The Bribery Act: What can we say about its likely impact?
For a country like the UK that has a pretty good reputation for doing business fairly and cleanly, it is surprising that enshrining anti-corruption practices in law has proved so difficult. Yet reforming the UK’s aged bribery laws has been a long and painful process. And although the Bribery Act was finally passed in April 2010, implementation has been delayed twice. At the time of writing, it is uncertain when the law will go into effect. Prime Minister David Cameron has asked the Ministry of Justice to hold off on publishing guidance for companies about the Act, and the law will only come into effect three months after that guidance is published, whenever that might be.
The delays come in response to a slew of panic from British business. Some companies say they cannot afford the necessary compliance measures. Others fear that they will get hauled up for bribery when they simply entertain their business partners. Yet others say they simply cannot do business in certain environments without making the occasional unofficial payment. But there is a lot of bluster and very little serious discussion about the likely impact of the law. It’s as if the UK is the first country to ever take such a step.
In reality, many other countries have laws against bribery. The Americans introduced their Foreign Corrupt Practices Act (FCPA), a law against bribery of foreign public officials, more than thirty years ago, and it is largely American pressure on its competitors that has led to a gradual tightening of bribery laws and enforcement around the world. The UK Bribery Act is not a unilateral initiative. It is a rather tardy response to a much wider process.
Once they had their own law in place, the Americans realized that the only way to make it work without damaging the prospects of their own companies was to ensure that their main competitors were subject to similar constraints. American pressure on European countries thus led to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials, which entered into force in 1999. A full 38 countries have signed up to the Convention, which requires them to pass laws against overseas bribery. There is a variation in commitment, but the OECD monitors enforcement closely and countries cannot get away with only talking tough. Indeed, it is OECD naming and shaming that has prompted the UK to finally get serious about bribery, albeit reluctantly.
The impact...
The good thing about not being the first is that it is possible to look at the evidence about what happened to other companies in other countries after they passed anti-bribery laws. Yet there is not much sign that British business is doing that. Or that the government is willing to draw on such evidence to respond to business’s bluster.
Yet there is plenty of evidence about how anti-bribery laws are enforced elsewhere and what impact the FCPA has had on US companies. I focus on three main findings.
First, companies tend to adopt or reform their Codes of Conduct when anti-bribery laws are passed, but often not in a way that adequately protects them from the law. A survey of the chief legal counsels of Fortune 500 companies by Mary Jane Sheffet found that 42% of responding companies had a code of ethics or conduct prior to the passage of the FCPA, and a further 29% of companies introduced one in the next ten years. However, Kathryn Gordon and Maiko Miyake found that companies often adopt off-the-peg Codes that re not tailored to the particular risks they face.
Indeed, there have been many cases where companies which had a code of conduct and compliance procedures did not implement them properly and fell foul of the law anyway. A recent case in the UK is that of insurance company Aon Ltd. Although the company had risk-prevention and anti-corruption systems in place, the Financial Services Authority (FSA) found that these systems were inconsistently implemented and inadequately monitored, thereby breaching Principle 3 of the Financial Services and Markets Act 2000. The FSA fined Aon £5.25m. The FSA did not establish that Aon had made illegal payments.
Similar cases abound relating to FCPA violations. For example, German car manufacturer Daimler did make efforts to comply with the new German anti-bribery law after 1999 – for example, by adopting an integrity code. However, the code was not properly implemented and payments to foreign public officials in at least 22 countries continued, worth hundreds of millions of dollars over the period 1998-2008. Daimler thus pleaded guilty to certain FCPA violations, leading to fines and penalties of 185 million dollars.
Second, being implicated in a bribery scandal is hugely – and increasingly - damaging for companies. The fines have become much heftier over time. In 2009-10, companies paid FCPA fines and disgorgements of $2.6 billion, nearly triple the amount of settlements in the previous two years. But shareholder suits are also becoming more common: 24 suits against US companies relating to FCPA violations were filed in 2010, compared to an annual average of eight previously. Plaintiffs have collected in around two-thirds of such suits in recent years.
There is also the reputational damage. This is difficult to quantify, but the loss of trust that a bribery scandal provokes can have wide-reaching ramifications. Business is lost as clients look elsewhere or consumers shop around, supplier relationships can be disrupted, and employees start seeking new jobs to avoid their individual reputation being tarnished.
Third, there is also research which suggests that anti-bribery laws lead to a reduction in foreign direct investment in countries that are seen as highly corrupt. Hines found that US companies invest less in corrupt countries and more in less-corrupt countries in the five years after the FCPA was passed. This would suggest that the FCPA makes companies much more risk averse, and that they often decide to withdraw – or not to enter – rather than stay and try to do business cleanly.
Levelling up the playing field...
Companies operating in very corrupt environments clearly do face significant pressure to pay bribes. If they refuse to pay, they may lose business, particularly if their competitors continue to offer bribes. And this is one of the main grounds for complaint from British business.
In fact, the number of competitors that operate beyond the reach of the FCPA and the OECD Convention are becoming fewer and fewer as more companies adopt anti-bribery laws. But Chinese and Russian companies are still unencumbered by such constraints (unless the companies operate in the United States or UK and hence are liable under their anti-bribery laws, even if the bribes are paid in a third location), and they are serious competitors in Africa or Central Asia. Whether or not the playing field is level varies according to the sector. In sectors dominated by large multinationals, such as oil and gas or pharmaceuticals, increasingly all companies are becoming liable to the same laws.
Moreover, even emerging markets are clamping down on corruption. In March 2010, four employees of mining company Rio Tinto received severe jail sentences in China on charges of bribery. The latter was particularly significant since it related to commercial bribery – ie one firm bribing another – an area to which the authorities had not previously paid much attention. And investigations in one country can reveal information that leads to cases in other countries. Siemens and Daimler have both faced investigations in many emerging markets, in parallel with investigations by the US and German authorities.
However, British businesspeople complain that the UK Bribery Act is stricter than the FCPA in some respects, and they are right. First, while the FCPA focuses on bribery of foreign government officials, the UK Bribery Act makes bribery of private citizens illegal too. This makes it harder for companies to circumvent bribery laws by channeling payments through third parties.
Second, the FCPA partially excludes facilitation payments – eg small payments used to facilitate the transit of goods through customs – whereas the UK Bribery Act prohibits these. Facilitation payments could be interpreted as bribes, particularly if they are repeated frequently, on the grounds that they enable a company to retain business. However, final judgements on this will depend upon prosecutorial discretion.
If British business hopes to get concessions from the government, it is here that it should focus its efforts. Revoking the Bribery Act is not an option. The growth of international anti-bribery regulation is inexorable and if the UK is seen as a laggard it will risk the country’s good reputation for fair play. However, the government could use its guidance on the Act to signal that it aims only to keep up with the Americans in fighting international bribery, not to outdo them. [ends]