Rooting out corruption

Chinese outbound investment has reached record levels. Companies that once focused solely on the domestic Chinese market are now investing, and operating, in markets around the world. These activities present tremendous commercial opportunities and many Chinese corporates have become global leaders in their sector. However, with this growing presence in the global marketplace also comes increased risk. Many of these companies operate in emerging markets across Asia, Africa and the Middle East. Every day they are faced with significant corruption-related issues.

In order to protect themselves, Chinese companies must assess the relevant laws and regulations and take appropriate measures to mitigate their risk exposure. This means not only assessing their risk under the PRC Criminal Law (中华人民共和国刑法) and the anti-corruption legislation of the host country, but also looking as well to anti-corruption laws from other jurisdictions where the Chinese organisation may have operations and determining whether those laws subject the organisation to an additional level of risk. One such law is the UK Bribery Act (the “Bribery Act” or the “Act”).

The Bribery Act has the potential to become one of the toughest anti-corruption regimes in the world. Unlike its better known American counterpart, the Foreign Corrupt Practices Act (FCPA), the Bribery Act prohibits bribery in both the public and private sectors, and imposes penalties on both bribe payers and recipients. The Bribery Act also lacks the FCPA's exception for “facilitation payments,” for example, payments made to secure routine governmental action to which the payer is already legally entitled, as well as its affirmative defence for payments that constitute reasonable and bona fide business expenditures incident to an existing governmental contract or the promotion of goods and services. Perhaps the most significant difference between the Bribery Act and the FCPA is the provision imposing criminal liability on organisations that fail to prevent bribery within their ranks. This offence, coupled with the Bribery Act's broad extra-territorial reach, has the potential to significantly impact Chinese organisations operating in the international marketplace.

The Bribery Act

The Bribery Act came into force on July 1 2011 and created four new bribery-related offences. The Act significantly altered the UK's legal framework for combating bribery by introducing a broad extra-territorial application to organisations with a close connection to the UK or which carry on a business in the UK. In some cases the Act has removed the need for enforcement authorities to prove that conduct was either corrupt or dishonest. Organisations that engage in such conduct are liable for an unlimited fine, while individuals can be imprisoned for up to 10 years and/or face an unlimited fine.

Offences for active and passive bribery

The Bribery Act's first and second offences apply to conduct in both the public and private sectors. The first offence is that of “active” bribery. It prohibits offering, promising or giving a financial or other advantage (directly or indirectly through a third party) to another person while intending to induce that person to improperly perform any function of a public nature or otherwise connected with a business. It is not necessary that the improper payment or activity is performed in, or has any connection with, the UK. All that is necessary is that the offender has a “close connection” with the UK. Any subsidiaries of a Chinese organisation that are incorporated in the UK will have this “close connection” and are therefore subject to jurisdiction of the Bribery Act for misconduct occurring anywhere in the world. Any employees of a Chinese organisation holding a UK passport, or who are ordinarily resident in the UK, are also subject to the Act's jurisdiction.

The jurisdictional requirements for the second offence are equally broad. The second offence is “passive” in nature and prohibits requesting, agreeing to receive, or accepting a bribe. The benefit requested or received need not be for the party requesting the bribe. Indeed, the request or acceptance can be made through a third party. Also of note, while the first offence requires that the bribe payer intend to induce the recipient to improperly perform his duties, the recipient can be guilty under the second offence regardless of whether they knew their performance was improper.

Offence for bribery of a foreign public official

Notwithstanding the extra-territorial scope of the first and second offences, the Bribery Act also contains a separate and distinct offence of bribery of a foreign public official in order to obtain or retain business or obtain an advantage in the conduct of business. Like the first offence, the third offence will be implicated regardless of whether the payment is made directly or indirectly through a third party. Unlike the first offence, it is not necessary that the payer intend for the public official to improperly perform their role. It is sufficient that the payer sought to influence that official in the performance of their duties. This is a key point that highlights the differences between the Bribery Act and the FCPA. The Act does not allow for an FCPA-style affirmative defence for payments that are a reasonable and bona fide business cost. Reasonable and bona fide hospitality and promotional expenses are often designed to influence officials who are making business decisions. These costs are covered under the FCPA's affirmative defence because they would constitute reasonable and proportionate hospitality. Under the Bribery Act, any such payments are problematic.

Unless it can be shown there was no advantage to the public official, the paying organisation will have to rely on enforcement authorities to exercise proper discretion in differentiating between reasonable and unreasonable hospitality or promotional expenditures. It should be noted that the UK enforcement authorities have been clear that they are not seeking to criminalise reasonable and proportionate behaviour. Bona fide hospitality and other promotional expenditures which seek to improve an organisation's image, better present its products, or establish customers' goodwill and improve overall customer relations, are established ways of conducting business. On the other hand, those same enforcement authorities have made it clear that hospitality and other promotional expenditures can be employed as bribes. The higher the expenditure or more lavish the hospitality, the greater the likelihood that the enforcement authorities will take a view that it was intended to influence the official and obtain or retain business or a commercial advantage.

Small “facilitation” or “grease” payments made to secure routine governmental action will also be subject to the Bribery Act. It is correct to say this is a continuation of existing law as these payments have always been prohibited under UK law, but it is a different course than that charted in the US. The FCPA contains a “facilitating payment” exception. This effectively permits organisations subject to the FCPA to make modest payments to low-ranking foreign officials to secure the performance of routine governmental action to which the party is otherwise legally entitled. The lack of a similar exception under the Bribery Act places organisations doing business in emerging markets in Asia, Africa and the Middle East in a difficult position. In many countries across these regions such payments are considered an accepted part of doing business.

Enforcement authorities in the UK have already provided some guidance on this point, noting that any organisations making facilitation payments will be prosecuted unless the public interest factors tending against corruption outweigh those tending in favour. Notably, those factors tending in favour of prosecution include frequent or large payments, payments that are planned or accepted as a standard way of conducting business, or payments that are clearly contrary to the organisation's internal policy and procedures for such payments. Factors militating against prosecution include a single, small payment, a payment made by a party who was in a vulnerable position, a payment that came to light as a result of a proactive approach involving self-reporting and remedial action, or payments that are consistent with the organisation's internal policy and procedures for such payments.

Offence for failure to prevent

The fourth offence is the “corporate” offence which occurs when an organisation fails to prevent those performing services on its behalf from paying bribes (such that the first or third offences are implicated). Specifically, an organisation will be guilty of the offence if an “associated” person bribes someone else to obtain or retain business or a business advantage for the organisation. This is a “strict liability” offence, meaning the enforcement authorities are under no obligation to prove that the organisation possessed improper or corrupt intent. An “associated” person is an individual or organisation which provides services for the organisation. Any employees of a Chinese organisation, third-party agents or consultants, as well as joint venture partners, subsidiaries or affiliated entities have the potential to subject the Chinese organisation to liability. Organisations are well-advised to exercise the necessary due diligence to ensure they are aware of any potential risks that may arise from a relationship with such “associated” persons, and take additional steps to make certain these parties are aware of their obligations under the Bribery Act.

Importantly, the only defence to the Bribery Act's fourth offence is to demonstrate that the organisation had established “adequate procedures” to prevent bribery. Having “adequate procedures” in place includes being able to show that the organisation's management team is committed to preventing bribery and that risk-based due diligence and compliance procedures have been implemented to reduce the external and internal risks of bribery by persons associated with the organisation. Naturally no such set of procedures will ever be perfect; nor can they prevent every act of bribery. The most important step is to properly assess the risk and design procedures that are proportionate under the circumstances. A Chinese organisation whose international operations are limited to the UK and the US is only likely to face moderate risks and would therefore be expected to implement a correspondingly moderate level of compliance measures. On the other hand, an organisation with significant operations throughout Asia, Africa or the Middle East would be expected to have much more stringent compliance measures in place.

The fourth offence applies not only to organisations incorporated under UK law, but also to any other company carrying on a business, or part of a business, in the UK. The Act does not elaborate on what it means to “carry on a business or any part of a business in the UK”. This will naturally lead to a level of uncertainty until the English courts provide further guidance, which could take some time. In the meantime, enforcement authorities have indicated they will apply a “common sense approach”. Organisations that do not have a demonstrable business presence in the UK would not be within the reach of the “failure to prevent” provision in the Act. For example, enforcement authorities have indicated that they would not regard the listing of a Chinese organisation's securities in the UK as evidence that would, of itself, demonstrate that the company is carrying on a business or part of a business in the UK. Likewise, having a UK subsidiary will not, in itself, mean that a Chinese parent organisation is carrying on a business in the UK, since a subsidiary may act independently of its parent or other group companies.

Final thoughts

One consequence of China's move onto the world economic stage is that many Chinese organisations have become subject to anti-corruption legislation in multiple jurisdictions. The Bribery Act is one such piece of legislation that is potentially applicable to Chinese organisations that have a presence in, or a connection with, the UK. Accordingly, Chinese organisations with significant international operations should assess their exposure to the Bribery Act and take any steps necessary to ensure compliance.

Risk assessment – external risk factors

 Five broad groups of external risk factors:

– country
– sectoral
– transaction
– business opportunity
– business partnership

-Aim of an assessment of external bribery risks: to help an organisation to decide how those risks can be mitigated by procedures governing its operations or business relationships

-Essentially about where, what type and with whom you do business, and to what extent should / can you monitor existing / new business relationships, supply chains, etc.

Risk assessment – internal risk factors

Also necessary to assess whether and how internal structures or procedures of the organisation may contribute to the level of bribery risk
Commonly encountered internal risk factors may include:

– deficiencies in employee training, skills and knowledge
– bonus culture that rewards excessive risk taking
– lack of clarity in the organisation's policies on, and procedures for, hospitality and promotional expenditure, and political or charitable contributions
– lack of clear financial controls
– lack of a clear anti-bribery message from the top-level management

Risk assessment (under new Principle 3 of the MoJ's Guidance)

Commonly encountered external risks can be categorised into five broad groups – country, sectoral, transaction, business opportunity and business partnership. An assessment of external bribery risks should help an organisation to decide how those risks can be mitigated by procedures governing its operations or business relationships.

A bribery risk assessment should also examine the extent to which internal structures or procedures may themselves add to the level of risk. Commonly encountered internal risk factors may include deficiencies in employee training, skills and knowledge; bonus culture that rewards excessive risk taking; lack of clarity in the organisation's policies on, and procedures for, hospitality and promotional expenditure, and political or charitable contributions; lack of clear financial controls; and lack of a clear anti-bribery message from the top-level management.

Impact on businesses – practical tips on compliance

The tone of the Bribery Act seems to suggest that the government recognises the fact that there are shades of grey in business, for example in relation to hospitality and promotional expenditure. This however may not reconcile with the aggressive stance recently demonstrated by the SFO, which will be enforcing the Act.

It is important to consider the Bribery Act (or indeed, any foreign bribery law with extra-territorial reach) in conjunction with local bribery laws, and understand the differences between the Bribery Act and the local laws in terms of scope and elements of offences. The Prevention of Bribery Ordinance in Hong Kong, for example, permits the offering of “advantages” to and acceptance by certain public officials or agents of private organisations, as long as the “advantages” are sanctioned by the officials or agents' superior.

Kyle Wombolt and Damien McDonald, Herbert Smith, Hong Kong and Beijing