UK bribery law will mean more due diligence

An anti-bribery rule coming into effect in the UK later this year will likely mean more due diligence for funds with businesses in the country, lest they find themselves dealing with the same headaches as some firms in the US amid the recent pay-to-play scandal.

The new law goes farther than merely making it illegal to bribe a public official, it also says that corporate entities will be held liable for failing to prevent employees, agents, intermediaries or joint venture partners from offering a bribe on their behalf to win or retain business.

The fact that such crimes were committed without their knowledge would not be considered an acceptable defense unless they can argue that they had adequate procedures in place that were breached.  Unfortunately, the UK’s Serious Fraud Office (SFO) has not given much guidance about what they would consider to be “adequate procedures”, which can be especially worrisome as private equity funds are often considered deep-pocketed and high-profile targets for prosecutors in corruption cases.

Shaistah Akhtar, partner in the litigation and dispute resolution group at SJ Berwin, says that absent such guidance, private equity funds and their portfolio companies should go beyond just adopting a typical code of compliance, including putting in place appropriate financial controls relating to gifts, expenses and corporate hospitality. Proper staff training, continual monitoring and the establishment of clear reporting lines between staff and senior management is also advisable, as is designating a single person to be responsible for overseeing all anti-bribery compliance matters.

“The SFO is likely to look at what the culture of an organisation is, that is if you have a culture of compliance, ongoing training of new and existing employees, monitoring and compliance processes, internal checks and controls,” Akhtar said. “On the other hand, you can have the best anti-corruption programme in the world and still have a rogue employee or associate. You can’t stop that from happening but the critical thing is how you deal with this problem.”

This may include undertaking an internal investigation as well as involving external advisers, and self-reporting to the authorities. “For example, if the SFO picks up a report in the press or an employee whisleblows, and it is discovered that you knew about this problem or suspected it but chose not to engage with the authorities, that will probably impact on the penalty you receive,” she said.

Firms should be especially careful in countries in areas like Africa and the Middle East where such corruption is rife, although those with UK portfolios that have a US connection should also careful due to the potential exposure to the US Foreign Corrupt Practices Act. A 2007 case involving Vetco Gray UK, which was acquired by JP Morgan, 3i and Candover, highlights such dangers.

The US Department of Justice issued a record fine of $26 million on the company after it was discovered that bribes being paid to Nigerian government officials – as part of an effort to win oil exploration contracts – were coordinated through Vetco Gray Control’s Houston, Texas office. It also ordered the company to hire an independent monitor at its own expense and conducted further investigations of its activities in other countries, which became binding on any future purchaser of Vetco Gray UK.

Akhtar said such examples demonstrates the need for ensuring appropriate due diligence is undertaken on any acquisition in the UK, and that companies should be aware of the risk they face especially in dealing with the US. “If you put money through a US clearing bank or have any kind of connection with a US territory you are opening yourself up to the jurisdiction of US authorities,” she said.

While the push for the stricter anti-bribery law originated before the recent pay-to-play scandal, the new law also comes as firms in the US such as The Carlyle Group, Riverstone Holdings and HM Capital Partners have had to pay fines and/or adopt a code of conduct after getting caught up, directly or tangentially, in an ongoing investigation involving kickbacks to obtain investments from the $109 billion New York State Common Retirement Fund (CRF).

Such impacts underscore the need for firms making investments in the UK to ascertain whether placement agents, advisers or consultants conducting business on their behalf are conducting appropriate due diligence, training and monitoring.