Strengthening of anti-corruption mechanisms in business activities

SPEECH BY RICHARD ALDERMAN

DIRECTOR, SERIOUS FRAUD OFFICE

Delivered at the British Consulate-General St Petersburg on 17 March 2011

I am here today to talk to you about the UK Bribery Act and in particular the implications that this Act will have when it comes into force for Russian and indeed other companies. Let me start straightaway with this particular issue before describing why the Act also deals with foreign companies and what the implications are.

When the Act comes into force, the provisions in the Act will apply not just to UK companies, but also to foreign companies that carry on business or part of their business in the UK. If that simple test is satisfied, then they will be within the jurisdiction of the Serious Fraud Office in respect of their activities in any part of the world. What this means is that a Russian company that carries on business or any part of its business in the UK will be within the SFO’s jurisdiction for any bribery that it commits in any other part of the world, even if that bribery has no connection whatsoever with the UK business presence of the Russian company.

Many people have commented on the width of this provision and the extension of the UK’s jurisdiction to what foreign companies do in countries outside the UK. Let me explain the background to this and why the provision is potentially so important.

I regard the Bribery Act as being important in promoting fair competition between companies. There are many companies that I know that are doing their best in difficult circumstances to stop bribery. They do a great deal in various countries of the world to ensure that their employees in all of those countries, their sub-contractors, agents and others providing services to them know that the corporation is determined not to pay bribes. This is very genuine on their part and I have been very impressed by the presentations to me by a number of companies who have told me about what they have done and the success that they have had. They have also told me how important this has been for their business.

They have done this for a number of reasons. First of all of course, the law on this topic has developed both in the US, the UK and internationally. Many countries have signed up to the OECD Convention on preventing bribery. This sets the international norm for combating bribery. The Working Group on Bribery set up by the OECD is a very effective mechanism for ensuring that States live up to their responsibilities here. And so companies are complying with legislation in order to ensure that they obey the law.

There is also more to it that this. Corruption brings all sorts of bad features into a business. There has to be concealment. There has to be falsification of documentation. Different levels of the business have to be involved in this. Money will be circulating in the company as a result of contracts obtained through bribery and there will be an exposure to money laundering legislation in different jurisdictions. Companies with a culture that promotes corruption are very fragile and will at some stage in my view collapse. Sustainable long term companies need to be based upon a proper respect for the law and for ethical standards.

What these companies are also doing is trying to ensure that other companies live up to the best modern standards. They can do this in a variety of ways. First of all it is becoming increasingly common for these companies to insist on disclosure of corruption investigations when they are seeking offers by other companies or individuals who want to do work for them. These investigations have to be disclosed. Note that it is not prosecutions and convictions, but investigations. If a company is, or has been the subject of an investigation, then this will undoubtedly be detrimental to the attempt by the company to secure the contract. This is because the company awarding the contract will not want to take on the potential exposure of having services provided to it by a company that had become involved in corruption in the past.

I know that this is a very particular concern of companies that have become the subject of SFO activity. I have been told that the existence of an investigation is likely to lead to serious consequences for the company in bidding for new contracts. This is a fact of life in modern commercial dealings.

Another area where the very good companies that I have mentioned pay attention to corruption issues is through mergers and acquisitions. You may have a very attractive offer from a corporation to take over your organisation at a price that you would very much like to receive. However, it may be that the due diligence conducted on behalf of the corporation shows that you have had some corruption issue in the past or some exposure to an investigation. The price drops. Indeed there may be no transaction at all and you lose a very considerable amount of money.

These are trends that are happening in the market place and show to me that there is a commercial case for ensuring that companies and individuals do not get involved in bribery.

These good or gold standard companies as I call them also want more. They want to ensure that they are not placed at a competitive disadvantage in competing for business in other countries in the world. This could happen when another company (whether based in the UK or abroad) offers a bribe in order to obtain the contract. The gold standard company is not prepared to respond in the same way and as a result it will lose the contract. This is a thoroughly undesirable development. It is undesirable from the point of view of the citizens of that country because they are likely to suffer as a result of poor services provided following contracts obtained corruptly. That has certainly been the experience and we have plenty of evidence to show that.

There are also other victims as well. The gold standard company may have to close an operating subsidiary because it does not obtain the contract. The employees and their families are also victims here.

The question from these gold standard companies then is, what can the authorities do in order to support them by taking action against the companies that seek to obtain a competitive advantage by using bribery?

The answer to that in the past and indeed at present, until the Bribery Act comes into force, is that (unless we are talking about a UK company) I can take no action. The position will change though when the Bribery Act comes into force. After that, as I have said, Russian companies (and companies from other countries) will be within my jurisdiction if you satisfy that simple test of carrying on business or part of your business in the UK. If a Russian company satisfies that test and we find evidence of bribery in another country that has had a detrimental effect on a UK company, then taking action against that Russian company will be a high priority for us. This will enable us to show the gold standard companies that I have talked about that the authorities will support them in ensuring fair competition in the market place.

Lots of people want to know what the test means. The test is expressed in very simple terms. Are you carrying on your business or part of your business in the UK? What does that mean? What about subsidiaries? What about raising finance? What about providing services over the Internet, or indeed in other ways? We shall have to see. Ultimately our courts will apply that test to particular circumstances. Do not be surprised though, if the Serious Fraud Office takes a wide view of this phrase so that we can ensure that the policy objective of ensuring competitiveness is complied with.

Once the Act comes into force, there will be a new corporate level offence under the Act. This will apply when what is called a relevant commercial organisation fails to prevent bribery. The defence to this is that there were adequate procedures to prevent bribery.

What this means is that the defence of adequate procedures will be very important. If there were adequate procedures to prevent bribery then no offence has been committed. It is not a matter of mitigation, but a matter of defence to the charge. No criminal offence would have been committed by the corporate if there were adequate procedures.

Our Government is obliged to issue guidance on the meaning of adequate procedures. This has been the subject of a consultation and the Government is considering the results of that consultation. The Government has promised to publish the guidance following that consultation. Following publication, the Act will come into force three months after that date. I hope that this will be soon, although it is important to ensure that the guidance gives the help that everybody is seeking.

There has been considerable debate in my jurisdiction about some of the aspects of the guidance and indeed of the Bribery Act itself. Let me give you a flavour of two of the debates. The first of these concerns entertaining and hospitality expenditure. What is being said is that business will be impossible if it is not possible to spend money on developing the relationships that are needed in business through entertaining and hospitality.

There are to mind misconceptions about the scope of the Act. Sensible proportionate expenditure on hospitality and entertaining is not unlawful under the Bribery Act. Therefore, if you buy breakfast or lunch or dinner for a contact there is no offence. Similarly, taking prospective or actual clients to a sporting event is not an offence. There only becomes an offence when we are talking about expenditure that is lavish or excessive. In those circumstances we will be asking ourselves whether what was really going on here was the payment of a bribe.

For example, there is no problem with flying a party of prospective clients from one part of the world to another to see your installation in Russia for example, if that is the best way of demonstrating to those prospective clients what you can do. Putting them up at reasonable hotels with good meals is not a problem. However, if you add on to that visit a stay at the company’s estate or private island for a month for the individuals, together with their families, with considerable spending money for a month, then we will be inclined to ask whether bribery is taking place, particularly if the result of the expenditure is the conclusion of a contract. It is clear to me that most companies clearly understand the difference between what is permissible here and what is not permissible.

Another area of debate concerns facilitation payments. These are payments of a small amount designed to ensure what is called a routine government action. Usually this is to get goods through customs or across a border quickly or to get some sort of permit. Companies tell me that this is a real issue in many jurisdictions and how difficult it is. On the other hand, a number of other companies have told me that they have a zero tolerance approach for these payments and that they ensure that this zero tolerance approach is monitored and enforced in all the countries in which the company operates. Interestingly they also tell me that this proves to be good for their business. Officials in those countries know that the company does not pay bribes and therefore they do not ask for them. On the other hand, a company that does have a reputation for paying bribes will find that it cannot conclude any transaction or any movement of goods without paying bribes to ever increasing numbers of people .

I recognise that this is a difficult issue. A number of companies have reached zero tolerance, but many have not. Some jurisdictions are particularly challenging. I am sympathetic to the difficulties. I acknowledge that these payments will not cease as from the date when the Bribery Act comes into force. I have said though, that companies within my jurisdiction should be working towards zero tolerance within a reasonable period of time. I have said that they should come and talk to us about what they are doing so that we can be reassured that this is their approach and that they are genuinely committed to this. On the other hand, if we find a company that is continuing to use facilitation payments as a normal part of its business, particularly if it thinks that it can get an advantage over other companies by doing this, then that company will receive attention from the SFO that it will not welcome.

It is important to have these debates because they cast light to my mind on the many difficult issues that there are in dealing with corruption in all sorts of very challenging environments. The business world is complex and challenging. This is why I have said that I want the SFO to adopt a process of engagement with corporates and their advisors. This means that our door is open to corporates (whether based in the UK or abroad) who want to come and talk to us about anti-corruption issues and what they are doing to move towards zero tolerance. It gives us an opportunity to understand the issues and the risks in their own area of business and what they are doing to build up an anti-corruption culture. It helps companies understand that we take a very realistic approach and that we can contribute to what the company is doing as a result of the experience that we have had, particularly over the last few years.

We receive feedback from these visits and the feedback is very positive. We are regarded as being flexible and realistic in pursuing the objectives of having a gold standard of anti-corruption culture, while recognising that this is a journey. I take part in a number of these discussions myself so that I remain in contact with what is happening and I have to say that I find them very valuable. They contribute to my own thinking on these issues.

This offer as I have said is open to foreign companies. Russian companies that want to approach us whether directly or through their advisors are welcome to do so. Let me assure you that we are not seeking to catch you out. Some companies in the early days of the engagement process were very concerned that the moment they expressed some doubt about some of their procedures, then the SFO would immediately launch a full prosecution. This is not our intention and it does not happen. We want an honest dialogue. If we have suggestions to make, then we will leave you to consider those suggestions and decide whether to implement them. We will not check up on this and we regard this as a matter for you.

I have to say that I regard the SFO’s engagement approach as a very great success and I have been very pleased to see the response to this. I commend it to you.

There is much more to say on all sorts of issues concerning the Bribery Act and the impact it will have, but I shall leave it there because I know we have plenty of time for questions. Let me though thank you once again for the opportunity to be here in St. Petersburg and to have the opportunity to meet you. I look forward to your questions.