Corporate directors, already laboring under the weight of expanded regulatory reach in the United States, will soon have more regulation to deal with. The much-debated U.K. Bribery Act could take full effect by September, says European Chair of Litigation Lord Peter Goldsmith, and directors are right to be concerned. Goldsmith should know a thing or two about the Act since he was U.K. Attorney General during its initial formation. Some simple preparations will avert most problems for American corporate board members, Goldsmith said. Better still, years of experience under the Foreign Corrupt Practices Act (FCPA) may put U.S. firms at an advantage.
The Act is not going to go away. Of this Goldsmith is certain. Many business leaders both here in the U.S. and overseas have seen the delay in its release as an opportunity to lobby the government to change or scrap the rule. They fear its broad scope will significantly damage the ability of companies to do business and exposes directors and management to undue risks. “The legislation will not be changed,” he says. “That is not going to happen. It would take too long to do. The guidance is plainly in draft already—we know that.”
When will final guidance be released? Goldsmith expects the government to act this spring followed by a three- or four-month grace period. The delay is, in his eyes, understandable: “The legislation took a long time to build and certain elements, mainly the new provision making it a corporate offence to prevent bribery, were controversial. It was partially sold on the grounds that the government would provide adequate procedures and guidance but when they got into it the guidance was a lot tougher to write than anyone thought. So they are rightly taking their time with it.”
The focus of complaints from business leaders is that the rule is too broad. Unlike the Foreign Corrupt Practices Act (FCPA), which applies specifically to payments made to government officials, the U.K. Bribery Act applies to any individual or group and to almost any type of payment made to encourage someone to conduct business with a company.
The problem, according to opponents, is that there are many legitimate business payments and activities that could fall under the rule. When the rule first emerged, many companies completely ceased the practice of corporate hospitality. Is that a legitimate concern? While sensitive to the concern, Goldsmith does not believe so. He cites the example of a U.K. company that, in the natural course of doing business, brings a potential investor or partner to the U.K. to visit a production facility in the Midlands. The company provides airfare, lodging, food and other related expenses for the duration of the visit. “This would probably not be a problem,” he says. But if the company was to bring the entire family and put them up in a fancy, five-star, no-expenses-spared luxury London hotel, “Well, that will not work,” he says. The obvious problem is that there is so much in between. And, it is exactly this “in between” that managers are concerned about.
“I can understand the concern because the guidance is not there. What is being said is that reasonable and proportionate hospitality is fine but what does reasonable and proportionate mean? That is one of the big issues that the guidance has to deal with and I think it is going to be quite difficult for them [the U.K. government] to deal with it.”
Given the very real likelihood the official guidance will be at best vague on this issue, Goldsmith suggests some simple tests to apply to corporate entertaining expenses:
Be reasonable – would a reasonable person question the size or type of spending? Is it the sort of thing that your auditor will pass without raising an eyebrow? Is it something you could justify easily in public?
While companies are very worried about the potential impact of the Act, Goldsmith points out that perhaps the most important precaution for a company, and especially its board of directors, to mitigate the risk of falling afoul of new laws is to formalise a compliance program. “In short, it is about preparation,” he explains.
Richard Alderman, director of the U.K.’s Serious Fraud Office, has told companies that “if we can see a company that has thought about this and has produced a policy that is internally consistent and that they actually apply then we are very unlikely to criticise them for what they are doing.”
Goldsmith agrees: “Preparation of a robust compliance program is going to be the best defence against all of this”
This is good news for U.S.-based companies that are used to dealing with the FCPA as many of them already have robust compliance and fraud detection programs in place. That takes them a long way down the road to full compliance with the U.K. law. What might be even more important is that, unlike in the U.S. where a compliance plan is not a defence but may garner leniency at sentencing, the mere existence of a compliance program could well be an affirmative defence in the U.K.
Another major criticism of the Act is that it will unfairly handicap U.K. businesses because they are going to be held to a higher standard than other companies operating overseas – the U.K. Act is far broader in its application than the FCPA, for example. The best solution to this, according to Alderman, is an aggressive and unilateral enforcement policy. Alderman has said that prosecuting foreign firms as actively as British firms will protect British business from a possible double standard.
How realistic is that really and how much will the Act apply to foreign companies? As Goldsmith points out, it is very dangerous to assume that U.S.-based firms won’t be subject to the Act. “You may think that just because you only have a small operation in the U.K. you are not subject [to the Act]. That is a mistake.” Anyone doing any sort of business in the U.K. will have to comply with the Act. “It is also important to note that the illegal payments or incentives do not have to be made in England. If there are problems in an operation anywhere in the world, whether or not those payments are related to anything happening at your operation in the U.K., you will be subject to prosecution,” Goldsmith advises.
There are some experts that suggest that the Act can be applied broadly enough to encompass some types of financial transactions. So, even if a company does not have a physical presence in the U.K., but it borrows money from a U.K.-based financial institution, they may be at risk. Some sectors are more at risk than others. The extractive industries – not just oil and gas – are at high risk. Large construction contracts are vulnerable. Problems can be very region specific, too. Africa has traditionally been a huge area of concern as are parts of South America and East Asia. There are some parts of the world where all commercial contracts carry some sort of payment risk.
So what questions should directors be asking to make sure their companies are not at risk? The first is, what’s our compliance program? How recently was it reviewed and who reviewed it? What problems were revealed?”
“Directors ought to be concerned about signing off on the year-end financials, or a prospectus for a rights issue or other such filing,” says Goldsmith. Directors need to ensure there are no potential issues. “Let’s say you are preparing the annual statement and you discover a note that reads, ‘A small problem was discovered in a subsidiary in France. This problem was corrected and it is not material.’ This should immediately send up a red flag and, considering the scope of the new law, directors would be well advised to push management to ensure that problem is isolated and corrected.” It should also be looked at in the context of the U.K. Bribery Act and if there are larger underlying issues.
“In that case, the main board members are going to have a problem. They have effectively been party to a false statement. They had the opportunity to pick it up but allowed it to go unquestioned. That is real trouble for them. It is the biggest decision you have to make because management will ask what else can we do? and the board should push to hire an independent firm to investigate the situation. The existing outside firm may be too close to the issue. The problem is that a full investigation at this stage might take a few months. This would result in a delay in filing results which will lead to considerable shareholder and regulatory unrest. You could even get suspended from the exchange. But you have to do this because those consequences are all less than filing a false statement.”
In the U.K. and other countries, signing a false financial statement would potentially result in directors facing both criminal and civil liability – not through inadvertence but through recklessness or negligence. There have been an increasing number of cases where non-executive directors have found themselves facing personal liability as a result of large lawsuits. In the U.K. the business judgment rule is not a defence.
In short, the Act is going to make things more difficult for corporate directors both in the U.K. and the U.S. They will need to cast a closer eye on all M&A transactions and ask management to consider anti-bribery provisions during due diligence. This will likely require the use of independent outside counsel with specific expertise in the markets and countries in question.
Consistency of reporting is going to be very important. With more active cooperation between international regulators anything a company discloses in one jurisdiction will likely be seen by regulators and shareholders in other countries.
Whistleblowing is going to amplify the problem. Regulators are going to find out more about what is going on within companies. There will be increased revelations about past misdemeanours. What is happening in North Africa and some Middle Eastern countries should be setting off alarms, too. Goldsmith cautions that “with several regimes falling and power changing hands a lot of records and past deeds will come to light. Some of these could identify improper payments or other issues. Boards should be looking very carefully at what the situation in these regions might mean to their company and if special investigations or disclosure might be necessary.”
“It has been quite a tough time for directors and this is going to add to their workload. There are a lot of issues the board will need to look at, especially on the audit committee. Individuals are now facing questions of personal liabilities because they are expected to do more than they have been doing. Maybe a lot of directors do not realise how far their responsibilities reach. They are the custodians of the company and have ultimate responsibility to ensure the interests of the shareholders are being looked after.”
Brendan Sheehan is the editorial director of NACD Directorship and Directorship.com.
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