When the UK’s Bribery Act of 2010 was passed, one particular facet of the law caught the attention of the private equity industry. Section 7 created a new offense whereby commercial organizations could be charged with a failure to prevent bribery, so that GPs may be held responsible for a portfolio company’s misdeeds.
Since the law took effect in July 2011, no private equity firm has been charged under Section 7, though that may be about to change. “The transitional and implementation period is over and now the government is making enforcement a priority,” warns Stephen Fox of the law firm Weil, Gotshal & Manges.
Recently, the UK government has revealed not just how it intends to enforce the Bribery Act, but also that it will be using Section 7 as a model for additional legislation that holds companies responsible for failing to prevent other economic crimes. Initiatives that are part of the Anti-Corruption Action Plan released late last year suggest GPs might be targeted. Many private equity firms have already paid close attention to the Ministry of Justice’s six principles in crafting a compliance program, though experts suggest there remain blind spots that GPs should address before the regulator comes knocking.
And it appears that regulator will arrive, as the Prime Minister, the new Attorney General and the Financial Conduct Authority (FCA) have all stressed that curbing bribery and other economic crime is a key priority, by enforcing current laws and crafting new ones.
Back at the G8 summit in 2013, David Cameron proposed an anti-corruption agreement that would force companies to become fully transparent as to who owns them. He’s gone on to lobby for similar agreements among the G20, including one that would create a public registry that would name who “truly” owns companies in these countries.
However, the EU Commission’s President Jean-Claude Juncker has failed to endorse a similar measure that would create a public registry of company and trust owners in all 28- member states. That said, the EU Commission did release its first anti-corruption report in 2014 that reviewed each member state’s nature and level of corruption, and the effectiveness of measures taken to fight it. At the moment, the UK Bribery Act is widely viewed as one of the strongest anti-corruption laws on the books today.
And apparently, the UK isn’t resting on its laurels. This past September, in one of his first speeches as the UK’s newly appointed Attorney General, Jeremy Wright announced the government is considering proposals for the creation of an offense of a corporate failure to prevent economic crime. This would include crimes such as money laundering, tax evasion and fraud. It was initially proposed by David Green, the head of the Serious Fraud Office back in 2013 and would greatly expand his powers to pursue such offenses beyond the employees or agents directly committing these crimes.
A few months later, the UK issued its Anti-Corruption Action Plan that reported actions taken to date and plans for the future. A large portion of the plan was devoted to how multiple agencies would work together to enforce existing laws and how such efforts would be funded. But there were several new measures suggested; some of which are moving through Parliament at the moment.
According to the law firm King & Wood Mallesons, one measure being proposed is a register of people with significant control or ultimate beneficial ownership over a company. The intention is to create enhanced transparency to tackle corruption, tax evasion and the laundering of proceeds of crime. “Even if GPs aren’t directors or non-execs, it could be construed that they have significant control over the company. This has already been expressed to us as a concern of GPs who are monitoring closely how the central register – potentially accessible to the public through Companies House – will look once enacted,” says Ian Hargreaves of the firm.
The British Private Equity & Venture Capital Association is currently reviewing the Action Plan and preparing its suggestions, but regardless, there will be greater transparency as to who owns a particular company, and who might be considered responsible for failing to prevent economic crime.
Most recently, the Financial Conduct Authority (FCA) announced in its business plan for 2015/ 2016 that “financial crime prevention” will be one of its seven “key areas of focus.” This means that in the coming year, the FCA will be taking a closer look at firms’ programs and controls to prevent fraud, bribery and other financial crimes. But what kind of program would stave off charges of failing to prevent these crimes?
The Bribery Act explains the only defense to the offense created by Section 7 is to prove that adequate policies and procedures are in place at the time of the alleged act. So the Ministry of Justice issued six principles to guide the creation of programs, which include: risk assessment; proportionate procedures; communication (including training); proper due diligence; top level commitment and ongoing monitoring and review of that program.
Several market participants say that one reason for the lack of charges leveled under Section 7 is that companies took these principles to heart, though there are some ways companies may still leave themselves open to prosecution.
One is the quality of counsel. “A huge anti-corruption industry has sprung up in recent years but the expertise of consultants can vary considerably,” says Simon Airey, head of investigations and compliance at DLA Piper, a London-based law firm. An adviser should have sufficient experience and sector knowledge to properly gauge the potential for corruption, and that includes “hands on” experience of enforcement action. “Ask how many bribery investigations they have participated in, how they were resolved – and at what cost,” says Airey. Experts suggest consultants might offer helpful insights into an industry or geography, but they should always be paired with a law firm’s counsel.
When conducting any sort of due diligence, experts stress its hard to overestimate the importance of third party management. “Most companies have controls in place to avoid bags of money leaving the treasury as bribes, but bags of money are routinely paid to consultants, sales agents, and distributors,” says Jason Hungerford of the law firm Norton Rose Fulbright. “That’s the number one blind spot, and it’s the biggest risk.” The best programs include a rigorous policy for vetting and working with any third parties.
“Top level commitment” is a particularly vague principle. One lawyer quipped that it’s more than putting the chief executive’s face on the compliance manual. “In terms of senior management, they should undertake training the same as any employee, be involved in the initial risk assessment and ongoing monitoring, and be actively involved in approving policies,” says Fox. He also suggested there should be a senior level contact nominated to be responsible for bringing reports or concerns to management or the board.
And while most companies have lengthy compliance manuals, quite a few lack any meaningful ways to monitor and review if the company is actually following them. “Training is important, but you should also be able to generate a record of the more substantial measures you have taken – such as third-party management processes – so you can prove that the employee in question, is, in fact, an outlier,” says Hungerford. “A policy is a promise by the senior management and the board about how the company will act, and you must find a way to implement it credibly.” And given the recent pronouncements from the UK, someone is on their way to ensure that promise is kept.