ADEQUATE PROCEDURES: WHAT NEXT?

As the new Bribery Act looks to change the landscape of criminal exposure for corporations, Bill Waite examines the challenging issues surrounding ‘adequate procedures’.

Bill Waite, CEO of The Risk Advisory Group
Risk Quarterly, August 2010

SECTION 7 - THE KEY PROVISIONS

Section 7 of the Bribery Act removes the need to prove that a controlling mind approved the payment of bribes to secure a corporation’s conviction. Instead, the Prosecution will only have to prove that someone, somewhere, induced another to perform a relevant function or activity improperly, and that the corporation benefited as a result. There are no limits to what might constitute a benefit. Involved parties simply need to be ‘associated’ with the company to be liable, meaning employees, agents and intermediaries are all captured. Moreover, there is almost total territorial application ― the slightest association with the UK will create exposure.

MANAGING EXPOSURE ― AND EXPECTATIONS

Section 7(2) of the Act provides that ‘it is a defence for the company to prove that it had in place adequate procedures designed to prevent persons associated with the company from undertaking such conduct’.  The previous government was reluctant to elaborate on what ‘adequate procedures’ might mean – an untenable position given the prospect of unlimited fines and a potential ban from EU procurement. In December 2009, Lord Bach was forced to concede that guidance was essential and this was promised before Section 7 comes into force.

LATEST DEVELOPMENTS

The new government recently announced that the Act will not be effective until April 2011. In the interim, there will be further consultation from September, with guidance issued in January. The Serious Fraud Office’s guidance will follow. This means that from January companies will have three months to prepare.

IN THE MEANTIME…

The recommendations of the OECD, Transparency International and the Global Infrastructure Anti-Corruption Centre provide a clue to what adequate procedures might look like. Lord Bach also published the GC100 Memorandum, incorporating views from general counsels of 85 FTSE 100 companies ― and these recommendations for any company developing its own procedures:

• establish board responsibility for the anti-corruption programme
• make a senior person accountable for oversight, implementation and monitoring
• publicise an unambiguous code of conduct
• develop procedures to identify corruption risk within an organisation
• vet potential employees ― and introduce suitable contractual obligations and disciplinary procedures
• implement a gifts and hospitality policy
• use training to embed codes of conduct and other policies
• conduct rigorous due diligence on countries, potential business partners and agents
• introduce formalised processes to escalate decisions when risk modelling indicates a high corruption risk
• implement effective financial controls and reporting
• use procurement and contract management systems to minimise corruption risks, and
• introduce whistle-blowing procedures and informant protection mechanisms.

The above guidance is essentially lifted from the US model; unsurprising since most, if not all, FTSE 100 companies will have been directly exposed to the Foreign Corrupt Practices Act. And don’t be surprised if the guidelines eventually issued by the government and the SFO look similar. We have been promised principles, not granularity.

HOW TO RESOURCE?

The previous government’s view that the new legislation ‘should not place any additional burden on the private sector’ was always unrealistic. Siemens now has 600 people directly employed in its compliance function and a further 600 with partial responsibility. Compliance with the Act is not a zero cost option and will inevitably take more than three months to achieve. The new government must also recognise that there is a limit to what businesses outside the FTSE 100 can afford and organisationally manage.

M&A IMPLICATIONS

In the US, the position is plain ― there is successor liability if, for example, due diligence fails to pick up business bribes being paid by a remote subsidiary of an acquired business. However, the Department of Justice has said it will not prosecute if an acquirer reveals a corruption issue and implements a programme for change. UK businesses need the same comfort to encourage international expansion ― a key objective of the new government.