Anti-Corruption Compliance Programs And Adequate Local Knowledge - Essential Tools For Any International Business

Monday, September 1, 2008 - 01:00

The globalisation of the market place combined with an increase in international regulation (often with significant criminal sanctions for a breach) has led international companies to consider the effectiveness of their compliance policies. These compliance policies not only have to ensure companies adequately comply with legislation and regulation in their own jurisdictions but must comprehensively cover the international market place as well. These companies can no longer ignore the very grave threat that would be posed by a failure to adequately control and police their foreign offices or agents as such foreign dealings could lead to a significant risk of prosecution, particularly in the United States.

It has always been the case that foreign offices of international companies, or international dealings themselves, have led companies to have to consider local laws and customs. However, with the ever-increasing international reach of domestic laws, any breach will have implications both internationally and domestically.

For those companies located outside of the U.S., but with a connection to it, they also need to keep a watchful eye on the Department of Justice and the Securities and Exchange Commission. Even those who have no link with the U.S., but may use their banking systems or trade in dollars, are also within their international reach.

The issues of corrupt practices worldwide, for example, have led the U.S. Department of Justice to take a very aggressive stand, searching out and prosecuting not only U.S. domestic concerns involved in such breaches, but also any companies with a U.S. link to their business or the dealings in the particular case. In other words, they will accept international jurisdiction to investigate and prosecute alleged offences even where an alleged corrupt transaction has no link itself with the U.S. marketplace.

The U.S. has led the way in this regard. Most European-based companies often fear the U.S. Department of Justice more than their own domestic prosecution authorities. Such fear is based upon a very real threat of both civil action in the U.S. and criminal sanctions there as well. No CEO of an international company based in Europe, for example, will want to risk the threat of extradition to the U.S. and a potential jail sentence.

In the post-Enron world, the Department of Justice and the Securities and Exchange Commission prioritised corruption as an area where they needed to take a lead role internationally. The strict regime imposed in the U.S. by the Foreign Corrupt Practices Act of 1977 ("FCPA") was felt to place U.S. companies at a disadvantage internationally where a more "laissez faire" attitude appeared to apply. Their frustration grew when it appeared other countries, particularly in Europe, were failing to adequately prosecute those involved in corrupt activities. They felt that many European countries were turning a blind eye to corrupt practices, particularly those committed outside of the home jurisdiction.

The history of combating foreign corrupt practices began in the U.S. The FCPA appeared on the statute book long before many countries were considering the matter an issue of importance. It was the U.S.-led campaign in tackling corruption that led to the Organization for Economic Co-operation and Development ("OECD") negotiating in 1997 an agreement with the major trading partners of the U.S. to enact legislation with similar terms to the FCPA. As a result of this agreement, 33 countries signed up to the OECD "Convention on Combating Bribery of Foreign Public Officials in International Business Transactions."

Whilst many international jurisdictions are now catching up with the U.S. in enacting legislation to combat corrupt activities abroad and are beginning to take appropriate action, it is the U.S. authorities who have been the most aggressive historically in taking action and are the most feared internationally.

The far reach of the U.S. authorities in this regard and their increased efforts to obtain enforcement assistance abroad, and the "catch up" of other jurisdictions, has led both U.S. and non-U.S. based companies to have to review their compliance procedures to ensure they are compliant not only with the FCPA but also with the laws and customs of the particular jurisdiction.

Further, the FCPA has created successor liability, meaning that those companies taking over another become liable for corrupt activities that have occurred before the purchase. A good example of this was the French Communications firm "Alcatel-Lucent," which in 2007 paid a fine of $2.5 million for bribes Lucent paid to Chinese officials between 2000 and 2003. They were liable for these fines even though they did not acquire the company until 2006.

All this means that both U.S. and non-U.S. entities need to be conversant and compliant in the anti-corruption regime and need to ensure the international reach of such a compliance program. Such a program needs to ensure adequate local training and a key understanding of local laws and customs.

BAE And The Lack Of Prosecutions For Bribery World-Wide

A classic example of the way in which the Department of Justice will investigate allegations of corruption, which have been investigated but not prosecuted in other jurisdictions, occurred in the British investigation into BAE Systems, Britain's largest arms manufacturer. It has been alleged that BAE was involved in corrupt practices with the government in Saudi Arabia to ensure lucrative arms contracts. The investigation was abandoned in the UK on national security grounds.

Since then, the Department of Justice has been pressuring BAE Systems to cooperate in their own investigation. This has led to Mike Turner, BAE's chief executive, and Sir Nigel Rudd, a non-executive director, being served with subpoenas when they arrived in the United States in March.

Further, Transparency International released a report earlier this year which criticises many countries, including Britain, Canada, Italy and Japan, for what it states is a lack of political will to tackle the bribery issues.

By contrast, the United States and Germany were praised for being at the very forefront of investigating and prosecuting corruption. In 2007, Germany secured nine court convictions. It has also targeted Siemens, which has admitted that up until 2006, ¤1.3 billion ($2 billion) was unaccounted for, having gone through various funds.

The United States has seen a dramatic increase in FCPA prosecutions. In 2003 there were only two such prosecutions, but by 2007 this had risen to 18.

The pressure is now on for all western countries to follow the examples of Germany and the United States.

Developing Compliance Programs

Clearly, more corruption investigations are likely in the future, both in the U.S. and elsewhere.

Most U.S. entities will have devised a compliance program that deals with FCPA issues. However, such programs alone are inadequate unless they are backed up with suitable contractual control of local agents, a realistic approach to facilitation payments and adequate training worldwide.

In a difficult economic period, remaining competitive and winning contracts will place an ever-increasing burden on companies to ensure their compliance procedure does not simply involve reliance on local agents and staff to follow the "anti-corruption" manual. It is exactly in such an economic downturn that a proper understanding of both the FCPA and local laws and customs will be paramount to ensure compliance with the law but at the same time give that company an ability to maintain a competitive approach to business.

For example, many businesses will have maintained a "zero tolerance" approach to issues such as facilitation payments. They have devised a policy that ignores the defences contained in the FCPA because policing such payments has proved very difficult, and they have wanted to ensure no threat from prosecution. The very real fear of action is understandable. Such payments have only been allowed in very limited circumstances, unconnected with the FCPA's exception. For example, companies have only allowed such payments where they have preserved life.

Whilst a zero tolerance approach may have been an acceptable one in a period of economic growth, when the economy retracts or enters recession, companies may not wish to reject a contract if facilitation payments are legal under all applicable laws.

They may want to ask, "Are they for purely administrative matters? If so, are they legal and how should they be recorded?" In difficult market conditions there is, for example, an increasing necessity to understand the parameters of any anti-corruption legislation. Under such circumstances, companies may not want to simply reject contracts where facilitation payments are required. After all, such payments may be totally legal and a failure to act could lead to a competitor winning the contract. Companies will want to properly understand what constitutes facilitation payments for routine governmental action. Where such payments are to be made as part of a contract, a company will want to ensure it has taken the appropriate legal advice and protected itself from the risk of any form of action.

A Strategy For The Future

In areas with cross-jurisdictional implications such as U.S. Export Control laws and anti-corruption laws, the ability to seek the most effective advice is essential. This is where Eversheds can assist with an international reach that ensures the most up-to-date local knowledge. Our offices, associated offices and best friend firms ensure coverage across Europe (including Eastern Europe), Asia, the Middle East andAfrica. We are involved daily in projects where advice is required across multiple jurisdictions.

Whatever the compliance issues that may affect a business, the ability to oversee matters at a global level has to be the way forward. Any company operating across jurisdictions will want to ensure that any policy is properly managed and covers the areas it needs to. Local expertise and knowledge is vital but only where such expertise can be integrated into an international policy and properly supervised. After all, breaches of policy in distant locations is no defence to a breach of the FCPA for example, and such breaches can often bring a company to the attention of a prosecuting authority like the Department of Justice that is located many thousands of miles away from the breach.

Neill Blundell is a Partner with Eversheds LLP. He is head of financial crime and a highly experienced fraud and regulatory lawyer who is able to advise clients on the interface between business and regulatory practice and the criminal law.

Please email the author at neillblundell@eversheds.com with questions about this article.