Robert Hadley, partner in K&L Gates' securities enforcement and commercial litigation practice groups talks about anty-corruption precedures company need to implement.
From 1 July this year, any corporate with a UK business presence risks criminal prosecution in the country under the new Bribery Act for “failing to prevent” bribery by anyone performing services on its behalf. Not having an inkling that anything improper was going on is not a defence. The only defence is to show that the business had “adequate procedures” to prevent such conduct.
Apart from the need for robust anti-corruption procedures, the act raises some specific implications for the industry.
Private equity could potentially be prosecuted for the improper behaviour of a portfolio company. Funds entering into development joint ventures (JV) may be exposed through the JV or JV partner.
Richard Alderman, director of the Serious Fraud Office, characterised private equity as “well informed investors with a degree of knowledge of what happens” in their investees. Is a portfolio company “performing services” for the private equity house, such that it may be prosecuted for failing to prevent an act of bribery by the company?
While a passive minority investment may not create that link, Alderman noted that the position could be different where private equity takes management decisions, has people on the board and is running the company.
Funds would be well advised to ensure their associates can point to “adequate” anti-bribery procedures. The JV or portfolio company needs to have an anti-bribery programme, and to impose similar obligations on others performing services on its behalf. The fund will thereby set up a defence to an allegation that it failed to prevent bribery occurring at the portfolio or JV level. It is also taking a step to protect the company or project – and hence the investment.
The Ministry of Justice has issued guidance on “adequate procedures” to prevent bribery. A key principle is that the Ministry expects to see top-level commitment to an anti-bribery culture. Alderman recently referred to the “responsibility of the owners of companies to ensure proper standards of governance and a proper anti-corruption culture”. He has hinted that fund managers might consider imposing conditions so as to invest only in companies that take anti-bribery seriously. Outside the ethical investment sector it has not been the industry’s practice to make such judgements.
Unlike under United States law, the Bribery Act prohibits bribery anywhere in the world of anyone – not just public officials. However, the act creates a special offence of bribery of a foreign public official; therefore special care is required here. That term, too, is potentially very wide. Alderman has referred, in the context of state-owned banks, to their employees being foreign public officials under the act if the State has a major interest and exercises active control. Representatives of sovereign wealth funds or public sector pension schemes from which a fund or manager seeks investments or mandates could well be foreign public officials on this reading.
A clear risk arises for companies using placement agents or other intermediaries to secure investments or mandates, especially in higher risk countries. They may be prosecuted for not preventing an agent making improper offers or payments without their knowledge.
The risk that a particular arrangement may be alleged to amount to a bribe under the act is higher when dealing with state bodies, such as sovereign wealth funds, because of the lesser requirements for the bribery of a foreign public official offence.
As the Ministry guidance sets out, part of a business’ “adequate procedures” is to conduct thorough due diligence of agents. The first stage involves knowing who the fund is dealing with and looking out for “red flags”, such as family relationships with decision-makers, before appointing someone who can expose the fund or manager to UK criminal liability. The second stage is to appoint on the basis of protective contractual provisions, including assurances that no bribery or corrupt practices will be used – with rights such as termination with no further payment if those assurances prove false.
Apart from the defensive imperative to minimise the risk of criminal prosecution, an effective anti-bribery programme carries positive business gains. It can restrain the conduct that carries the risk. Further, as compliance with the act spreads, portfolio or joint venture companies – and fund managers and funds themselves – will find that clients and customers require anti-bribery compliance as a condition of handing over their business.
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