Clean-up time

Clean-up time
The successful judicial review of the Serious Fraud Office’s decision to end its investigation into allegations of bribery against BAE is just one of a series of events that is likely to lead to a rise in anti-corruption investigations and proceedings.

The UK Government’s failure to properly enforce laws prohibiting the bribery of foreign officials has been identified as a weakness for some time. In its evaluation of the UK’s implementation of the Organisation for Economic Cooperation and Development (OECD) anti-bribery convention in 2005, the OECD registered its surprise that no prosecutions had been brought in the UK in the six years since the convention’s ratification in 1999.

This can be contrasted with the position in the US, where the Department of Justice and the Securities and Exchange Commission have been active in policing the US Foreign Corrupt Practices Act (FCPA), usually with the imposition of significant fines and onerous remedial action. The OECD convention makes it clear that decisions ;on ;whether ;to ;bring ;a prosecutions should not be influenced by considerations of national economic interest, the potential effects on relations with other states or the identity of the parties involved. Of course, in the BAE case national security interests were said to arise.

Law enforcement

Accordingly, both for historic reasons and because of the focus brought to bear by the BAE case, the UK is now under considerable pressure to enforce its laws effectively. At the same time, the increased globalisation of business exposes UK firms to operating in environments where lower standards of business ethics may apply.

Authorities in the US have been quick to apply the FCPA jurisdiction extra-territorially to non-US companies. While the FCPA has traditionally been applied to US persons, non-US businesses that, for example, have alternative dispute resolutions traded in the US may be subject to US enforcement action even in relation to conduct that takes place outside the US.

The expansion in scope of the FCPA to confer jurisdiction where some element of the bribery offence takes place in the US has also enabled US authorities to seize jurisdiction. The link between the behaviour in question and the US is becoming increasingly tenuous. In 2001, US authorities successfully asserted jurisdiction against an Indonesian accounting firm that paid a bribe in Indonesia to obtain a lower tax assessment, to benefit an Indonesian subsidiary of a US issuer. There was no allegation that any of the conduct took place within the US. The double jeopardy risk is not fanciful. There have been instances of non-US businesses being fined twice for bribery violations – both in the US and in the ‘home’ state – for conduct that has taken place wholly outside the US.

When thinking about how corruption can impact on financial institutions, the first thing that springs to mind is the money-laundering risk on the retail and wealth management side of dealing with politically exposed persons. However, financial institutions risk being more directly affected by corruption and on the wholesale side too.

Investment banks regularly advise governments as to how to raise money. In less transparent jurisdictions, there is the risk that officials will accept or expect bribes such as in the US case of Giffen which concerned advice to the Kazakh government. However, corruption may not be so obvious and great care must be taken in areas such as client entertainment. It is not uncommon to discuss how the forthcoming deal will be celebrated when still at pitch stage. Moreover, increasing privatisation and the growth of the sovereign wealth funds are blurring the line of who is a government official.

Defining ‘corruption’

UK anti-corruption legislation is very broad. Corruption is not a matter that is limited to foreign or governmental bodies, as was seen in last October’s conviction of three men at Birmingham Crown Court for making and receiving corrupt payments in relation to supplying IKEA. Accordingly, financial institutions will need to be careful not only when they are dealing with governments but also the private sector, whether within the UK or – because of the extra-territorial reach of the UK legislation – abroad.

The risk is not only a reputational and/or financial one for the institution. The IKEA case cited above shows that UK courts are willing to impose criminal penalties. The same is true for US courts, which will do so even if the defendant is not American – as was the case with Hans Bodmer (a Swiss lawyer) and Christian Sapsizian (a French employee of Alcatel).

So what can be done to minimise the risk? Financial institutions need clear codes of conduct and ethics that must include well thought out entertainments policies. High-level personnel need to be assigned to communicate and oversee compliance with such standards. Finally, regular audits are advisable to ensure that the policies are working in practice.

Firms are still slow to wake up to the necessity to be compliant, but failure to take precautionary measures can lead to long and costly investigations – potentially in numerous jurisdictions.

Arun Srivastava is a partner and Oliver Kerridge a senior associate in the London financial services group at Baker & McKenzie