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The U.K. Bribery Act Goes Live

At the time of this post, the U.K. Bribery Act has been live for about ten hours, yet there has not been an enforcement action. Given that the Act is not retrospective and applies only to bribes paid after July 1st, this is hardly surprising, but I hope you appreciate the Friday humor.

U.K. corporates and others subject to the Bribery Act are doing business around the world, including in high-risk jurisdictions, and a healthy dose of corporate hospitality is no doubt occurring at Wimbledon. In other words, the world has not changed.

Today, of course, is the day the U.K. Bribery Act finally goes live.

As explained is this U.K. Ministry of Justice circular, “the Bribery Act replaces the offences at common law and under the Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916 (known collectively as the Prevention of Corruption Acts 1889 to 1916) with a new consolidated scheme of bribery offences.”

The FCPA-like provision of the Bribery Act is Section 6 described in the circular as follows. “Section 6 is designed to deal with the corruption of decision making in publicly funded business transactions through the personal enrichment of foreign public officials by those seeking business opportunities. The offence is committed where a person offers, promises or gives a financial or other advantage to a foreign public official with the intention of influencing the official in the performance of his or her official functions. There must also be an intention to obtain or retain business or a business advantage on the part of the perpetrator. However, the offence is not committed where the official is permitted or required by the applicable written law to be influenced by the advantage.”

As to corporate liability, the circular states as follows. “The Bribery Act includes a new form of corporate criminal liability where there is a failure to prevent bribery perpetrated on behalf of a “relevant commercial organisation” (Section 7). This new corporate liability for bribery […] does not in any way change the existing common law principle governing the liability of corporate bodies for criminal offences that require the prosecution to prove a fault element or ‘mens rea’ in addition to a conduct element. This common law principle, sometimes referred to as the “identification principle”, will therefore continue to operate so that where there is evidence to prove that a person who is properly regarded as representing the “directing mind” of the body in question possessed the necessary fault element required for the offence charged the corporate body may be proceeded against.”

As to the Section 7 offense, the circular states as follows. “The offence at section 7 of the Act creates a new form of corporate criminal liability. The offence applies only to a “relevant commercial organisation” as defined at section 7(5) and focuses on a failure by such an organisation to prevent a person “associated with” it from committing a section 1 or 6 bribery offence in order to obtain or retain business or an advantage in the conduct of business for that organisation. It creates direct rather than vicarious liability and its commission does not amount to the commission of a substantive bribery offence under section 1 or 6. A commercial organisation will have a full defence if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place designed to prevent persons associated with it from bribing.”

As Michael Volkov (here) nicely stated – “The longest pre-game show in history is drawing to a close. The new world will shortly be upon us. Will the UK Bribery Act be a game-changer or will it fizzle out like Y2K? Everyone has their predictions; everyone has their focus and emphasis.”

Here is my two cents.

As with any new law, there is likely to be a learning phase for both the enforcement agencies and those subject to the law. That was certainly the case in the U.S. in the years following passage of the FCPA in 1977. Thus, it very well may be the case that there are no enforcement actions for some time (recognizing that it often takes a few years from beginning of an inquiry to resolution of an action). Thus the greatest immediate impact of the Bribery Act is sure to be the compliance ethic it inspires. I expect that the enforcement actions that may develop over time to focus on egregious instances of corporate conduct on which no reasonable minds would disagree. I do not get the sense, based on public comments of the Ministry of Justice and the Serious Fraud Office, that the envelope will be pushed too far in the early years of the Bribery Act.

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See here for the text of Richard Alderman’s (Director of the U.K. Serious Fraud Office) recent speech on the Bribery Act.

In a signature departure from U.S. enforcement policy concerning merger and aquisition issues, Alderman stated as follows. “I know that there are many occasions when an acquiring company takes over a target company and discovers either before or after the event that there are serious problems about corrupt activities in the target company. My view is that when an ethical acquiring company identifies these issues, then it is in everyone’s interest that that acquiring company gets on and sorts out the problems that it has inherited. I have difficulty in seeing that any SFO investigation at the corporate level would be justified although I would have to consider carefully the position of any individuals.” (As highlighted in this recent post, several FCPA enforcement actions have been based on successor liability theories).

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In this speech, Alderman stated the following regarding the “foreign public official” term in the Bribery Act.

“Who then is a foreign public official? This is the subject of litigation at the moment in the US and I am following this with interest. The test I use is one that was set out by the OECD in the commentary on the OECD Convention. What we look at is whether or not the foreign State is in a position to influence the foreign company. We therefore look at the relationship between the company and the State to see whether effectively this commercial organisation is being run by the State. This can lead us into some tricky areas. We have received questions about banking officials in countries where the State has a very major interest in the Bank and exercises that interest very actively. Are those officials foreign public officials? Our view is that in those circumstances the individual is likely to be a foreign public official. On the other hand if the State has a major interest but does not control the operations of the Bank, then I think we could have a different situation.”

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Keeping with today’s U.K. theme, earlier this week Bloomberg reported (here) that the SFO is assisting the SEC “on inquiries involving financial institutions and whether bribes were paid in transactions with sovereign wealth funds.”

As previously reported by the Wall Street Journal (see here) the SEC is “examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya’s sovereign wealth fund.” The SFO’s inquiry appears to be related to HSBC Holdings Plc’s interactions with Libya’s sovereign wealth fund.

Other financial services firms that have reportedly received letters of inquiry from the SEC include Bank of America, Morgan Stanley, and Citigroup.

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A good holiday weekend to all.

In the News

Some interesting news articles to pass along.

The first piece is from today’s New York Times and is titled “Blackwater Said to Pursue Bribes to Iraq After 17 Died” (see here).

The article suggests, based on former company sources, that Blackwater (and its executives) could … well … be in some murky FCPA water in connection with alleged secret payments to Iraqi officials.

According to former company officials, the payments were intended to silence the officials’ “criticism and buy their support after a September 2007 episode in which Blackwater security guards fatally shot 17 Iraqi civilians” an event which generated much media coverage and congressional interest (see here among other sources).

The specific recipients of the payments? According to sources, officials in the Iraqi Interior Ministry who demanded that Blackwater secure an operating license after the September 2007 incident in order to continue doing business in the country.

The FCPA anti-bribery provisions contain an obtain or retain business element.

You ask, does making payments to foreign officials to secure a license satisfy that important element?

This general issue was addressed by the Fifth Circuit in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) (one of the few instances in which a court has rendered a substantive FCPA decision).

The issue in Kay was whether payments to Haitian officials for the purpose of avoiding custom duties and sales taxes in Haiti could satisfy the FCPA’s obtain or retain business element.

Concluding that the obtain or retain business element was vague, the court analyzed the FCPA’s legislative history and concluded that such payments (even though they do not lead to specific government contracts) could nevertheless provide an unfair advantage to the payor over competitors and thereby assist the payor in obtaining and retaining business.

The court did not hold that ALL such payments could satisfy the FCPA’s obtain or retain business element, only that such payments COULD satisfy this key element if, for instance (as in the Kay case), the payments were intended to lower the company’s cost of doing business in the foreign country.

Post-Kay there has been an explosion in FCPA enforcement actions involving payments made to secure foreign government licenses, permits, and certifications or otherwise involving custom duties and the like. Because these enforcement actions have not been contested, it remains an open question as to whether all such payments can indeed satisfy the FCPA’s obtain or retain business element and under what circumstances.

Blackwater (now called Xe Services), through a spokeswomen, dismissed the allegations as baseless.

Nevertheless, some juicy stuff here – the U.S. military’s then prime security contractor in Iraq (and a company which did classified work for the CIA) making bribe payments in a war zone.

One wonders who knew what within official Washington.

Will this alleged conduct be pursued by the DOJ or put on the backshelf due to national security / foreign policy issues?

To my knowledge, this angle of Blackwater’s activities in Iraq has never been disclosed and, if so, the piece would seem to represent a dandy piece of investigative journalism.

The second article, titled “A Morgan Stanley Star Falls In China,” is from Reuters (see here).

The piece examines the rise and fall of Garth Peterson, a U.S. citizen, who joined Morgan Stanley’s Hong Kong office earlier this decade and quickly rose through the ranks of V.P., executive director, and ultimately managing director of Morgan Stanley’s real estate investment operation in China.

Peterson was fired by Morgan Stanley last December over concerns that he may have violated the FCPA.

Morgan Stanley disclosed the results of its internal investigation into Peterson’s conduct to both the DOJ and the SEC. Here is the company’s February 2009 8-K filing.

What did Peterson do that may have violated the FCPA?

The article suggests that Peterson’s relationship with Shanghai Yongye Group (a real estate developer) and its former Chairman, Wu Yonghua, and his daughter, Linda Wu, are at issue. Also relevant, it appears, is Shanghai Dragon Investment Co.

I hate to be the one always bringing up this issue, but if employees of Shanghai Yongye Group and Shanghai Dragon Investment Co., are somehow being considered “foreign officials” under the FCPA, I would sure love to see that legal analysis.

Anyway, back to the story.

The article is an interesting read on a number of fronts and provides an insight into one company’s handling of an FCPA issue.

First, the article notes that Morgan Stanley sent Peterson to an FCPA workshop. Given that this occured in 2008, it is debatable whether this was “too little too late.”

Second, comes an internal review, which from the article, appears to have been done in the ordinary course of business. The ordinary internal review uncovers some extraordinary issues.

Next, the company initiates an internal investigation to look into the suspicious issues. And what an internal investigation it was. According to the article, more than 7.4 million pages of e-mails were reviewed. According to the article, the investigation “found that in a discrete number of instances, investment assets were used for improper purposes not authorized by senior management” an occurrence which would seem to violate, at the very least, the FCPA’s internal control provisions which require, among other things, that an issuer like Morgan Stanley devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; and (ii) access to assets is permitted only in accordance with management’s general or specific authorization.

Next, comes the corrective measures, in this case, Peterson was fired.

Next, comes the disclosure (see above).

The article closes by saying that even if found guilty Peterson is “unlikely to be jailed as he and the firm are expected to pay damages and fees, possibly through a deferred prosecution agreement.”

Spot-on with the company likely entering into a deferred prosecution agreement.

However, the authors (and their sources) apparently have never heard the names of Frederic Bourke, Albert Jack Stanley, Steven Ott, Roger Michael Young (and many others) who are currently living in a federal prison (or waiting to check in) for violating or conspiring to violate the FCPA.

According to article, Peterson currently lives in Singapore.

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