The Way It Is

The Bribery Act is coming to Russia, Part I

Introduction

Doran Doeh

The UK Bribery Act will come into effect on 1 July 2011. Its extraterritorial scope, the boldness of its approach and the novelty of some of its provisions have caused a stir amongst international and local businessmen worldwide in countries where corruption is widespread. This is particularly so in Russia where the government has launched its own anti-corruption campaign, and those fighting corruption hope the UK action will strengthen their efforts.

In this first part of two articles, I shall cover the background to the legislation: why the UK and why now? To a substantial extent the UK has been pushed to act by its own tardiness in bringing its legislation into line with international standards. The previous UK legislation, the Public Bodies Corrupt Practices Act 1989 and the Prevention of Corruption Acts 1906 and 1916, goes back to Victorian and Edwardian times. It has been suggested that it reflects the sensibilities of the British upper classes of those times, people who worried about their servants taking commissions from local tradesmen. In recent years there has been a flurry of international conventions dealing with corruption which the UK has been party to but failed to implement, most notably the OECD Anti-Bribery Convention. The OECD 2008 report heavily criticised the UK’s inaction in the BAe Systems case when dealing with allegations that surfaced in 2003. However, the Bribery Act does much more than close the gap in international compliance, it places the UK, alongside the United States, in the forefront of nations battling corruption.

As a piece of legislation, the Bribery Act is unusual in a British context. It is very short, written in “plain English” (language that, in theory at least, ordinary people can readily understand) and without the extensive detail and definitions that UK legislation usually contains. In that sense, it is much more like Russian legislation, and it has the same effect that Russian legislation has of giving the government much greater control over the way it is administered and implemented.

It is also innovative. The key feature is the new crime of “failing to prevent bribery” which applies to corporate entities. The point is that it is very hard to get convictions against corporates because, in order to prove a criminal offence, it is necessary to show that the behaviour complained of was activated by the corporate mind, in other words by the senior management of the company. This is, in most cases, impossible to do beyond a reasonable doubt, which is the standard required for a criminal conviction in the UK. The cleverness of the Bribery Act lies in its ability to turn the tables, by placing the onus on a company to show that it has NOT failed to prevent bribery when in fact an act of bribery has occurred.

To understand how this works, it is first necessary to consider the core offences: bribing, receiving a bribe and bribing a foreign public official.

Bribing – Section 1 provides that a person (an individual or a corporation) commits an offence if he (directly or indirectly) offers, promises or gives a financial advantage to another person and intends the advantage to induce/ reward the person for the improper performance of a relevant function or activity; or knows or believes the acceptance of the advantage is itself improper performance.

EXAMPLE: P provides a friend (who works in the same company as X) $10,000 to give to X, to persuade X to send P confidential information about the company that P wants in connection with her own business.

Being bribed – Section 2 provides that a person commits an offence if he (directly or indirectly) requests, agrees to receive or accepts a financial or other advantage; and intends there to be improper performance as a consequence; or (b) there is improper performance of relevant function or activity (whether as a reward, or in anticipation or consequence of a request, agreement or acceptance).

In the cases outlined in (b), there no requirement for person to know or believe that the performance of the function or activity is improper.

EXAMPLES:
(a) R asks P for $10,000 if he – R – or a colleague destroy supporting documents submitted by rival bidders for a contract P is seeking with R’s employer.
(b) R, a civil servant, asks for $1,000 for himself to process a routine application.
(c) R, a civil servant, asks for $1,000 from P as a reward, having processed P’s application especially quickly.
(d) R, an agent, accepts P’s bid for a contract on behalf of a company, because R expects P secretly to reward him personally.

Sections 1 and 2 apply to almost any activity or function, whether in public or private business, in relation to which the person: (A) is expected to perform in good faith (B) is expected to perform impartially and/or (C) is in position of trust by virtue of performing it. “Improper performance” means performance or failure to perform in breach of a “relevant expectation” under conditions (A), (B) or (C).

What is expected? “What a reasonable person in the United Kingdom would expect in relation to the performance of the type of function or activity concerned… any local custom or practice is to be disregarded unless it is permitted or required by written law”. In other words UK standards apply even if the behaviour takes place in Russia, unless Russian legislation permits or requires it.

Bribing a foreign public official (FPO) – Section 6 provides a specific offence of bribing an FPO if the person intended to influence that FPO is his capacity as an FPO and intended to obtain or retain business or an advantage in the conduct of business.

This applies if, directly or through a third party, the person offers, promises or gives any financial or other advantage to a FPO or another person at the request or with the assent or acquiescence of the FPO.

There is an exception if the foreign public official is permitted or required by applicable written law to be influenced by offer promise or gift, for example off-set arrangements.

For section 6 there is no requirement for conduct to be deemed improper, and the FPO does not commit an offence by being bribed (unless it is also within section 2).

EXAMPLE: (offence) P asks R, a civil servant in Toyland, to process quickly P’s application for licence to engage in construction work in Toyland. R says that will only be possible if P provides X, a relative of R, with help in the conversion of flats on X’s land. P agrees to provide the help.

EXAMPLE: (no offence) P asks R, a civil servant in Toyland, to process quickly P’s application for a licence to engage in construction work in Toyland. R says that will only be possible if P helps to build a new school in Toyland. P agrees to provide the help. The written law applicable to R says that favourable treatment may be given to foreign businesses if they agree to fund school building work in Toyland.

Failure to prevent bribery

In order for a company or partnership to be convicted of offences under Sections 1, 2 and 6 it would be necessary to prove that the “controlling mind” of the organisation had the necessary knowledge or intention. Section 7 provides a new strict liability offence with no requirement that the “controlling mind” authorise, encourage or be aware of the bribery.

Under this, a “relevant commercial organisation” is guilty of an offence if a person “associated” with it bribes another person intending (a) to obtain or retain business for the commercial organisation or (b) to obtain or retain an advantage in the conduct of business for the commercial organisation.

This applies wherever in the world the offence takes place.

It is a defence for a relevant commercial organisation to prove that it had in place “adequate procedures” designed to prevent persons associated with it from undertaking such conduct.

An “associated person” is any person who performs services in any capacity for or on behalf of the relevant commercial organisation. It can include agents, subsidiaries, intermediaries, distributors, contractors, joint venture partners and consortium members. Employees are assumed to be “associated” unless it is proven that they are not performing the service for or on behalf of the relevant commercial organisation.

It is the “associated person”, rather than the relevant commercial organisation, that needs to have the intention to obtain or retain business.

The meaning of “performs services” will be determined “by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between A and C”.

The role of subsidiaries is unclear and begs difficult questions of corporate identity and whether a subsidiary is really just an extension of its parent.

EXAMPLE: C (a company incorporated in the UK) wishes to do business in Toyland. C employs an agent (X) living in Toyland to establish business contacts on C’s behalf with government officials in Toyland. X bribes those officials to place contracts with C. The directors of C had given no guidance to A on their attitude to bribery, even though it is well-known that officials in Toyland are open to bribery.

Extraterritoriality

The core offences of sections 1, 2 and 6 will affect persons having a close connection with the UK (British citizens and residents, and British companies) even when they are abroad. If they operate through local subsidiaries the issue mentioned above as to the role of subsidiary will arise.

However, the most controversial aspect of the extraterritorial reach of the Bribery Act is section 7, failure to prevent bribery. The definition of “relevant commercial organisation” includes any body corporate or partnership—a Russian company or partnership would fall within this—which carries on business or part of a business in the UK.

EXAMPLE: C, a company incorporated in Noddy Land, with a branch in the UK, wishes to do business in Toyland. C, through its head office in Noddy Land, employs an agent (X) living in Toyland to establish business contacts on C’s behalf with government officials in Toyland. X bribes those officials to place contracts with C. The directors of C had given no guidance to X on their attitude to bribery, even though it is well-known that officials in Toyland are open to bribery.

Question: Does operating in the UK through a branch or a subsidiary make a difference? In theory, at least, it will limit the risk of falling within the ambit of the Bribery Act if Russian companies doing business in the UK only do so through subsidiaries which do not have operations in companies where corruption may take place. However, the issue mentioned above as to the relationship between the UK subsidiary and the Russian parent and with other subsidiaries of the parent may not be simple and straightforward in a particular case.

The Act does not define carrying on business and it will be a matter for the courts to decide in particular cases brought before them. There is already a significant body of judge-made law in the form of court decisions on this point. However, much of the case law relates to taxation and may not be relevant to bribery situations; conversely the judges may take a different approach in such cases.

Under the existing case law, “business” does not necessarily involve profit or gain and a single transaction can in some cases qualify. It is not at all clear at this point whether listing on the London Stock Exchange will qualify. There is guidance from the Ministry of Justice to indicate that listing in itself may not necessarily do so, but the Ministry itself leaves the matter to the judges.

Adequate procedures

The only defence to failure to prevent bribery is for the organisation concerned to have “adequate procedures” in place designed to prevent persons associated with a commercial organisation from bribing. Guidance on this has been published by the Ministry of Justice (available on its website). Although the full Guidance runs to 43 pages, there are six principles which may be usefully summarised here.

Proportionate procedures: the procedures should be proportionate the risks the organisation faces and the nature, scale and complexity of its activities.

Top-level commitment: the top level management of the organisation are committed to preventing bribery by its associated persons and foster a culture in which bribery is never acceptable.

Risk assessment: the organisation assesses the extent of its exposure to risks of bribery on its behalf by its associated persons. The assessment must be periodic, informed and documented.

Due diligence: the organisation applies due diligence procedures in respect of the persons who perform service for it in order to mitigate identified risks.

Communication: the organisation’s bribery prevention policies and procedures are embedded and understood throughout the organisation through internal and external communication, including training

Monitoring and review: the organisation monitors and reviews procedures and makes improvements where necessary.

Penalties

The key penalties are as follows:

Sections 1, 2 and 6 (core bribery offences): individuals, up to 10 years and unlimited fine; organisations, unlimited fine. Section 7 (failure of commercial organisation to prevent) unlimited fine.

There are also other consequences, such as debarment from bidding for government contracts in the EU.

How will the Act be interpreted and implemented?

The Act is written deliberately broadly to catch all forms of bribery and does not include any safe havens or de minimis levels.

In England and Wales, proceedings for offences under the Act require the personal consent of the Director of Public Prosecutions (DPP) or the Director of the Serious Fraud Office (SFO). The latter will be responsible for prosecutions under the Act in relation to offences outside of the UK. Before bringing a prosecution the Director must be satisfied that:

• there is sufficient evidence to provide a realistic prospect of conviction
• and if there is sufficient evidence, whether a prosecution is in the public interest.

The more serious the offence the more likely it will be in the public interest to prosecute.

The SFO and the DPP have published joint legal guidance for prosecutors which is available on the Crown Prosecution Service website.

To give a flavour of what approach will be taken, it may be useful to mention some comments that have been made by official sources:

Facilitation payments:

“It will rarely be in the public interest to prosecute … for the payment of small sums to secure the performance of routine tasks”. However, facilitation payments will still be prohibited by the Bribery Act even though there may be low risk of prosecution in the UK, although the Guidance points out that in some instances “individuals may be left with no alternative but to make payments… to protect against loss of life, limb or liberty” and that is such cases a defence of duress may be available.

It is worth noting, however, that facilitation payments are also prohibited by Russian law and the laws of many other countries.

Corporate hospitality:

“Corporate hospitality would trigger the offence only where it was proved that the person offering the hospitality intended the recipient to be influenced to act improperly. Obviously lavish or extraordinary hospitality may lead a jury to reach such a conclusion but “most routine and inexpensive hospitality would be unlikely to lead to a reasonable expectation of improper conduct.”

“Bona fide hospitality and promotional or other business expenditure which seeks to improve the image of a commercial organisation better to present products and services or establish cordial relations is recognised as an established and important part of doing business and it is not the intention of the Act to criminalise such behaviour.”

“An invitation to foreign clients to attend a Six Nations match at Murrayfield as part of a public relations exercise designed to cement good relations or enhance knowledge in the organisation’s field is extremely unlikely to engage section 1 as there is unlikely to be evidence of an intention to induce improper performance of a relevant function.” (This is intended for a commercial context. The answer might be different if the invitation was to an FPO as the relevant intention is different.)

“Offset” arrangements

• additional investment offered or required as part of a formal tender is “unlikely to give rise to difficulties”.

How does the Act relate to the US Foreign Corrupt Practices Act (FCPA)?

Those organizations already subject to the FCPA, who also carry on business or part of a business in the UK will have to adapt their anti-bribery policies and procedures to comply also with the Bribery Act, which is some ways is stricter and more demanding than the FCPA.

The FCPA applies to companies incorporated in the US and their corporate groups. It also applies to foreign companies registered with the US Securities Exchange Commission. Whilst the latter encompasses many organisations from western Europe which have raised funds in the US, very few Russian companies come within this category.

There are, however, a significant number of Russian organisations which themselves carry on business or part of a business in the UK or which have subsidiaries that do so and for whom the Bribery Act will be relevant, even if the FCPA is not.

What effect will this have in Russia?

British companies which do business in Russia will need to review their anti-bribery policies and procedures to ensure that they are robust enough to comply with the Bribery Act. Some commentators believe that the Bribery Act will make it easier from British companies to resist or avoid paying bribes, particularly if Russian officials become aware of the Bribery Act and that they may invite trouble if they approach British companies. Whether this turns out to be the case remains to be seen.

Others which clearly carry on business in the UK—this will includes many multinationals as well as some big Russian organisations—will need to do the same to ensure their procedures are adequate or to establish them if they do not already have existing ones. Whether this brings about a change of corporate culture in those companies that do not currently have a high level of anti-bribery compliance is a significant question.

For a number of businesses, however, the position may not be clear and they may need to take legal advice.

The chances of the SFO prosecuting a Russian organisation with a UK subsidiary in a situation where a Russian subsidiary of the same organisation pays a bribe to an official in a remote part of Russia are pretty small; it is difficult to see what the UK public interest would be in such a prosecution. However, where an EU-based car producer engages in bribery to sell its products in preference to others who manufacture in Britain so that the latter lose out, the situation would be different.

Sadly, bribery and corruption is a fascinating subject, so attention is likely to be focused on the effects of the Bribery Act, not only in Russia but elsewhere in the world, for a long time to come. There are a number of uncertainties over its implementation. We can assume that the SFO will bring some major prosecutions to show its effectiveness, and these may bring some answers to the outstanding questions.

In part II of this article, which shall be printed in the July issue of PASSPORT, I shall cover the issues of: Extraterritoriality, Adequate Procedures, Penalities, implementation, and the effect that the act will have in Russia.