With the act set to take effect on July 1, the guidance provides some much needed instruction on the intended scope of the act and some suggested corporate processes to fulfill a covered company’s obligation to take adequate steps to prevent bribery by an “associated person.”
The act’s extra-territorial reach and expansive definitions creates the potential to impact U.S. companies that were previously immune from prosecution in the U.K.
In many ways, the act is broader than the U.S. Foreign Corrupt Practices Act; therefore it is important for U.S. companies that may conduct business in the U.K. to be aware of the new regime.
Broadly defining bribery
The act covers both giving and receiving a bribe. (A summary of the act can be found at www.justice.gov.uk/publications/bribery-bill.htm.)
Bribery is defined as giving someone a financial or other advantage to encourage that person to perform their functions or activities improperly or to reward that person for having done so.
Importantly, the act prohibits bribery in the public and private sectors, a significant expansion over the FCPA, which extends to only public bribery and corporate recordkeeping. In effect, the act has the potential to cover bribes offered and received in almost any commercial, governmental, or regulatory context.
The act creates a separate offense under Section 7 for companies that fail to prevent persons “associated” with them from committing bribery on their behalf. The definition of “associated persons” embraces a wide range of persons connected to a company. Employees are clearly associated persons. Generally, so are direct contractors. Subcontractors are not associated persons, absent extraordinary circumstances. However, direct sales agents can be, depending on the size, scope and materiality of the agency contract in relation to the company’s overall business.
Whether a person is performing services for a company will be determined by reference to all of the relevant circumstances and not merely by reference to their title.
The act provides a full defense to a corporation if the company can demonstrate that it had an effective compliance program in place designed to prevent employees, agents or other third parties acting on its behalf from committing bribery.
What counts as an adequate procedure depends on the bribery risks the company faces, as well as the nature, size and complexity of the business.
The particular bribery risks a company faces will be determined by the combined risks of the market, sector, and countries in which the company operates.
For example, western European markets clearly present less inherent market risk than the BRIC countries (Brazil, Russia, India, and China). The Ministry offers six principles for well-conceived bribery prevention: proportionate procedures, top-level commitment, risk assessment, due diligence, communication (including training), monitoring and review.
The act and the guidance leave open whether there is successor liability for acquiring companies. Under the FCPA, the acquiring company can be liable for the seller’s pre-transaction activities, and there are multiple examples of successor liability settlements with the U.S. government. It would be prudent to assume the U.K. will move in the same direction. Therefore, U.S. acquirers should revise their M&A due diligence checklists to include a separate compliance analysis under the act.
Those familiar with the FCPA will recognize the multitude of potential bribes that may be covered by the act that are not covered by the FCPA. As an initial matter, unlike the bribery act, the FCPA does not include penalties for those who receive a bride.
Further, the FCPA only prohibits bribery of foreign officials. It does not include bribery in the private sector.
Also, the FCPA requires that bribery payments be made “corruptly” to establish liability. Under the act, an intention to influence the official in his or her official capacity with an eye toward obtaining or retaining business is sufficient to trigger liability.
The guidance states that when determining whether a function or activity has been performed improperly, the test is what a person in the U.K. would expect in relation to the performance of that function or activity. In other words, how a reasonable person in the U.K. would view that act.
The guidance further provides that when the act takes place outside of the U.K., local custom or practice is to be ignored. Thus, the reasonable U.K. person standard applies worldwide.
Careful to reign in the fears of those who might see the act as overly broad, the guidance notes that the goal of the act is not to criminalize reasonable and proportionate hospitality. Instead, the question is whether the hospitality is intended to induce conduct that amounts to a breach of an expectation that a person will act in good faith, impartially or in accordance with a position of trust.
The guidance provides examples of hospitality that may be appropriate (e.g. taking clients to sporting events or dinner). But the analysis needs to be fact specific and driven by an objective review procedure that is independent of any interested internal corporate stakeholder, such as the sales or marketing departments.
One of the biggest differences that many have noted between the act and the FCPA is that the act lacks an exception for facilitation or “grease” payments.
The guidance specifically draws a distinction with the FCPA: “Exemptions in this context create artificial distinctions that are difficult to enforce, undermine corporate anti-bribery procedures, confuse anti-bribery communication with employees and other associated persons, perpetuate an existing ‘culture’ of bribery and have the potential to be abused.”
Therefore, those multinational corporations that may fall under both the FCPA and the bribery act must be aware that while grease payments may be allowed as an exception to the FCPA, they are not permitted under any circumstances under the act.
The discrepancy between the FCPA and the act regarding how to define bribery also highlights the fact that because many countries’ bribery laws are overlapping, and sometimes contradictory, once a company engages in bribery it may face prosecution in separate proceedings all over the world.
Further, this risk is not remote or hypothetical since authorities throughout the world now share information with one another.
The bribery act provides that a “relevant commercial organization” is guilty of bribery if a person associated with it bribes another person intending to obtain or retain business or a business advantage.
As defined by the act, a relevant commercial organization is either a body or partnership incorporated or formed in the U.K., or an incorporated body or partnership that carries on a business or part of a business in the U.K., irrespective of where it is incorporated.
An “associated person” is a person who performs services for or on behalf of the company; a definition that is broader than the FCPA’s “intermediary” analog.
Further, U.K. courts have jurisdiction over offenses committed outside of the U.K. where the person committing them has a “close connection” with U.K. because they are a resident of the U.K., a British national, or a company incorporated in the U.K.. The act will also apply if only some part of the facts forming the basis of the charge has occurred in the U.K.. This extra-territorial reach clearly exceeds that of the FCPA.
Before the guidance, many feared that this extra-territorial reach could potentially reach any company that had limited connections with the U.K..
The Ministry now states that a common sense approach will be taken to determine whether companies that are incorporated outside of the U.K. can be regarded as carrying on a business or part of a business in any part of the U.K. Applying this standard, the Ministry anticipates that the act will not reach companies that do not have a demonstrable business presence in the U.K.
For example, it would not reach businesses that merely have securities listed on the U.K. Listing Authority’s Official List or trade on the London Stock Exchange, and having a U.K. subsidiary will not, by itself, mean that the parent company is carrying on business in the U.K.
The U.K. courts will be the final arbiter of whether a company carries on business in the U.K. and whether a person is associated with a business.
Multinational companies will be well served to take a cautious approach to the definitions of “close connection” and “associated persons” until they are construed by the courts. Companies should examine the application of the act across all operations. If a company has any connection to the U.K., or an associated person with contacts to the U.K., the best course is to adopt preventative procedures across the entire operation.
Given that the U.S. Department of Justice and Securities and Exchange Commission have ramped up prosecutions under the FCPA in recent years, it is reasonable to assume that the U.K. minister of justice will follow suit.
Getting one’s house in order now is a prudent course to set for any U.S. company with a U.K. presence.