UK: Brown Paper Bags

Last Updated: 22 February 2007
Article by Mark Surguy

The recent football ‘bungs’ debacle neatly illustrates the issues faced by businesses when employing the services of agents or middlemen to facilitate business contracts. Agencies can arise automatically and the definition of ‘agent’ in this context may surprise some people.

Payments in return for business are common. A volume discount would be a common example or a sales commission. Surely discounts are legal? Are all payments of commission unlawful or is it only when they are ‘backhanders’? When does a payment to an agent become improper? And what exactly do we mean by a ‘kickback’?

In the football context, Lord Stevens' enquiry is investigating payments to decision-makers to persuade them to buy or sell premiership players. Does this sound like a bribe?

The essence of a payment to ‘grease a deal’ and which makes it unlawful is its secrecy. If a payment is authorised or disclosed, then it will not amount to a bribe or improper payment. The question here is to whom and how should disclosure be made and who is the proper source of authority.

In the football context the allegations have included secret approaches by agents to players or managers to broker a transfer. The player and manager are employees of the football club and any approach should be properly made to the Club itself not to its employees. Once the essence of secrecy is removed and the Club consents to the discussions, the deal cannot be tainted. Unless of course there is also a secret payment.

The questionable payments under investigation in the premiership football clubs have allegedly taken various forms:

  • the agent represents the player, negotiates a transfer and then demands payment from the Club. The player should properly pay the agent, but instead the Club pays - perhaps into an offshore account, the ownership of which does not have to be publicly declared. The agent does not declare the payment for tax. The agent might get paid by the player as well of course.
  • the agent negotiates a transfer and from his cut of the deal, a payment is made to the club's manager to reward him for ensuring the deal goes through. The Club does not know about the payment. The Board will only see itself as being asked by the manager for a specific player from a specific agent and will know nothing of the agreement between the agent and the manager whereby a payment is made to the manager.

A closely related subject in the matter of so-called facilitation payments is that of a conflict of interest. The civil law does not prevent an agent from having a conflict of interest unless the agent is classed as a fiduciary. An example of a fiduciary agent is a solicitor. A solicitor is not permitted to allow his own interest to conflict with that of his client. The Law Society which regulates the legal profession has developed the conflicts rules still further beyond the basic civil law rule in order to ensure clients' interests are safeguarded. If a conflict arises, the solicitor must declare it. If the conflict is declared, it is possible in most cases for the agent to give consent and the transaction can proceed.

A director of a company is also an agent of the company and is a fiduciary. By statute (the Companies Acts) a director is required to declare any conflict of interest to the Board and / or the shareholders who can then decide whether the proposed transaction should proceed. Informed consent by the decision-making body is the aim of the rule requiring disclosure. Disclosure obviously negates secrecy.

Whilst the activities of solicitors may be governed by the profession's regulator and the actions of directors governed by statue and football agents by Football Association rules, many agents in the commercial sphere are unregulated and not subject to the supervision of an independent body. Whilst regulations exist to licence agents in the football club sector, they are not so rigorous as to prevent an agent acting for and receiving payment from both player and Club. Recent efforts to tighten the rule failed.

So what should companies do where their business activities involve the use of agents to broker deals and where there is no statutory regulation or industry code of practice? Does your business know who its ‘agents’ are?

The starting point is to understand whom the law classes as an ‘agent’ for this purpose. The 100-year old Prevention of Corruption Act still applies and is the source of the definition. The definition includes an employee or a nonemployee who is acting on behalf of another. A sales representative or a self-employed commercial agent could fall within the definition as also would a company appointed by the ‘principal’. The ‘principal’ can be an employer or just the other party to a transaction.

This legislation outlaws the giving or receiving of gifts, consideration, inducements and rewards in relation to the principal's affairs if it is given or received ‘corruptly’.

So, if an employee of a Building Society with his employer's consent refers property repossessions to a cleaning company to be cleaned up ready for a sale, there is no problem with the transaction, even if the cleaning company is operated by the employee's brother-in-law. But if the employee takes 10% from the cleaning company for every referral and does not tell his employer, not only is the transaction with the cleaning company potentially void on the grounds of illegality, the employee is committing a criminal offence. If the brothers-in-law fall out and the referrals continue but the 10% commission stops, the employee will not be able to enforce payment through the courts. Because the commission payment is ‘secret’, it is improper and the colloquial term ‘kickback’ is apposite. If the employer is told about the 10%, (i.e. the commission is ‘declared’), he may have no problem with it and all will be well.

In another case, a UK company sourced new contracts from Portugal through a middleman in Brazil. Lucrative contracts were forthcoming but the middleman wanted a cut paid into an American bank account. Payments were made for a time and then lapsed. When the UK company later received a message from a senior manager of the Portuguese company saying the ‘the system was not working’ and demanding payment be reinstated to his personal account or the orders would stop, what was the UK company to do?

The 1906 Act was amended in 2001 to cover activity carried out abroad which if done in the UK would be unlawful. Payments in America or Portugal would not be outside the legislation if they are ‘corrupt’. If one sees the Portuguese Senior Manager as either a director or employee and the Portuguese company as the ‘principal’, then the manager's receipt of a payment which was not authorised by or disclosed to the Portuguese company's Board, would make the payment illegal.

Furthermore, the Proceeds of Crime Act 2002 makes it an offence to be concerned in an arrangement which oneknows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person. Our UK company in this example therefore could face a prosecution under both the 1906 and 2002 Acts. The profits from the contracts ‘greased’ by the payments would be acquired and used or retained. The definition of ‘criminal property’ in s.340 of the Act is very wide.

In another case, a senior sales manager acted in concert with the procurement officer in a customer encouraging him to place large numbers of orders. The sales manager was awarded a bonus for his exceptional performance and shared the bonus with his partner in crime at the customer. The receiving of the bonus was not corrupt since the employer knew about it. It was the making of the payment out of the bonus to influence the placing of further orders by the customer that was tainted. This was the payment of a secret commission or in colloquial terms a ‘back-hander’.

How do you avoid getting embroiled in these dodgy deals? The best approach is to look at the transaction in question and identify the ‘principal’ and the ‘agent’. If the agent is keeping the receiving or making of payments from the principal, then there is in all likelihood some form of corruption which will fall foul of the statute.

So, what exactly is a ‘corrupt’ payment? To begin with, it need not be ‘dishonest’. It need only be made with the intention of persuading the receiver of the money to enterinto a ‘corrupt’ bargain. There is an element of circularity here and it is thought that the safe way to avoid a payment being classed as ‘corrupt’ is for the ‘agent’ to declare it and act transparently.

The aim to create transparency has led to companies developing policies about the disclosing of gifts and payments, ranging from corporate hospitality to Christmas presents. So, if you are an employee, when you open that bottle of wine from your supplier this year, you may want to give pause for thought and perhaps offer to share a glass or two of it with your employer! At the very least find the company policy and make sure you comply with it. Small gifts are unlikely to have too much influence and it is the influence that counts.

All businesses want to influence the making of deals, the award of contracts and the making of favourable decisions and should be encouraged to do so - by legitimate means of persuasion. What the law aims to prevent is the pursuit of this influence in a ‘corrupt’ manner.

So, it is less what is in the brown paper bag than the bag itself that is the concern. Discounts and commissions are all part of doing business. In other words, transparency is the name of the game. If companies want to avoid the risk of payments being impugned, strive for openness and transparency. Declaration should be made of the existence of any conflict of interest. The making of payments should be disclosed to the ‘principal’ and the receipt of payments properly accounted for.

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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