UK: Financial Services Quarterly Report - June 2011

Last Updated: 30 June 2011
Article by Jonathan Pickworth, Andrew Hearn and Deborah Williams

CONTENTS

  • UK Bribery Act 2010 – What It Means for the Financial Services Industry
  • New U.S. Reporting Requirement Regarding Cross-Border Holdings
  • Banking Regulatory Consequences for German Banks Holding Investment Funds
  • Recent French Tax Instruction Renders French SICAV More Attractive to Non-Resident Investors
  • News on the Regulatory Front in Luxembourg
  • UK Remuneration Code – Poacher's Paradise?
  • Ireland Proposes a Voluntary Corporate Governance Code for Its Funds Industry
  • Recent Developments in Chinese Securites Regulation
  • Risky and Complex? Recent Trends in Investor Suitablity Regulation in Asia
  • Upcoming and Recent Events

UK Bribery Act 2010 – What It Means for the Financial Services Industry

The UK Bribery Act 2010 ("Act") comes into force on 1 July 2011. It amounts to a landmark in the UK's desire to play a leading role in international efforts to combat corruption. The UK's commitment was underlined by the Secretary of State for Justice:

Tackling this scourge is a priority for anyone who cares about the future of business, the developing world or international trade.1

Although UK legislation, the jurisdictional reach of the Act is broad and it is perfectly capable of applying even where the acts in question are committed outside the UK, by non-UK nationals, and even if the corruption in question benefits (or is intended to benefit) a non-UK business.

Background

The impetus for the UK Government to enact this new legislation was the criticism levelled at it over recent years for its failure to take enforcement action effectively against corruption, particularly involving companies.

The Act replaces, and builds upon, a myriad of existing anti-corruption legislation in the UK, which was viewed by some as outdated, complex and disjointed. In reality, the main issues with the earlier legislation were that (a) it was not enforced rigorously, and (b) it allowed no easy way to secure prosecutions of corporate entities (English law making it hard for a prosecutor to attribute the necessary mental element of a crime to a corporate entity).

The Act provides a unified and modernised list of bribery offences. It allows for prosecution of corruption— in the UK as well as overseas. And, critically, it creates a new corporate offence of failing to prevent bribery, which will allow criminal action to be brought against corporate entities much more easily than ever before because it is a strict liability offence. The difficulty of proving that the corporate entity had the necessary mental element to commit the offence is removed (as explained further below).

The jurisdictional reach of the Act is broad and it is perfectly capable of applying even where the acts in question are committed outside the UK, by non-UK nationals, and even if the corruption in question benefits (or is intended to benefit) a non-UK business.

Scope of the Act

The Act has far-reaching implications for individuals and companies both in the UK and overseas. Many of the main players in the financial services industry, already subject to extensive regulation by the Financial Services Authority ("FSA") and other bodies, are likely to have anti-corruption policies and procedures in place to minimise the risk of falling foul of existing global regulation—particularly the U.S. Foreign Corrupt Practices Act ("FCPA")—and to meet the FSA's Systems and Controls requirements. However, the Act is far wider in its scope than the FCPA, and those within the industry will need to adapt and build upon existing policies to avoid exposure to criminal liability under the Act.

The Act is broader than the FCPA in the following key ways:

  • Receipt of bribes – The Act extends to the receipt of bribes, not just the giving of them.
  • Domestic bribery – The Act prohibits bribery both in the UK and abroad.
  • It is not limited to the bribing of foreign officials – Although the Act contains a specific offence of bribing a foreign public official (Section 6), the offences it contains (relating to the giving and receiving of bribes and the failure to prevent bribery) are not limited to the bribery of public officials. They extend to all forms of commercial bribery.
  • Facilitation payments are not exempt – The Act does not exempt facilitation payments from its scope. To the contrary, the Guidance on the Act makes it clear that such payments can constitute bribery under the Act.
  • New strict liability offence – The new corporate strict liability offence of failing to prevent bribery has no equivalent in the FCPA.

Failure to Prevent Bribery

As noted above, in addition to the offences of (i) bribing another person (Section 1), (ii) receiving a bribe (Section 2) and (iii) bribing a foreign public official (Section 6), Section 7 of the Act introduces a new, strict liability offence where a relevant commercial organisation ("RCO") fails to prevent bribery.

The Section 7 offence is committed by an RCO if a person associated with the RCO bribes another person, with the intention of obtaining or retaining business or an advantage in the conduct of business for the RCO.

This is by far the most onerous provision of the Act for the reasons set forth below.

Strict liability nature – Unlike the other offences under the Act, the new Section 7 offence of failure to prevent bribery is a strict liability one. There is no requirement to prove that senior management had the necessary mental element normally required. The only defence available to an RCO that is prosecuted under Section 7 will be to show that it had "adequate procedures" in place (see next page). Lack of intent or "turning a blind eye" will provide no defence to an RCO.

Associated persons – For the Section 7 offence to have occurred, a person "associated" with the RCO must have committed a bribery offence anywhere in the world under Sections 1 or 6 (though they need not have been prosecuted for it), with the intention of obtaining or retaining business or an advantage in the conduct of business for the RCO. Under Sections 1 and 6, it is an offence not only to give a financial or other advantage, but also to offer or promise such an advantage. The meaning of "associated person" in Section 8 of the Act is very broad and is "a person who performs services for or on behalf" of the RCO. This can include, but is not limited to, the RCO's employees, agents and subsidiaries. The Guidance acknowledges that, in addition to employees of the RCO, its agents or subsidiaries, contractors and suppliers could also be "associated" persons if they are performing services for or on behalf of an RCO. However, this is not likely to be the case if the contractor is merely acting as a seller of goods. The Guidance suggests that, where a contractor is just one link in a long supply chain involving several entities, it is likely that it will only be treated as an "associated" person of its contractual counterparty (subject to the facts of the case).

Critically, it creates a new corporate offence of failing to prevent bribery, which will allow criminal action to be brought against corporate entities much more easily than ever before because it is a strict liability offence.

Carrying on business (or part of a business) in the UK – An RCO is defined in Section 7 as including (i) any company or partnership formed/incorporated in the UK carrying on business anywhere, and (ii) any company or partnership (wherever formed) that carries on business, or part of a business, in any part of the UK. The second limb of this definition is extremely broad, but the Guidance indicates the Government's view that it should be approached in a common sense way so that, for example, the mere fact that a foreign corporate entity has a UK listing, or that a foreign parent company has a UK subsidiary, should not, in itself, make it an RCO. Nevertheless, whether this requirement is met will always be fact dependent and will be for a court to decide. The financial services industry may well be particularly cautious of this, in light of the wide interpretation given to a similar provision under the Financial Services and Markets Act ("FSMA") in relation to the carrying on of a regulated activity in the UK.2 It is clear that the FSA may consider that organisations could carry on an activity for the purposes of FSMA without much of a physical presence in the UK. However, whether Section 7 of the Act will be given as wide an interpretation is not clear.

Only defence is "adequate procedures" – Once it is established that a business is an RCO, any bribery committed by an "associated" person anywhere in the world exposes the RCO to a potential Section 7 prosecution, provided the bribery was committed with the intention of obtaining or retaining business or an advantage in the conduct of business for the RCO. The breadth of this offence is therefore extremely wide. That breadth makes it all the more important for an RCO to ensure that it can confidently rely on the one defence that exists to a Section 7 prosecution—that it had "adequate procedures" in place designed to prevent persons associated with it from taking part in bribery offences under the Act.

"Adequate procedures" are not defined in the Act, but the Guidance sets out the following six key principles intended to assist organisations in minimising their risk of corporate liability under the Act: proportionate procedures; top-level commitment; risk assessment; due diligence; communication (including training); and monitoring and review.

What is clear is that having adequate procedures is about much more than simply having a book of procedures. For the procedures to be adequate, a company will need to be able to demonstrate a genuinely compliant culture. For this reason, those companies with good and effective FCPA compliance programmes already in place will have a distinct advantage. Such programmes will need upgrading though to bring them into line with the requirements of the Act—which undoubtedly sets a new gold standard—but at least for those companies, the culture is already established.

Key Considerations for the Financial Services Industry

The following considerations are likely to be particularly relevant for the financial services industry:

Intermediaries – The use of intermediaries is widespread in the financial services industry (for example, insurance) and, given that intermediaries who contract directly with an RCO are likely to be considered "associated" persons for the purposes of Section 7 of the Act, measures should be taken to ensure that the risk of bribery is minimised and that the RCO can feel confident, and can demonstrate, that it has adequate procedures in place. Although what is needed may depend on the nature of the RCO's business (for example, its size and the precise sectors and countries in which it operates), such measures may include: (i) vetting potential intermediaries; (ii) ensuring that intermediaries are familiar with corruption policies and are adequately trained; (iii) ensuring that adherence to anti-corruption policies (and the consequences if they are breached) is set out in written agreements; (iv) ensuring that those agreements also require the intermediary to impose similar contractual requirements on any third parties with whom the intermediary contracts to do work for the benefit of the RCO; and (v) conducting periodic reviews to detect any problems that have been encountered and to update anti-corruption policies accordingly. Similar consideration should be given in relation to all parties that could be considered "associated" persons under the Act.

A non-UK parent company should not attempt to avoid liability under the Act by contracting directly with agents for or on behalf of its UK subsidiary, since the non-UK parent company could be considered an RCO for the purposes of the Act in any case.

Corporate hospitality – The Guidance makes clear that the provision of corporate hospitality is entirely permissible, provided it is not being used as a bribe; the key will be to ensure that hospitality is offered for a legitimate purpose (such as to improve the image of a commercial organisation or establish cordial relations) and is both appropriate and proportionate. The latter involves a subjective assessment, which may be influenced by factors such as the seniority of the people involved, and what conduct is generally regarded as an accepted norm in a particular sector. Corporate policies and procedures should be reviewed and amended to ensure that (a) adequate guidance in clear language is in place to enable "associated" persons to know what conduct is or is not acceptable, and (b) relevant procedures are in place for securing approvals and reimbursement. Such approvals may, for example, require advance approval from different levels of management depending on the value of the hospitality being provided. Overall, perhaps too much has been written about the impact of the Act on corporate hospitality; used appropriately and proportionately, it is unlikely to give rise to any issue for most organisations.

The Guidance sets out some useful examples of what may be acceptable hospitality that would fall outside of the Act—for example, the provision by a UK mining company of reasonable travel and accommodation to allow foreign officials to visit distant mining operations so that those officials can satisfy themselves as to the physical operations. Likewise, taking to a business lunch a client or contact who refers work, should not, in itself, fall within the Act.

Relationships between regulators – The financial services industry is likely to be already aware of the information- sharing powers of both domestic and international regulators. One of the key methods by which a regulator may be alerted to the commission of a bribery offence is by way of information-sharing. In the UK, bribes are reportable to the Serious Organised Crime Agency under the Proceeds of Crime Act 2002 and, inevitably, reports may be shared with other regulators such as the Serious Fraud Office and the FSA. In addition to criminal penalties under the Bribery Act, action can be taken by regulators, including the FSA, in respect of corruption concerns.

High-risk jurisdictions Particular thought should be given to high-risk countries in which corporate entities operate, to ensure that adequate procedures are in place, having regard to the risk of conducting business there. In deciding whether a country is high-risk, regard may be had for sources such as Transparency International's rating of countries by reference to their perceived prevalence of corruption. It is important to bear in mind that claiming that the practice of bribery is prevalent somewhere, or a that a particular action is regarded as customary there, will provide no defence under the Act (except in those rare instances where it can be shown that what occurred is positively permitted under local legislation or case law).

Impact of the Act Personal convictions for corruption offences under the Act may lead to substantial prison sentences, unlimited fines and ancillary orders (such as the confiscation of revenues that flow from an illegal act) and disqualification as a director. Corporate convictions expose corporate entities to unlimited fines (not to mention reputational damage), and the penalties may extend to confiscation orders and will (or, in the case of a Section 7 conviction, may) lead to debarment from tendering for Government contracts across the EU in perpetuity—and this is without even mentioning the devastating cost and impact of a protracted and public investigation.

Personal and corporate convictions for approved persons and regulated entities could also be taken into account by domestic and overseas regulators in considering whether to grant authorisation to carry out regulated activities. For example, in the UK, the FSA is able to take into account, among other things, domestic and overseas convictions (as well as ongoing regulatory investigations) when assessing the integrity of regulated firms for the purposes of authorisation, and whether a person is "fit and proper" for the purposes of granting "approved person" status.3

Although the bribery offences under the Act carry criminal liability, there may well be wider financial and commercial implications. Any investment in (or loans to) a business that has corruption compliance issues could become impaired if the business falls foul of the Act, leading to very serious repercussions. Apart from the consequences for the business where the bribery offence occurred, the impact on the investor/lender, both financially and reputationally, may also be substantial. Comprehensive anti-corruption due diligence is therefore recommended prior to any significant investment being made.

Footnotes

1 The full title for the guidance issued on 30 March 2011 (the "Guidance") is "The Bribery Act 2011 – Guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing (Section 9 of the Bribery Act 2010)".

2 See FSA Perimeter Handbook: PERG 2.4.

3 See FSA Handbook (for example, PRIN, COND, APER, FIT handbooks).

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