TI-UK Briefing 2010 Bribery Act: How are supply chains affected?

2010 Bribery Act How are supply chains affected?

Briefing note December 2010

2010 Bribery Act How are supply chains affected?

1. Introduction

On April 8th 2010, a new Bribery Act received Royal Assent – one of the last bills to pass into law before the general election. The Act is expected to come into force in April 2011. Prior to this, the Government is due to publish official guidance on how a company can design adequate procedures to prevent bribery, which is due in January 2011.

The Bribery Act is one of the most thorough anti-bribery laws in the world, with several provisions that go further than the US Foreign Corrupt Practices Act (FCPA). It has significant implications for organisations carrying on business in the UK, who can be liable for failing to prevent bribery being committed on their behalf by their business associates. There are particular risks for companies with overseas supply chains as this could cover bribery by their suppliers or contractors wherever they are based, whether in the UK or abroad.

This briefing note presents an overview of the new law and its implications, with a focus on how the law treats the issue of supply chains.

Transparency International UK has produced detailed documentation to accompany the Bribery Act, which is available free of charge from www.adequateprocedures.org.uk. For further information please contact robert.barrington@transparency.org.uk.

2. Summary of the new law For the full text of the Bribery Act, download the pdf at: http://www.opsi.gov.uk/acts/acts2010/pdf/ukpga_20100023_en.pdf • The Bribery Act replaces old and fragmented legislation with a modern and consolidated bribery law, based on the recommendations of the Law Commission • The Act creates offences of offering, promising or giving of a bribe and requesting, agreeing to receive or accepting of a bribe either in the UK or abroad, in the public or private sectors • The Act creates a discrete offence of bribery of a foreign public official in order to obtain or retain business • The Act creates a new offence in relation to commercial organisations which fail to prevent a bribe being paid by those who perform services for or on behalf of the organisation. It will, however, be a defence if an organisation has adequate procedures in place to prevent bribery.

3. Bribery Act: key areas to note 3.1 The Act has wide extra-territorial jurisdiction. Any act of bribery by a UK organisation, UK nationals or UK residents, anywhere in the world, breaks the law in the UK. Furthermore, the new corporate offence (dealt with in more detail below at 3.3) will apply to any commercial organisation carrying on business, or part of business in the UK. 3.2 Indirect bribery is expressly prohibited. The Act prohibits all corrupt payments, regardless of whether they are paid directly by the company, or on its behalf by a third party.

If the bribe is paid by someone else on the company’s behalf or in furtherance of its business activities (which could include a supplier), the company may be guilty of an offence – even if the bribe is paid without its knowledge.

© Text and annexes II and III Transparency International UK; ©Annex I Transparency International. This briefing note has been produced for information only and should not be relied on for legal purposes. Legal advice should always be sought before taking action based on the information provided.

3.3 Corporate liability. The organisation is liable as well as the employee or business partner who paid the bribe. Companies, as well as individuals, can be liable for all the general bribery offences. The Act (Section 7) also creates a new strict liability offence for ‘commercial organisations’ who fail to prevent bribery. An organisation can be liable if an “associated person” carries out an act of bribery with intention to obtain a business advantage for the organisation. The Act defines “associated persons” as those who perform services for or on behalf of the principal. This may include employees, agents, distributors, subcontractors or joint venture partners - and in certain cases also suppliers.

For example, if a supplier based in South-East Asia bribes a local customs official in order to allow goods to be shipped to a UK retailer, the UK retailer can potentially be exposed to corporate liability, depending on whether the supplier can be considered to perform services for or on behalf of the retailer. This will be judged in light of all the relevant circumstances.

Whilst, a priori, suppliers of goods would seem to be outside of the definition, suppliers who are providing services in addition to goods are more likely to be caught by the provision.

Similarly, where there is an exclusivity arrangement with a supplier of goods, the position becomes more problematic, and the relationship could be considered as falling within the remit of the offence.

The law has been drafted in this way because historically, many cases of bribery have involved companies using third parties to pay bribes on their behalf. What this means is that where a company has operations carried out by another individual or entity on its behalf, even in small part, particularly in difficult jurisdictions, it is important to ensure that the third party is aware of and commits itself to the anti-bribery policies of the principal, that it is made aware of a zero tolerance culture within the company, and that it is subject to appropriate due diligence and monitoring.

3.4 The ‘adequate procedures’ defence The defence for an organisation whose employees or business partners have paid a bribe is that the organisation had put in place “adequate procedures” designed to stop incidences of bribery. The meaning of “adequate procedures” is not defined in the Act. The Secretary of State is required to provide formal guidance on the extent and meaning of “adequate procedures”. However, this will not be prescriptive, and will not set out a fail-safe check list of requirements. There is likely to be a focus on the “culture” of an organisation, and it will be expected that there is a “tone from the top” of zero tolerance to bribery and corruption, which is adopted at all levels within the organisation. The Government’s guidance in respect of the adequate procedures is expected to be published in January 2011.

3.5 Directors and senior managers also have personal liability The Act penalises not only individuals directly involved in bribery but also those senior officers of the company with whose “consent or connivance” the bribery was committed (although where the bribery takes place overseas, they must have a “close connection with the UK”). An offence could be committed by the passive acquiescence of a director, if in practice that amounted to consent to the bribery. Although the corporate offence of failing to prevent bribery cannot trigger criminal liability for senior officers based on their consent or connivance, failure to maintain “adequate procedures” could render directors vulnerable to civil claims.

3.6 There are stiff penalties. Companies face unlimited fines; individuals – whether bribe payers or directors who ‘consent or connive’ – face up to ten years’ imprisonment, or an unlimited fine, or both.

3.7 What is a bribe? All bribes whether made or promised, no matter how small or routine, or expected by local customs, are illegal. You are breaking the law whether you give or receive a bribe – irrespective of the size of the bribe (e.g. a ‘facilitation payment’ of $20 to pass through customs). Unlike some other anti-bribery laws, the Bribery Act applies both to bribes paid to public officials and in the context of the private sector. A bribery offence is committed if the intention of the briber is that the person being bribed improperly performs his/her duties.

Improper performance will arise if it is intended that, by paying the bribe, the recipient of the bribe would be expected to act otherwise than in good faith, an impartial manner or in accordance with a position of trust. Expectations are judged by UK, not local standards. Any local practice or custom will be disregarded, unless permitted or required by local written law.

© Text and annexes II and III Transparency International UK; ©Annex I Transparency International. This briefing note has been produced for information only and should not be relied on for legal purposes. Legal advice should always be sought before taking action based on the information provided.

4. Relevance of the Bribery Act to supply chains •

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Many companies have supply chains, or are part of supply chains, in countries where there is a high risk of bribery occurring [see the Corruption Perceptions Index at: http://transparency.org/policy_research/surveys_indices/cpi/2009]. Their operations may also involve activities or sectors at high risk from corruption such as interacting with public officials or using local agents and partners. It is therefore possible that many companies will be exposed to high risks.

To mitigate this risk, companies need to ensure they have ‘adequate procedures’ to prevent bribery. Depending on the nature of the arrangement with the supplier, it might be appropriate to conduct due diligence on suppliers and to demand that the supplier itself has in place ‘adequate procedures’ to prevent bribery. Otherwise, the company will put its employees, senior managers, directors and itself at risk.

The Ministry of Justice’s draft guidance in respect of adequate procedures notes as a key principle that: ‘The commercial organisation has due diligence polices and procedures which cover all parties to a business relationship, including the organisation’s supply chain, agents and intermediaries, all forms of joint venture and similar relationships and all markets in which the commercial organisation does business.’

Over and above the risk of prosecution, which is increasing both due to the Bribery Act and greater levels of enforcement activity, the reputational impacts of a bribery scandal should be a significant concern. For example, if a company is known to be or suspected of paying bribes, this may deter clients concerned about their own liability for ‘associated parties’ under the Bribery Act.

5. What should you be doing?

1. Introduce a zero-tolerance policy: if you have not already done so, put in place a headline policy that makes it clear that the organisation does not tolerate bribery in any form and commits to strong anti-bribery systems including requiring that supply chain partners commit to abide by the company’s policy. Anything less will provide a weak defence under the Bribery Act. Samples policies are attached in Annex III. 2. Conduct a risk assessment: evaluate where your organisation is exposed to risk of bribery and assess whether the anti-corruption policy and management systems are adequate to meet the risks. Note that bribe-paying is present in all countries, not just developing countries.

3. Information gathering and documentation: it is important to know whether bribes are being paid by your employees, agents or partners – and if so where, how much, and how frequently. This information is crucial if the company is to implement a zero-tolerance policy and, where necessary, try and ‘design out’ bribery from future projects or operations. Paradoxically, creating such a paper trail may provide evidence in a prosecution. However, such information gathering would probably be regarded as part of an ‘adequate procedure’. Moreover, failure to take active steps against current bribery practices within the organisation might create liability for senior managers and directors who could be accused of ‘consent and connivance’ by turning a blind eye.

4. Put in place robust anti-bribery systems: having in place ‘adequate procedures’ is the only defence to protect an organisation against corporate liability under the Bribery Act. TI produces a high-level 20-point checklist for companies to assess anti-corruption procedures, which is annexed to this briefing note. A fuller description by TI of adequate procedures, including case studies, sample policies, a copy of the Bribery Act and a 231point checklist, can be downloaded free from: www.adequateprocedures.org.uk or purchased in hard copy.

5. Training and support: implementing effective anti-bribery systems can be a difficult process, and employees and partners may feel vulnerable and ill-equipped, especially in a transition phase from one way of doing things to another. Proper training and support is a vital part of this process.

© Text and annexes II and III Transparency International UK; ©Annex I Transparency International. This briefing note has been produced for information only and should not be relied on for legal purposes. Legal advice should always be sought before taking action based on the information provided.

6. Where can you get help?

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Transparency International: TI has corruption experts able to assist companies in developing robust anti-bribery systems, on a fee-paying but non-profit basis. Further details are available from alison.taylor@transparency.org.uk.

Get professional help: A large number of advisors, including law firms, accountants and consultants, are starting to offer services in the area of adequate procedures.

Do it yourself: annexed to this note are six scenarios to illustrate situations in which companies might encounter bribery or risk contravening the Bribery Act. Transparency International publishes a selection of tools for risk assessment and designing robust systems that are likely to be regarded as ‘adequate procedures’ under the Bribery Act. They are available free of charge at www.transparency.org and www.adequateprocedures.org.uk. The government’s official guidance on adequate procedures is available in draft at: http://www.justice.gov.uk/consultations/briberyactconsultation.htm

Published by Transparency International UK, 1 London Bridge, SE1 9BG. We would like to acknowledge the help of Norton Rose in preparing this briefing note – a fuller description of the legal detail can be found at www.nortonrose.com

www.transparency.org.uk

© Text and annexes II and III Transparency International UK; ©Annex I Transparency International. This briefing note has been produced for information only and should not be relied on for legal purposes. Legal advice should always be sought before taking action based on the information provided.

Annex I: Anti-Bribery & Corruption 20-point checklist TI’s fuller description of Adequate Procedures can be found at www.adequateprocedures.org.uk POLICY 1

Is there a formal up-to-date published policy of zero tolerance of bribery?

2

Is there a public commitment to be consistent with all relevant anti-bribery laws in all the jurisdictions in which your company operates?

1 Have you made a commitment to implement an anti-bribery Programme ?

3

IMPLEMENTATION 4 5

6 7 8 9

10

11 12

13

14

16 17 18 19 20

No

Partly

Plan ned

Yes

No

Partly

Plan ned

Yes

No

Partly

Plan ned

Do you carry out regular risk assessment to determine the risks of bribery and tailor the Programme to mitigate these risks?

Does your Programme have detailed political contributions? policies, procedures and controls for: charitable donations and sponsorships? facilitation payments? gifts, hospitality and travel expenses?

2 Does your leadership show active commitment to the Programme and act as an example for transparency and integrity?

Does your leadership assign unambiguous responsibility and authority to managers for carrying out the Programme?

Is the Programme implemented in all business entities over which your company has effective control?

Do you encourage an equivalent Programme in business entities in which your company has a significant investment or with which it has significant business relationships?

Is the Programme communicated to: all employees? business partners? other stakeholders?

Do your human resources practices3 reflect your company’s commitment to the Programme?

Is tailored training provided to: all Directors, managers, employees and agents? key high risk third parties including other intermediaries, contractors and suppliers?

Does your company provide secure and accessible channels through which employees and others can obtain advice or raise concerns (‘whistleblowing”) without risk of reprisal?

Are there internal controls to counter bribery comprising financial and organisational checks over accounting and record keeping practices and related business processes?

MONITORING AND REVIEW 15

Yes

Are the internal control systems, in particular the accounting and record keeping practices, subjected to regular review and audit?

Do you have procedures in place to deal with any incidents of bribery?

Do your senior management periodically review the Programme’s suitability and effectiveness and implement improvements?

Does the Audit Committee, Board or equivalent body make a regular independent assessment of the adequacy of the Programme?

Does your company publicly disclose information about its programme and its implementation?

Do you carry out external assurance of the Programme and is the opinion statement published publicly?

1 The whole of an enterprise’s anti-bribery efforts including values, code of conduct, detailed policies and procedures, risk management, internal and external communication, training and guidance, internal controls, oversight, monitoring and assurance.

2 Owner, Board or equivalent body, chair and/or chief executive 3 Including those for recruitment, training, performance evaluation, remuneration, recognition and promotion

© Text and annexes II and III Transparency International UK; ©Annex I Transparency International. This briefing note has been produced for information only and should not be relied on for legal purposes. Legal advice should always be sought before taking action based on the information provided.

N/ A

Annex II: Corruption scenarios for contractors and suppliers Scenario 1 A UK-based retailer needs to ship a container of perishable goods from a supplier in sub-Saharan Africa to the UK. A freight company is engaged to make the shipment. The freight company is told at the exit port that there is a large backlog of customs checks to process, and that this container will take four weeks to clear – by which time the goods would have perished.

Alternatively, it can be processed immediately on payment of $500. The freight company’s local manager phones his contact at the UK retailer to ask for clearance for $500 one-off ‘customs clearance’ fees. You are the manager at the UK retailer who takes the phone call: • How would the Bribery Act apply to this situation?

• What would you do?

Scenario 2 A clothing manufacturer in South-East Asia supplies finished garments to UK retailers. The manufacturer’s factories require operating permits from a range of authorities. An ethical supply chain audit on behalf of the UK retailer reveals that local health & safety permits have been obtained through bribing the relevant authorities. You are part of the ethical audit team: • How would the Bribery Act apply to this situation?

• What would you do?

Scenario 3 A local employee of your company regularly needs to pass a border checkpoint; by paying $50 to the officials there is a ‘fast track’ process. The money is regularly paid. You are the worker’s manager: • How would the Bribery Act apply to this situation?

• What would you do?

Scenario 4 A UK retailer wants to open stores in China. A local agent is employed to negotiate the required leases and permits. In one large city, the agent is able to secure a rare lease for retail space but requires an unusually high commission of 25% of the first year’s rent. The UK retailer’s in-country director suspects this may be because a payment is being made both to a government official and a manager at the property company. However, he has no evidence and is not sure whether this is the usual practice. You are the UK-based line manager of the in-country director: • How would the Bribery Act apply to this situation?

• What would you do?

Scenario 5 A company based in Eastern Europe has a major client in the UK, which is planning to set up its own operations in the same Eastern European country. This UK client is insistent that in order to retain the contract, the East European company should collaborate with a state-run company that is known to be highly corrupt. You are the sales director of the East European company and make monthly visits to the UK where you have a 3-person representative office: • How would the Bribery Act apply to this situation?

• What would you do?

Scenario 6 A UK logistics company operates a large warehouse in the former Soviet Union, which has taken significant investment but is starting to be profitable. The warehouse needs security due to an unstable political situation. The logistics company can employ a private, UK-headquartered security company at a cost of $1 million per year; or pay the local head of police for ‘enhanced police protection services’ at a cost of $10,000 per month. You are the country manager for the logistics company and need to make a decision: • How would the Bribery Act apply to this situation?

• What would you do?

© Text and annexes II and III Transparency International UK; ©Annex I Transparency International. This briefing note has been produced for information only and should not be relied on for legal purposes. Legal advice should always be sought before taking action based on the information provided.

Annex III Sample Anti-Bribery Policies Example no-bribes policy This company has a zero tolerance of bribery and corruption. This policy extends to all the company’s business dealings and transactions in all countries in which it or its subsidiaries and associates operate.

This policy is given force in a detailed anti-bribery programme which is regularly revised to capture changes in law, reputation demands and changes in the business. All directors and employees are required to comply with this policy.

Example facilitation payments policy Our company prohibits ‘facilitation’ or ‘grease’ payments as these are bribes and illegal. Facilitation payment are small payments made to secure or speed up routine actions, usually by public officials, such as issuing permits, immigration controls, providing services or releasing goods held in customs. It is also our policy that we work to ensure that our agents and other intermediaries, joint ventures and consortia, contractors and suppliers do not make facilitation payments on our behalf. If you have doubts about a payment and suspect that it might be considered a facilitation payment, only make the payment if the official or third party can provide a formal receipt or written confirmation of its legality. If practicable, obtain senior management/legal approval for the payment or consult the corporate helpline. If the demand is accompanied by immediate threat of physical harm then put safety first, make the payment and then report immediately to senior management/legal counsel the circumstances and amount of the payment.

Example criteria to test if gifts, hospitality or reimbursed expenses comply with the antibribery programme: • • • • • • • • • • • •

Made for the right reason: if a gift or hospitality, it should be given clearly as an act of appreciation, if travel expenses then for a bona fide business purpose; No obligation: the gift, hospitality or reimbursement of expense does not place the recipient under any obligation; No expectations: expectations are not created in the giver or an associate of the giver or have a higher importance attached to it by the giver than the recipient would place on such a transaction; Made openly: if made secretly and undocumented then the purpose will be open to question; Accords with stakeholder perception: the transaction would not be viewed unfavourably by stakeholders if it were made known to them; Reasonable value: the size of the gift is small and the value of the hospitality or reimbursed expense accords with general business practice; Appropriate: the nature of the gift, hospitality or reimbursed expense is appropriate to the relationship and accords with general business practice; Legality: it is compliant with relevant laws; Conforms to the recipient’s rules: the gift, hospitality or reimbursement of expenses meets the rules or code of conduct of the recipient’s organisation; Infrequent: the giving or receiving of gifts and hospitality is not a regular happening between the giver and the recipient; Reported: the gift, hospitality or expense should be recorded and reported to management; Documented: the expense is fully documented including purpose and approvals given and properly recorded in the books.

© Text and annexes II and III Transparency International UK; ©Annex I Transparency International. This briefing note has been produced for information only and should not be relied on for legal purposes. Legal advice should always be sought before taking action based on the information provided.