The Bribery Act in 2012: a Year for Transition

The past year has been one of transition for the UK Bribery Act and the Serious Fraud Office (SFO). The transitions began with the appointment of David Green QC, as Director of the SFO. Green’s appointment brought a different focus to the SFO regarding the enforcement of the Bribery Act. At the start of his four-year term David Green released a statement to the press in which he said, in part, “The SFO is here to stay. It is and will remain a key crime fighting agency targeting top-end fraud, bribery and corruption. We will play our part in maintaining in the national interest a level playing field for investors and the business community. We will work cooperatively with others in the emerging counter-fraud landscape. We will press for all the tools necessary to maximise our impact. The SFO will be tough but approachable. I am delighted to take on the leadership of the agency at this exciting and challenging time. There is much to be done.”

This change in tone was perhaps responding to a critical report by Transparency International (TI) in its 8th annual progress report on OECD Convention enforcement, entitled “Exporting Corruption”. While the TI report focused on anti-corruption efforts across the globe, it did state that “The UK Government must strengthen its anti-bribery effort by ensuring that the Serious Fraud Office (SFO) has adequate resources to investigate and prosecute bribery”. Although TI noted that under the Bribery Act, prosecutions had increased over the past year, “cutbacks to the SFO could see a decline in future UK enforcement. The Government has cut more than a third of the SFO’s budget in the last four years, hampering the prosecutor’s ability to tackle complex and damaging bribery cases.” Chandu Krishnan, Executive Director of Transparency International UK, was quoted in a Press Release as stating, “If the Government is serious about fighting corruption, it should not be cutting resources for enforcing the legislation designed to do just that. We must ensure that the SFO is not outgunned by those it should be prosecuting, who incidentally can usually afford the best legal advice available. The SFO should never be in a position where it is unable to investigate and prosecute cases due to a lack of resources.”

I.                   Change in Tone at the Top

This new tone was a departure from the prior Director Richard Alderman. This noticeable change began in earnest in September with the statement by Director Green, that his agency has no real interest in pursuing cases concerning corporate hospitality under the Bribery Act. He was quoted as saying “We are not interested in that sort of case. We are interested in hearing that a large company has mysteriously come second in bidding for a big contract. The sort of bribery we would be investigating would not be tickets to Wimbledon or bottles of champagne. We are not the “serious champagne office.”” This was followed by the removal from the SFO’s website of pages for its guidance on facilitation payments and corporate hospitality. Then in October, the SFO published their position in relation to facilitation payments, corporate hospitality and self-reporting. As noted by Barry Vitou and Richard Kovalevsky, QC, writing in thebriberyact.com, “The honeymoon is over.” They went on to say that “The revised guidance is a model of clarity.  The new Director has previously made his position clear namely that the SFO is not there to provide guidance and those seeking it should liaise with their advisers.”

II.                The New Guidance

In a Press Release announcing this new guidance the SFO stated that “the Serious Fraud Office has reviewed its policies on facilitation payments, business expenditure (hospitality) and corporate self-reporting. The purpose is to: (1) restate the SFO’s primary role as an investigator and prosecutor of serious or complex fraud, including corruption; (2) ensure there is consistency with other prosecuting bodies; and (3) meet certain OECD recommendations.” The new guidance discussed three areas that companies need to address in their compliance programs. These were self-reporting, business expenditures and facilitation payments. Writing in the Bribery Library, Adams Greaves said “the guidance reinforces a widely held belief by the legal profession that Mr. Green is likely to prove to be a much tougher prosecutor than his predecessor Richard Alderman, who had (perhaps a little unfairly) acquired a reputation for seeking civil settlements with corporate defendants rather than prosecuting them through to trial.”

Self-Reporting

The SFO stated that it will prosecute a company if it is in the public interest to do so. The fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the Guidance on Corporate Prosecutions. The Guidance explains that, for a self-report to be taken into consideration as a public interest factor tending against prosecution, it must form part of a “genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice”. However, the SFO cautioned that self-reporting is no guarantee that it would not prosecute and emphasized that each case would ‘turn on its own facts.”

Business Expenditures

The SFO recognized in the new Guidance that bona fide hospitality, promotional or other legitimate business expenditure is recognized as an established and important part of doing business. It is also the case, however, that bribes are sometimes disguised as legitimate business expenditure. However, the SFO would prosecute if there was a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. The SFO could also use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution.

Facilitation Payments

In the area of facilitation payments, the SFO was very clear that it considers facilitation payments as a type of bribe. It provided the example where a government official is given money or goods to perform, or speed up the performance of, an existing duty. The SFO emphasized that facilitation payments were illegal before the Bribery Act came into force and they are illegal under the Bribery Act, regardless of their size or frequency. This SFO position basically restates the UK legal position and the various tests the SFO will use when weighing prosecution.

III.             The Rolls-Royce Investigation

One of the areas of criticism of the SFO has been the lack of prosecutions. This may have an effect on the SFO in the recent announcements by Rolls-Royce that it is investigating allegations of bribery. In December, the BBC online service reported that Rolls-Royce was in talks with the SFO regarding potential allegations of bribery and corruption in Indonesia and China. It was reported that this investigation began when the SFO requested information from Rolls-Royce about possible bribe-paying in those two countries. This prompted Rolls-Royce “to bring in a legal firm to conduct an internal investigation earlier this year, which uncovered potential misbehaviour in other countries as well as the two named by the SFO.” The FT has also reported that Rolls-Royce has now retained Lord Gold for a review of its compliance on a world-wide basis.

Such a high profile UK company and investigation will certainly test the mettle of the SFO regarding prosecutions of UK entities. While the FT noted that Lord Gold was brought in by Rolls-Royce “precisely to avoid the costs” that the British company BAE incurred in its massive scandal and to perhaps make a “radical change” in not only Rolls-Royce but the entire British aerospace industry, if there are allegations of bribery and corruption substantiated by the internal investigation and Rolls-Royce is not prosecuted, it may make companies less inclined to follow the strictures of the Bribery Act.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

Socio-Economic and Cultural Risk Factors That Drive Corruption: A Focus on the ‘Supply Side’ of the Equation

Ed. Note-today we conclude a three-part series by our colleague Mary Shaddock Jones on occupational fraud. 

This is the last installment of my three party series regarding Occupational Fraud.  One can never lose focus on what I consider the key question as they enter or play within the international arena:  What are the socio-economic and cultural risk factors that make companies and individuals conducting business in a particular location more vulnerable to possible corruption schemes?   We cannot adequately address corruption unless we address both the “supply side” and the “demand side”. Yesterday we considered the “Demand Side” of the equation.  Today we will focus on the “Supply Side”.  If your company has a clear policy against corruption- why would your employees risk losing their jobs or worse, going to jail by violating these laws?

A side benefit to being married to a CPA and a Certified Fraud Examiner is the ability to read not only legal and compliance magazines on a monthly basis- but also the Journal of Accountancy and the publications from the ACFE society.  I loved the August 2012 cover of the Journal of Accountancy- “Think Like a Thief”! There were three very pointed articles contained in this publication:  (1) Fraudsters Reveal Weaknesses They Exploited; (2) Detecting a Criminal Mind Before It Strikes; and (3) Antifraud Controls Can Benefit Small Businesses.   In addition to this publication, I will be examining some of the conclusions recently published in the “Report to the Nations on Occupational Fraud and Abuse- 2012 Global Fraud Study” which is recognized as the authoritative annual national report on fraud

Considering the “Supply Side” of the Equation:

The fraud triangle is a model for explaining the factors that cause someone to commit occupational fraud. It consists of three components which, together, lead to fraudulent behavior:  (1) Pressure; (2) Opportunity and (3) Rationalization.

Pressure- According to the ACFE, the first leg of the fraud triangle represents “pressure”. This is what motivates the crime in the first place.  The individual has some financial problem that he/she is unable to solve through legitimate means, so he or she begins to consider committing an illegal act, such as stealing cash or falsifying a financial problem, or entering into an improper payment (perhaps thinking of the bonus he or she will get if they land a lucrative contract for their employer) as a way to solve their problem.   The 2012 ACFE report concluded that “Most fraudsters exhibit behavioral traits that can serve as warning signs of their actions. These red flags — such as living beyond one’s means or exhibiting excessive control issues — generally will not be identified by traditional internal controls. Managers, employees and auditors should be educated on these common behavioral patterns and encouraged to consider them — particularly when noted in tandem with other anomalies — to help identify patterns that might indicate fraudulent activity.”  The report found that “More than three-quarters of the frauds in our study were committed by individuals in six departments: accounting, operations, sales, executive/upper management, customer service and purchasing.

Opportunity- The second leg in the fraud triangle is perceived as “opportunity”, which defines the method by which the crime can be committed.  The person must see some way the he or she can use (or abuse) their position of trust to solve their financial problem with a low perceived risk of getting caught.

Rationalization- The third leg of the fraud triangle is “rationalization”. According to the ACFE, the vast majority of fraudsters are first time offenders with no criminal past; they do not view themselves as criminals. They see themselves as ordinary honest people who are caught in a bad set of circumstances. Consequently, the fraudster must justify the crime to himself in a way that makes in an acceptable of justifiable act”.  Again, according to the ACFE, the most common rationalizations fraudsters use include a) I was only borrowing the money; b) I was entitled to the money; c) I had to steal to provide for my family; d) I was underpaid; my employer cheated me and e)  My employer is dishonest to others and deserved to be fleeced.

As discussed in the first part of this series, Occupational Fraud is broader than just anti-corruption as it relates to the Foreign Corrupt Practices Act or the U.K. Bribery Act.  However, the motivating factors and conclusions reached in the 2012 Global Fraud studies should be examined by companies when examining its overall anti-corruption risk profile.

I will end this series by listed two of the conclusions and recommendations contained within the 2012 Global Fraud Report which I believe are excellent advice:

“Targeted fraud awareness training for employees and managers is a critical component of a well-rounded program for preventing and detecting fraud. Not only are employee tips the most common way occupational fraud is detected, but our research shows organizations that have anti-fraud training programs for employees, managers and executives experience lower losses and shorter frauds than organizations without such programs in place. At a minimum, staff members should be educated regarding what actions constitute fraud, how fraud harms everyone in the organization and how to report questionable activity.”

“Our research continues to show that small businesses are particularly vulnerable to fraud. These organizations typically have fewer resources than their larger counterparts, which often translates to fewer and less-effective anti-fraud controls. In addition, because they have fewer resources, the losses experienced by small businesses tend to have a greater impact than they would in larger organizations. Managers and owners of small businesses should focus their anti-fraud efforts on the most cost-effective control mechanisms, such as hotlines, employee education and setting a proper ethical tone within the organization. Additionally, assessing the specific fraud schemes that pose the greatest threat to the business can help identify those areas that merit additional investment in targeted anti-fraud controls.”

What is your company’s risk for corruption?  When is the last time that you conducted a risk assessment for corruption? As yourself these questions:

1. Do you have a Code of Conduct?
2. Do you have a policy which clearly addresses the company’s position on anti-corruption? If so, is the policy easily accessible to your employees in their native language?
3. Do you have an anonymous reporting system or other method in which employees can elevate concerns relating to occupational fraud to the appropriate person within the company?
4. Do you provide any type of meaningful training on fraud and corruption to your employees?
5. Do you have internal controls to prevent and detect fraud or corruption within your organization?

________

Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries. She was the first woman to earn TRACE Anti-bribery Specialist Accreditation. Mrs. Jones has extensive experience in creating and designing compliance programs to reduce the risks of such violations, including policies and procedures, educational and training materials and programs, contract provisions and due diligence protocols. She implements and works with in-house counsel and compliance vendors to execute compliance policies and training programs tailored to the client’s business structure and the market conditions in the client’s target countries.  She can be reached at 337-513-0897 or via e-mail at msjones@msjllc.com. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.