Corruption crackdowns

Carrying on a business

The corporate offence applies to any organisation “carrying on a business, or part of a business” in the UK, wherever it is headquartered and wherever the actual bribery takes place. Carrying on a business is not defined by the Act and the courts will determine this on a case-by-case basis.

According to Guidance published by the UK's Ministry of Justice, applying a common sense approach would mean that organisations that do not have a demonstrable business presence in the United Kingdom would not be caught. The Guidance states that a UK listing would not be expected to qualify as a company carrying on a business or part of a business in the UK. Having a UK subsidiary will likewise not mean that a parent company is carrying on a business in the UK, since a subsidiary may act independently of its parent or other group companies. However, subsequent comments by the Serious Fraud Office (SFO) have indicated that the SFO would take a broad view of carrying on a business to ensure a level playing field between companies in the UK and those based elsewhere. This means that, PRC companies may fall within the scope of the Act, depending on the nature of their business.

Associated persons

The Act creates an offence of “failure by a commercial organisation to prevent bribery on its behalf”. This is particularly problematic for PRC activities. The Act creates criminal liability for a commercial organisation if an associated person bribes another with the intention of benefitting that organisation.

Some may apply the tactic of removing this risk by outsourcing activities to separate entities, but given the wide definition of an associated person, this will often not be effective. Under the Act, a person who performs services for the organisation is associated with it. This may include joint venture partners, subsidiaries, distributors, sub-contractors and suppliers.

There is no requirement that the organisation knew of the bribery or agreed to it for the organisation to be liable. This creates particular risks and since the Act came into force several multinationals have taken this opportunity to review their systems and processes.

This presents perhaps the most difficult area for PRC companies who do business in the UK. Is a joint venture company or subsidiary always performing services for the parent company, or is the parent company rather in the position of a third party investor? Whether the act was done with the intention of benefitting the organisation may not always be a straightforward question to answer.

Adequate procedures

The only defence for a commercial organisation which fails to prevent bribery is that it had adequate procedures against corruption in place. According to the Guidance, adequate procedures include conducting due diligence on anyone who will be performing services for the organisation and making this part of the tendering and recruitment process. The Guidelines also stress the need for communication and training so that bribery prevention policies are understood throughout the organisation. In addition, they stress the need for regular risk assessment, monitoring and review of the company's anti-bribery procedures and their effectiveness.

Enforcement trends

It is still unclear how far the UK authorities will press for enforcement. There has only been one prosecution to date – a court official was convicted of taking bribes. This is perhaps a reflection of the fact that the Act does not have retrospective effect. The UK authorities have brought many cases against companies and individuals for corruption offences in the last few years under the old laws and will undoubtedly be looking for test cases for the Act to send a warning signal to others.

US companies and citizens doing business in the PRC are already subject to the Foreign Corrupt Practices Act (FCPA). The FCPA prohibits US companies, citizens and companies listed on US exchanges, or anyone acting in the US from offering, paying or promising to pay money or anything of value, directly and indirectly, to obtain or retain business or to gain an undue business advantage with a corrupt intent. In April this year, Garth R Peterson, managing director of Morgan Stanley's real estate investment funds, pleaded guilty to conspiring to evade the bank's internal controls by bribing a Chinese official to win lucrative real estate investments for the bank and himself (see case in point). The banker faces up to five years in prison when he is sentenced in July. This prosecution bears out the warning from Assistant US Attorney General Lanny Bruer that “FCPA enforcement is stronger than it has ever been – and getting stronger”. Notably, the Department of Justice declined to bring charges against the bank because of the systems it had in place to prevent employees from engaging in bribery.

Even institutional investors may be at risk. In January 2012, the SFO announced it had recovered more than £130,000 ($208,902) from Mabey Engineering (Holdings) by way of civil compensation. What distinguished this from other similar orders was that it was made against a company not accused of any wrongdoing. The funds recovered represented dividends paid by a subsidiary, Mabey and Johnson, which was convicted in 2009 of corruption offences relating to overseas contracts. The director of the SFO heralded the development as marking a wider approach to the enforcement of anti-corruption measures to include investors who receive the proceeds of corporate crime through dividends. The courts have yet to determine whether shareholders who have no knowledge that crimes have been committed can be pursued in this way, but the possibility cannot be ruled out. However, what seems clear is that the SFO expects stakeholders not to turn a blind eye to what may be corrupt or questionable practices and thereby indirectly benefit from those prohibited practices.

The response in China

There has been a significant amount of interest from multinationals seeking advice when contracting with Chinese companies to set up joint ventures or supplier or even distributor relationships. There is an increased emphasis on performing due diligence as contracts are being negotiated. Domestic companies will see this become the norm among international customers and business partners.

Companies are seeking advice on contractual provisions requiring the counterparty's compliance with the Act. They also seek to allow for terminating the contract where there are grounds for suspicion that an offence has been committed or where there is an investigation underway by the authorities. If it is known that the counterparty will subcontract to a local agent, provisions are often included to ensure the agent is identified and that appropriate due diligence is conducted. The effect will be a trickle down of obligations to those who may currently assume they are unaffected by the Act.

This is particularly important in the context of mergers and acquisitions. Generally, a purchaser inherits the target company's liabilities and contingent liabilities, including liability for violations of law and contracts with third parties who may not engage in best practice. This calls for thorough due diligence before completion and, if problems arise, a proactive approach to self-reporting may be warranted. In certain cases, it may also be necessary to exit the investment.

The Act has altered somewhat the treatment of facilitation payments for many multinationals in China. Facilitation payments are permitted under certain defined circumstances and with written pre-approval under the FCPA. However, the Act outlaws facilitation payments. Consequently, many multinationals are subject to the Act and the FCPA have had to revisit their policy on facilitation payments since the Act came into effect. Many that previously did not prohibit facilitation payments now do so.

There has also been an increase in training international companies in terms of best practice regarding compliance with the Act, the FCPA and the body of civil and criminal laws and regulations that make up PRC anti-corruption laws. Many international companies doing business in China have opted for a global approach – reviewing systems and processes to ensure compliance with all three pieces of legislation, thereby ensuring compliance with the highest common denominator in every jurisdiction. Under the Act, if an organisation is stringent in its anti-bribery controls, it may escape liability even where an employee acting alone circumvents those controls. In the case of Garth R Peterson, this led to the bank escaping prosecution. The relatively low penalties issued against IBM last year after some extensive bribery schemes were exposed, underscores the same lesson.

PRC companies have yet to grasp the importance of the Act upon their businesses. Since June 2011, Chinese firms operating abroad have been subject to Article 164 of the PRC Criminal Procedure Law (中华人民共和国刑事诉讼法). These provisions criminalise bribes paid by individuals and entities to foreign public officials or officials of public international organisations for “pursuing improper commercial interests”. It is unclear at present as to the degree of rigour with which this new domestic law will be enforced.

While the full effects of the Act are yet to be felt by companies operating in the PRC, these companies should be under no illusions about the determination of the UK enforcement authorities to uphold the principles enshrined in the Act, in step with their US counterparts. Directors and shareholders should be alive to the risks, not least upon the company's brand, often one of its most treasured assets.

By Lesli Ligorner, Abdulali Jiwaji, Michael Hickman and Nigel Sharman, Simmons & Simmons, Hong Kong and Shanghai