Middle East firms need UK Bribery Act compliance programmes, conference hears

* Any views expressed in this article are those of the author and not of Thomson Reuters Foundation.

Experts have warned that firms operating in the Middle East must implement robust anti-bribery programmes to offset the risks posed by the UK Bribery Act 2010 and other global anti-corruption initiatives. Speaking at a recent anti-corruption conference in Dubai, international legal and compliance experts discussed the UK Act and the effect it will have on regional businesses. In particular, speakers focused on the requirement to prevent bribery by associated parties and the need to adopt risk assessment programmes, enhanced due diligence measures and anti-bribery contractual obligations for counterparties. Roderick Macauley, Bribery Act implementation manager for the UK Ministry of Justice, stressed that the Act would have profound implications for individuals, corporations and states. He noted that s 7 of the Act, which criminalises the failure to prevent bribery by a firm's associated parties, was the Act's most innovative element. "Section 7 is a new area of corporate liability," he said. "It's about direct liability, not for one of the bribery offences, but for failing to prevent the commission of one of those offences". Failure to prevent bribery Macauley explained that prosecutors did not require a bribery conviction in order to prove that a firm was guilty of failing to prevent corruption. "Prosecutors only need to lead with proof," he said, adding that firms would be found guilty of failing to prevent bribery unless they could show that, despite the payment of a bribe, the firm had implemented adequate anti-corruption policies. On the definition of associated persons, Macauley told Thomson Reuters that the Act's language covered any entity performing services for an organisation, including not only agents and intermediaries, but also suppliers and distributors. "It's a matter of substance, not form," Macauley said. "It doesn't matter what the contract looks like; the authorities will be examining what the role of that associated person was." Michael Hancock, regional general counsel for HSBC, emphasised the risks posed by s7. He stressed that the criminal liability for corruption by associated parties was direct, not vicarious, and that convictions under s7 carried unlimited fines and the possibility of a 10-year prison sentence. Additionally, entities convicted under s7 were likely to be permanently banned from participating in European Union public procurements, Hancock said, adding: "The consequences are extremely serious." Hancock also noted that while the Act's jurisdiction was limited to foreign firms with a demonstrable business presence in the UK, no such limitation existed for third parties paying bribes on a firm's behalf. "For the purposes of an offence, the entities you're dealing with in the Middle East do not have to have any dealing with the UK," he said. Regarding bribery of joint venture entities (JVEs), Macauley told Thomson Reuters that the parties who initiated a joint venture (JV) could be prosecuted for bribes paid by one of its entities. "By creating a JVE, you are not somehow avoiding the scope of the Bribery Act; it depends on the facts of the case," he said. "Prosecutors will look at the managerial and financial ties between those that set up the joint venture." Carlo Fedrigoli, senior legal consultant at DLA Piper, stressed the importance of selecting JV partners that shared the same level of commitment to anti-bribery. "If the JV partner is a public official, it's very important to ensure that the official is not benefiting in an improper way from the JV agreement," he said. "Written assurances are required to make sure the partner won't inappropriately influence government entities to gain business advantages." Policies and procedures Macauley said that compliance with the Act required anti-corruption processes that were proportionate to a firm's size, business activities and the jurisdictions in which it operated: "The policies required for companies working in low-risk sectors and jurisdictions are going to be very different from those required of large, multi-national corporations." Macauley added that the Act did not create a "new order" in the world of compliance, stressing that anyone with experience in corporate governance would be familiar with the principal requirements, namely risk assessment, monitoring and review. Hancock urged firms to conduct a thorough assessment of their corruption risk, and to focus in particular on the activities of counterparties. "When looking at due diligence in relation to counterparties, the key element is how far down the chain you need to go," Hancock said. "If your counterparty is going to perform some of the functions that you have contracted to it through another company, then you must examine how much liability you could have for the entities for which you have no contractual nexus at all." Hancock noted that companies could substantially lower their regulatory risk by imposing contractual obligations on counterparties to prevent bribery by other third parties. John Garrett, group chief compliance officer at National Bank of Abu Dhabi, also emphasised the importance of knowing how and with whom a firm's counterparties conducted business: "Focus on who you're dealing with; are they acting for themselves or for someone else? If they're acting for someone else, identify who they are and what they're doing." Garrett urged firms to impose enhanced due diligence measures and internal controls on counterparties that posed excessive corruption risk. "If you decide to take a higher risk [with a counterparty], then you have to make sure senior management signs off on it," he said. "You have to have a structure in place where junior people look at risk, but where senior people sign off on higher-risk cases." Jermyn Brooks, chairman of Transparency International's Business Advisory Board, observed that multi-national firms were often unsure how to implement anti-corruption processes across multiple jurisdictions. He urged firms to start by adopting high-level anti-bribery standards and then, if necessary, to introduce specific guidelines for certain jurisdictions. "You as a company have to have a set of standards about bribery and then implement those in each jurisdiction," he said. "You can't possibly have a legal compliance function that looks after compliance with the laws in a hundred countries." Hospitality and gifts Turning to hospitality and promotion spending, Macauley stressed that the Act did not criminalise bona fide expenditures. "You can carry on taking people to sporting events and putting people up in five-star hotels, as long as it's linked to a business purpose," he said. Macauley warned, however, that bribery could be inferred from disproportionate spending. "If the hospitality and promotion expenditure is very lavish, then of course the inference can be drawn that it was intended as a bribe. The policy we're pursuing is for businesses to look at their hospitality and promotion policies to make sure they are acting competitively and fairly," he explained. Asked whether UK authorities would consider the region's cultural norms in relation to gift-giving, Hancock stressed that a firm's internal policies and procedures must be designed in accordance with what was judged as appropriate in the UK, and not anywhere else. Macauley added that arbiters of fact and juries must disregard local customs, practices and laws. He emphasised, however, that customary gifts which had no nexus to business decisions would not constitute bribery. "To constitute a bribe, the gifts have to be intended to create an advantage over others who are competing in the same market," Macauley said. Facilitation payments Hancock emphasised that the Act took a more aggressive stand against facilitation payments than did the U.S. Foreign Corrupt Practices Act. He noted that, although the UK government was committed to eradicating the practice, it was also aware that doing so would take considerable time. He stressed, however, that while the SFO was unlikely to prosecute on the basis of facilitation payments, companies should understand that the primary risk posed by such practices came from their corrosive effect on overall ethics. "If a company is trying to set a clear tone in relation to anti-bribery, but allows frequent, systematic facilitation payments, that will undermine the company's anti-bribery stance, which is why the UK legislation has gone after it. The amounts are often small, but the consequential effects on the ethos of the company can be quite significant," Hancock said. Raji Hattar, chief compliance officer at Aramex International, said that bribery in the form of facilitation payments was a major concern for global shipping firms such as Aramex. "Facilitation payment is becoming a killer; it's hitting the bottom line and it's hitting the trade across the region, because if you don't pay, then a customs official makes the shipment stay in storage, which can destroy items like food," he said. Hattar highlighted Aramex's active role in working with competitors to take a collective stand against facilitation payments, as well as the company's participation in numerous international anti-corruption initiatives. He stressed that corruption could not be eliminated without collective action by businesses. "It's not in the government's hands, so it's extremely important that private sector companies start acting on that," he said. Asked why Aramex was taking such a visible stance, Hattar told Thomson Reuters that the firm's chief executive had a deep personal interest in fighting against bribery. Aramex had been established with just $200,000 and was now worth over $700 million, Hattar said, explaining that paying bribes threatened the company's competitiveness and represented an unacceptable financial burden. Further emphasising the business case against corruption, Macauley said: "Bribery is a continuing, incredibly expensive, world-spanning, market-distorting drain on legitimate business and has very bad effects on trade in emerging and developing economies." He added that the business community was better positioned than governments to fight corruption. "Governments cannot tackle bribery without taking a collaborative approach with the business community," Macauley said. Regional risk Fedrigoli observed that the abundance of government-related entities in the Middle East added to the corruption risks faced by firms operating in the region. "Employees at any state-owned companies and sovereign wealth funds must be considered [to be] public officials," he said. Fedrigoli explained that the region's vulnerability to corruption was facilitated by poor accounting and recordkeeping standards, which allowed certain corrupt practices, such as over-invoicing, false accounting and the creation of slush funds, to flourish. He added that regional anti-bribery compliance risk was further worsened by tax havens and free zones that allowed the establishment of non-transparent corporate entities. Michael Adlem, a partner at Ernst & Young's fraud investigation unit, said the firm was increasingly being asked to examine the internal processes and controls of Middle East companies, and to investigate whether employees were involved in bribery. "Unfortunately it is the case that we find that bribes have been paid or that fantastic gifts have been given that are far in excess of what is appropriate," he said. Adlem also observed that while many regional countries had anti-bribery laws, including the United Arab Emirates, there was often reluctance to enforce those laws.