks

- Communication – policies and procedures should be communicated to employees and others who perform services for the company

- Monitoring and review – companies should assess risks and the ability of policies and procedures to mitigate them as they evolve over time

COMPLIANCE AS COMPETITIVE ADVANTAGE

Companies that can demonstrate to business partners and customers that they have sound, ethical business practices can differentiate themselves from competitors. Such programs can expedite the entry into new markets or countries, where companies may be subject to new risks, and could enable compliant companies to pursue deals and uncover new business oppor tunities that might otherwise not be present.

The UK Bribery Act provides an incentive for companies to establish robust compliance programs, given that a company with an effective compliance program may be in a better position to defend itself against allegations of bribery. For example, an offense may be defensible if a company demonstrates that it had adequate compliance procedures in place before the occurrence of any alleged misconduct. In addition, a company may be protected if an employee engages in corruption despite the company’s effor ts to mitigate its occurrence. With such a program in place, it may demonstrate that an impropriety is an isolated event that its compliance program was unable to detect. To this extent, the UK Bribery Act could motivate a company to identify an impropriety before it escalates into a companywide problem.

DEVELOPING A COMPLIANCE CULTURE

Establishing a strong compliance culture entails looking both outward for external risks and looking inward to evaluate company culture. First, it’s important for companies to conduct a comprehensive bribery risk assessment. Some key risks include assessing those countries and markets in which the company does business, the transactions it enters into, and the business partners it chooses.

A robust compliance program should include internal controls, written policies, and procedures. Anti-bribery policies and procedures should be clearly stated and practical, they should be applicable to employees and third parties, and they should address dealings with vendors and other partners.

The program should be top down; management should set the tone and reinforce it, where necessary, by developing appropriate training programs for employees. These may include guidance on policies and procedures related to gifts and entertainment in the normal course of business.

Training is but one component of establishing a compliance culture that may help to facilitate internal reporting. It’s also important to maintain books and records to prevent bribery and corruption. And once a company establishes internal controls, it is important to continually monitor them to account for new risks that surface as the company expands into new countries or businesses. Companies should also conduct an appropriate level of due diligence on key vendors and other counterparties such as agents, joint venture partners and others. Particular attention should be paid to key subsidiaries and branch offices to ensure that appropriate internal controls are in place.

MULTI-JURISDICTIONAL ENFORCEMENT: BEYOND THE UK

The UK Bribery Act impacts every company that is incorporated in the UK. But the law is multi-jurisdictional and will also have an impact on companies based elsewhere. Specifically, a company that “operates” in the UK, whether it may be through the possession of a UK branch office, employment of UK citizens, or provision of services to a UK company, may be prosecuted for offenses that take place anywhere in the world. As a result, the law has significant implications for a vast majority of multinational companies. Further, investigations conducted by the UK‘s Serious Fraud Office (SFO) into allegations of overseas bribery would now fall under the jurisdiction of the UK Bribery Act.

MEASURING UP TO THE FCPA

A key distinction between the UK Bribery Act and the FCPA is the new law’s introduction of a corporate offense related to the failure to prevent bribery. Yet, there are other aspects that distinguish the law between the FCPA, of which multinational companies should be mindful.

For example, where the FCPA prohibits the bribery of foreign public officials, the UK Bribery Act goes further, prohibiting the bribery of not only public officials but also of non-governmental entities. Unlike the FCPA, the UK Act Bribery does not distinguish between giving and receiving bribes and covers facilitation payments (bribes that seek to expedite services a company is legally entitled to, such as the connection of electricity and mail collection). Finally, the new law applies to both the public and private sector, meaning a company could be liable for bribing management at other companies.

REMAINING COMPLIANT

The enactment of the UK Bribery Act makes it especially important for companies to review their approach to managing bribery risk and to evaluate the adequacy of existing procedures and processes. It is important for companies with a presence in the UK to understand their risk exposure via subsidiaries, branch offices, and business partners. And because the statute is extraterritorial in its jurisdiction, multinational companies should also be on the lookout for behavior that could put them at risk.

Companies not only have strong motivation to mitigate bribery, but they have incentives to be diligent in their approach to detecting bribery and other forms of corruption. The new law has implications for senior management and the board of directors. The chief question is whether or not companies are prepared to meet the law’s steep guidelines. For example, do companies have compliance programs in place to not only detect unethical conduct but also to reasonably prevent its occurrence? Again, it’s important to recognize that under the prevention provision, companies may be liable even if a distributor or other business partner commits the offense without the company’s knowledge. By establishing incentives and compliance programs within the context of a larger culture of compliance, management can identify risks and work to prevent the occurrence of conduct that could be in violation of the law.

Source: AlixPartners - GAI

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