Assessing the extra-territorial reach of the UK Bribery Act

Contributed by Arnold & Porter LLP

Introduction
Main offences
Extra-territoriality of bribery offences
Key aspects of failure to prevent bribery
Comment

Introduction

When the UK Bribery Act came into force on July 1 2011, it was hailed as one of the toughest pieces of anti-corruption legislation in the world. It follows a recent trend in criminal legislation, such as the Fraud Act 2006 and the Consumer Protection from Unfair Trading Regulations 2008, which seeks to replace complex and unwieldy statutes with simple and broad offences in codified form. Much of the commentary on the act has related to its extra-territoriality, and concerns have been expressed that this could damage the ability of UK companies to do business in certain parts of the world where corruption is prevalent. This update assesses whether the jurisdictional reach of the act is really as broad as much of the commentary would imply.

Main offences

In order to understand the extra-territorial reach of the act, it is necessary to understand the offences that it creates.

The act creates three offences which seek to capture acts of bribery by natural persons or corporate bodies: bribing another person,(1) being bribed(2) and bribery of a foreign public official.(3) In contrast to the US Foreign and Corrupt Practices Act, the UK offences of bribing another person and being bribed apply to bribery in both the public and private sectors.

In addition to the bribery offences, the act creates a new offence in relation to commercial organisations which fail to prevent bribery.(4)

Extra-territoriality of bribery offences

The jurisdictional reach of the bribery offences extends to offences that are committed or partly committed in the United Kingdom and offences committed abroad by persons with a close connection to the United Kingdom. Unsurprisingly, the bribery offences are committed in England, Wales, Scotland or Northern Ireland if any "act or omission"(5) which forms part of the offence takes place in that part of the United Kingdom, regardless of the nationality of an individual suspect or the place of incorporation of a corporate suspect.

Thus, the bribery offences are committed where a payer makes a payment from the United Kingdom to an overseas recipient in order to induce the improper performance of a function or activity outside the United Kingdom, on the basis that part of the offence (ie, the payment) has taken place in the United Kingdom. This aspect of the act is not new or controversial, and accords with the general criminal law of the United Kingdom, which is usually concerned with conduct within the jurisdiction. It is also consistent with the pre-existing bribery legislation.

The jurisdictional reach of the bribery offences is broader in relation to persons with a 'close connection' with the United Kingdom for the purposes of the act.(6) British citizens, citizens of British overseas territories and bodies incorporated under the law of any part of the United Kingdom, among others, are deemed to have a close connection with the United Kingdom and may be prosecuted where the entire offence takes place abroad. For example, the bribery offences would be committed where a UK citizen makes a payment from outside the United Kingdom to an overseas recipient in order to induce the improper performance of a function or activity outside the United Kingdom. In these circumstances, no act or omission forming part of the offence would take place in the United Kingdom, but the UK citizen could still be prosecuted on the basis of his or her nationality and be deemed to have a close connection with the United Kingdom. Although this aspect of the act constitutes an extension of the general criminal law of the United Kingdom, it is not particularly controversial, as it largely accords with the pre-existing bribery legislation.(7) The only significant extension under the act is that the bribery offences now capture foreign nationals who are involved in bribery abroad while ordinarily resident in the United Kingdom.(8) This was perceived to be a loophole in the pre-existing bribery legislation, which has now been remedied so that such individuals are deemed to have a close connection with the United Kingdom.

Thus, the act does not significantly extend the jurisdictional reach of the UK courts in terms of acts of bribery committed by individuals.

Key aspects of failure to prevent bribery

Extra-territorial reach
Most of the concerns highlighted by commentators have focused on the offence of failing to prevent bribery, and with some justification.

There was nothing remotely similar to this offence under the pre-existing bribery legislation, and its essence -secondary criminal liability for another's actions - is unusual in the context of a white-collar criminal offence such as bribery. Moreover, it sidesteps the limitations on corporate criminal liability under the common law identification doctrine, whereby a company can normally be held criminally liable only on the basis of the acts and state of mind of those of its directors and managers who represent its "directing mind and will",(9) thereby precluding prosecutions if there is no evidence of board-level complicity.

Once it is established that a commercial organisation "carries on a business, or part of a business, in any part of the United Kingdom",(10) regardless of where in the world it is incorporated, it may be guilty of failing to prevent bribery if an "associated person",(11) such as an employee, agent or subsidiary, bribes another person or a foreign public official for the benefit of the commercial organisation. It is irrelevant whether the associated person is unconnected with the United Kingdom or the entire offence takes place outside the United Kingdom.

Although the courts will ultimately decide whether an overseas commercial organisation carries on a business or part of a business in the United Kingdom for the purposes of the offence, Paragraph 36 of the Ministry of Justice Guidance on the Bribery Act 2010 may provide assistance:

"As regards bodies incorporated, or partnerships formed, outside the United Kingdom, whether such bodies can properly be regarded as carrying on a business or part of a business 'in any part of the United Kingdom' will again be answered by applying a common sense approach... the Government anticipates that applying a common sense approach would mean that organisations that do not have a demonstrable business presence in the United Kingdom would not be caught. The Government would not expect, for example, the mere fact that a company's securities have been admitted to the UK Listing Authority's Official List and therefore admitted to trading on the London Stock Exchange, in itself, to qualify that company as carrying on a business or part of a business in the UK... Likewise, having a UK subsidiary will not, in itself, mean that a parent company is carrying on a business in the UK, since a subsidiary may act independently of its parent or other group companies."

As announced in a speech by the then-director Richard Alderman, the Serious Fraud Office (SFO) considers that "economic engagement with the economy of the UK" may determine whether an overseas commercial organisation carries on a business or part of a business in the United Kingdom for the purposes of the offence. The SFO has also informed the Organisation for Economic Cooperation and Development that carrying on a business in the United Kingdom should be understood to mean buying and selling in the United Kingdom.(12) For example, a parent company incorporated in Japan, whose agent based in China bribes a Chinese official for the parent company's benefit, could be prosecuted in the United Kingdom because one of its subsidiaries is located in the United Kingdom, regardless of the fact that the UK subsidiary was uninvolved in the act of bribery in China.

The offence of failure to prevent bribery represents a significant extension of jurisdictional reach under the act, well beyond both the general criminal law of the United Kingdom and the pre-existing bribery legislation.

Adequate procedures defence
The Ministry of Justice's guidance confirms that the act's objective is not to bring the full force of the criminal law to bear on well-run commercial organisations that experience an isolated instance of bribery on their behalf. It is acknowledged that no policies or procedures can detect and prevent all bribery. Accordingly, a full statutory defence is available if the commercial organisation can show that although a particular instance of bribery occurred, the organisation had adequate bribery prevention procedures in place. The question remains as to what constitutes 'adequacy' in this context, but underlying the ministry's guidance is the proposition that bribery prevention procedures should be proportionate to risk.

Enforcement
Since R v Innospec Ltd(13) the SFO has largely restricted its bribery-related enforcement activity against corporate bodies to civil recovery orders under the Proceeds of Crime Act 2002 (which permit the recovery of property obtained through unlawful conduct without the need for a criminal conviction), as opposed to prosecutions under the pre-existing bribery legislation.(14) It is likely that this prevalence of civil recovery orders has been partly due to the litigation risk involved in prosecuting corporate bodies under the identification doctrine. The offence of failure to prevent bribery may provide a user-friendly way for the SFO to prosecute corporate bodies where there is no evidence of board-level complicity in an act of bribery; this may, in turn, lessen the need for the SFO to use civil recovery orders in future.

Although the offence of failure to prevent bribery has extensive jurisdictional reach, it remains to be seen whether the SFO will enforce the offence aggressively against overseas companies. Indications from the SFO suggest that the extra-territoriality of the offence is central to one of its enforcement priorities - namely, protecting UK companies and the United Kingdom as a centre of business, and ensuring that UK business interests are not disproportionately prejudiced by the act. During its consultation, the Joint Committee on the Draft Bribery Bill asked the SFO whether, in practice, it would investigate and prosecute companies that have a limited connection to the United Kingdom. The SFO's response was unequivocal:

'We welcome the ability to investigate and prosecute companies carrying on part of a business here, irrespective of where they are registered. It is part of creating a world level playing field which would see those companies having to adhere to the same international standards of our own companies and the international community. The SFO will look at appropriate cases with a view to investigation and prosecution."

Alderman subsequently reiterated the SFO's approach in a speech in October 2011:

"I have said in public on a number of occasions that proceeding against foreign corporations under the Bribery act for corruption committed in other countries is a high priority for the SFO. What we are actively looking for is a case where a foreign corporation (with a UK business presence) has disadvantaged a good ethical UK company by using corruption in another country. This is likely to have had a detrimental impact on the UK company with a possible loss of jobs in the UK. There is therefore a very strong UK public interest in an investigation in those circumstances."

It is therefore likely that, for presentational reasons, the SFO will seek to ensure an appropriate balance between enforcement action against domestic and overseas commercial organisations in its portfolio of Bribery Act cases. Failure to do so would risk incurring criticism from influential business lobbying organisations, such as the Confederation of British Industry, which has already warned the SFO not to be over-zealous in policing British companies. Furthermore, such an approach fits with overall enforcement practices in the United Kingdom that not all criminal offences result in a prosecution.

Comment

Although the Bribery Act does not significantly extend the jurisdictional reach of the UK courts in respect of acts of bribery, the extra-territoriality of the offence of failure to prevent bribery is extensive. Overseas commercial organisations with what could be deemed a 'demonstrable business presence' in the United Kingdom should consider whether they have any exposure, especially given the expressed intentions of the SFO. Both domestic and overseas commercial organisations should be aware that the offence may provide the SFO with an easier path to demonstrate corporate liability.

However, the availability of the full statutory defence, coupled with potential representations in relation to the public interest, means that the legal risks associated with the offence are manageable, provided that companies act pre-emptively by ensuring there are adequate bribery prevention procedures in their corporate compliance programmes and that such procedures are periodically reviewed. Creating and managing a robust corporate compliance programme entails a cost, but this is minimal compared to the reputational damage, legal costs and distraction from the core business purpose that may result from a substantial criminal investigation.

For further information on this topic please contact Kathleen Harris at Arnold Porter LLP by telephone (+44 20 7786 6100), fax (+44 20 7786 6299) or email (kathleen_harris@aporter.com).

Endnotes

(1) Section 1 of the act.

(2) Id, Section 2.

(3) Id, Section 6.

(4) Id, Section 7.

(5) Id, Section 12(1).

(6) Id, Sections 12(2)(c) and 12(4).

(7) Section 109 of the Anti-terrorism, Crime and Security Act 2001.

(8) Section 12(4)(g) of the Bribery Act 2010.

(9) As per Viscount Haldane LC in Lennard's Carrying Co Ltd v Asiatic Petroleum Ltd [1915] AC 705.

(10) Section 7(5) of the Bribery Act.

(11) Id, Section 8.

(12) Phase 3 Report on Implementing the OECD Anti-Bribery Convention in the United Kingdom, March 2012, paragraphs 37- 41, page 15.

(13) 2010 WL 3580845.

(14) In particular, the Prevention of Corruption Act 1906.

An earlier version of this update was first published in MLex Magazine.

“Instrumentality”: Ways the Government’s Power-to-Appoint Creates Control Over SOEs

I read the article below by Matteson Ellis Law PLLFC, and noted the stark parallels in the governance gap created by the incorporation and operation of hybrid public/private entities in Haiti and other English Speaking Caribbean States.  

“Instrumentality”: Ways the Government’s Power-to-Appoint Creates Control Over SOEs 

This week, the DOJ filed its reply brief in the Esquenazi appeal before the 11th Circuit on the meaning of “foreign official.” This is the first time that an appeals court will consider the heated issue of “instrumentality” under the FCPA – what types of entities constitute “foreign officials” for purposes of foreign bribery. In its brief, the DOJ argues that one of the factors establishing that the company Teleco was an instrumentality of Haiti was that “Haiti’s president and high-level ministers controlled Teleco through their appointment of Teleco’s board of directors and general director.”

What does this type of “control” look like? In the last six months, I have had the opportunity to work directly with two state-owned enterprises (SOEs) to advise them on building anticorruption compliance mechanisms. Through these experiences, I have seen ways in which such “control” can manifest itself:

Board appointees selected for political reasons, not commercial ones. When this happens, board members do not always have the necessary qualifications for the job. In cases I have seen, a board’s audit committee members could not read financial statements. Governance committee members had never served on a board before. Many board members were not experienced in the specific industry and thus were unable to make informed decisions on strategy and technology. Some board members saw their positions as rewards for political good acts, not as fiduciary duties. Some thought they were supposed to be involved in the day-to-day decision-making of the company, not long-term strategy-setting.

Unqualified lower-level hires. The government can impact the company’s business by pressuring it to hire people at lower levels of the operation. In cases I have seen, these people were not qualified to do their jobs. They became burdens, not assets. This undermined the effectiveness of the particular business unit and wasted resources.

Unfavorable suppliers and third parties. The government can impact the company’s decisions on use of suppliers and third parties. A company might be pressured to hire a supplier with a relationship with a government official and whose equipment is more expensive and less reliable. It might be asked to hire a marketing agent who has no knowledge of that market.

Misguided investment decisions. The government can impact the company’s decision-making on investments. Decisions on the provision of services might be made to please certain constituent groups for short-term political gain rather than lay the groundwork for long-term commercial success.

Such political interference means that the company is not fully operating like a commercial entity. It is somewhat serving a political purpose, and somewhat performing a commercial role. This bipolar existence has the effect of damaging morale. Employees want their company to succeed. They want their own performances to be measured against transparent standards. They are frustrated when decisions are made, not to improve the bottom line, but for other reasons. Constant turnover of a country’s political leadership leads to turnover of state-owned company’s own leadership, which thwarts planning and growth.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2012 Matteson Ellis Law, PLLC

Author: Matt Ellis

Categories: Enforcement, FCPA, Foreign Official/Instrumentality

Lessons from “The Mensalão”: Brazil’s Largest-Ever Corruption Trial

Right now, Brazil is in the middle of its largest corruption trial in its history. The proceeding is being called the “Mensalão,” meaning “the big monthly payment.” Thirty-eight individuals, including current and former government officials, have been accused of paying or accepting monthly bribes, money laundering, conspiracy, fraudulent management of finance institutions, and other related crimes to secure support in Congress for the legislative priorities of Brazil’s former President, Luiz Inácio Lula da Silva. Al Jazeera recently reported: “The case is of such great importance that Brazil’s powerful Public Defender (the Ministério Público) has established a website to explain the trial to children.” Learn more background here.

In legal terms, the mensalão deals with purely domestic bribery issues. There is no indication that foreign bribery played a role in the scheme. But the case is still relevant to FCPA compliance practitioners. Here are some reasons why:

Another Sign that Brazil is Confronting Corruption. The mensalão marks the first time that such a large number of high-level individuals, both from politics and business, are going to trial for corruption. Nearly all Brazilians are talking about the case. The news is covering it every night. There are heightened expectations. The atmosphere is so charged, there is even concern among legal circles that the hysteria will lead to a miscarriage of justice – the Supreme Court is under pressure to act.

These developments build on other signs of growing intolerance for corruption in Brazil, such as current President Dilma Rousseff’s decision to rid her administration of numerous corrupt Ministers, discussed here. In these ways, Brazil is starting to grapple with a problem that has been there for a long time. At the same time, there is still significant skepticism among the public. According to one recent poll, 73% of Brazilians think that the accused in the mensalão should go to jail but only 11% think that they will. It will be interesting to see how the trial turns out.

Political Contributions Riskier for Multinationals. Brazilian electoral rules permit some political contributions, so legal contributions by a company in Brazil would not be per se violations of the FCPA given the statute’s local law defense. But such contributions are always risky because they could form, or be perceived to form, part of aquid pro quo. Further, the mensalao case heightens the risk that such contributions will be misperceived by the public. Thus, even a legal donation to a politician might be ill advised in the current environment. As a result, many multinationals that are concerned about compliance issues are choosing to reduce or eliminate their political contributions. Whether such donations pick up in the upcoming election season will be an important measure of the impact of this case.

No Corporate Liability for Corruption. The mensalão reminds us that Brazilian law does not yet make corporate entities liable for corrupt acts, although the country has committed to establish such liability for purposes of compliance with the OECD Anti-Bribery Convention. Several companies, like the well-known Banco Rural, are allegedly involved in the scheme. But none will be charged. All defendants are individuals.

Anti-Corruption Legislation Under Consideration. As discussed in previous FCPAméricas posts, the Brazilian Congress is currently considering legislation to strengthen the country’s anti-corruption regime. But the provisions of the proposed law – including the establishment of corporate criminal liability – could be watered down in negotiations. The mensalão may influence these negotiations, as it highlights risks and methods for improperly influencing the legislative process. It gives observers real reason to question how the bill writing process might be playing out, how drafts might be changing, and what might be the influences at play.

Anti-Corruption and Anti-Money Laundering. The mensalão shows the clear connection between corruption and money laundering, and the need to tackle both in tandem. For example, it is alleged that President Lula’s Chief of Staff laundered funds first before disbursing them to legislators to secure votes. Through the United Nations Convention Against Corruption (Article 23), the international community took a significant step in elevating money laundering to a prohibited practice on par with that of bribery itself. The mensalão shows why.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2012 Matteson Ellis Law, PLLC

Author: Matt Ellis