Thursday, May 17, 2012

M&A FCPA Compliance Risks

The risk of liability under the Foreign Corrupt Practices Act (FCPA) cannot be understated when undertaking corporate merger and acquisition activity.
In recent years, pressure to avoid corruptive practices within mergers and acquisitions has heightened, with due diligence becoming imperative for companies undertaking acquisitions outside the U.S. The DOJ’s Criminal Division Presidential Budget Request stated:
FCPA enforcement is consistent with Obama’s administration goals of promoting transparency, democracy, sustainable development and good governance’.
Through several administrative cease-and-desist proceedings, the U.S. Securities and Exchange Commission (SEC) has reasserted the importance of the Act. In particular, they have highlighted the importance of completing proper due diligence, so as to ensure both the determination of the deal’s true value and the extent to which compliance related steps must be implemented after closing.

Key Corruption Risks: Mergers and Acquisitions

There is a risk of corruption when undertaking any Merger or Acquisition. Crucially, if an acquired company was tainted by corruption prior to its acquisition, its new parent company will assume both civil and criminal liability for that corruption. Recent SEC findings have confirmed this. The cases of the Ball Corporation, Diageo and Watts Water Technologies, where companies were fined for failing to operate comprehensive compliance programs, all involved successor liability.

There is also a risk that a company enters into a merger or acquisition on the basis of financial statements which include revenue that has been corruptly obtained and is therefore not sustainable. When a party to a merger or acquisition has entered into corrupt behavior, the reputation of the law abiding party may come into jeopardy. This may impact upon sales figures. It may also impact upon overhead costs in the form of significant penalty charges.

Factors Leading to Increased Risk of Corruption: Mergers and Acquisitions
Increased global support for US investigations into foreign corrupt practices and global anti-corruption efforts should not be overlooked. However, where an international element is present, the risk of corruption is enhanced. For example, when joint venture deals are entered into in developing/emerging countries, investors are often required to incur additional risks by forming associations with local partners. In addition, undertaking financial transactions also carries increased risk in developing/emerging countries which may not have as robust financial regulatory framework as other jurisdictions. Thus, due diligence must be exercised when transferring money abroad as part of an international acquisition.

The way in which an acquisition is structured will also directly impact upon the risk of corruption. When acquiring a company, it is critical to ascertain whether a complete acquisition is required as opposed to an asset only purchase. Significantly, asset only purchases pose less corruption risks for the acquiring companies than whole company acquisitions. This is because when a company (as opposed to just its assets) is acquired, all historical liabilities remain.

Completing A Merger or Acquisition: Understanding the FCPA
As we have shared in greater depth in previous posts on this blog the FCPA applies to those with formal ties to the U.S. and also to those who violate the Act within the U.S. In broad terms, the act prohibits any payments to foreign officials where the motive is corrupt. Any payment must be intended to influence the recipient’s acts or decisions in order to assist with obtaining or retaining businesses with any party.

Crucial to FCPA compliance is the completion of pre-closing due diligence. This involves undertaking an investigation of the business that is being acquired prior to the signing of contacts. In such an investigation a company may refer to many documents including procurement reports, financial statements and compliance procedures.

Post-acquisition due diligence should also be undertaken. This involves an in-depth examination of the operational dynamics of the newly acquired company. It should build upon the pre-closure due diligence and may identify significant impact factors and potential areas for compliance enhancement.

Understanding Recent Developments
On 21st February 2012, the U.S. Chamber of Commerce Institute for Legal Reform and 36 other business organizations wrote to the DOJ seeking guidance relating to:

several issues and questions of significant concern to businesses seeking in good faith to comply with the FCPA’.

Queries related to compliance programs, instrumentalities of foreign government, parent company and successor company liability, the extent to which intent is necessary and issues surrounding gifts between parties.

Several informal meetings have since been facilitated with members of both private and public sector organisations in order to discuss topics relevant to the guidance. On 24th April 2012, the DOJ and the SEC attended a discussion with representatives from both the American Bar Association of International Law and the International Corruption Committee.

As a result of this consultation, it has been predicted that guidance will be produced as a joint issue between the SEC and the DOJ. As yet, however, it appears that no commitment has been made relating to the exact content of the guidance. Equally, no timescale for release of the guidance has been issued, nor is it clear whether the guidance will be developed using the notice and commitment process included within the Administrative Procedure Act.

Wednesday, January 18, 2012

The Anatomy of Corruption in Public Procurement

Public procurement presents significant risk under the U.S. Foreign Corrupt Practices Act (FCPA). Cases like Siemens Argentina, Siemens Venezuela, Johnson & Johnson, and Tenaris highlight the risk. Large amounts of money are at stake when the government procures things like roads, computer systems, oil extraction services, medical equipment, power stations, and textbooks. Companies must interact directly with government officials. And government officials have pockets of discretion that can give rise to manipulation of the process. When corruption is involved, procurement decisions are no longer based on price, experience, and quality.

I investigated corruption and fraud for The World Bank for several years in multiple countries known for high corruption risk. Almost every one of these investigations involved an expensive public procurement that The World Bank was financing in whole or in part. This financing is what gave The World Bank the jurisdiction to investigate and proceed against companies and businesspeople that we had found to have engaged in wrongdoing.
Public Procurement is Common
Government procurement is more common than one might think. It has been estimated to account for 14 to 20 percent of a country’s GDP, which would be between $8.16 trillion and $11.65 trillion worldwide each year. In Mexico, for example, the federal government spent about $53 billion in 2008 on public procurements, constituting about 18.4 percent of Mexico’s GDP. In 2009, it spent about $78 billion.
Common Corruption Schemes in Public Procurement
Through my experiences in private practice and at The World Bank, I have seen several common corruption schemes in public procurements. Internal compliance officers should be especially vigilant when their companies engage in this area of work. Here are some common issues to watch for.
Sometimes procurement officials require that bidders hire “consultants” as a way to funnel money back to the officials. This formed the basis of one Baker Hughes action and several of the Siemens actions.
Sometimes companies will disguise direct payments to procurement officials as something else. In the Johnson & Johnson case, the company funneled money to procurement authorities at state-owned hospitals by using sales agents to award “civil contracts” to doctors, purportedly to conduct trainings for the company that never actually happened.
Sometimes companies hire “experts” that, with or without the company’s knowledge, previously worked for the procurement agency itself. These individuals still have contacts in the procurement offices. Maybe they even designed the actual specifications of the tender at issue.  As former officials, they know how to game the system.
Sometimes improper payments, if made during the project design phase, will influence procurement authorities to narrowly design a project’s specifications to benefit the company making the payments.
Sometimes project designers proactively seek to include complicated technical features in the tender. The more technical, the more room an official has to use discretion in the selection process to favor one bidder over another.
Sometimes companies gain access to confidential information, such as getting to see the tender specifications before they are officially released. In the Tenaris case, the company obtained access to competitors’ confidential bid information and then revised its own bids accordingly to win.
Sometimes procurement officials might choose to fully vet the bid of one company while giving a less rigorous review to the bid of another. In this way, companies that are unable to show appropriate qualifications and experience or the ability to deliver the appropriate product are still able to win the contract.
Sometimes companies will learn early on that a government is considering the procurement of goods and will then seek to “entertain” procurement officials before the tender process even begins. During these periods, actors are able to develop complicated schemes to transfer improper payments and direct contracts in return.
The World Bank does a good job in its publication, “The Most Common Red Flags of Fraud and Corruption in Procurement,” of highlighting other red flag in procurement. For example, when a procurement authority does not select a lowest bidder, repeatedly awards contracts to the same bidder, or changes the contract terms and values after the process concludes, investigators know to take a closer look.
High Alert Needed
Compliance officers should be on high alert when dealing with procurements. The above themes can help in structuring their own compliance measures to respond to risk.
In addition to being mindful of these corruption schemes, companies should also be mindful of the books and records and internal controls violations that can be associated with them. They should put mechanisms in place to ensure that management authorizes any use of agents, third parties are fully vetted and trained, transactions are accurately recorded in the books, backup documentation is maintained to justify expenses, and justification is maintained for the amount of fees paid to agents.
Companies should also make sure they know and follow the rules of public procurements. Almost every country has in place detailed rules that govern this activity. The World Bank requires countries to follow Procurement Guidelines for projects it finances. Companies should understand when they can and cannot interact directly with officials. They should know when it is appropriate to revise or clarify their bids. They should know and comply with timelines for submitting their bids, submitting clarification questions, and expecting procurement decisions.

@2012 Matteson Ellis Law, PLLC
Author: Matt Ellis

Friday, January 13, 2012

Another BRIC in the Anti-Corruption Wall (Brazil considers foreign bribery law overhaul)

The Brazilian Congress is now considering Draft Bill 6.826/2010 that would dramatically strengthen its foreign bribery law. This is a significant development – the result of years of effort by Brazilian authorities working closely with their OECD, United States, and other counterparts. It is also timely. Sophisticated Brazilian-based multinationals are quickly expanding internationally, and encountering corruption risk. At the same time, Brazil is grappling with corruption on the domestic front: the President’s administration has lost six Ministers to corruption allegations since June 2011, and the country consistently ranks high on corruption risk indices.
Brazil’s effort is part of a broader movement. Countries that have adopted the OECD Anti-Bribery Convention, the United Nations Convention Against Corruption and other treaties are working to strengthen their anti-corruption laws. The FCPA Professor summarized Turkey’s recent progress in an earlier post. The Brazilian bill should improve its treaty implementation status with the OECD. (Brazil’s gaps were highlighted in the OECD’s Country Monitoring Reports for Brazil.) Moreover, as a significant effort by a major economy and regional leader, this bill may have impact outside of Brazil.
These provisions constitute dramatic changes in the Brazilian legal system. According to Carlos Henrique da Silva Ayres, one of the attorneys heading the Anti-Corruption and Compliance Committee of the Brazilian Institute for Business Law (Ibrademp):
The new law still requires some adjustments; however, it should be more easily applied than current laws. It introduces features that are relatively new or non-existent in the Brazilian anti-corruption arena, such as the credits corporations will get for compliance programs, self-disclosure and cooperation with authorities.
Key Provisions in Brazil’s Draft Legislation
In addition to penalizing domestic bribery, Brazil’s draft bill prohibits bribery of foreign public officials, defining the act in a way that appears consistent with the OECD Anti-Bribery Convention. Some provisions are particularly relevant:
Corporate Liability. The draft bill establishes the direct civil liability of corporations (also known as “legal persons”) for bribery of foreign public officials. It also makes corporations liable for the acts of their directors, officers, employees and agents under the theory of respondeat superior. These are dramatic developments in a country where the notion of corporate liability has received only limited recognition.
These changes bring Brazilian law closer to the U.S. Foreign Corrupt Practices Act (FCPA). Why not extend criminal liability to corporations, like the FCPA does? The answer is reflected in Brazil’s civil law system. Unlike common law jurisdictions, civil law systems generally do not apply criminal liability to legal persons. Civil law typically considers corporations to be abstract, intangible entities that have no capacity for the mens rea (intent) required to establish criminal conduct.
The OECD Antibribery Convention recognizes this variation in legal systems and compensates for it. Article 3(2) provides:
In the event that, under the legal system of a Party, criminal responsibility is not applicable to legal persons, that Party shall ensure that legal persons shall be subject to effective, proportionate and dissuasive non-criminal sanctions, including monetary sanctions, for bribery of foreign public officials.
Tightened Sanctions. The draft bill would establish harsh consequences for bribery of foreign officials. Fines would range between 1% and 30% of the company’s gross revenue. In addition, the bill would make prosecutions public, potentially creating reputational risk. Companies can be debarred from public contracts based on bribery violations.
These steep penalties appear responsive to the requirement of sanctions that are “effective, proportionate and dissuasive.” If the legislation is enacted, it will be important to watch how Brazilian courts apply these sanctions. The OECD Working Group on application of the convention is certain to review that question (see a previous review here).
Voluntary Disclosure, Cooperation, and Compliance Programs. The draft bill provides that the government should take into account voluntary disclosure, cooperation with government investigations, the existence of pre-existing and effective compliance programs, and other factors when determining sanctions. Specifically, Article 9 states:
The following will be taken into consideration at the application of the sanction:
I. the seriousness of the offense;
II. the advantage obtained or sought;
III. the accomplishment or non-accomplishment of the offense;
IV. the extension of the breach or the danger of injury;
V. the negative result caused by the injury;
VI. the economic status of the company;
VII. the cooperation in investigating the facts, through practices such as reporting violations to public authorities before a legal proceeding is initiated and the promptness in providing information in the course of investigations; and
VIII. the existence of internal integrity mechanisms and procedures, audits, and incentives to report violations, as well as the effective application of codes of ethics and conduct within the company.
This also makes the Brazilian approach similar to that of the FCPA. In fact, many of the provisions in the Brazilian bill appear to be directly lifted from the U.S. Department of Justice’s McNulty Memorandum and Chapter 8 (Sentencing of Organizations) of the 2010 United States Federal Sentencing Guidelines. But the bill goes further than the FCPA by incorporating considerations of such factors into the law. Under the FCPA, such factors make up enforcement policy and practice.
The difference, again, flows from Brazil’s civil law system. As a general principle of law, prosecutors and public authorities do not have discretion to seek specific sanctions. Rather, sanctions must be determined in accordance with a written law. Invoking a memorandum on enforcement practice would have little, if any, effect before a Brazilian court. In order to have any relevance, considerations like cooperation and compliance must be written into the law.
Mr. Ayres, along with Bruno Carneiro Maeda (also of Ibrademp), have testified before the Brazilian Congress about the draft legislation. They point out some lingering questions related to Article 9. They seek clarification on whether companies will get credit for their cooperation after proceedings have already begun. They are also concerned that the draft bill does not describe the elements of a credit-worthy compliance program.
Foreign Official. The Brazilian draft bill defines “Foreign Public Administration” and “Foreign Public Official” in a way that is consistent with the OECD and United Nations Conventions. Specifically, Article 6 provides:
The agencies and government entities or diplomatic representations of a foreign country are considered foreign public administration, no matter their level or sphere of government, as well as companies held directly or indirectly by the government of a foreign country.
For purposes of this law, a foreign government official is any individual who, although momentarily or without payment, holds a public position, employment or function in any public agency or entity or diplomatic representations of foreign country, and also in companies held directly or indirectly by the government of a foreign country or in any international public organization.
This definition encompasses a broad range of entities, including agents of the state, state-owned enterprises, international public organizations, and other instrumentalities of the state. This definition would make employees at these entities “foreign public officials.” The broad definition appears to stand in contrast with ongoing efforts in the United States to clarify or narrow the
meaning of that term.
Accounting Provisions. The Brazilian draft bill does not include any accounting provisions, as required under Article 8 of the OECD Anti-Bribery Convention. However, Brazil’s laws provide similar provisions elsewhere, which work to meet the OECD requirement as noted in the OECD Working Group Phase II Report. The report also notes that, while an advanced framework for accounting requirements exists under other laws, requirements under the law for internal controls have room for development.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact
The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.
@2012 Matteson Ellis Law, PLLC
Author: Matt Ellis

Sunday, January 8, 2012

The End is Nigh for Facilitation Payments – Get Ahead of the Breeze

Last summer, an article was published in the University of Pennsylvania, Journal of Business Law, entitled “The OECD’s Call for an End to the ‘Corrosive’ Facilitation Payments and the International Focus on the Facilitation Payments Exception under the Foreign Corrupt Practices Act”. It was authored by Jon Jordan, Senior Investigations Counsel, in the Foreign Corrupt Practices Act (FCPA) Unit of the Securities and Exchange Commission (SEC). In this article, Jordan reviews, at length, the creation of the facilitation payment exception to the FCPA and the international criticism of the US position by the Organization of Economic Co-operation and Development (OECD), Transparency International, the World Economic Forum and TRACE International. The article also contains a discussion of the hidden costs to US companies which still allow facilitation payments under their company compliance regimes. I found this article to be an excellent review of the issue of facilitation payments and a useful guide to the compliance practitioner on how to navigate this knotty problem.
Costs of Facilitation Payments
1. The Bull’s Eye
Jordan notes that the cost of making facilitation payments is often higher than simply the (purportedly) small dollar amount. He believes that once a company starts down the road of making such payments, it may well lead “to higher costs imposed on those companies that choose to engage in that type of activity.” He quotes Alexandra Wrage, President of TRACE International, that having a corporate policy of allowing facilitation payments is like “putting a bull’s eye on your company’s forehead” as the payment of facilitation payments sets “a permissive tone, which leads to more and greater demands.”
2. Books and Records Issues
A second reason detailed by Jordan is the hidden intra-corporate transaction costs in making facilitation payments. There are a “complex matrix of domestic and foreign anti-bribery laws that companies must navigate when making facilitation payments, and steering through that matrix can be a compliance nightmare and a costly legal undertaking.” The clearest example of this situation is the UK Bribery Act, which has no exception for facilitation payments. If your company has a UK subsidiary, or any employees who are UK citizens, you must carve out an exclusion for them from your facilitation payment exception under your FCPA compliance policy. Got that? So not only must you have an entire carve out in your compliance protocols, your internal accounting system, which is required under the FCPA to record internal controls, you must also make sure that no UK citizen or person otherwise under the jurisdiction of the UK Bribery Act, makes such a claim for reimbursement under your company policy.
 3. Customers
The same is true for large UK based multi-national companies with which your company might transact business. The most obvious example in the energy arena is BP, which not only bans facilitation payments, but requires that any company which provides services for them ban facilitation payments made while doing work for or performing services on BP’s behalf. So think through how you would train your employees on how to properly make and record facilitation payments under your FCPA compliance policy with the HUGE EXCEPTION of when they might be performing some work under the 5 year Master Services Agreement with BP. It’s an administrative nightmare.
Is it Legal to Bribe?
Jordan also brings up the issue that there is not any country in which facilitation payments to public officials of that country are permitted under the written law of the recipient’s country. Accordingly, even if a particular facilitation payment qualifies for an exception of the FCPA, it, nevertheless, is likely to constitute a violation of local law – as well as under anti-bribery laws of other countries that also might apply simultaneously – and thus exposes the payer, his employer and/or related parties to prosecution in one or more jurisdictions. While enforcement to date in this area has been limited increased global attention to corruption makes future action more likely. Countries that are eager to be seen as combating corruption are prosecuting the payment of small bribes with greater frequency. Remember the hellish example of UK citizen Bill Smith, who was sentenced to two years imprisonment in an Afghanistan prison for making a ‘facilitation payment’ to get his company’s vehicles out of a Kabul impoundment lot. Apparently, even Afghanistan will fight the corruption of its own government officials, particularly if the fight involves a foreigner.
You Don’t Need a Weatherman
Jordan concludes by stating, “The facilitation payments exception has become a dinosaur remnant of a bygone era…” He advises US companies to get ahead of this issue and ban such payments in their company compliance programs now. This is sound advice. I would, however, add one additional reason for such advice, which is foretold in the intro paragraph to this article.
Who does the author work for and where does he work? Let’s recap: The SEC in the FCPA Unit. The article clearly states, “The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement of its employees…and do not necessarily reflect the views of the Commission…” Did I mention who the author works for and where he works? You don’t need a weatherman to know which way the wind blows and the direction of that breeze you feel at your back about now is clearly running against allowing the facilitation payments to continue.

© Thomas R. Fox, 2012

Tuesday, November 22, 2011

First Conviction under the UK Bribery Act

Munir Patel
(Reuters) - The first person to be convicted under new bribery laws was jailed on Friday November 18th, 2011, and lawyers said his sentence sent out a warning message to business.

Munir Patel, 22, a court clerk who worked at Redbridge Magistrates' Court in east London, had pleaded guilty to accepting 500 pounds to "get rid" of speeding charges by keeping the details off a court database.

He was given three years in prison for bribery offences and six years for misconduct in a public office, with the sentences to run concurrently, the Press Association reported.

"The sentencing ... demonstrates the significant sentences that the courts are willing to impose on individuals who commit an offence under the (Bribery) Act," said Angela Pearson, a partner with international law firm Ashurst.

"It is only a matter of time before the SFO (Serious Fraud Office) bares its teeth and prosecutes the first corporate or its directors under the Act. In the meantime, the business community collectively hold their breath."

The Bribery Act, which came into force in July, makes failure to prevent bribery - whether committed by staff, subsidiaries or "associated persons" anywhere in the world - a criminal offence.

It also clamps down on so-called "facilitation payments," often used to oil the wheels of business by speeding up services such as visa applications, and "disproportionate" hospitality.

Southwark Crown Court heard Patel had helped at least 53 individuals evade prosecution for driving offences, and that he had advised people on how to avoid being summoned to court.

His salary was 17,978 pounds, but the court heard that 53,814 pounds in cash was deposited in his bank account while another 42,383 pounds was transferred into the same account, both without explanation.

"It hardly needs saying that these were very serious offences," Judge Alistair McCreath said.

"A justice system in which officials are prepared to take bribes in order to allow offenders to escape the proper consequences of their offending is inherently corrupt and is one which deserves no public respect and which will attract none."
(Reporting by Michael Holden; editing by Andrew Roche)

Wednesday, November 16, 2011

Australia Considering Criminalizing Facilitation Payments

Customer pays for a beer in central Sydney 21/06/2011 REUTERS/Tim Wimborne

Lawyers have welcomed the government's plans to bolster Australia's anti-bribery laws and outlaw facilitation payments, saying the changes would bring the country into line with international best practice and address the "weakest link" in the existing legislation.

In a consultation paper (PDF) launched yesterday the government outlined its proposals to remove the facilitation payments defence from s70.4 of the Criminal Code Act 1995. The reforms would align Australia's laws more closely with the UK's Bribery Act 2010, which took effect in July and has banned facilitation payments for UK-linked companies.

Unlike the UK and U.S., Australia does not have dedicated anti-bribery legislation. In Australia the act of bribing a foreign public official is proscribed under Division 70 of the Criminal Code. The legislation ensures that a person can be prosecuted under Australian law for "offering or providing a bribe to foreign public officials for the purpose of obtaining business or an undue business advantage". Like the UK and U.S. legislation it has extra-territorial effect and covers activities anywhere in the world.

In addition, Divisions 141 and 142 of the Criminal Code make it an offence to bribe a Commonwealth public official or for a Commonwealth public official to solicit a bribe.

Breaches of the legislation carry a maximum penalty of 10 years in prison and A$1.1 million fines for individuals and A$11m million in fines, or three times the benefit gained, for corporations. If the value of benefits obtained through bribery cannot be determined, the penalty for a company is 10 percent of annual turnover in cases where that amounts to more than A$1.1 million.

Brendan O'Connor, the minister for home affairs and justice, said there were strongly divergent views in Australia about the case for an exemption for facilitation payments. He said the purpose of the consultation was to get feedback from stakeholders about the merits or otherwise of removing the facilitation defence.

"I hear anecdotal evidence about the need to retain the defence because it is a reality of doing business, especially in the Asia-Pacific region," O'Connor said at the launch of the consultation paper. "I also note that, internationally, the defence of facilitation payments is gradually being removed from the criminal laws of our international trading partners. Maintaining the defence in Australia could appear incongruous with the aid and assistance message we send out in the region."

O'Connor said the government was aware that banning facilitation payments might put Australian businesses at a competitive disadvantage or in a "difficult situation" if payments were solicited under duress. It might also create an uneven playing field between large and smaller businesses. On the other hand, he said, it might also create greater consistency with the laws of other countries, promote regulatory certainty for businesses that operate across jurisdictions and help to reduce corruption globally. The government was also mindful that international developments, such as the commencement of the UK Bribery Act in July, had turned the tide against the facilitation payments defence.

Industry support

Within the legal and consulting sectors, there has been strong support for the government's decision to review the facilitation payments defence and other aspects of Australia's anti-bribery statutes.

Rob Locke, partner at Ernst & Young in Sydney, said that the latest consultation was further evidence of the global trend to take a harder line on facilitation payments. He said: "It is a timely and healthy initiative and a further sign that there is a global rethink about facilitation payments."

Christopher Keane, special counsel at Middletons, described the facilitation payment defence as the "weakest link" in Australia's foreign bribery legislation. He said the justifications for the defence were "tenuous at best" and said that businesses would be unwise to rely on this as part of their anti-bribery compliance frameworks.

"It is a very limited and complicated defence and is frequently misunderstood, thus exposing Australian businesses operating offshore to criminal liability in circumstances where they might genuinely believe they are acting lawfully," Keane said.

In essence, Keane said that there were three fundamental problems with the facilitation payments defence. "First, the defence is inconsistent with Australia's domestic laws. Secondly, the defence is inconsistent with the extra-territorial UK Bribery Act and the domestic laws of many of Australia's major trading partners. Thirdly, the most effective way for companies to avoid criminal liability arising under any anti-bribery legislation is to encourage a strong culture of compliance, whereas the facilitation payment defence is at the top of a very slippery slope that leads to serious criminal conduct," Keane said.

In view of all these issues, Keane said he was advising clients that Australian businesses should eliminate facilitation payments regardless of the outcome of the current consultation. "The safest approach is to proceed on the basis that there is no such thing as a facilitation payment defence," he said.

Extra-territorial impact

For Australian businesses that have links to the UK, the decision on proscribing facilitation payments has already been made. According to consultants at KPMG, Australian businesses with operations in the UK have already had to take a harder line on facilitation payments. These firms, as well as Australian subsidiaries of UK parent companies, are not only subject to the Australian anti-bribery laws but also to the requirements of the UK Bribery Act.

David Luijerink, partner at KPMG Forensic, said that those businesses with links to the UK could already be found guilty of an offence under the UK laws if they were unable to prove they had adequate procedures in place to prevent people from committing bribery. This applied not only to the activities of their employees but also to third-party associates, such as business partners, agents and contractors.

Luijerink noted: "It is important to note that the Act also covers the actions of non-UK nationals or residents. This means that an Australian business that transacts with the UK could very well find itself facing charges over illegal conduct by a non-British employee or a contractor, or for failing to prevent a third-party supplier from paying or receiving a bribe, even if the misconduct took place in another country."

He added that, under the new legislative landscape, firms would not be able to claim they were ignorant of facilitation payments that were happening under their watch. "Businesses need to cultivate a deeper culture of compliance and be able to demonstrate that they have sufficient risk management practices embedded in the business to mitigate bribery risks. Citing corporate ignorance in this instance will offer no protection from the long reach of the Act," Luijerink said.

A recent report from KPMG, entitled the "Global Anti-Bribery and Corruption Survey 2011", revealed that one third of businesses in the UK and U.S. did not assess the risk of bribery or corruption. Of those with written anti-bribery and corruption policies, 40 percent did not distribute them to relevant third parties and 60 percent did not require third-party representatives to participate in anti-bribery compliance training.

The survey also found that most anti-bribery and corruption compliance programs lacked sufficient depth and breadth to offset any regulatory risk effectively.

Luijerink said: "The potential costs of involvement in bribery and corruption are not limited to economic costs but also extend to reputational harm, and businesses need to weigh up whether not complying with the Act is a risk they can afford."

Broader discussion

Consultants and lawyers have said that, in Australia, the reform of the anti-bribery laws will have to take into account all of these major international developments. As well as the facilitation payments issue, the review of Divisions 70 and 141 of the Criminal Code will also explore a number of related issues regarding the anti-bribery statutes. Under the existing laws, courts must disregard the value of a benefit when determining whether a benefit was "legitimately due". This is to ensure that bribery is an offence irrespective of the value of the benefit.

As an example, the consultation paper stated that there might be situations where a person would be legitimately due a moderate fee in return for providing a particular service connected with obtaining business. "However, in the same situation a very large fee may be highly improper and not legitimately due to the public official or other person," it stated.

The government is considering whether to change para 70.2(2)(b) to clarify that bribery is an offence irrespective of the value of the benefit offered or given.

The consultation has also looked at changing the laws to ensure that prosecutions can proceed where a recipient of a bribe cannot be identified. To achieve this, the laws would need to be changed so that it is not necessary to prove an intention to influence a particular official. This will ensure that the law covers circumstances where a bribe is paid but the particular official to whom the bribe was destined cannot be identified.

The consultation paper stated: "For example, it may be possible to prove a person offered or provided a bribe to an agency in charge of granting public infrastructure contracts, but not possible to identify whether the payment is destined for the official directly responsible for granting contracts or another official who will direct their staff to grant a certain contract."

The final significant reform would be to change the laws so that "dishonesty" was not a requirement of the domestic bribery offence. Under the foreign bribery laws (Division 70) there is an obligation to demonstrate that bribery was committed intentionally but not necessarily "dishonestly". The government has proposed to align the offences in Divisions 141 and 142 with Division 70 by removing the "dishonesty" requirement from these offences, which would assist with the harmonisation of domestic and foreign bribery offences.

The paper noted that "the requirement in Divisions 141 and 142 to prove dishonesty as well as bribery could make it more difficult to prosecute crimes of domestic corruption".

O'Connor said that stakeholders should make the most of the opportunity to improve Australia's anti-bribery laws and to bring them more closely into line with those in other jurisdictions.

"While we consider that we have strong laws to combat foreign bribery, we want to examine our legislation in light of international developments and hear from you about the reality of doing business beyond our shores," he said.

Responses to the consultation paper (PDF) need to be lodged by December 15, 2011.

(A$1 = US$1.01)

Thursday, October 27, 2011

United Kingdom: Redefining The Criminal Cartel Offence

This article was first published in Competition Law Insight, 18 October 2011. Corker Binning is a law firm specialising in fraud, regulatory litigation and general criminal work of all types. For further information go to

In March 2011 the government published a lengthy consultation paper which set out proposals for a wide-ranging reform of the UK competition regime. One section of this consultation paper was devoted to the criminal cartel offence under the Enterprise Act 2002. The government argued that the need to prove dishonesty as an element of this offence had made prosecutions too difficult and, in consequence, the introduction of the offence in 2003 had not had the intended deterrent effect. The paper puts forward four options for a new model offence with a preference for the one which would criminalise secret price-fixing agreements with no requirement to prove dishonesty as a specific ingredient of the offence. But is this the right approach and is it too soon to be proposing such a radical change?
The government's proposals attracted a large number of responses. A quick survey shows them to be uniformly hostile to the removal of the dishonesty element. They almost all make the same central point: paucity of cases is not necessarily an indication that the regime is not functioning well. To put this another way, there is insufficient evidence to establish that the dishonesty element has led to otherwise strong cases not being brought to court.

The OFT's mediocre record to date

Plainly the OFT's performance in relation to prosecutions of this offence is a matter of legitimate public concern. In the last eight years there have only been two prosecutions. And in the only one of these which was contested (BA-Virgin or R v George), the OFT's case collapsed because of its inadequate capability to deal with certain investigatory procedures. So on the face of it, enforcement of this offence is not working out as the government intended.
However, a fair appreciation of the OFT's record needs to take account of three important factors - all of which work against the bringing of prosecutions. First, in the realm of competition law enforcement generally, the main weapon available to regulators is leniency. In common with the US approach, the OFT believes that the best means to achieve compliance is a clear policy which encourages cartel participants to report themselves. This is underpinned by the opportunity to achieve a non-prosecution outcome in some cases. So a lack of prosecutions may in fact be a measure of the OFT's success. In order to fairly determine this, what is needed is an evaluation of the leniency applications made since 2003 to see how many of them were made partly out of a desire to limit the threat of a prosecution.
Secondly, as the international record of criminal cartel enforcement demonstrates, the majority of alleged cartels which are selected for prosecution are, for reasons beyond the scope of this article, bipartite ones. Unlike civil litigation, prosecutions tend to be of one set of participants connected to company A with the other set connected to Company B being immunised prosecution witnesses, as in the BA-Virgin case. As any prosecutor well knows, a case built on the purported credibility and honesty of witnesses from A whose evidence has only been obtained as a result of an immunity deal and whose conduct was the same as the accused from B will always be a risky one. The witnesses may turn sour on the prosecutor and the court may regard the prosecution with distaste taking account of the fact that pragmatism has apparently scored over principle and that the accused have palpably been singled out for prosecution whilst the others happened to do a deal which meant they escaped justice so long as they heaped blame on the accused. Whilst these problems may also infect a more multi-party case, the mirror-image issue is unlikely to be as pronounced.
Thirdly, the likelihood is that most cartel investigations are multi-jurisdictional with the implication that what one enforcer does in one country is likely to shape the approach of others. A decision made in, for example, the US by the cartels section of the Department of Justice to settle a case via a non-prosecution agreement is likely to fetter the ability of the OFT to prosecute anyone concerned in the same alleged cartel. So an antecedent and often uncoordinated decision by one prosecutor to extend leniency can lead to other prosecutors having to accept they have to act likewise. This is not a problem confined to cartels; much of the SFO's work concerning overseas corruption has been stymied by an announcement made in Washington DC that the criminal investigation there is all over.
Rather than considering changes to the offence itself, it may be better to look instead at measures designed to improve the OFT's capacity to bring cartel prosecutions successfully. Indeed this in essence was the conclusion reached by the OFT itself in its Project Condor Board Review published in December 2010. Undoubtedly the OFT has sought to implement many of its recommendations and some time must elapse before they bear fruit. Criminal cartel investigations take a long time as the subject-matter is invariably complex; for example on 4 October 2011, the OFT announced it had dropped its probe of a company executive (just one) in the automotive components industry having first arrested him in February 2010.

Why the dishonesty element is worth preserving

When the offence was first mooted by the then government and later considered during the Act's legislative passage, this element and the rationale for its inclusion in the new offence attracted considerable attention and debate. It did not slip into the Act during a late night parliamentary sitting or, like SOCPA 2005 which created the now to be abolished SOCA, get nodded through in a parliamentary rush on the eve of a general election. The case for change as now advocated should begin with the issue of whether it is proper in relation to an offence which alleges serious criminality and in respect of which the maximum penalty is five years' imprisonment, that there should no longer be any need to establish an accused's dishonesty.
If a reworded cartel offence did not include the requirement to prove dishonesty, this would constitute a remarkable and troubling exception to the tradition of English criminal law when serious criminal conduct is involved. In economic crime, the offences applicable to the serious criminal conduct of individuals created either by the common law (such as conspiracy to defraud and offences of cheating the public revenue) or by statute (such as the Fraud Act 2006) have all included an element of conscious impropriety. Whilst this mental element may be expressed in slightly different terms in the calendar of offences falling within the rubric of economic crime, essentially they mostly require proof of dishonesty. One cannot defraud or cheat by mere recklessness or negligence. Of course there are offences of strict liability applicable to individuals as well as companies but these tend to be summary only offences where the conduct is not nearly so serious as in the more serious offences such as criminal cartel activity.
The creation of new criminal offences has usually been preceded by a public consensus that the conduct to be criminalised is that which the majority of the public regard as nefarious or seriously harmful to the public interest. If the government contends that a criminal offence needs to be made easier to prove because a jury will otherwise not convict, one must ask whether such reluctance reflects a widespread perception that the conduct should not be prosecuted at all. So in the case of the cartel offence, is the perceived difficulty about proving dishonesty rooted in a fear that the public generally believe that anti-competitive activity is best sanctioned by the civil and not criminal law? Without a jury ever having had the opportunity to consider a verdict in respect of this offence, this question remains a real one.
The proposals also fail to take into account the detailed consideration given to the reform of the law on fraud by the Law Commission in its 2002 report which gave rise to the Fraud Act 2006. Instead, it refers to an earlier 1999 Law Commission report. In its 2002 report, the Law Commission found that the R v Ghosh definition of dishonesty is unproblematic for jurors - a vital element of a large number of criminal offences - and that to abandon it would have a significant impact on the criminal justice system.

The government's four options for reform

Whilst it is argued that none of these proposals for reform are superior to the current offence, each requires a brief mention.
  • Reliance on prosecutorial guidance. The DPP's recent guidance on prosecuting cases of assisting suicide may be analogous. But do we want to rely on prosecutors to tell us what should be a tort and what should be an offence? It becomes very difficult for a prosecutor to fairly distinguish one form of alleged "hard-core" cartel behaviour from another and so decide which to take no action against and which to prosecute. Surely it is preferable that the statute defines the offence and that the current formula of requiring cogent evidence of dishonesty is a suitable way of discriminating one alleged cartel from another?
  • Excluding the offence for a list of virtuous or "white-listed" price-fixing agreements. It is difficult to see how such an approach would avoid the vice of uncertainty. Surely any purportedly benign agreement would be pro not anti-competitive and establishing this would invite a plethora of expert evidence into the criminal courtroom. Moreover, the burden of proving this would inevitably be cast onto the accused.
  • A secrecy criterion. Such an element would be a novel one for our criminal jurisprudence in contrast to the settled law on dishonesty. Distinguishing legitimate confidentiality in commercial transactions from the concept of secrecy would seem a difficult test to apply in reality and thus allow for lawyers to endlessly argue it is the former not the latter. And why should secrecy be the proper moral foundation for distinguishing civil from criminal conduct?
  • Defining the offence to exclude agreements made openly. But "openly" in relation to whom? The immediate customer who may be another wholesaler able to absorb a price increase by passing it on, or the ultimate retail customer unable to easily do so? Surely the kinds of cartels which most deserve prosecution are those which harm individual consumers, in relation to whom the concept of agreements between suppliers made openly or not has no application.


There is plenty of cartel activity around the world but national and regional competition regimes vary considerably in the enforcement tools available to them. Criminal penalties do operate as significant deterrents if they are backed up by real cases coming to court. In the UK at least, the criminal cartel regime needs time to develop with more resources for investigation and prosecution. Removing dishonesty as an element of the cartel offence is an easy option but it may not speed up investigations or make prosecutions before juries easier. The government may have its work cut out to come up with a better regime than the one we have at present.

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