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Control Risks forms anti-fraud investigation team

29 Jun 09

Control Risks Group has launched a new team dedicated to screening international agents, vendors and third parties. Brian Sims reports on this, while Peter Gray and Paul Cohen outline the Government's proposed UK Bribery Bill.

By Brian Sims

As business becomes increasingly globalised, more and more companies find themselves operating in jurisdictions plagued by all-pervasive corruption and – at best – weak corporate governance standards.

Bribes, kickbacks and other unethical activities have, of course, been the norm in many parts of the world for years. However, while these practices may be acceptable within a given country, such complacency does little to reassure western businesses subjected to increasingly strict regulatory requirements. They need to preserve their own good reputations and, in the case of public companies, answer to their shareholders.

In such a climate, those companies operating on the international stage are forced to devote increasing time and resources to due diligence procedures. Such procedures cannot always be taken care of in-house, thus many clients are looking for third parties to provide a robust solution.

Global Business Integrity Programmes

As a response to this increasing market demand, Control Risks – the independent, specialist risk consultancy based in London – has established a new investigations team dedicated purely to high volume, compliance-focused due diligence screening services.

Designated ‘Global Business Integrity Programmes’, the team will assist clients in both structuring and executing due diligence policies, under which a given client’s potential counterparts – such as local sales agents, joint venture partners, intermediaries and candidates for senior positions – are screened for evidence of corrupt activities, money laundering, unethical conduct or other matters of concern.

The new team’s prime focus, then, is on adequately investigating and vetting both individuals and companies.

US and European enforcement agencies have recently handed down historic fines – running into millions, and sometimes billions of dollars – under legislation such as the US Foreign Corrupt Practices Act (FCPA), while at the same time the US Department of Justice has instigated a sharply increased emphasis on individual liability.

Penalties for violations can be painful

The US Foreign Corrupt Practices Act prohibits the direct or indirect payment of cash (or anything else of value) to a foreign official in order to “obtain or retain business”. The penalties for violations can be painful, including fines of up to US$2 million per violation, as well as criminal fines for culpable individuals of anything up to US$250,000. The threat of imprisonment for up to five years is also an option if US legal officials decide that’s the best course of action.

As evidence of the jurisdictional reach of the FCPA, US regulators – in conjunction with German regulators – recently fined Siemens AG a record US$1.6 billion for scores of FCPA violations.

Legislation similar to the FCPA exists in most European countries via the OECD Anti-Bribery Convention, the EU Third Directive on Money Laundering and other legislation. In January 2008, for example, the UK’s own Financial Services Authority (FSA) fined Aon Limited £5.25 million for making illicit payments to overseas third parties who helped it win business. This is the largest financial crime-related fine imposed by the FSA to date.

Coupled with the prospect of a new Corruption Bill in the UK (more of which anon), all of this makes it even more critical for companies and executives conducting business overseas – particularly in emerging markets – to implement and then adhere to global compliance programmes that meet the requirements set out by international and local regulators.

Third party due diligence: key role to play

The key role of third party due diligence has already been underlined by the US Department of Justice, which has stated that regulators would consider the extent – or absence of – due diligence when resolving a case pertaining to foreign payments.

Indeed, Mark Mendelsohn – the Department’s deputy chief prosecutor of foreign bribery – has advised companies to undertake “aggressive due diligence”, and stated that his Department would be “much less sympathetic” to companies that “stumble on” foreign payments a year or two after the transaction.

Last September, Mendelsohn noted that the Department of Justice had yet to bring charges against any companies that have had “meaningful compliance programmes” in place.

For these and other reasons, Global Business Integrity Programmes offers efficient compliance solutions in the form of robust due diligence tailored to the specific needs and requirements of individual clients.

Mendelsohn’s sentiments also permeate through the UK. Following the FSA’s fine against Aon Limited, Margaret Cole – the FSA’s director of enforcement – sent a clear message in saying: “It’s completely unacceptable for firms to conduct business overseas without having in place appropriate anti-bribery and corruption systems.”

Appropriate vetting of business partners

Continuing the theme, Toby Latta – regional director for Europe at Control Risks – added: “In this climate of rigorous enforcement, it has become critically important for companies conducting business internationally to implement programmes that appropriately vet all of their business partners. It’s vital that such companies be informed as to an individual’s or company’s professional history, and whether there is any evidence of illegal or unethical activity having taken place in the past.”

Through its 27 offices worldwide, Control Risks has extensive experience of designing and executing due diligence programmes. While often focused on compliance with FCPA and other applicable legislation, these programmes also provide a ‘lens’ through which the general reputation and track record of the subjects can be scrutinised, thus enabling companies to make informed commercial decisions about future business partners.

UK Bribery Bill: will it actually happen?

It’s well known that the UK’s anti-corruption laws are outdated, write Peter Gray and Paul Cohen. Many commentators have written of the mooted Bribery Bill, which is currently being considered by a Parliamentary Committee. Will this much-needed legislation come into being and, if so, should multinational companies be at all concerned?

Bribery has been unlawful in the UK since at least the time of the Magna Carta, so it’s perhaps a tad surprising that the legislature has struggled to implement anti-corruption legislation suitable for modern business. It has also been criticised – some might say unfairly – by the OECD for failing to adequately implement the provisions of the Anti-Bribery Convention.

Many have questioned the UK’s commitment to the issue, and felt vindicated after the Government halted the Serious Fraud Office’s investigation into BAE’s Al-Yamamah deals.

The UK’s principal anti-corruption legislation – namely the Public Bodies Corrupt Practices Act 1889 and the Prevention of Corruption Act 1906 – is over a century old. In addition, there’s the common law offence of bribery to be considered (which is understood to take place when a bribe is given or offered to induce a public official to fail to act in accordance with their duty).

The Public Bodies Corrupt Practices Act makes it an offence for any person to “corruptly” solicit or receive any advantages as an inducement to any officer of a public body, doing or omitting to do any matter or transaction. There is a similar offence for the giving of the advantage.

The Prevention of Corruption Act 1906 states: “If any agent corruptly accepts or obtains, or agrees to accept or agrees to obtain, from any person, for himself or for any other person, any gift or consideration as an inducement or reward for doing or forbearing to, or for having… done or forborne to do, any act in relation to his principal’s affairs or business, or for showing or forbearing to show favour or disfavour to any person in relation to his principal’s affairs or business…”

There are similar provisions in place for paying a bribe.

The overriding need for legal reform

The Act was mainly limited to domestic bribery. At the time it was enacted, international corruption was, of course, somewhat less widespread. The world’s first airline had yet to be formed, and the transatlantic telegraph was but a few years in existence.

Despite the rapid increase in the speed and ease of travel and communications throughout the 20th Century, it was not until 2001 that the Act was expressly extended to include bribery carried out overseas – in the shape of the Anti-Terrorism, Crime and Security Act 2001. Even so, the amendment has resulted in only one single successful prosecution for bribery overseas (to date, at least).

The foremost problem with the current law is the use of the word ‘corruptly’ in the Acts, which has resulted in the development through case law ever since, the most recent incidence being in 2001.

In addition, there are different regimes for the private and public sectors. An example of the confusion caused by this was realised with the case of Regina versus Natji in 2002. The defendant was charged under the wrong Act and then acquitted on appeal. The prosecutors, the trial Judge and the Attorney General had all failed to apply the anti-corruption legislation in the correct manner.

The confused state of affairs that exists is also blamed by some for the relatively low number of prosecutions, and has engendered an almost universal acceptance of the desperate need for reform.

Will the Bill become law at some point?

The last attempt at comprehensive reform of the system – namely the draft Corruption Bill – was abandoned back in 2003 in the wake of heavy criticism from a Parliamentary Joint Committee. The current draft follows a Government consultation paper and a further Law Commission report.

During this time, a separate Bill introduced by Lord Chidley also met a premature end. Speaking for the Government when the Bill was presented, Baroness Scotland commented: “I must emphasise that our existing corruption law is fully compliant with our obligations… including the OECD Convention”.

Only a few months later, the Lord Chancellor and Secretary of State for Justice, Jack Straw, took a different stance. When introducing the new Bill, Straw said: “We have acted on their [the OECDs] particular criticism because it was true that our bribery legislation is to be found in a number of separate Acts of Parliament and in common law. Most of these statutes go back a hundred years or so, and they’re incoherent.”

This time it should be different. The new Joint Committee has a very tight timetable. It must report by 21 July. Allowing for the Parliamentary summer recess, which lasts from that day through until 12 October, this doesn’t leave much time before the next General Election (which must take place prior to 10 May next year).

While none of this bodes well for the Bill’s chances of becoming law in the near future, it does enjoy all-Party support. Indeed, the legislative calendar is likely to be much lighter before rather than after the next General Election, meaning that it’s possible for the Bill to become law prior to May 2010.

If it doesn’t, well then you can expect delays. With the recent Parliamentary expenses controversy having caused Speaker Michael Martin’s resignation and – possibly – making a change of Government that bit more likely, it’s interesting to note that it was bribery that caused the last Speaker to be removed from Parliament… In 1695!

Governments may change, but international pressure – particularly from the US – will not. That pressure is not only to change the law, but also to enforce it. We have been told to expect that there will indeed be prosecutions. Under the current law, we all know they’ve been few and far between. It looks like a case of Watch This Space.

Key provisions of the legislation

The draft Bill does not define ‘bribe’ or ‘bribery’ even though it does use those words. Instead, its sets out three cases, two of them in relation to offering a bribe and one in respect of receiving a bribe.

Notwithstanding that these ought to encompass all forms of bribery, there’s also a separate offence of bribing a foreign public official. Presumably, those who attempt to bribe domestic officials will be dealt with under the previous sections.

In short, an offence is committed if a person offers or accept a “financial or other advantage” where the intention is to induce the other to act (or reward the other for acting) improperly. Acting improperly means that the person concerned was expected to perform the act in good faith, impartially or that it’s being performed by someone in a position of trust.

Offering a financial advantage where the acceptance of the advantage itself would be improper is also an offence. This is so even if the recipient has not behaved improperly, and was not intending to behave improperly. The offence covers a very wide range of activities, including “any function of a public nature” and “any activity connected with a business, trade or profession,” provided that the function should have been performed impartially and in good faith by a person “in a position of trust” (this term being undefined).

There’s also a new offence of corporate liability. Section 5 criminalises negligent failure by a “responsible person” to prevent a bribe by – or on behalf of – a corporation (it’s the corporation rather than the responsible person who’s ultimately liable). A “responsible person” is the person at the organisation tasked with preventing bribes, failing which it is a senior officer of the organisation (a role which is also defined).

It’s a defence, however, if “adequate procedures” were in place and designed to prevent bribery offences from being committed. The notes to the Bill deliberately reject providing guidance on what amounts to “adequate procedures” on the basis that the offence is not regulatory, and that there’s no ‘one size fits all’ approach to encourage companies in implementing proper measures.

The penalty for corporate liability is an unlimited fine. Individuals convicted of bribery face a maximum sentence of ten years in prison and/or an unlimited fine.

Likely effects on the multinationals

The fact of corporate liability should not be a concern to most multinationals. The US FCPA already contemplates corporate liability, as is commonly the case under US criminal law.

Although the FCPA is an intent-based statute and doesn’t attribute liability for negligence in this area, according to the US Attorney’s Manual – itself produced by the aforementioned Department of Justice – the existence and effectiveness of compliance procedures will play a role in the Department’s decision as to whether or not it prosecutes an individual under scrutiny.

The Attorney’s Manual acknowledges that no compliance programme can ever prevent all criminal activity by employees, but provides that the programme will be evaluated to check whether it was properly designed and whether it’s being enforced (or whether management is tacitly encouraging employees to behave corruptly).

The FCPA doesn’t just apply to US companies. It’s well known that the Department of Justice and other US enforcement authorities will assume jurisdiction on the basis of what other nations might characterise as tenuous connections within the US. It was enough in the US investigation of BAE, for example, that some of the alleged bribes had apparently passed through US bank accounts.

As such, most compliance officers at multinational corporations have had anti-bribery policies in place for some time now. In 2006, a survey conducted by Control Risks found that such policies were in place in statements of business principle for 90% of all surveyed British, German, Dutch and US organisations.

Those who didn’t follow this up by ensuring their systems were adequate would have had a wake-up call in January when the aforementioned Aon Limited case came to light.

Regulatory overlap: The Big Issue

The bigger issue for compliance officers is now regulatory overlap. The anti-bribery programme may need to satisfy the Department of Justice, the Financial Services Authority (in relation to financial services firms) and now, possibly, a UK Jury as well. This is to say nothing of other countries’ regulators, who may also be keen to show they’re being tough on acts of corruption and bribery.

It would probably simplify matters for all concerned if the Bill expressly stated that approval of a corporation’s procedures by an appropriate regulator or prosecuting authority should be a defence. Clarity is also needed as to who has the burden of showing that procedures were adequate or not.

While in most cases an FCPA-compliant system should not require much amendment to comply with the provisions of the new Bill (if indeed it does become law), there’s one issue which – as drafted – could trip up the unwary. It’s the issue of “facilitation payments”.

These are relatively small payments made to officials for routine matters to ensure they carry out the role they should be playing anyway. Under limited circumstances, facilitation payments can be made without violating the FCPA. Although they are currently unlawful under UK law, the new wording of the prohibition is stricter than before.

If it would be unlawful – under local laws – for the official to take the payment, then the paying party commits a crime. It’s up to that paying party to satisfy itself that the payment is indeed lawful. Given the opaque nature of the laws of many countries, this is an impossible task.

According to guidance from UK Trade and Investment – the Government sub-department with which many of you will be familiar as a result of IFSEC and the BSIA’s Meet The Buyers event – a blind eye is often turned towards such payments. This is an unsatisfactory situation for the purpose of advising a Board. Guidance from the Government department is not a defence in Court.

These issues have been brought to the attentions of the appropriate Members of Parliament with the suggestion that it would be better that the paying party knew (or should reasonably have known) that they were making an unlawful payment. Goodness knows there are already enough challenges facing local employees without them also having to be experts in local laws.