UK: Developments in the UK: The Bribery Act and the FSA's Enforcement Drive

Last Updated: 2 August 2010
Article by James Cooper

Two topical issues for directors and officers in the UK are the implementation of the Bribery Act 2010 and the FSA's mantra of credible deterrence, in particular the recent actions against D&Os in a management function.

The new Bribery Act (the Act), which will come into force in April next year, is designed to provide a more effective framework for the relevant authorities to bring the force of the law to bear on bribery. Indeed, in a number of ways it goes further than the US FCPA.

There are four offences. The two general offences of paying and receiving bribes; the offence of bribery of foreign public officials; and the offence committed by the failure of commercial organisations to prevent bribery.

The latter "corporate offence" represents the most significant departure from the old law on bribery and will place the onus on corporates to ensure that their anti-corruption procedures are robust and up to date.

A corporate will be guilty of an offence if an 'associated person' (including an employee, agent or subsidiary providing services for the organisation) commits bribery to obtain or retain business or an advantage in the conduct of business for the organisation. Previously, it was necessary to prove that the illicit conduct was by someone who could be considered a "directing mind" of a corporate entity; essentially some link between the board and the person carrying out the act of bribery. Now the only requirement on the prosecution is to prove a failure to prevent bribery.

The sole defence available to the organisation will be to show that it had in place "adequate procedures" to prevent bribery. The Act, therefore, places the onus on organisations to ensure that their own procedures (and where necessary those of their associated persons) are adequate.

The Act specifies that a senior officer who consents or connives in the commission of the first three bribery offences by the body corporate will be guilty of the same offence. If the company is charged with the "corporate offence" of failure to prevent bribery, then the directors may face exposure for example for failures in corporate governance.

The Act stipulates that the Government will issue guidance before the Act comes into force. The Government has announced that it will launch a consultation in September this year on the proposed adequate procedures guidance. The final version of the guidance is expected to be published in early 2011 which will allow organisations some time to familiarise themselves with it. However, that guidance is expected to be principles-based, rather than prescriptive, and it seems unlikely that it will be capable of direct implementation. Instead, organisations will need to develop and refine procedures appropriate to their own circumstances. They should be using the period before the Act comes into force to undertake a root and branch review of their business practices and reassess whether the protective measures and compliance procedures now in place are appropriate, given the nature of the risks faced.

Looking forward, organisations will also have to ensure that they have the necessary resources to implement their procedures and it will certainly not be sufficient for large commercial organisations to simply produce written policies and compliance programmes without effective implementation and record keeping. Good anti-corruption policies will involve tailored risk analysis, clear and cogent strategies and training to combat specific risk, and provide evidence of careful and committed monitoring with rigorous enforcement at all business levels.

Penalties

An individual guilty of one of the first three offences is liable to a maximum of 10 years' imprisonment and/or an unlimited fine. Commercial organisations convicted of committing the corporate offence will also be subject to an unlimited fine.

Recent judicial comment in R v Innospec suggests that the English courts will exercise increasing assertiveness in assessing and handing down sentences against companies that are at least as stringent as those coming out of the US.

International scope

The first three offences will be committed if any act or omission which forms part of the offence takes place in the UK or if it would have been an offence if committed within the UK and the person involved has a close connection with the UK. The corporate offence is committed irrespective of whether the acts or omissions which form part of the offence take place in the UK or elsewhere and will apply to commercial organisations which have a business presence in the UK (regardless of whether the bribe is paid in connection with that business).

The extraterritorial reach of this Act has important implications, particularly as regards the corporate offence. A business, even if based entirely in the UK, may be held responsible for the acts of its foreign associated persons. Similarly, organisations incorporated elsewhere but carrying on business in the UK or employing British citizens should not assume that they will fall outside the reach of the Act, and even those multinational businesses that have organised their procedures to comply with the US FCPA will need to consider whether readjustment is necessary to reflect the different requirements and scope of the UK's Act.

The key differences between the Bribery Act and the FCPA are:

  • Management has potential criminal liability under the UK Act
  • Offences in the UK include receiving bribes as well as giving them
  • There are no exceptions for facilitation payments under the UK regime
  • The level of penalties differs
  • The resources devoted to enforcing the Act. Whilst the DoJ is well funded, we will be effectively relying on the SFO and the City of London Police to enforce the Act. Will sufficient resources be provided for effective implementation in these straightened times?

As with all primary legislation, implementation is critical. Given the wide ranging nature of the legislation, underwriters should consider raising enquiries with their assureds about whether their procedures have been reviewed in light of the Act.

The FSA

Another issue of interest in the UK is the actions of the FSA's initiative to bring enforcement actions against senior officers of financial services firms for breaches of regulations either by their staff or due to systemic failings within the organisation.

One of the FSA's more prominent strategies is credible deterrence. One of the main components of this strategy is enforcement, with a particular current focus on individuals. The FSA's official view is that action against individuals, particularly senior management, has a greater impact than action against firms. However, it is an area in which it can be difficult to obtain successful outcomes, especially as they are more fiercely contested and settlements are more difficult to attain.

The principle of senior management responsibility is a fundamental feature of the regulatory regime introduced under the Financial Services and Markets Act 2000 (FSMA). It means that the FSA holds the senior management of regulated firms responsible for those firms' activities and for ensuring that the business of the firms is run in compliance with relevant regulatory requirements.

Historically, FSA supervision was focused on ensuring that appropriate systems and controls were in place and relied on senior management to make the right judgements.

This meant that regulatory interventions only occurred to force changes in systems and controls or to sanction transgressions based on observable facts. Now, however, the FSA seeks to impose its own judgements on the decisions of senior management and takes action if, in its view, those decisions will lead to risks to its statutory objectives. This means that the FSA has moved from regulation based on observable facts to regulation based upon business judgements about the future. The FSA heralds this as a more intrusive and direct style of supervision: the intensive supervisory model.

Senior management's role has therefore become even more crucial. The FSA has made it very clear that it will be increasingly prepared to take disciplinary action against those individuals within senior management who fail to ensure that their firm has, for example, an appropriate training and competence programme in place.

The part of the FSA Handbook which deals with this is known as 'SYSC' or Senior Management Arrangements, Systems and Controls. Essentially, its purpose is to:

  • Encourage firms' directors and senior managers to take appropriate practical responsibility for their firms' arrangements on matters likely to be of interest to the FSA.
  • Increase certainty by amplifying Principle 3 of the FSA's Principles for Businesses which requires firms to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems.
  • Encourage firms to vest responsibility for effective and responsible organisation in specific individuals.
  • Create a common platform of organisational and systems and controls requirements for all firms.

There are a number of examples of enforcement action taken this year against individuals in a senior management role. By way of example, in May this year Johnny Cameron, former Executive Director of the Royal Bank of Scotland (RBS), gave an undertaking that he would not perform any significant influence function (SIF) in relation to any regulated activity carried on by any regulated firm or carry on any further full time employment in the financial services industry. The FSA stated that it had not made any findings of regulatory breach against Mr Cameron and he had not made any admissions, but it believed that Mr Cameron would not meet its standards for SIF approval.

It also appears that the FSA is increasingly prepared to take informal action to prevent individuals about which it has concerns moving to senior positions in authorised firms. For example, In May 2010 it was reported that John Hyman, a former joint head of global capital markets at Morgan Stanley, was blocked by the FSA from moving to Nomura as co-head of global finance. The grounds on which the FSA had vetoed Mr Hyman's appointment were not made clear.

The focus of the FSA on credible deterrence of individuals will no doubt lead to more of these types of enforcement action against D&Os for the role within the management of firms rather than their actions in carrying out trades and so on on behalf of clients.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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