The UK comes into the modern age as the Bribery Act becomes law

Update of prior bribery laws which dated back to 1889.

On 1 July 2011, the long-awaited UK Bribery Act finally took effect. Passed in April 2010 in the dying days of the UK’s last Labour Government, it lays to rest the prior bribery laws which dated back to 1889. At long last it brings the UK into the modern age: 14 years after the country’s ratification of the OECD Convention Against Bribery of Foreign Public Officials, and 34 years after the passage of the US Foreign Corrupt Practices Act (FCPA). For investors concerned by the escalating anti- corruption crackdowns and multi-million-dollar fines that have befallen a growing number of blue chip names – Siemens, Halliburton, BAE Systems, Thalès, Alcatel-Lucent, Statoil, HP and Merck – this is good news. Why? How is it that stricter laws, tougher enforcement and higher fines make for better returns for investors? As emerging markets with weaker judicial systems and pervasive corruption attract an ever-larger rush of capital investment, is it realistic to expect Western companies to compete without ‘playing by local rules’? In fact, while bribes may help to win business deals, corruption unquestionably raises operating risk and depresses returns. From vacant ‘white elephant’ airports to ‘bridges to nowhere’, to collapsing schools and abandoned hospitals, the scale of waste and embezzlement is estimated to reach over US$1.5 trillion roughly 2.5% of global GDP year after year. By diverting capital away from its “highest and best uses” towards those that offer the richest illicit rewards, corruption not only distorts competition, but breeds corporate cultures that promote circumvention of the law, undermines the rule of law and creates the conditions for companies to mistreat shareholders just as they do other business partners. This is plainly not in the interests of long-term investorsand their clients, who therefore have much to gain by pressing companies to refrain and enforcement authorities to be consistent and uncompromising in clamping down on it. This is why F&C has, since 2000, led the investor community in calling for stricter anti-corruption standards, and played an active role in pressing for the passage of the UK Bribery Act. While slow in coming and fraught with last-ditch efforts to delay and dilute it, including controversial Guidance by the UK Ministry of Justice (MoJ) aimed at diminishing its extraterritorial reach, it marks a historic milestone in the UK’s efforts to uphold high standards of corporate governance and use its role at the centre of global finance to drive global efforts to curb corruption. The entry into the world of the UK Bribery Act was anything but smooth. UK and overseas business lobbies voiced concerns about its broad extraterritorial reach, as well as its deliberate move to lighten the burden of proof needed to secure a conviction by dropping the need for evidence of an actual incident of corruption. Instead, Section 7 of the UK Act establishes a corporate offense of ‘failing to prevent bribery’, under which companies can face liability if they are judged to have inadequate anti-bribery procedures – so called ‘Adequate Procedures’. But by criminalising the bribery of foreign public officials even if none of the malfeasance has occurred on British soil, the Act has now closed the gap with the US FCPA. Indeed, by banning so-called private-to-private bribery, i.e. illicit payments made to non-governmental counterparties in order to win business, as well as facilitation payments, it goes considerably further than its American predecessor. F&C supported the introduction of the Bribery Act, and also led fellow investors in submitting a joint response to
the MoJ’s Guidance consultation on the Act in the autumn of 20103. However, the implementation of the Act has not been smooth sailing. Faced with a staunch corporate lobby seeking to delay the Act’s implementation and water it down, the first few months of 2011 were tumultuous, and resulted in F&C intervening on several occasions to urge passage of the Act without delay and without dilution. These interventions included a letter in January 2011 from the International Corporate Governance Network (ICGN) – led by F&C in its capacity as Chair of the group’s Business Ethics Committee – to the UK Prime Minister’s Office objecting to the government’s move to delay the introduction of the Act.4This proved fruitless as the UK Government pushed back the effective date of the Act to allow additional time for the MoJ to issue Guidance on how it would be enforced. Then shortly before the Guidance reached its final stages, a leaked report revealed that the MoJ had ceded to pressure from capital markets advocates urging that overseas companies listed on the London Stock Exchange be exempted from the Act’s purview, unless they had other connections to the UK. This caused F&C yet again to address the UK Prime Minister’s office in protest, posing the following questions. Why is capital-raising in London not regarded as ‘carrying out business’ in the UK? Surely, capital-raising is integral to doing business? Does this not clearly disadvantage honest UK companies that are prohibited from corrupt activity under the Act? Does the Ministry of Justice effectively intend that capital raised in the UK markets be used to pay bribes and yet the bribe-paying company go unpunished? The MoJ Guidance on the Act was finally published in late March 2011. On the bright side, it steers clear of any furtherattempt to delay the effective date of the Act, confirming it will come into force in July 2011. The Guidance is also helpful in clarifying how specific features of the Act will and will not be subject to potential prosecution – corporate hospitality being one particularly hotly-debated example. Disappointingly, however, the Guidance does retain the previously-leaked loophole for overseas firms listed in London if they have no commercial presence in the UK apart from a “mere” listing. Moreover, the Guidance also identifies certain mechanisms relating to joint ventures and supply chains that companies may employ to avoid prosecution under the Act. In effect, this seeks to dilute the Act’s original aim of establishing a company’s responsibility for actions taken by third parties on its behalf – as has long been the case under the FCPA – by raising doubts about the government’s intent. While on balance the introduction of the Act is still an improvement on its predecessor, F&C considers that this last-minute retreat has fundamentally compromised the Act’s purpose and effectiveness. Notwithstanding this disappointment, the public visibility that resulted from F&C and fellow investor protests against the overseas issuers’ carve-out was not lost on the Serious Fraud Office (SFO) – the body that has responsibility for initiating prosecutions under the Act. Indeed, in response to public concerns expressed about this, Richard Alderman, Director of the SFO warned: “I would say to companies not to rely on very technical arguments that … you are outside the scope of the act.” Perhaps unintentionally echoing Mr. Alderman’s point, UK Secretary of State for Justice Kenneth Clarke likewise challenged his critics to take the matter to the courts if they were dissatisfied with the Guidance’s interpretation
of the Act. This suggests that the one thing that companies value above all else – predictability – will be some time in coming. Between Lord Chancellor Clarke’s bravado and Mr. Alderman’s tenacity, there is now good reason to expect key aspects of the new Act to be fought over in the courts. While stricter laws and tougher enforcement can be expected to reduce bribery and corruption in the UK and other jurisdictions globally, the Act imposes much more exacting anticorruption standards on companies, and will force them to raise their game in order to stay aligned with best practice.Failure to adapt could mean not only hefty fines, blacklisting from bidding on contracts and significant reputational damage, but most damagingly of all the prospect of having top management tied up in endless investigations and prosecutions. In sum, corruption is swiftly moving from being the tempting but morally-wrong thing to do to win lucrative contracts, to career and corporate suicide for any company or board that is foolish enough to indulge in it.
George Dallas is Director of Corporate Governance at F&C. This is an extract of F&C’s latest reo® Viewpoint”