Bribe money talks

Posted on 4 Aug 2011 by The Manufacturer

The manufacturing sector is highly vulnerable to corruption, both in the UK and abroad. Although the Bribery Act was returned to the legislative pan in April to burn off the additional fat considered too burdensome for UK businesses, as of July 1, the act is in full force. UK businesses must ensure their corruption prevention policies are fit for purpose and, as Tim Brown reports, the weight of compliance is considerable.

While the timing of the Bribery Act’s introduction and the scandal relating to alleged payments to Metropolitan Police officers by the News of the World seems uncanny, it is unlikely that the Act will claim its first scalp during that particular investigation. The allegations predate the Bribery Act and the investigation, titled Operation Elvedon, is therefore being conducted within old legal frameworks.

Although the Bribery Act came into force on July 1, it is important to remember that bribery has been a criminal offence in the UK for over a century. The Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916 were in existence long before, putting the UK far ahead of some of its trading partners in its dedication to above board business.

So why the need for the bribery act at all? The answer can be found in a string of events beginning in 1999:

1999 – The UK signed up to the Organisation for Economic Cooperation and Development (OECD) Anti-Bribery Convention which required countries that signed the convention to put in place legislation criminalising the act of bribing a foreign public official.

2002 – A draft Bribery Bill was announced but was rejected by joint committee examining it.

2006 – The Blair Government urged the Serious Fraud Office to drop an investigation into BAE’s Al Yamamah contract with Saudi Arabia which allegedly included the secret payment of £1bn to Prince Bandar of Saudi Arabia to secure Britain’s biggest ever weapons deal. The OECD, which usually carries out reviews on members every two years, decided to undertake an extra investigation of the UK’s enforcement of the anti-bribery convention following the controversial BAE decision.

2008 – The OECD Working Group on Bribery leased a report which said it was “disappointed and seriously concerned” about the UK’s continued failure to address deficiencies in its laws on bribery of foreign public officials and on corporate liability for foreign bribery, which it said has hindered investigations. The Working Group reiterated its previous 2003, 2005 and 2007 recommendations that the UK enact new foreign bribery legislation at the earliest possible date.

2009 – The strength of the criticism and lack of diplomatic language used spurred the Government into action and, following a white paper in March 2009, the Bribery Bill, based on the Law Commission’s 2008 report Reforming Bribery, was introduced to Parliament in the 2009 Queen’s Speech.

Lessons from America
At the time of publication, case law relating to the Bribery Act is non-existent. In the US, however, the manufacturing sector has proven to be particularly susceptible to the Foreign Corrupt Practices Act (FCPA), the US equivalent to the Bribery Act. A significant proportion of ongoing cases involve manufacturing firms and, on May 10, 2011, Lindsey Manufacturing Company became the first corporation to be convicted under the act. Two Lindsey Manufacturing executives and a Mexican intermediary were convicted by a US federal jury on all counts for their alleged respective roles in a bribery scheme involving Mexican government officials.

After a five-week trial, the jury took just one day to return the guilty verdicts. Lindsey Manufacturing hired Grupo Internacional de Asesores SA to act as its Mexican sales representative and to obtain contracts for Lindsey from Mexico’s state-owned utility company, Comisión Federal de Electricidad (CFE). Grupo received a percentage of Lindsey Manufacturing’s revenue from CFE contracts.

Aguilar and her husband, Enrique Aguilar, were directors of Grupo.

According to the International Law Office, at trial the Department of Justice presented evidence that from approximately February 2002 until March 2009, Lindsey Manufacturing and Lindsey, Lee and others orchestrated a bribery scheme whereby Mr Aguilar was paid a 30% commission on Lindsey Manufacturing’s sales to CFE, a significantly higher commission than that given to previous Lindsey Manufacturing sales representatives.

According to the department’s evidence, Lindsey and Lee understood that all or part of this commission amount would be used to bribe CFE officials in exchange for contract awards. Those bribes were said to include a $297,500 Ferrari Spider and a $1.8 million yacht. The evidence presented at trial stated that Lindsey Manufacturing increased the price of the goods and services sold to CFE by 30% to ensure that CFE, rather than Lindsey Manufacturing, absorbed the cost of the bribes.

On home soil
With BAE Systems still in the headlines regarding its “dirty deal” to sell Tanzania an overpriced radar system in 1999, the UK is clearly not corruption free. In December 2010 BAE Systems Plc was fined £500,000 after admitting it had failed to keep adequate accounting records in relation to a defence contract for the supply of an air traffic control system to the Government of Tanzania.

This fine came in addition to a settlement already agreed by BAE as part of a global agreement earlier in 2010. This settlement, made with the Serious Fraud Office and the US Department of Justice concerned contracts in a number of countries and in relation to the Tanzania contract it bound BAE to pay an ex-gratia payment for the benefit of the people of Tanzania of £30 million less any fine imposed by the Crown Court.

On July 19, 2011, the cross-party International Development Select Committee questioned BAE and SFO executives as to why the £29m that BAE had agreed to pay in 2010 still had not been received by Tanzania. “I expected all this to be done in the first month or two of this year,” said Richard Alderman, director of the SFO, when asked about the payment’s delay. “If, in the future, there are agreements of this nature… clearly we have to put in more rigid time scales. I did not expect to find, when I’m sitting here in July, that BAE has not as yet reached agreement on how the money is going to be paid.” The defence firm’s head of government relations Bob Keen told the committee that the company hoped to make an initial payment of around £10m “in a matter of weeks”, while BAE’s General Group Counsel Philip Bramwell said: “I think we are moving as fast as we reasonably can.”

Moving forward
Except for investigations pre-July 2011, the Act repeals all previous statutory and common law provisions in relation to bribery, instead replacing them with the crimes of bribery, being bribed, the bribery of foreign public officials, and the failure of a commercial organisation to ensure adequate procedures to prevent bribery. Individuals will face up to 10 years in prison and an unlimited fine if found guilty of committing bribery. Parties involved in the News of the World fiasco may consider themselves fortunate to not be subject to the Bribery Act but investigations from now on will be sure to utilise the full power of the Act and UK businesses must take heed its requirements to avoid falling foul of the Serious Fraud Office.

According to Julian Smart of law firm BLM, there is a certain level of ambiguity with regards to the Act.

Specifically he says that the areas around adequate procedures, hospitality and partner compliance are all somewhat open for interpretation. “The Act makes it out to be clear that facilitation payments (or grease payments) are prohibited and should be stamped out,” says Smart. “On that point it is not open to interpretation. However, another aspect is hospitality and that is open to interpretation. There is no level of value or figure as to what is acceptable for hospitality but the Guidance does give some examples which are quite helpful.” As stated in the Bribery Act Guidance: ‘Flights and accommodation to allow foreign public officials to meet with senior executives of a UK commercial organisation in New York as a matter of genuine mutual convenience, and some reasonable hospitality for the individual and his or her partner, such as fine dining and attendance at a baseball match are facts that are, in themselves, unlikely to raise the necessary inferences.

However, if the choice of New York as the most convenient venue was in doubt because the organisation’s senior executives could easily have seen the official with all the relevant documentation when they had visited the relevant country the previous week then the necessary inference might be raised.’ The question of what constitutes adequate procedures will depend on the “factors such as the size of the organisation and where it operates,” says Smart. “What is adequate for a large multinational corporation is going to be different to a SME in the UK.”

However, consensus among legal professionals focuses around the necessity of a risk assessment to ensure compliance. Tom Ellis, dispute resolution partner and Bribery Act specialist at law firm Wragge & Co, says that it is going to be important for a company to carry out a very robust risk assessment. “This is in order to establish where the risks lie and then take the measures to mitigate against that risk,” he says. “Where that extends to counter-parties and agents in other jurisdictions practical steps will need to be taken, those will vary on a case by case basis.” Matthew Bridger, associate at Thomas Eggar LLP, concurs. “Guidance exists to help show what will be considered to be adequate procedures and from that we can deduce what would be inadequate,” he says. “But the very first step for any company is an initial risk assessment to identify the particular risk exposures for each sector and employee within the business.

This assessment will then be used as the basis for monitoring and evaluating bribery risks on a periodic basis.” “Once the particular risk exposures have been identified,” says Bridger, “it is then a case of putting in place adequate policies and procedures to address those risks and to help minimise further exposure going forward. Training for all staff members should then be undertaken and this should be tailored to the risks that the employees face. It is also important to ensure that those who have authority to enter into contractual relationships on behalf of the company are doing so in a manner that properly incorporates anti-bribery and corruption provisions so that your trading partners are aware of your requirements and are contractually bound to comply with them.”

There is certainly a risk both with the high level of involvement required for compliance as well as the likelihood of lost contracts to competitors not subject to bribery laws that may result in a considerable cost to UK businesses and put them at a competitive disadvantage. Not all view the Bribery Act in such negative terms however.

Andrew Durant, senior managing director, FTI Consulting says that the act will “bring us into line with other countries that have signed up to the OECD convention. This will create a level playing field which will ensure that British businesses have a fair chance to win overseas contacts.” Ellis agrees and says that, “major companies that are operating to the highest ethical anti-bribery and anti-corruption standards will be able to exert influence and improve the conduct of those with whom they deal.”

According to the International Chamber of Commerce, doing business in corrupt markets has been found to cost equivalent to a 20% tax on business. Once the level of compliance with the bribery act begins to filter down throughout the global marketplace this is certainly a cost most businesses will not be likely to miss.