UK: Corporate Briefing December 2010 - The Bribery Act 2010

Last Updated: 13 December 2010
Article by Bruce Jones, Peter McLoughlin and John Turnbull

The Bribery Bill received Royal Assent on 8 April 2010 becoming the Bribery Act 2010 (the Act) and is due to come into effect in April 2011. Its purpose is to reform the UK's criminal law of bribery and to reinforce the UK's reputation as one of the least corrupt countries in the world. The changes are significant and businesses are likely to face a number of difficulties in complying with the new regime.

The Act replaces the existing mixture of common law and statutory offences with four offences:

  • Bribing another person (section 1): This offence covers the offering, promising or giving an advantage to another.
  • Being bribed (section 2): This offence deals with requesting, agreeing to receive or accepting an advantage.
  • Bribing a foreign public official (section 6): This offence only covers offering, promising or giving bribes but not acceptance of them. The person giving the bribe must intend to influence the recipient in the performance of their functions as a public official and must intend to obtain or retain business or a business advantage.
  • Commercial organisations failing to prevent bribery (section 7): A commercial organisation (a company or partnership) will be guilty if a person associated with it (including an employee, agent, subsidiary or possibly even a joint-venture partner), bribes another person to obtain or retain business or a business advantage for the organisation. The offence is a strict liability offence so a company can be guilty even if no-one within the company knew of the bribery. As discussed below this is a change to the existing law.

In addition, senior managers and directors can be held personally liable under the Act for offences committed by the commercial organisation if they are found to have consented to or connived in the commission of a bribery offence under sections 1, 2 or 6.

Territorial scope

The jurisdiction of the Act is wide and companies and partnerships incorporated in the UK, and those carrying on business in the UK (wherever formed), are all subject to the Act. The corporate offence under section 7 is committed regardless of where it takes place in the world and offences under section 1, 2 and 6 are committed if the act takes place in the UK or by a person who has a close connection with the UK (including a citizen, a body incorporated under UK law or a resident).

Penalties

Under the Act the maximum penalty for all the offences except the offence relating to commercial organisations has been increased to 10 years imprisonment and/ or an unlimited fine for individuals. Commercial organisations that fail to prevent bribery face an unlimited fine. Apart from the financial penalties a successful prosecution under the Act could leave a company permanently debarred from tendering for public sector contracts and also with serious reputational damage from the adverse publicity.

Corporate liability

Unsurprisingly the new section 7 corporate offence has created the most comment and concern from commercial organisations. Under existing law it is difficult to convict a company of bribery unless senior management can be shown to have known of it. The offence under the new Act is one of strict liability meaning the prosecution will not have to prove knowledge or intention on the part of the management in order to gain a conviction. Where bribery is shown to have taken place the only defence open to the commercial organisation will be to show it had in place adequate procedures designed to prevent bribery by persons working on behalf of the business – and this will have to be demonstrated against a background of an offence actually having occurred. The Act itself does not set out a 'one size fits all' set of adequate procedures so there is no safe harbour as such but it requires the Government to give companies illustrative guidance on what adequate procedures might be.

Government guidance

To comply with this obligation and to give businesses the chance to input their concerns, in September 2010 the Ministry of Justice launched a public consultation on its draft guidance This consultation closed on 8 November 2010 and it is expected the final form of this guidance will be published early in the New Year, to allow businesses time to familiarise themselves with it before the Act comes into force. The Government guidelines will clearly be of great importance both to companies and their advisers in seeking to finalise their arrangements to comply with the Act.

Other areas of concern

For companies involved in business in foreign countries where it is customary to make facilitation payments (for example to obtain timely release of goods from customs) the Bribery Act contains no exemption for such payments, which are permitted under the US Foreign Corrupt Practices Act (FCPA). This potentially places UK companies at a disadvantage against their US counterparts. The Serious Fraud Office (SFO) which will be policing compliance with the Act has stated that it does not believe facilitation payments are justifiable and that they should not be made. Whether the SFO will prosecute companies ruthlessly for making such payments remains to be seen, but for the present they should assume that there will be strict enforcement.

Similarly, the Act does not permit reasonable corporate entertainment expenditure, for which there is an exemption under the FCPA, so companies doing business both in the UK and abroad will need to bear in mind the possibility that corporate entertainment can always potentially amount to bribery. The Government believes that it should be left to the prosecutors at the SFO to decide whether bribery has occurred in any case, but this leaves an unsatisfactory level of uncertainty for companies until cases have been brought and the approach adopted by the SFO becomes clear.

What does this mean for companies and partnerships?

The Government hopes that by introducing the strict measures in section 7 it will encourage senior managers pro-actively to adopt anti-bribery safeguards, although it is likely the range of safeguards will vary from business to business. In the first instance the board of directors and/or senior managers should make sure they are aware of the new law so that they can ensure that the commercial organisations for which they work start to review existing policies and consider the need for any new policies and procedures to be implemented in order to minimise the risk of corporate liability. Therefore, even ahead of the Government guidance being finalised the senior management of all organisations should be thinking about the risk of bribery in the context of their businesses and develop a risk profile; the higher the risk of bribery taking place the more stringent the policies and procedures need to be. In particular, organisations should consider the sectors in which they operate, the countries they do business in and their relationships with third parties.

As part of this process organisations should consider reviewing internal procedures for entering contracts (including effective due diligence) and check that their commercial contracts include standard clauses to prohibit bribery. Where new policies and procedures are put in place staff training will be needed to make staff aware of any changes and companies will need to monitor to ensure compliance with any relevant policies on an on-going basis.

In relation to corporate acquisitions and disposals the question whether a company has complied with the Act will become an important issue that will need to be investigated during due diligence. From a buyer's perspective it will be even more important to ascertain whether any part of the target company's current or projected financial performance is underpinned by corrupt practices. If so, the buyer is likely to revise its valuation of the target or may abandon the transaction.

We will be issuing a further update once the Government guidance has been issued

Accounts warranties and unknown liabilities

In the recent case of Macquarie Internationale Investments Ltd v Glencore UK Ltd, the Court of Appeal considered whether a seller was in breach of its accounts warranties in a share purchase agreement where the target company had a large financial liability at completion which was unknown to, and therefore undisclosed by, the seller. The question the court had to answer was which party bore the risk of this unidentified liability where accounts had been warranted as giving a 'true and fair view'.

Background

The case concerned the acquisition of the holding company of an energy group. The energy group's business involved the supply of gas to commercial customers in the UK. The gas was transported by distribution companies one of whom had undercharged one of the target's subsidiaries in respect of certain charges over a period. Due to an error on the part of an agent of the distribution company the liability was not invoiced and so not provided for in the target's audited or management accounts at the time of the sale of the target's shares to the buyer.

The share purchase agreement contained a warranty that the audited accounts gave a 'true and fair view' and made appropriate disclosure or provision for all material actual and contingent liabilities of which the group and/or target or subsidiary to which they relate was aware as at the accounts date and in respect of which provision or disclosure was required. The management accounts were warranted as fairly reflecting the group's financial position and not being misleading in any material respect.

The omission came to light and the buyer argued there had been a breach of warranty under the audited and management accounts warranties. The buyer claimed that had the liability been known, it would have resulted in a reduction in the purchase price. It was common ground that the net asset value of the company would have been reduced by £2,440,187 if provision had been made for the missed charge in the accounts.

Decision

The Court of Appeal confirmed that there was no breach of the audited accounts warranties and that the accounts presented a true and fair view of the assets and liabilities of the group for the relevant year end as the seller did not know about, and could not reasonably have discovered, the liability in question at the relevant time. Equally, a seller would not be in breach of a management accounts warranty where those management accounts did not disclose a liability which was unknown to, and not reasonably discoverable by, the seller at the relevant time.

The Court held that the management accounts warranty had to be construed as a warranty about the manner of preparation and the degree of accuracy of the management accounts and did not purport to warrant anything about unknown or undiscoverable liabilities no matter the size of such liabilities

Impact

Following this decision, a buyer should consider whether to seek enhanced warranty protection to cover undisclosed liabilities not reasonably discoverable by the seller. For a seller, where 'standard' non-enhanced accounts warranties are included, then provided the target's accounts are prepared in accordance with published professional standards and include all known and reasonably discoverable liabilities, he should be able to avoid a claim that the accounts do not present a true and fair view should an additional liability come to light post completion, unless there is some exceptional circumstance.

However, it should be noted that the case did not discuss the lengths to which a seller must go in order to satisfy himself that there are no reasonably discoverable liabilities and also the Court of Appeal did suggest that in some cases warranties relating to assets and liabilities would have covered this type of error although, unluckily for the buyer, in this case they did not.

Location, Location, Location – Corporate residency, a tricky balancing act

Offshore corporate entities have and continue to be a useful tool in the tax structuring framework for many organisations. However, HMRC under renewed government pressure to increase tax revenues in the current economic downturn and buoyed by its recent tribunal success in Laerstate BV v HMRC (2009) TC00162, seems to want to take an antagonistic approach to offshore tax structures by investigating and attacking the residency of some offshore corporates.

The Laerstate case heralds a new era of an interventionist tax inspectorate. Shortly after the Tribunal's decision in October 2009, a senior figure at HMRC confirmed that it would no longer only concentrate its residency investigations on offshore special purpose vehicles but would instead look at the place of residence of major listed companies.

Central management and control

The location of a corporate's central management and control (CMC) has long been the test for determining where the entity is resident for tax purposes and this has generally been held to be where the board of directors meets. As such, it was in the past relatively easy to ensure that a company was not resident in the UK for tax purposes by complying with certain prescriptive guidelines, which included:

  • the company being incorporated and all the corporate books being maintained outside of the UK;
  • the majority of the directors being resident outside of the UK; and
  • the Board meeting regularly outside of the UK and sitting for a reasonable amount of time to properly consider their decisions.

In Laerstate both parties agreed that the residence of the company in question (Laerstate BV) should be determined by reference to where CMC was based. However, the Tribunal determined that CMC could not simply be evidence by Board minutes showing that Board meetings were held offshore to approve particular transactions. Instead the Tribunal investigated where, as a matter of fact, strategic decisions were actually made, not where they were approved. The Tribunal accepted, on the basis of extensive factual evidence presented by HMRC, that CMC of Laerstate BV during the relevant time was based in the UK. The evidence presented to the Tribunal included extract diary entries, airline ticket stubs and transcripts from interviews with the relevant directors and other third parties.

Facts

Laerstate BV was a company incorporated and registered in Holland and was the vehicle used by Dieter Bock to acquire and then dispose of shares in Lonrho plc. Dieter Bock was the sole shareholder of Laerstate BV during the relevant period and was one of the directors from incorporation until his resignation in August 1996, following which time Johannes Trapman was the sole director.

The Tribunal had to determine whether: (a) whilst Dieter Bock was a director; and (b) after he had resigned, CMC was located in Holland or in the UK, where (following the acquisition of Lonrho plc) Dieter Bock was permanently based. The Tribunal found that during the period in which Mr Bock was a director, the fact that the constitutional documents of Laerstate authorised Mr Bock to represent and bind the company in his own right was persuasive evidence that CMC was where Mr Bock resided and not where the company held its Board meetings.

In relation to the period after Mr Bock's resignation the Tribunal held that the available factual evidence suggested that Mr Bock, rather than Mr Trapman, was still making the strategic decisions in relation to the disposal of the shares in Lonrho. Mr Trapman (as the sole director) was effectively rubber stamping decisions already made by Mr Bock.

Comment

The reasoning behind the Laerstate decision is quite simple. Corporates should be resident in the UK for tax purposes if their business is genuinely run in the UK and no sham structuring should enable a corporate to avoid liability to UK tax. However, in practice what this case does is to create an environment (at least for the time being) where it is difficult for truly international organisations to determine where corporates within the organisation are resident for tax.

In July 2010, HMRC published new draft guidance on situations where it would not usually review a company's residence status. The advice restates a lot of the old case law but does little to clarify the confusion created by Laerstate.

Following the Laerstate case corporates should be wary of how their business is run. No longer can advisers set out a set list of criteria, which if met will ensure that a corporate is resident offshore for tax purposes. Corporates will have to review their business in the round and the governance of where key decision makers are based and where they make strategic decisions will have to be tightly controlled and clearly documented.

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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