Minimising corruption risk

The FCPA contains an exception to the bribery prohibition for facilitating payments for routine government action. It also provides two affirmative defences which can be used to defend alleged violations of the FCPA: payments expressly permitted by the written laws of the host country (the first affirmative defence); and payments which constitute reasonable and bona fide expenditures, such as travel and lodging expenses, incurred in relation to the promotion or demonstration of the products or services of the person paying or the execution or performance of a contract between the person paying and the foreign official's employer (the second affirmative defence).

The FCPA's accounting provisions include a books and records component and an internal controls component. Broadly speaking, those components (i) prohibit record-keeping practices that conceal or disguise the fact that a bribe was paid, and (ii) require issuers to operate internal controls that are designed to detect and prevent the payment of a bribe. If an organisation makes cash payments to foreign officials, either directly or indirectly through third-party agents or consultants, and the organisation's books do not expressly record this fact, these provisions will generally be implicated.

Both the anti-bribery and accounting provisions apply to US issuers. An issuer for this purpose is an issuer of securities listed and traded on a US exchange. It is important to note that many foreign multinationals with American Depository Receipts listed on a US exchange are issuers.

UK Bribery Act – the corporate offence

The Bribery Act came into force on July 1 2011. It prohibits both public and private sector bribery.The offence of active bribery prohibits a person giving, promising or offering a so-called “advantage” to another with the intention of inducing that other person to do something improper. There is an equivalent offence of passive bribery which prohibits requesting, agreeing to receive or accepting a bribe.

The statute contains a separate offence of bribing a foreign public official with the intention of influencing that official and with the intention of obtaining an advantage as a result. These offences apply not only to acts undertaken in the UK, but also to acts undertaken outside the UK by those with a close connection to the UK, including UK companies, UK citizens and UK residents.

Probably the most far-reaching provision of the Bribery Act is the corporate offence. This offence is committed where a company fails to prevent those performing services on its behalf from paying bribes to win business for it. The only defence is to show that an organisation had in place adequate procedures to prevent such bribery. The UK government has issued six guiding principles for companies to assist them in determining whether their compliance programmes constitute adequate procedures for the purpose of the Act.

The offence has very broad jurisdictional scope. It applies not only to companies and partnerships incorporated and formed in the UK, but also to non-UK incorporated companies and partnerships which carry on a business, or part of a business, in the UK.

PRC anti-corruption laws – dealing with demand

The PRC Criminal Law (中华人民共和国刑法) and the PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法) are the primary anti-corruption statutes in China. The Criminal Law creates offences relating to bribery in both the public and private sectors. Article 393 is concerned with public sector bribery and makes it an offence for individuals and entities to offer bribes to state personnel for the purposes of securing illegitimate benefits, or to give kickbacks or so-called “service charges” to state personnel in violation of state regulations. For the purpose of this provision, state personnel include a person performing a public function in an SOE. Article 164 relates to commercial bribery and makes it an offence to give money or property to the personnel of any private sector company for the purposes of securing illegitimate benefits. In 2011, the Criminal Law was amended to create a new offence of bribing foreign public officials to mirror the corresponding FCPA and Bribery Act provisions.

The Anti-unfair Competition Law prohibits commercial bribery by business operators. In particular, it prohibits the offer of money or property in order to sell or purchase commodities. It also prohibits the provision of off-the-books kickbacks. To date, the authorities in the PRC have focused on the prosecution of individual recipients of bribery, or the demand side of bribery. That being said, the PRC prosecutorial authorities have recently been more active and the risk of prosecution of Western companies for corruption offences is increasing.

|

Comparing the Acts

Public and private sector bribery

The FCPA only applies to the public sector whereas the Bribery Act and PRC law apply to both the public and private sectors. Other US laws have been used to combat corruption in the private sector.

|

Gifts and hospitality

The three statutes deal differently with the provision of gifts and hospitality to customers and government officials. Gifts and hospitality may constitute what are called “things of value” for the purpose of the FCPA and therefore implicate the anti-bribery provision if provided corruptly to a foreign official. As noted above, the FCPA does, however, contain an affirmative defence for “reasonable and bona fide” expenditure directly related to business promotion or contract performance. As a result, low-value gifts or product samples as well as promotional trips to companies' facilities would generally be permissible under the FCPA.

The Bribery Act does not contain an equivalent defence for “reasonable and bona fide” expenditure. In its most recent guidelines released in October 2012, the UK's Serious Fraud Office (SFO), the principal body responsible for prosecuting the Bribery Act, noted that even though bona fide hospitality or promotional or other legitimate business expenditure is recognised as an established and important part of doing business, bribes are sometimes disguised as legitimate business expenditures. Prosecution will depend on whether there is a realistic prospect of conviction and whether it is in the public interest to do so. The availability of civil settlement is also a relevant factor.

PRC law is silent on when gifts or hospitality are unacceptable. While commercial bribery requires the advantage provided to be of “relatively large value”, there is no minimum exception for public sector bribery. In respect of the latter, the prosecution will consider: (a) the relationship between the person offering and the recipient; (b) the value of the advantage; (c) whether the parties seek any interest by taking advantage of the recipient's position; and (d) the purpose, timing and manner of delivering the advantages.

|

Facilitation payments

While the FCPA contains an exception to the anti-bribery provision for facilitating payments for routine government action, the Bribery Act and PRC law contain no such exception. The most recent guidance on the Bribery Act emphasises the illegal nature of facilitation payments but suggests that the SFO will focus on cases with a significant international element. PRC law is silent on this issue. However, multinationals should note that there are no minimum thresholds for public sector bribery and the provision of facilitation payments may therefore create risk under PRC law.

How to mitigate corruption risk

There is no one size fits all compliance solution for multinationals operating in China. A compliance framework should be developed based on an analysis of the entity's business and risks that it faces. However, there are a number of general points that organisations should bear in mind when putting together their compliance programs (see below: 'Nine rules to minimise risk').

Nine rules to minimise risk:

1 Assess which laws are relevant to your organisation: As illustrated above, different laws contain different prohibitions and exceptions. It is important that organisations take legal advice to understand which regulations apply to them.

2 Identify the risk: Organisations should analyse the type of business and transactions they are undertaking in China. They should also consider the degree of interaction with government officials and agencies, whether they engage third party agents or consultants to secure business or interact with government officials, and the policies and processes they already have in place to prevent corruption.

3 Develop an appropriate and effective anti-corruption compliance programme: The programme should be tailored to mitigate the risks faced by the organisation and provide straightforward guidelines for employees to follow. It should be kept under review and updated where necessary according to current risk assessments.

4 Allocate responsibility for implementing and overseeing the policy: It is important that those responsible for compliance understand their role and have ready access to legal advice if they have any concerns or questions.

5 Inspire a culture of compliance: The tone should be set by management and the importance of compliance emphasised on a regular basis at all levels of the organisation.

6 Provide regular training programmes: Continuing education for employees is key to maintaining an effective compliance program.

7 Maintain compliance records and conduct compliance audits: It is important that accurate records are kept and regular compliance audits undertaken to monitor compliance with the policy.

8 Ensure M&A due diligence includes an anti-corruption review: Acquiring organisations can assume liability for corrupt conduct of the target entity both before and after completion of the transaction. Due diligence is a key tool for managing corruption risk in these circumstances.

9 Act promptly if an issue arises: Prompt action should be taken to investigate potential breaches of the compliance policy and effective steps should be taken to implement necessary remedial measures (including taking disciplinary action as appropriate). Consideration should be given to retaining outside counsel at the outset to maintain privilege over any investigation.

Kyle Wombolt and Robert Hunt, Herbert Smith Freehills, Hong Kong