Russian Legal Update - Third Quarter 2011
The UK Bribery Act 2010 (the "Act"), which came into legal effect on July 1, 2010, overhauled the UK's arguably outdated corruption legislation and introduced a tough new regime that in some ways is more stringent and broader than the U.S. Foreign Corrupt Practices Act. The Act's extremely wide extra-territorial effect may result in millions of dollars for international businesses being spent on new control systems and compliance program updates. In this article, we provide a brief overview of the impact of the Act on Russian companies and their businesses, both in Russia and abroad, in light of the Guidance on the defense of adequate procedures, published under Section 9 of the Act by the UK Government on March 30, 2011 (the "Guidance").
The Act covers both the public and private sectors: prohibits facilitation payments, imposes strict liability for worldwide actions of "associated" persons of relevant commercial organizations, and may even impose personal liability on management. The Act prohibits the following offenses:
- an active offense of bribing another person (Section 1);
- a passive offense of being bribed (Section 2);
- an active offense of bribing a foreign public official (Section 6); and
- a strict liability offense where a commercial organization fails to prevent bribery (Section 7).
Why Russian Companies Should Be Concerned
The Section 7 strict liability offense, which has been the focus of much of the commentary on the Act to date, provides that a relevant commercial organization commits an offense if a person associated with it, bribes another intending to obtain or retain business or an advantage in the conduct of business for this commercial organization.
The jurisdictional scope of Section 7 of the Act is exceptionally broad. It applies to a "relevant commercial organization," which is defined in the Act to include:
- companies or partnerships, incorporated or formed in the UK, doing business or part of their business in the UK or elsewhere; and
- companies incorporated or formed outside the UK, carrying on at least part of their business in the UK.
This means that the Act will not only apply to the UK subsidiaries of Russian companies, but also to Russian companies that have, as the Guidance puts it, a "demonstrable business presence" in the UK. What exactly amounts to a "demonstrable business presence" is ultimately a question that only a court would be able to answer in respect of any particular case, but the Guidance suggests using a common sense approach to making this determination. For example, according to the Guidance, the mere fact that a company's securities have been admitted to the UK Listing Authority's Official List and, therefore, admitted to trading on the London Stock Exchange will not, in itself, mean that the company constitutes a "relevant commercial organization" for the purposes of Section 7. Similarly, a parent company should not fall within the scope of Section 7 just because it has a UK subsidiary, as the subsidiary may act independently of its parent or other group companies. Nevertheless, there is still potential for the UK authorities to determine that a UK subsidiary was not independent and its actions were directed by the parent company.
Associated Person
A relevant commercial organization will be liable under Section 7 if a person "associated" with it bribes another person intending to obtain or retain business or a business advantage for the organization. The Guidance acknowledges that in addition to the obvious categories of associated persons such as employees, agents and subsidiaries, contractors and suppliers could also be "associated" persons if they are performing services for an organization, and the question as to whether a person is performing the services for an organization is to be determined by reference to "all the relevant circumstances" and not merely by reference to the nature of the relationship between that person and the organization. It is explicitly stated in the Guidance that the purpose of this broad definition of association is to embrace the whole range of persons connected to an organization who might be capable of committing bribery on the organization's behalf. However, if a contractor is acting merely as the seller of goods, it is unlikely that this contractor will be deemed an "associated" person.
The concept of "associated" persons may become particularly difficult to assess in the context of joint ventures ("JVs"). The Guidance stresses that the Section 7 offense is only committed where the bribing by the "associated" person is done with the intention of obtaining or retaining, for the relevant commercial organization, either business or an advantage in the conduct of business. Therefore, if a JV with participation of a Russian owner operates through a separate legal entity and that entity pays a bribe that is intended to benefit an owner of the JV, the Russian owner may be liable under Section 7 if the JV is performing services for or on behalf of that owner. However, a bribe paid on behalf of a JV entity by one of its employees or agents is unlikely to trigger liability for the owners of the JV, if the JV itself (rather than the owners) was intended to benefit from the bribe. This will be a particularly fact sensitive issue.
Extra-Territorial Application of Section 7
The extra-territorial effect of Section 7 will potentially lead to dramatic consequences for Russian corporations operating abroad. If a Russian company qualifies as a relevant commercial organization for the purposes of Section 7, it will be liable under the Act for the associated person's bribery regardless of the associated person's nationality and regardless of the country where bribery occurred. For example, bribery committed outside the UK by an executive with no connection to the UK could lead to a Section 7 offense on the part of his/her employer because the employer conducts part of its business in the UK. This is so even where the jurisdictional reach of the Act does not extend to the individual in question.
Defense from Strict Liability of Commercial Organizations
The only defense available to a Section 7 prosecution is for the relevant commercial organization to prove that it had "adequate procedures" designed to prevent persons associated with the organization committing bribery.
Adequate procedures are not defined in the Act, but the Guidance sets out the key principles to assist organizations looking to avoid violating the Act. In summary, these principles are the following:
- Proportionate procedures. The procedures to prevent bribery should be proportionate to the bribery risks faced by the organization and the nature, scale and complexity of the organization's activities.
- Top-level commitment. Senior management should be committed to preventing bribery and a senior person should have overall responsibility for the compliance programme.
- Risk assessment. The organization should carry out periodic, informed and documented assessments of its exposure to bribery and take steps to mitigate the risks identified.
- Due diligence. Appropriate checks should be carried out on persons performing services for or on behalf of the organization and those persons should in turn be required to carry out similar checks on the persons acting on their behalf.
- Communication. Bribery prevention policies should be clearly communicated internally and there should be continuous training.
- Monitoring and review. The risks and procedures should be regularly monitored and reviewed.
In order to successfully defend a prosecution, commercial organizations should have procedures in place that are proportionate to their business and their risk profile, but which above all must be "adequate."
Hospitality, Promotional and Other Business Expenditure
The Guidance makes it clear that the Act is not intended to prohibit "reasonable and proportionate" hospitality and promotional or other similar business expenditure intended for these purposes. It is advisable to have transparent internal guidance and an appropriate policy in place to guide employees and directors, particularly in dealing with government officials where no corrupt intent is required under the Act. When assessing corporate hospitality, the following general questions should be considered:
- Is the hospitality offered for a legitimate purpose or is it intended to influence decision making?
- Is the level of hospitality proportionate and therefore considered to be a routine business courtesy, or is it excessive?
If the policy of a commercial organization allows gifts, the organization should specify the permitted levels and maintain a publicly available register of them. Because there is no need for corrupt intent, gifts and entertainment of foreign public officials should be dealt with very carefully. Before any gift is made, it should be considered whether it could be seen to be an "advantage" to the official, which is capable of influencing them to act in a certain way. The safest course of action is to prohibit any such gifts. However, the provision of small value items within nominal limits as set out in corporate policies is unlikely to fall within the remit of the Act. Cash or cash equivalent gifts (including facilitation payments) should be prohibited.
An organization should also have policies and procedures in place to ensure that there is adequate guidance to enable associated persons to know what is acceptable and that there are appropriate procedures for securing approvals and reimbursement, by, for example, including suitable provisions in legal documents binding upon associated persons, requiring them to comply with the organization's anti-bribery policies and to have and implement their own policies with which they must require their own associated persons to comply. There should also be provision for immediate termination of the contract if those requirements are breached.
For a more detailed discussion on practical steps that an organization may take to minimize the risk of being held liable under Section 7, please refer to our article in the April 2011 issue of DechertOnPoint.
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.