The UK Bribery Act 2010 and the US FCPA, Concepts and Contrasts

With the issuance by the UK Ministry of Justice of their “Guidance” and related “Quick Start Guide,” the imminent effectiveness on July 1, 2011 of the UK Bribery Act 2010 makes it timely to review this new legislation in comparison to the US Foreign Corrupt Practices Act, which has been on the books since 1977. Notably, several recent enforcement actions have been jointly US-UK proceedings.

 

General Applicability

The US FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business. Enforcement has expanded dramatically over the last 10 years. In addition, other US statutes such as the mail and wire fraud laws, and especially the US Travel Act, provide for federal prosecution of violations of state commercial bribery statutes, which may also apply to such conduct, and to bribery of anyone, not just foreign officials.

The US law applies generally to all US businesses, and to foreign companies which commit a violation in the US, and generally to foreign companies with securities including ADRs registered and trading in the US, and most recently to foreign companies charged with “aiding and abetting” a US violation. While a foreign subsidiary might itself be beyond the reach of the FCPA, the US parent could be liable if it authorized, directed, or controlled the making of a foreign bribe.

Under the US FCPA’s accounting provisions added in 1994, (and under Sarbanes-Oxley), all securities issuers registered under the US Securities Exchange Act of 1934, domestic or foreign, must maintain record-keeping and disclosure for themselves and their offshore subsidiaries as well to prevent “off-book” accounting which might facilitate bribery.

The UK Bribery Act prohibits not only the payment of bribes, as does the FCPA, but also the receipt of bribes. The UK law applies to all companies which carry on a business in the UK, regardless of where in the world the actual bribe occurs. A UK Listing alone, or merely having a UK subsidiary, will not suffice to have the new Act apply, but otherwise it will be instructive to see how this incredibly broad potential reach of the new law is actually applied in practice.

Underlying Elements of a Violation

Neither the US FCPA nor the UK Bribery Act requires proof of actual knowledge and intent to promise or to actually pay a specific bribe. In the US, a finding of willful blindness or reckless disregard on the part of the parent company will suffice to trigger liability in the absence of express authorization, while negligence alone will not. Similarly under the UK Bribery Act, actual knowledge of the bribe and its circumstances are not necessary. While reasonable and discrete enforcement has been promised, the only statutory defense available in the UK is the development and enforcement of “adequate procedures” to prevent bribes being offered or made.

Neither law has any statutory minimum bribe amount required, and several cases in the US have been based on relatively modest bribes. In the UK there have been calming statements that only “significantly serious” situations will merit prosecution, which must be specifically approved by very senior MoJ officials before a case can be brought.

 Bribe By Whom

The FCPA applies to any individual or any intermediary if they violate or conspire. Having the payments made by an agent or distributor clearly does not work, and likely never did. The UK Bribery Act similarly covers principals and “associated” persons to the extent that they actually represent the paying company and the bribery is intended to benefit it.

Type of Bribe

The bribe under both laws can be almost anything of value, from cash to trips to job offers to motorcycles! Anything of value, whether actually paid or simply promised, will be a target predicate.

Bribe To Whom

The actual or proposed recipient can be a “Foreign Official” (US) or a “Foreign Public Official”(UK) or anyone else, public or private, since private bribery likely violates the US Travel Act and definitely violates the UK Bribery Act. In the US there is recent and active litigation over the issue of which employees of state-controlled enterprises qualify as “Foreign Officials” -- the US DOJ and the US SEC position is that they all do, even if the state control is less than a majority interest.

Purpose of the Bribe

The purpose of the payment must be to obtain or retain business, or direct business to any person (US), or to “intend to induce or reward the improper performance of a relevant function or activity.” (UK).  Under neither law is it necessary that the bribe actually succeed in its purpose -- “passive” bribery is a violation of both laws if the improper purpose exists.

Defenses

Under the FCPA, it is a defense that the payment was lawful under written laws of the foreign country, or that the money was spent as part of demonstrating a product or performing a contractual obligation. Under the UK Bribery Act, similar legitimate expenses also are legal, but local custom and practice are given no weight unless local law affirmatively permits or requires the payment.

“Grease”

“Grease” or “Facilitating Payments” are commonly required in many countries for securing routine government action on a timely basis. Payments can be expected under local practice to secure permits, licenses, or other official documents; to process governmental papers, such as visas and work orders; to provide police, mail pick-up and delivery; to secure phone service, power and water, to load and unload cargo, or to protect perishable products; and to schedule inspections associated with contract performance or transit of goods.

Under the FCPA, grease is not prohibited if the payor is legally entitled to the service and the local agency has no discretion to provide the service or not, and the payment is legal under written laws of the relevant country. But facilitating payments are prohibited under the UK Bribery Act, and were prohibited under prior UK law, but the official position is that the authorities will “consider very carefully what is in the public interest before deciding whether to prosecute.” Many US companies already prohibit grease, because of grey areas and probable illegality under local law. But it is unlikely that “grease alone” will attract determined prosecutorial interest in either country.

Whistleblowers

The new US Dodd-Frank Act includes whistleblower rewards of 10-30 percent of fines collected worldwide as a result of FCPA or securities violations that result in monetary sanctions exceeding $1 million. There is no clearly comparable provision under UK law, but the Guidance actively encourages “speak up” and “whistle blowing” by knowledgeable employees up the ladder in their companies, and self-reporting in the UK will clearly affect prosecutorial discretion. US Whistleblowers are strongly protected against retaliation by employers, and potential whistleblowers could easily include formerly faithful employees or even advisors lured by the rewards.  These incentives have been bitterly criticized by US companies, whose compliance programs are expected to be far less effective if employees become aware of violations and rush off to become whistleblowers instead of reporting under their companies’ internal programs, and giving the company the chance to self-report with the related benefits of that candor.

Compliance Programs

Under US law, vigorous internal compliance programs are a critical component in decisions by prosecutors to bring enforcement proceedings or not, and under the Sentencing Guidelines and penalties in general if enforcement proceeds. In the UK, “adequate procedures” to prevent bribery are virtually the only defense available to companies facing action under the UK Bribery Act, to the point that “failing to prevent bribery” is a separate offense.

Under both regimes, the same elements are prominent, beginning with “tone at the top” -- active involvement by the Board and senior management to create an environment where bribery is never tolerated, and is vigorously dealt with whenever discovered.

But there are clear differences in approach. The UK specifically recognizes “proportionality,” -- that one size of compliance does not fit all, while the US has been quick to prosecute bribery rather modest in amount, and individuals guilty in some cases of more inadvertence than evil intent. Hospitality and client entertainment are specifically approved in the UK, while being far more suspect in the US, as evidenced by the recent $10 million settlement by IBM for FCPA violations based on entertainment thought too lavish. The UK Guidance announcements took care to specifically mention both Wimbledon and the Grand Prix as appropriate entertainment! Self-reporting is strongly encouraged in both countries, with a possible race to the prosecutors if potential whistleblowers are involved in the US at least.

Risk assessment and thorough due diligence, especially on agents and other intermediaries, are key features of both regulatory regimes. Regulators in both countries have their “red flag” lists to help spot possible bad actors: Beware specifically of cash payments, high commissions and ill-defined responsibilities, infrequent reviews, and the absence of auditing provisions.

Thorough employee training programs, again proportional to the size and sophistication of the companies involved, are required in both jurisdictions, with emphasis on T&E, political contributions, due diligence, and liability for all intermediaries.  Incentives and affirmation of retaliation protections could be offered for self-reporting. Benchmarking of other companies’ practices and review of trade association models is often instructive. And the compliance programs must always contemplate ongoing review and adjustment, depending on the changing facts and specific developments.

Penalties

Maximum penalties under the UK Bribery Act include, for individuals, up to 10 years’ imprisonment and an unlimited fine, and for commercial organizations unlimited fines and mandatory debarment from tendering for public contracts under EU Directive 2004. Directors and Senior Officers of a commercial organization can also be guilty in relation to active and passive bribery and bribery of a Foreign Public Official (but not failure to prevent) if they “consented or connived,” or turned a blind eye, or chose not to investigate.

US FCPA criminal penalties include for individuals up to 5 years’ imprisonment and fines up to $250,000, and for corporations fines up to $2 million. In addition, intentional violation of the accounting provisions can attract individual prison sentences up to 20 years, individual fines up to $5 million, and corporate fines up to $25 million and possibly higher, in addition to disgorgement of related profits. Expensive ongoing compliance monitors are a frequent US remedy, the bribe and fines are not tax-deductible, and fines on an individual must be paid personally and not by the employer. Debarment from bidding on US Federal and individual State programs could also result. In addition, the US DOJ or SEC may bring a civil action for a fine up to $16,000 per occurrence against any involved as well as any guilty officer, director, or stockholder. In the SEC action, the court may impose additional fines not to exceed the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of the violation, or (ii) a specified dollar limitation based on the egregiousness of the violation, ranging from $5,000 to $100,000 for a natural person and $50,000 to $500,000 for any other person. Injunction proceedings and stockholder suits are also potentials.

 Suggestions

A “Top Ten List” of Guidelines to ensure compliance with both the US FCPA and the UK Bribery Act 2010:

1.         Improper payments to secure business are illegal and violate the Company’s Business and Ethical Standards. This Commitment is shared and strictly enforced by our Board, by our senior management, and by every employee.

2.         We continually assess the risks of such payments occurring in our existing businesses, and particularly when we enter new geographic areas or into new lines of business or with new intermediaries not formerly well known to us.

3.         Whenever we deal through agents, distributors or other intermediaries, our due diligence should be at least equivalent to our hiring of an active employee, and our assignments of duties, monitoring and review of their activities and results should be just as thorough.

4.         All agents, distributors and other intermediaries through which we do business are expected to confirm that they will abide by these principles in all respects. If they do not have internal anti-bribery procedures in place, it is unlikely that we will do business with them.

5.         We do not pay “Grease” or other facilitating payments to assure receipt of services to which we are legally entitled under local law.

6.         Within designated limits in effect from time to time, we extend routine hospitality to existing and potential, customers, and we pay or reimburse reasonable expenses to demonstrate and discuss our products and services

7.         We maintain, and require all intermediaries to maintain, complete, accurate and candid records of all payments made by or on our behalf to anyone for any purpose. These records are fully available to senior officers and for audit internal and external auditors.

8.         Any observed or suspected violation of these principles is to be reported immediately, through the Company’s Hotline or otherwise, to superior executives and to the Company’s Compliance Officer.

9.         Violation of these principles will result in the immediate termination of the employee, agent, distributor, or intermediary involved, and to other legal action as appropriate.

10.       Any fines or expenses incurred by any individual must be paid personally by the individual and will not be paid or reimbursed by the Company.

Conclusion

Until adoption of the UK Bribery Act 2010, the US FCPA was the most energetic anti-bribery legislation in the world, and depending upon the level of actual UK enforcement, the FCPA may still be in the lead, even with the new and strong laws in China. But the UK Bribery Act has been fairly described as “the FCPA on steroids,” and if enforcement follows, and even if not, it must be taken with the utmost seriousness by anyone possibly subject to it.

Both laws apply wherever in the world the bribe occurs. This can produce odd inconsistencies. If an American businessman and his London partner do business with a joint venture in China 51% controlled by the PRC, and they travel to China and murder the JV's CEO, and then make it home, neither the US nor the UK have obvious jurisdiction to arrest them for their crime, unless China asks for extradition. But if instead of murdering the CEO, they send him and his family to Asia Disneyland to secure a profitable contract with the JV, then they have bribed someone who is probably a “Foreign Public Official” and a “Foreign Official,” and they can be prosecuted, convicted and jailed in either the US or the UK. This incongruity demonstrates only that when nations choose to export their standards of moral business conduct, they should reserve prosecutions for the most serious cases, especially in situations where the local jurisdictions either ignore or even condone exactly the same conduct.

And one key element to keep in mind is that US FCPA Compliance will not necessarily constitute “adequate procedures” under the UK Bribery Act, particularly in light of the Six Principles specifically enumerated in the UK Guidelines. Furthermore, the FCPA needs the US Travel Act to reach bribery of private persons, while the UK Bribery Act stands on its own in that respect. Finally, “Grease” is permissible in some very limited cases under the FCPA, but never under the UK Bribery Act.

Enforcement of the US FCPA sets new records every year for fines and jail terms, and more commonly these cases have been multi-jurisdictional, with the UK being a favorite partner.

But whatever the applicable enforcement predicate and degree of enforcement, bribery of foreign officials or foreign private business contacts is now completely prescribed by extremely strong laws in the world’s two principal financial centers, and the only reasonable reaction is complete compliance in good faith with the laws as written.  Expect possible competition among prosecutors as well, as the various enforcement agencies on either side of the ocean do not want to appear lax in enforcement in this area as compared with t