Proposed changes to the UK Bribery Act

May 2014  |  TALKINGPOINT  |  FRAUD & CORRUPTION

financierworldwide.com

FW moderates a discussion on proposed changes to the UK Bribery Act between Satnam Tumani, a partner at Kirkland & Ellis International LLP, Siobhain Egan, a director at Lewis Nedas Law, and Sam Eastwood, a partner at Norton Rose Fulbright LLP.

FW: The head of the Serious Fraud Office (SFO) recently proposed changes to the UK Bribery Act. Could you outline the significance of these proposals?

Tumani: The director of the SFO has said that he would like to see changes to the UK Bribery Act (UKBA) although it appears that formal proposals for revision have yet to be made. The director has suggested that the section 7 Failure to Prevent Bribery offence should be extended to include a failure by a relevant commercial organisation – for instance, a UK company or foreign company that carries on a business or part of a business in the UK – to prevent fraud. The proposed new offence would of course be subject to the affirmative defence of having in place adequate procedures to prevent fraud. Accordingly, relevant commercial organisations would have to consider putting in place broader financial crime controls than perhaps is currently the case.

Egan: David Green QC has called again for an extension of section 7 of the Bribery Act 2010. This is the strict liability offence commonly referred to as the ‘corporate offence’. Currently, section 7 states that it is an offence for a commercial organisation to prevent bribery, subject to the statutory defence of having ‘adequate procedures’ in place. The director of the SFO now wants section 7 to be extended to cover failure to prevent financial crime from being committed by employees, servants, agents, business partners, subsidiaries, among others, again with the ‘adequate procedures’ defence in place. So, it appears that he intends to broaden corporate responsibility, not just to look at allegations of bribery but all financial crime, which will include all aspect of fraud and money laundering, and so on. He has emphasised that the SFO would only prosecute those companies who actually gained from the criminal conduct of its staff, partners, or third parties. His suggestion has been supported by Labour and by some in government. The immediate significance for any commercial organisation will be to enhance its compliance standards, not just for itself, but it must also look closely at the compliance procedures and systems in place by third parties with whom it intends to do business abroad.

Eastwood: As currently drafted, section 7 makes it an offence for “relevant commercial organisations” to fail to prevent bribery. Section 7 was introduced to avoid the difficulties in meeting the high “directing mind and will” test. This is the common law test for corporate criminal liability and means that, unless specific legislation states otherwise, a prosecutor has to prove that the “directing mind and will” of the corporate – for instance, board members or senior executives with power to bind the company – were implicated in the wrongdoing. Section 7 avoids this test by introducing a 'strict liability' offence whereby a company is liable where an act of bribery has been committed for the benefit of the corporate. A corporate can only evade liability by proving that it had adequate procedures in place. David Green’s proposed extension would make section 7 apply to “acts of financial crime”. It is unclear precisely which criminal offences this may cover, but it would presumably include fraud, theft and false accounting, among others. This change would make it far easier for the SFO to prosecute corporates where their employees have committed financial crimes; it would be for the corporate to prove that they had adequate procedures in place preventing such acts being committed. When a corporate is convicted of a criminal offence it becomes disbarred from competing for EU public contracts. 

FW: In force since July 2011, the UK Bribery has received a mixed response. What have been the major criticisms of the Act and how have they influenced the proposed changes?

Egan: It is true that the business world was horrified when the Bribery Act 2010 was enacted because it is currently a standard bearer for international anti-corruption, and it is one of the toughest anti-bribery statues in the world. Critics complained that it would mean that UK businesses tying to conduct business abroad would not be playing on a level playing field; the differences between the 2010 Act and the FCPA have constantly been highlighted, in particular the controversial issue of facilitation payments. The FCPA allows low level facilitation payments but the 2010 Act most certainly does not. It was criticised for being too draconian by its insistence upon the highest ethical standards, and because its extraordinary jurisdictional reach would lead to massive problems for UK businesses abroad. As a result of the criticism, the SFO revisited the issue of facilitation payments, there having been widespread concern amongst smaller businesses that they would be adversely affected because of this, and guidance was published emphasising again that the SFO were not interested in ‘small fry’, but more concerned about larger systematic campaigns for the abuse of facilitation payments. Perhaps the most consistent criticism of the Bribery Act 2010 is that there has been little enforcement by the SFO, save for a prosecution brought in September 2013 against four individuals connected with the promotion and selling of ‘bio fuel’ investments to UK investors. In fact, it would appear that the Bribery Act offence was ‘tacked on’ to that indictment, and was certainly not the main thrust of the allegations against the four individuals facing trial. Critics forget that the Bribery Act 2010 is not retrospective and it only applies to allegations that have taken place after 1 July 2011.

Eastwood: The UKBA was a much needed updating and strengthening of the UK’s anti-bribery and corruption legislation. Its introduction was broadly welcomed and it was seen as setting a new “gold-standard” in bribery legislation. Most of the criticism since its introduction is not of the law on paper, but the lack of prosecutions brought, however it is still early days. There are a number of high-profile investigations ongoing – Barclays, LIBOR and Rolls-Royce – but these are still at the investigatory stage. David Green’s proposals seem to be driven by a desire to lower the legal thresholds to establish corporate guilt in cases where there are criminal offences beyond bribery rather than any concerns regarding the UKBA itself. The proposed amendment is not being introduced due to deficiencies in the UKBA, but is aimed at extending the principles that were introduced by the UKBA itself.

Tumani: The proposed changes do not appear to be driven by criticisms of the UKBA, indeed quite the opposite. The allegations of impropriety arising out of the LIBOR investigations appear, at least in part, to be the context for the proposals. The scheme of the UKBA as described is credited with revolutionising the approach of corporate entities to preventing bribery. This is so because the presence of an affirmative defence, one of having in place adequate procedures, is likely to have significantly reduced the incidence of corrupt conduct long before the reach of a criminal investigation and associated remediation process. Accordingly, it appears to be the view of the director that a similar incentive should govern the manner in which corporates approach fraud risk. 

FW: Compared to counterparts in the United States, the SFO has a relatively poor record of bringing corporate prosecutions. To what extent would the proposed amendments make prosecutions easier for the SFO?

Eastwood: The legal and evidential hurdles would be much reduced for establishing corporate liability beyond the failure to prevent bribery if these amendments are introduced. Once a prosecutor had proved that an employee committed a financial crime with the intention of obtaining or retaining business or an advantage for the corporate, the corporate would be guilty unless it could establish that it had adequate procedures preventing such matters. Some commentators have suggested that the very fact a crime is committed means the procedures cannot have been adequate. At a time of serious funding issues for the SFO and judicial criticism over its over-reliance on third-parties in several of its high-profile failures, David Green is clearly trying to improve the odds in favour of the SFO.

Tumani: Historically, the SFO focused on the prosecution of culpable individuals and rarely considered corporate action. The focus on corporates is a relatively new one for the SFO. In recent years, the SFO has successfully pursued criminal proceedings against four corporates – Severn Trent, Mabey & Johnson, Innospec & BAE Systems. In addition to these criminal convictions the SFO has pursued Civil Recovery proceedings against a further six corporates, the latest being Oxford University Press in 2012. The SFO has also recently initiated criminal proceedings against Olympus and a UK subsidiary. In the UK a prosecution against a corporate is generally more difficult than one in the US. The test for corporate attribution is set at a much higher threshold. Plainly, any change that reduces the threshold for attribution is likely to make prosecutions easier to establish in the long run. The UKBA introduced such a change in the context of bribery. The UKBA does not apply to conduct before the implementation date – 1 July 2011 – and hence there was always likely to be a significant delay before the SFO brought corporate cases under the new provisions.

Egan: Both the government and the prosecuting authorities here have looked to their US counterparts who have been enforcing corporate prosecutions and investigations for much longer with high degrees of success. To be fair, self reporting amongst US corporates is a large factor in this success, together with the use of non- or deferred prosecution agreements by the US authorities. Self reporting in the UK has had very limited affect and the SFO have repeatedly called for corporates to self report and cooperate with them at the earliest opportunity. 2014 has also seen two additional developments concerning a code for the use of deferred prosecution agreements and corporate crime sentencing guidelines published by the Sentencing Council and due to take effect in October. These will give an additional framework for the SFO to work within and should ‘beef up’ their enforcement capabilities. To compare the SFO’s prosecution record on bribery and corruption with that of the US is markedly unfair. The US has had the Foreign & Corrupt Practices Act since 1977, and the reality is that investigations and prosecutions under the FCPA only really took off in 1997 and have escalated into what looks like a full time industry recently under the Obama regime. Speak to any US FCPA expert and they complain about the dearth of corporate prosecutions in this field brought by the DoJ and the SEC, echoed loudly by some members of the US judiciary. The US excels at civil and regulatory enforcement. They work within a culture where corporate self reporting is encouraged and does actually happen, and the have a wide range of options when dealing with corporates including non- and deferred prosecution agreements, eye watering fines, imposition of independent compliance monitors, debarment from public procurement contracts, and so on. However, the US is not at all consistent or transparent when applying these remedies.

FW: What are the implications for corporations if the proposed amendments are enacted? In what ways, and with what reach, could the amendments restrict business activities?

Tumani: Whilst the proposals are certainly significant they are perhaps rather more manageable than one might initially think. The many manifestations of fraud suggest that prevention is a more difficult issue than confronting the risk of bribery. However, a great deal fraud within the corporate context is targeted at the corporate itself. There are obviously many good reasons for a corporate to manage the extent to which fraud can be committed against it, but this is not the focus of the proposed changes to the UKBA. For the purposes of any affirmative defence, a relevant commercial organisation would only need to consider fraud risk that had the potential to benefit the organisation and then to take steps to prevent this from occurring. While this does have the potential to impact business activity, the reputational and other consequences of such activity are likely to be viewed as the greater issue for many corporates. 

Egan: If David Green’s proposed amendments are enacted, the immediate implication for any corporate is that they are going to be liable for their employees’ and third parties’ actions. This means they will have to enhance their compliance systems in order to accommodate the behaviour of employees and third parties; they will also have to ensure that whoever they are dealing with on this basis behaves within the legislation and has their own compliance systems which are up to standard. Frankly, some commercial organisations are going to have to make some big decisions as to whether or not it will be viable for them to remain within a particular sector or working within a particular jurisdiction.

Eastwood: There remains uncertainty as to the precise requirements of the proposed expanded section 7, and until legislation is drafted illustrating the scope of the extension it is difficult to comment on specific implications. However, it is clear that the legislation will have to be drafted carefully and that the element of prosecutorial discretion in utilising the extension will be of great importance. The proposed extension demonstrates a clear intent to introduce an element of corporate criminal liability in circumstances such as the recent financial crisis where regulators faced difficulty in prosecuting financial institutions for inadequate internal systems and controls. If section 7 requires that an act benefit the company through obtaining or retaining business, then it is difficult to see how fraud offences might be approached if, for example, an individual commits a fraud on the company. The initial introduction of section 7 UKBA led to most firms bolstering their anti-bribery programmes and the clear intention behind the proposed change would be to widen such programmes to cover other financial crimes. That said, an effective anti-bribery programme should be sufficient to address financial crime more broadly, or at least it should be able to be reinforced fairly easily. Companies are still struggling however to implement effective anti-bribery programmes. This proposed legislative change may serve to encourage corporates to take greater steps in this regard.

FW: How have the proposed changes been received by the corporate and legal community? In your opinion, do would the proposals grant the SFO excessive powers?

Egan: The reaction to the proposed changes has been muted; I think most lawyers and commercial organisations are adopting a ‘wait and see’ policy. I do not think that it would necessarily grant the SFO excessive powers, it is really just a logical progression of what already exists under the Act.

Eastwood: Amendments to legislation are traditionally made once provisions have been tested and weaknesses found. Extending section 7 in a vacuum appears premature as no case has been brought under it. The main issue that will require reflection if the proposed changes are implemented is discretion, namely when will the SFO apply these powers. There is recognition that the law as it stands makes it difficult to bring prosecutions. Section 7 is of interest to the corporate and legal community due to the introduction of strict liability, and the community will watch the proposed extension of section 7 with anxious scrutiny to see if the wording of the extension develops with a view to the scope and extent of the offence.

Tumani: The director of the SFO has said that he would envisage the new powers being used in exceptional circumstances. The proposed changes have been met with a mixed response with some in favour and some arguing that the cost of doing business should not be added to by the further intrusion of the criminal law. Those within the regulated sector are already under a responsibility to maintain financial crime systems and controls. The proposals will, in certain circumstances, criminalise a failure to do so. Companies outside of the regulated sector will have to consider the issue, perhaps for the first time. It might be argued that businesses outside the regulated sector are less likely to benefit from fraud carried out by their employees. If that is the case then it might be argued that the SFO would indeed be given excessive powers, given that the Financial Conduct Authority (FCA) already seeks to take enforcement action against regulated firms for deficiencies in systems and controls.   

FW: In what ways do the provisions bring the UK Bribery Act closer in line with the FCPA? What areas of overlap exist, and where does the Bribery Act exceed the provisions of its US counterpart?

Eastwood: When comparing the UKBA with US regulatory measures it is important to remember that the US has the benefit of a greater number of statutes covering discrete offences. The SEC and Department of Justice make use of statutes other than the FCPA, such as the Travel Act and the False Claims Act. UK prosecutors had previously faced a separate issue that their US equivalents did not, namely the question of attribution. Until the UKBA it was necessary to consider issues relating to the directing will and mind of the company, however, section 7 of the UKBA aimed to change this through the introduction of a strict liability offence. It should be remembered that the directing will and mind remains an active issue for corporates in the context of offences under section 1, 2 and 6 of the UKBA. Despite the strict liability element in section 7, UK prosecutors still face difficulty with attributing criminal conduct to corporates, and US regulators do not face such impediments which in part explains the greater number of prosecutions in the US. The UKBA is different to its US counterpart in some key ways. The UKBA introduces the offence of bribery on a private-to-private basis, in other words, without the involvement of public officials. Furthermore, the UKBA prohibits active and passive bribery whereas the FCPA only covers the former. Namely this means that in the UK prosecutors can bring charges for both the giving of a bribe and the taking of a bribe.

Tumani: The new proposals do not bring the UKBA closer to the FCPA. The FCPA is a statute aimed at combating the bribery of foreign public officials. The conduct that the Director of the SFO seeks to target with his new proposals would, in the US, be dealt with by other criminal provisions.

Egan: The proposed extension of section 7 of the 2010 Act follows the FCPA which also holds commercial organisations liable for the acts of their employees and agents. It is one of the reasons that the US has found it much easier to bring enforcement actions against offending corporates. Both statutes underline the importance of compliance systems and adequate procedures. The Bribery Act exceeds the FCPA in a number of areas as the FCPA does not have any strict liability offence and it does allow low-level facilitation payments in specific circumstances; the Bribery Act does not. One could argue that the 2010 Act has a longer extraterritorial reach than the FCPA. An offence can be committed as long as the commercial organisation has a presence in the UK. In addition, The 2010 Act does not just apply to bribing foreign officials and official bribery, but also to private individuals and includes commercial bribery. It also applies to domestic bribery, which the FCPA does not. The 2010 Act applies to both active and passive bribery offences, whereas the FCPA does not recognise receiving a bribe as an offence. Finally, the FCPA requires the person offering the bribe to have a corrupt intent; the 2010 Act does not require a corrupt intent vis-à-vis the bribery of a foreign public official.

FW: The Home Office has noted that it is considering financial incentives for whistleblowers in cases of fraud, bribery and corruption. In your opinion, does this encourage an open culture of speaking up? To what extent does it lead to false reporting?

Tumani: It should be noted that a UK enforcement agency already offers the prospect of financial rewards for whistleblowers. The Office of Fair Trading will, in exceptional circumstances, consider the payment of up to £100,000 for information relating to cartel activity. This incentive, alongside others such as immunity from prosecution, is a recognition by the OFT that secret cartel behaviour is particularly resistant to effective scrutiny.  The financial incentives have not as yet been used in a case that has gone to court. The US system also provides for financial incentives. There have been a number of incidents of financial rewards being paid for information that has proved to be of use in fraud related proceedings. The incentives are payable for information that is demonstrably of value. Accordingly, the issue of false reporting may not be engaged in cases that actually result in a payment. The mere fact of such incentives can, in some circumstances, undermine the effectiveness of internal whistleblowing procedures. Given that the UKBA incentivises corporate self-policing, the UK should be wary about introducing incentives that undermine the effectiveness of what corporates try to achieve internally.        

Egan: The authorities here have been considering paying rewards to whistleblowers within the financial services sector since 2013, largely because the US has both the False Claims Act and the Dodd-Frank Act 2010 ,which both encourage and protect whistleblowers, and in 2013 paid out its highest award so far, in astounding sums. The real issue is, do we need it in the UK? HMRC already has a facility for incentivising whistleblowers, and so did the organisation formerly known as the Office of Fair Trading. Neither body was overly generous or enthusiastic about making such payments. So do we need it here, bearing in mind that the FCA had a 38 percent increase in whistleblowing reports without such incentives? I am not convinced that it does encourage an open culture of speaking up; I strongly suspect that issues thrown out by more draconian compliance demands are the main catalyst behind this increase in reports, and I think it is unlikely that it will lead to much false reporting. Paying large sums to financial services workers for doing what most would consider to be their moral duty is unlikely, in this political climate, to go down well with the British taxpayer.

Eastwood: Financial incentives for whistleblowers attracts much attention in the US, however, it should be remembered that the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 remains controversial. There remains a risk that financial rewards will incentivise individuals to falsely report the benefits of flushing out problems and create a counterculture to that which the Dodd-Frank Act envisages. Thought should be given to whether rewards can be withheld or reclaimed if a whistleblower’s testimony is found to be false.

FW: What are your predictions for the future of the UK Bribery Act? Do you expect the proposed amendments to be enacted in their current form?

Egan: It is likely that David Green QC will get his way – there is cross-party political support for the amendment to section 7, and also amongst law enforcement agencies. I also envisage that the SFO will be close to signing the first of their deferred prosecution agreements. There are a number of major corporates who are finding themselves in acute difficulties, for example Rolls Royce and, more recently, GlaxoSmithKline. Once the SFO has secured those DPA agreements, it is also likely that general counsel will consider self reporting as a viable option for them to pursue.    

Eastwood: The UKBA is arguably the strongest piece of bribery legislation internationally on paper. It simplifies the law in England and should make it far easier to prosecute bribery offences. Whether the UKBA succeeds will become clear when cases are brought under it, as these will show whether the legislation has teeth in practice. I believe that David Green is testing the waters with his recent comments and no such changes will be introduced in the near future: the priority must be enforcing the UKBA in its current form.

Tumani: The SFO has brought it first criminal proceedings under the UK Bribery Act against individuals. The director of the SFO has also stated that there are a number of corporate Bribery Act investigations underway. The future of the Bribery Act may depend on the potential corporate cases that the SFO have discussed. If such investigations lead to contested prosecutions then the outcomes will be very closely watched for judicial interpretations of key UKBA provisions. If the cases are not contested and perhaps are disposed by way of Deferred Prosecution Agreements then we may begin to see the start of an enforcement profile similar to that which the DOJ achieve in the US. The success of the UKBA will not, in my view, depend on the new proposals. The director has said that his new proposals are aimed at exceptional cases. The bribery offences within the UKBA will continue to inform the correct approach to anti-corruption across the whole of the UK corporate sector.

Satnam Tumani is a partner at Kirkland & Ellis International LLP. His practice focuses on a range of white collar and corporate crime matters, contentious regulatory cases, government and internal investigations, FCPA & UK Bribery Act compliance advice and related anti-money laundering issues. Mr Tumani is regularly asked to speak at conferences and seminars on white collar crime matters. He has been appointed to the Law Society’s Money Laundering Taskforce and, is a member of the City of London Law Society’s Corporate Crime & Corruption committee. Mr Tumani can be contacted on +44 20 7469 2390 or by email: satnam.tumani@kirkland.com.

Siobhain Egan is a director at Lewis Nedas Law. Ms Egan is a leading financial crime defence specialist , and advises on AML, AB&C compliance, money laundering, insider dealing, bribery and corruption, FX, Libor , business investigations and all aspects of serious fraud  and FCA regulatory investigations. Ms Egan was formerly a member of The Sentencing Council, where she advised upon the consultation on sentencing for Corporate Crime , DPAs. Ms Egan writes extensively on Financial Crime issues. She can be contacted on +44 207 387 2032 or by email: segan@lewisnedas.co.uk.

Sam Eastwood is a partner at Norton Rose Fulbright LLP. He specialises in dispute resolution and Business Ethics. In 2008 Mr Eastwood established the dedicated business ethics and anti-corruption practice, which he continues to head. He advises major corporations on anti-corruption issues in connection with companies’ internal compliance policies and procedures, international business transactions and internal corporate investigations. He is consistently recognised in both the Legal 500, and Chambers and Partners directories. He sits on the board of Transparency International. Mr Eastwood can be contacted on +44 20 7444 2694 or by email: sam.eastwood@nortonrosefulbright.com.

© Financier Worldwide

THE PANELLISTS

Satnam Tumani

Kirkland & Ellis International LLP

Siobhain Egan

Lewis Nedas Law

Sam Eastwood

Norton Rose Fulbright LLP