Compliance With The Sarbanes-Oxley Act By Multinational Companies: Challenges For The American General Counsel

Tuesday, March 1, 2005 - 01:00
Herbert Smith
Richard Fleck
Clint Keller

The Sarbanes-Oxley Act has expanded the role of the general counsel in promoting good corporate governance. As the general counsel will usually be asked to provide assistance to the CEO and CFO so that they may in good faith certify the company's annual and quarterly reports, the general counsel must work with executives to ensure that oversight controls are in place that will result in all events requiring disclosure being reported.

The American general counsel of a multinational company faces complexities in addition to those encountered by his purely domestic counterpart. He must anticipate legal problems that are peculiar to the individual jurisdictions in which his company has operations and design corresponding oversight controls. As an American lawyer, the general counsel will quite naturally tend to focus on US legal matters. It is important that he recognize the potential pitfalls posed by foreign laws that differ markedly from US law and design oversight controls that sufficiently incorporate the advice of foreign legal counsel, either internally or externally.

The following sections highlight certain provisions of UK law that might result in an event requiring disclosure by a US company operating in the United Kingdom but which, because there are no analogous provisions under US law, may be overlooked by an American general counsel. This discussion is not intended to be exhaustive but merely to illustrate the difficulties of complying with the Sarbanes-Oxley Act when a company operates in multiple jurisdictions.

Money Laundering

The Proceeds of Crime Act (the "POCA"), which came into force in February 2003, expanded the definition of money laundering and changed significantly the potential effect of money laundering regulations on companies operating in the United Kingdom.

  • The definition of money laundering has been expanded to encompass any crime that results in proceeds. As this definition includes any crimes that result in saved costs, violations of environmental and health and safety regulations may also be considered money laundering.

  • Auditors and attorneys are required to report to the authorities if they have knowledge or suspicion or reasonable grounds to suspect that a money laundering offense has been committed. For example, attorneys working on a real estate sale where the purchaser's source of wealth and source of funds for the transaction is unclear may be required to report this fact to the authorities. Companies operating in the United Kingdom face the risk that their transactions may be held up by attorneys complying with these whistleblowing duties.


English anti-bribery provisions are broader in certain key respects than the Foreign Corrupt Practices Act (the "FCPA").

  • While the FCPA only applies to payments made to foreign government officials, political party officials, and candidates for a foreign political office, English law also prohibits corrupt payments to foreign private sector employees.

  • The FCPA includes an exemption for "facilitating payments" - payments made to expedite or secure the performance of routine governmental actions. English law contains no such exemption.

  • The FCPA does not impose penalties for conduct that is lawful under the written laws and regulations of the foreign country where it occurs. English law does not provide for this defense.


Employees in the United Kingdom have a whole host of statutory rights that could easily be overlooked by US counsel more familiar with the concept of employment at will.

  • UK employees have rights to minimum notice of termination and often will have contractual notice rights exceeding the statutory rights. Employers may be exposed to employee claims for compensation (or, rarely, reinstatement or re-engagement) unless they can show that a dismissal is for one of five potentially fair reasons and is procedurally fair.

  • There are various rights to family-related leave and obligations to pay statutory sick pay and statutory maternity/paternity/ adoption pay, in addition to protection against various forms of discrimination.

  • Where employees are being acquired as part of a "transfer of an undertaking" as defined in the Transfer of Undertakings (Protection of Employment) Regulations 1981 (e.g. as part of a business acquisition), they have the right to have employee representatives informed and consulted and they transfer with all their terms and conditions of employment intact. This can lead to a number of difficult issues. For example:

  • variations of employment terms are ineffective if transfer-connected even where agreed with the employee;

  • replicating incentive scheme rights may be problematic;

  • with effect from April 2005, employees who had occupational pension rights with their old employer must be offered certain minimum pension rights by their new employer;

  • some companies will also be subject to collective bargaining obligations with trade unions and/or obligations to inform and consult a works council on other issues;

  • there are similar information and consultation rights where collective redundancies are proposed.

Intellectual Property

For companies with a heavy reliance on intellectual property, differences between US and UK intellectual property laws can give rise to significant issues affecting value and possibly requiring disclosure. For example:

  • Unlike in the United States, where the initial inventor is given priority in claims for patent protection for an invention, in the United Kingdom the first person to file an application obtains the patent for an invention, regardless of when it was invented or by whom. In the United Kingdom, there is no US-style grace period allowing other inventors to demonstrate that they created the same invention at an earlier date and so secure the patent protection ahead of the first-to-file competitor. US corporate counsel for a company operating in the United Kingdom would need to anticipate this issue and arrange for European patent applications to be made promptly, especially in situations where market competitors are likely to be close behind.

  • Companies operating in the United Kingdom will be affected by the special protection in the United Kingdom for databases, UK legislation relating to data protection and European regulation of consumer contracts. If separate English law advice is not sought on this legislation, then UK operations could be drastically affected. For example, European database right protection is only afforded to non-European Union databases if they originate in countries which offer reciprocal protection for European databases. The United States does not currently offer such reciprocity and so US databases will not enjoy UK database rights. US counsel needs to be aware of such differences as an alternate infringement/enforcement strategy based more on copyright and contract than database rights may well be necessary.


The appropriate response to the challenges posed by operating in multiple jurisdictions will obviously depend upon the situation of the individual company but will necessarily involve seeking advice from foreign legal counsel. Depending upon the size of a company's foreign operations and the number of foreign legal counsel available internally, companies may consider approaches ranging from merely involving external foreign counsel in discussions of oversight controls to employing foreign counsel to design, implement and enforce such controls. As the examples provided above illustrate, failure to take into account unique foreign law issues when designing oversight controls and providing disclosure could result in material events being left undisclosed.

Richard Fleck is Herbert Smith's worldwide Practice Partner, based in London. Clint Keller is an Associate in the firm's US Securities group.

Please email the authors at or Clint.Keller@herbertsmith.comwith questions about this article.

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