Effect of UK Bribery Act on Project Finance Market; tough new anti-bribery statute that takes effect on July 1, 2011

Effect of UK Bribery Act on Project Finance Market | Norton Rose Fulbright

June 11, 2011

By M. Scott Peeler, Heidi Lawson and Ramsey Jurdi

Companies with any tie to the United Kingdom — beyond just share listings in London — will be subject to a tough new anti-bribery statute that takes effect on July 1.

The new law is expected to have an effect on the project finance market.

Its scope is similar to the US Foreign Corrupt Practices Act, with three important expansions. First, accepting a bribe from or paying a bribe to any individual is prohibited, no matter where it occurs. A bribe paid to an employee of a private company is illegal. This is a much broader prohibition than the US Foreign Corrupt Practices Act, which makes it illegal to offer anything of value only to foreign government officials and employees of international public organizations. Second, a company can be held strictly liable for bribery if the company fails to put in place procedures to prevent corruption. Third, there is no limit on the size of fines, and the potential prison sentences are longer.

What is Illegal

The UK Bribery Act 2010 makes it illegal to make or accept a bribe, under any circumstances, whether to a private individual or public official. The Bribery Act does not only apply to UK companies or companies listed on the London Stock Exchange. In fact, listing securities in London does not, by itself, subject a company to the Bribery Act. Rather, the Bribery Act applies to anyone who conducts business in the UK.

The very nature of project finance makes the industry particularly susceptible to violations of this ambitious statute. Its far-reaching jurisdictional reach, along with the well-used and successful US Foreign Corrupt Practices Act playbook, is shaping up to be a new strategy in the war against corruption.

In order to comply fully with the Bribery Act, it is necessary to understand its meaning and applicability to companies involved in various projects around the world.

By doing so, companies that were not previously subject to the Foreign Corrupt Practices Act or “FCPA” will be able to immediately assess the risk involved with the implementation of the Bribery Act and the effect of any violation.

If a company arranges financing, uses an agent, supplies or purchases goods or does any other “part” of its business in the United Kingdom, it is likely subject to, and must comply with, all of the provisions of the Bribery Act. Merely visiting London to conduct business meetings or using London as a place to negotiate contracts is not enough by itself to subject a company to the statute.

The Bribery Act applies to any bribe regardless of whether it took place in the UK.

For example, a US company arranging financing in London for a project in Africa could be held responsible under the Bribery Act if any one of its agents makes or accepts a bribe on the company’s behalf. It is also important to note that, unlike the FCPA, the Bribery Act does not have an exception for facilitation payments, such as those used to speed up the process for obtaining a building permit or import license. If such a payment is found to occur, this will be a violation of the Bribery Act.

The Bribery Act puts a heavy burden on management and the board of directors to ensure company compliance.

Once the Bribery Act comes into force, for instance, it will be a criminal offense if a company fails to prevent relevant acts of bribery. If there is such a failure to comply, individuals could be subject to prison sentences and companies could be subject to unlimited fines. To make matters worse, the UK’s Serious Fraud Office, the government agency in charge of enforcing the Bribery Act, may hold companies strictly liable. The only defense available would be if the company could establish that it had in place “adequate” procedures aimed specifically at bribery prevention.

Many companies, along with the attorneys who advise them, are struggling with the enormity of “strict liability” and wonder what specifically must be done to establish “adequate procedures” sufficient to prevent it from being imposed. Recent guidance by the UK Ministry of Justice tried to clarify that very question.

There are a few clear action items that companies should take as soon as possible.

Step 1: Assess Risk

The first step in assessing risk is to determine whether a company falls within the Bribery Act’s jurisdiction.

Generally, the entirety of the Bribery Act applies to UK citizens, residents and incorporated entities. Even if a company is not incorporated under British law, it should assess whether it conducts any “part” of its business in the UK and, if so, the Bribery Act’s prohibitions will apply. It is hard for any international company to not have part of its business touch the UK in some way.

The next step is to assess the nature and extent of its exposure to the risk that bribery may be committed, directly by its employees or indirectly by third-parties acting on the corporation’s behalf. A good place to start is to identify those countries where the company does business — for example, where is it located, where are its customers and where do the products necessary for it business originate? Then, by simply using the same tools relied upon by government agencies tasked with enforcing these laws, such as the Transparency International’s Corruption Perceptions Index, a company can determine the level of risk associated with its entire global operation. This is essential in tailoring corporate compliance efforts where they are needed most.

Another key element of assessing risk can be found through a careful examination of a company’s specific industry and practices unique to it. In the world of project finance, for example, joint ventures, consortia and acquisitions present clear risks, as a company can be held liable for bribery committed by its partner or, in some cases, even for improper acts of an acquired company that occurred prior to the acquisition. Further, these complex deals often involve government entities and officials, which increase the risk of corruption in many countries. The common practice of using local agents in foreign countries also increases risk, as does the giving or receiving of business gifts, entertaining and the covering of travel-related expenses of government officials. Guidance issued by the Ministry of Justice indicates that assessment of such risks must be periodic, informed and documented, overseen significantly by top management and appropriated adequate resources.

Step 2: Implement Meaningful Procedures

Once risks have been identified, a company must issue a meaningful global anti-corruption policy.

At first blush, this step appears deceptively easy. Typically only a few pages in length, an anti-corruption policy describes the organization’s tireless commitment to bribery prevention and delineates the very prohibitions, guidelines and limits that will mitigate risks and hopefully prevent bribery from occurring. Once finalized, the policy should be translated into all relevant languages and circulated widely to every employee, agent involved in business activities and sometimes even clients and customers.

However, simply issuing a policy or paying it lip service is far from adequate and will assuredly expose a company to unnecessary risk.

The companies that have been most successful in avoiding violations of the FCPA, for example, are those with a demonstrable and unshakeable top-level management commitment to anti-corruption initiatives. As with many things in business, leadership is key –- employees and business partners alike must witness management’s commitment to a zero-tolerance policy toward bribery. That commitment can be demonstrated in many ways, but none more powerful than turning away a potentially-lucrative business opportunity if it includes any act of impropriety. Management must also spread the message downward, so that everyone knows that the company will never offer, pay, reimburse or condone a bribe.

A company must also design and enforce effective, workable procedures that are proportional to its risk.

Of these, none is perhaps as important as performing thorough due diligence on customers and agents hired to assist with business activities. This can include retaining companies to conduct background checks, requiring business partners and agents to complete questionnaires designed to quickly uncover red-flags, and forcing business partners and agents to certify in writing that they will abide by the company’s anti-corruption policy. Of course, companies will be expected to monitor the activities of these parties to ensure compliance.

Step 3: Training, Training and More Training

Finally, a company must institute strong and effective training on these values, policies and procedures. The UK government guidance requires a company to ensure that its bribery prevention policies and procedures are embedded and understood at all levels. This frequently includes live and online training sessions and periodic refreshers on core topics such as the ever-changing world of anti-corruption laws. The frequency, intensity and format of training will depend to a large degree on the company’s risk profile.

Risks for Project Finance

The risk that a bribe will be offered or paid increases as a company expands into developing markets, as business ventures increase in size and scope and as a company cedes control to local entities or persons located thousands of miles from its headquarters. Project finance matters are often subject to these risks and more.

Government tenders present a particular risk of corruption. Lavish entertainment, gifts or an advantage of any sort that is given to a government official — including employees of state-owned entities — for a specific business advantage (think quid pro quo or “I’ll scratch your back if you scratch mine”) will likely violate the Bribery Act or give rise to an appearance that it has been violated.

Giving a job to a government official’s relative can also be considered a bribe, as well as taking a government official and his family on a lavish vacation.

In short, a bribe can be anything of value, tangible or not.

Often, local agents are retained to facilitate business overseas or dealings with foreign governments, and these third-parties pose a specific and concrete corruption risk. Local agents have historically led to the prosecution of many companies under the FCPA. Therefore, a company must know its agents before retaining them and keep a careful watch on their activities afterward.

With regard to joint ventures and consortia, the UK government guidance to the Bribery Act states that a joint venture partner will be liable for an act of bribery by the joint venture if the bribe was paid with the intention of “benefiting” that member. While the mere existence of a joint venture does not automatically trigger liability, partners must be aware that this possibility exists and take meaningful steps to guard against it. The Bonny Island joint venture to construct liquefied natural gas facilities in Nigeria is a particularly jarring example of what can happen under the US Foreign Corrupt Practices Act. A total of $1.5 billion in fines were levied against members of the joint venture between 2009 and 2011, non-US citizens have been extradited and guilty pleas have been entered.

With regard to acquisitions, due diligence is key. An acquiring company will often become liable for the past acts of the company it acquires. By way of example, General Electric settled FCPA charges in 2010 and agreed to pay $23.5 million for not only its own violations, but also for those committed by Amersham and Ionics, two companies it acquired after their violative conduct. The risk of acquiring liability, however, can be substantially mitigated through pre-acquisition due diligence.

Rabid Enforcement

While the FCPA has been on the books for 34 years, the first 25 years were relatively quiet, with only a handful of prosecutions each year.

To expect the same for the Bribery Act would be foolish.

British prosecutors will speed through the learning curve normally associated with implementing new and complicated legislation, and are expected to run the “FCPA playbook” from start to finish. Who can blame them? The United States has extracted more than $3 billion in the last three years alone from corporations that ran afoul of the FCPA, while establishing itself as a global leader in the war against corruption.

Companies must recognize that the Bribery Act places no limits on the monetary fines that can be levied for violations and, unlike the FCPA, the Bribery Act allows executives who violate the law to be jailed for up to 10 years.