“Follow the money …” - The role of Article 8 (Accounting) of the OECD Convention and the law of Bribery and Corruption

“Follow the money …”

David MacLeod and Mark Rainsford QC consider the role of Article 8 (Accounting) of the OECD Convention and its implementation in the legislative schema governing the law of Bribery and Corruption.

There has been much ink spilt on the enactment of the new Bribery Act 2010, which came into force on July 1st 2011.

The Act sweeps away the common law of Scotland, England and Wales (see section 17) and a patchwork of statutory provision: the three principal Prevention of Corruption Acts are repealed, along with the piecemeal legislation hurriedly enacted in section 47 of the Criminal Justice Act (1988), sections 108 to 110 of the Anti-Terrorism Crime and Security Act (2001), and sections 68 and 69 of the Criminal Justice (Scotland) Act (2003), (see Schedule 2).

Westminster ratified the OECD ‘Convention on Combating Bribery of Foreign Public Officials in International Business Transactions’ as far back as December 17th 1997. The Bribery Act - which sets out to implement the UK’s Convention obligations – has been a long time in the making.

There was however a significant issue identified in the Peer Review process regarding the UK’s implementation of the Convention, specifically Article 8, which deals with “Accounting”.

Article 8 (taken short) provides that,

“[I]n order to combat bribery of foreign public officials effectively, each party shall take such measures as may be necessary, … to prohibit the establishment of … inadequately identified transactions, … the entry of liabilities with incorrect identification of their object, as well as the use of false documents, by companies … for the purpose of bribing foreign public officials or of hiding such bribery.”

The OECD Working Group – experts tasked with examining the implementation of the Convention into the law and regulatory framework of signatory states – were concerned prior to the passing of the Bribery Act, that UK law did not proscribe the “activities” set out in Article 8 of the Convention.

Accordingly, the Working Group made a “recommendation” in their report on UK compliance to that effect, for the UK to follow up (dated 21st June 2007).

Prior to that, the Working Group in their “Follow-Up Report on the Implementation of the Phase 2 Recommendations” (dated 17th March 2005), had observed that, in the UK

“[N]either company law nor accounting standards set out specific requirements in respect of the recognition, measurement, presentation or disclosure of matters relating to bribery offences.”

This followed on from a previous observation by the Working Group in the same Report that,

“[T]o date, the activities listed under Article 8 of the OECD Convention are not specifically prohibited under the United Kingdom legislation, and only basic requirements are imposed by law on companies to produce true and fair accounts.”

The DTI (as it then was) stated in its response to the Working Group that it had,

“assessed UK compliance with Article 8 and is confident that the requirements are met under UK company law …”

That is, the accounting regime set out in section 386 (Duty to keep Accounting Records) of the Companies Act (2006) are sufficient to meet Convention obligations in terms of Article 8

The Working Group further observed,

“[A]s regards internal controls and the role of company directors, companies are not obligated to maintain or report on the effectiveness of internal controls.”

It’s interesting to consider the observations of the Working Group set out above in the context of a ‘regulatory action’, which was to come to fruition in the UK in 2009. The Financial Services Authority (FSA) is the sole regulator of “authorised persons”, broadly, financial institutions. The FSA has a number of statutory objectives (see the Financial Services and Markets Act 2000), amongst which is fighting financial crime. It has statutory authority to promulgate ‘rules’ to govern “authorised persons”, in accordance with its remit to further its statutory objectives.

In December 2008 the FSA gave Aon Limited a Decision Notice pursuant to s.206 of the FSMA. This was followed by a Final Notice in January 2009 in which the FSA required Aon to pay a financial penalty of £5.25M (in an agreed settlement). The penalty related to a breach of the FSA’s Principles for Business (specifically Principle 3), which occurred between January 2005 and September 2007.

Principle 3 states that;

“a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”

It is worth quoting directly from the text of the FSA’s Final Notice.

“Aon Limited did not take reasonable care to establish and maintain effective systems and controls for countering the risks of bribery and corruption associated with making payments to non FSA-authorised overseas third parties (Overseas Third Parties) who assisted Aon Ltd in winning business from overseas clients, particularly in high risk jurisdictions. As a result, Aon Ltd made suspicious payments to a number of Overseas Third Parties amounting to approximately US2.5 million and €3.4 million …This gave rise to an unacceptable risk that Aon Ltd could become involved in potentially corrupt payments to win or retain business.”

Two specific issues singled out by the FSA in Aon’s conduct as breaches of Business Principle 3, also feature as “activities” proscribed in Article 8 of the Convention. The first relates to “inadequately identified transactions”. At paragraph 4.24 of the Final Notice the FSA stated,

“Other completed Third Party Agreement forms did not provide any information regarding the nature of the services the Overseas Third Party was performing for Aon Ltd”

The second activity proscribed by Article 8 relates to “the entry of liabilities with incorrect identification of their object”. At paragraph 4.25 (1) of the Final Notice the FSA stated,

“The terms of the agreement did not correspond with what Aon Ltd had been told by its client”.

It is noteworthy that the nature of the censure by the FSA directed at Aon Ltd was not the payment by Aon of bribes to overseas third parties to win or retain business; rather it was their not taking reasonable care to counter the risk of bribery and corruption when making a payment.

The regulatory regime established by the FSA directly links internal controls exercised in the course of business by an “authorised person” and financial crime. That is, without the necessity of the FSA proving the commission of a financial crime, in this case the payment of a bribe, the “authorised person” can be liable to a significant financial penalty. That would seem to be the import of Article 8 of the OECD ‘Convention on Combating Bribery of Foreign Public Officials in International Business Transactions’.

Conclusion

The regulatory regime established by the FSA is not available to the lead enforcement agency (the Serious Fraud Office) policing the Bribery Act, as the SFO is not tasked with a regulatory function similar to that of the FSA.

It would seem that the SFO to achieve the same outcome as the FSA in the Aon case, would have to establish one further step than the FSA were required to before the imposition of a financial penalty. Namely, prove the commission of an overt act of bribery. This would necessitate dealing wtih all of the ensuing evidential and admissibility issues.

It does not seem likely that section 386 of the Companies Act (2006), nor for that matter the terms of section 17 (false accounting) of the Theft Act (1968), could place the SFO in the enviable position of the FSA.

As the Hollywood scriptwriter wrote, “follow the money …” it would seem that the money trail for the FSA to follow is considerably shorter than that of the SFO! The next article will compare and contrast the ‘books and records’ provisions of the FCPA with the Bribery Act 2010.

Faisal Osman Speaks at Butterworths Anti-Bribery and Corruption Conference

Faisal Osman presented a lecture on 'Asset Recovery Across Borders and International Co-operation' at the 2011 Butterworths Anti-Bribery and Corruption Conference in London today.

As well as dealing with the legal basis for international co-operation, Faisal also invited delegates to consider civil actions and whether clients ought to seek redress for losses sustained by 'external' and 'internal' bribery.

The presentations also touched on issues to do with confiscation, enforcement of orders overseas, the use of the London High Court in determining claims for overseas corrupt acts and cases studies where Foreign States have brought claims here.

Click here: to read the paper and here: to download the a .pdf version of the powerpoint presentation.

Guidance on the Bribery Act 2010 Released by Ministry of Justice

Bribery Act 2010 Guidance

The Government's long-awaited guidance on the Bribery Act 2010 has now been released.

A 'Quick Start' Guide has also been produced.

Introducing the Act, Justice Secretary Ken Clarke has confirmed that the legislation will not lead to a large number of prosecutions and will not outlaw corporate hospitality:

"Cases will be brought where they are in the public interest, which will require the personal agreement of the Director of Public Prosecutions or the Director of the Serious Fraud Office,"

"I do not expect a large number of prosecutions and certainly not for trivial cases. The Act should not be used to stop companies from entertaining customers and contacts."

He added:

"The guidance makes clear that no one is going to try to stop businesses getting to know their clients by taking them to events like Wimbledon, Twickenham or the Grand Prix," said Clarke. "Reasonable hospitality to meet, network and improve relationships with customers is a normal part of business."

The Guidance Reads:

"Bona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organisation, better to present products and services, or establish cordial relations, is recognised as an established and important part of doing business and it is not the intention of the Act to criminalise such behaviour,"

The Act will now come into force on 1 July 2011.

The guidance clarifies what is meant by adequate procedures, and said that this would be considered in the light of the size and kind of company involved.

The Justice Secretary added:

"Small organisations are unlikely to need procedures that are as extensive as those of a large multi-national organisation," said the guidance. "A very small business may be able to rely heavily on periodic oral briefings to communicate its policies while a large one may need to rely on extensive written communication."

"Modest risks require modest procedures to mitigate them."

"Small companies ought not fear that they will suddenly need an army of lawyers in order to manage bribery risks."