Dealing with bribery and corruption arising in Corporate Due Diligence

Updated January 2011

The UK bribery laws have always outlawed bribery within and by commercial organisations, however the Bribery Act 2010, which comes into force in April 2011, creates a new regime whereby a commercial organisation may be prosecuted for the actions of its employees and other persons acting on the company's behalf, as well as for criminal actions carried out in its own name.

In the case of a share acquisition the buyer will often conduct detailed due diligence so as to be aware of potential liabilities it may take on. With criminal offences there is no statute of limitation on prosecution and as such the buyer and its directors may be held responsible for an instance of bribery which happened prior to the acquisition.

In the case of an assets sale the seller may commit a money laundering offence where he disposes of assets which were obtained as a result of bribery, as these may be classed as proceeds of crime. Similarly the buyer may commit a money laundering offence by buying the assets.

Bribery offences

The Act consolidates existing bribery and corruption offences into one piece of legislation and creates the offences of:

• offering, promising or giving a bribe;
• requesting, agreeing to receive or accepting a bribe;
• failure of commercial organisation to prevent bribery by those acting on their behalf; and
• bribing a foreign public official.

The Act has significant territorial scope: it captures bribery that takes place in the UK, but also bribery abroad where the person giving or accepting the bribe has a "close connection" with the UK. This includes companies incorporated in the UK and British citizens.

The corporate offence of failing to prevent bribery is a strict liability offence and, on conviction, companies are liable to an unlimited fine. This will occur where an organisation failed to take "adequate procedures" to prevent its employees or others acting on their behalf (for example, agents or subsidiaries) from bribing someone. Government guidance is due to be published very soon as to what constitutes "adequate procedures".

Directors and senior managers will be personally liable if a bribe is given or accepted with their consent or connivance. Convicted directors may face disqualification for up to 15 years.

As this is a new offence it is not yet obvious what will actually constitute bribery. However, the Serious Fraud Office (SFO) has produced guidance which suggests that in some cases excessive corporate hospitality may constitute bribery for the purposes of criminal prosecution.

It is also notable that business organisations which are involved in public sector work may be barred, under the 2004 EU Public Procurement Directive, from tendering for public work if convicted for bribery offences.

Money laundering offences

The Proceeds of Crime Act 2002 (POCA) created, among others, the following offences:

• money laundering; and
• failure to disclose.

A company or person commits the offence of money laundering if he:

• conceals, disguises, converts or transfers criminal property, or removes it from the UK
• enters into or becomes concerned in an arrangement that he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person
• acquires, uses or has possession of criminal property

For the purposes of POCA, "criminal property" is very widely defined to include any benefit which was obtained as a result of criminal conduct. There is no minimum limit on the amount of benefit obtained and criminal conduct applies to any act in the UK which constitutes a crime, or an act elsewhere which would constitute a crime if carried out in the UK.

As such, where a company wins a contract tender and there is evidence that it was obtained through bribery by the company or its employees, then all proceeds from the contract would constitute criminal property. Similarly, any assets purchased with that money would be criminal property.

Reports to the Serious Fraud Office

In its recent guidance statement the Serious Fraud Office (SFO) has indicated that in cases involving corruption which have an international dimension, it would prefer businesses to move towards a US style system of self reporting.

This envisages that an organisation would voluntarily come clean to the SFO about its involvement in any bribery and in return reach a negotiated settlement with the SFO which may help avoid criminal prosecution. This is particularly useful for organisations involved in public sector work, as it may help avoid any prosecution and preserve access to public sector work.

Self reporting also has the advantage of bringing some certainty to the organisation's liability for fines. In the case of a share acquisition this would allow for any civil penalties to be dealt with by way of warranties or indemnities as appropriate. The current guidance refers to matters with an international dimension but we expect that a similar approach would be taken in cases of domestic bribery.

However, the law is currently unclear as to whether settlement agreements reached by the SFO will be binding upon the Courts. In recent cases (R v Innospec [2010] EW Misc 7 (EWCC) and R v Dougall [2010] EWCA Crim 1048), the Court emphasised that it would not be bound by such agreements and that the SFO should only recommend a sentencing range. Although in the subsequent case of R v BAE Systems Plc the Court felt that it was bound by the settlement agreed between the SFO and BAE. No bribery or corruption charges were brought against BAE, and therefore the law remains disputed. Nonetheless, whilst there is no guarantee of leniency from the SFO, it is likely that a more favourable outcome will be achieved if offences are voluntarily reported.

Reviewing a target

A useful starting point when reviewing a target is to search publically available information to gauge the general risk of corruption. Does the target business, for example:

• operate in jurisdictions where corruption is perceived to be high?
• operate in an industry that is susceptible to corruption, such as construction and oil and gas industries?
• operate through agents, intermediaries, consultants or other third parties or joint venture parties? If so, the risk of corruption could be higher.
• contract with public sector bodies (as referred to above organisations convicted of bribery offences will be debarred from entering such contracts in the future)?

Buyers should request copies of any compliance policies, training materials, audits and reports to assess the adequacy of the target's anti-corruption polices and procedures, and to help verify that there has been no bribery in the past.

The SFO has published a list of corruption indications that should be considered when conducting due diligence. Indicators include:

• abnormal cash payments;
• lavish gifts being received;
• missing documents or records;
• unusual payment patterns; and
• the payment of unusually high commissions.

How to deal with a bribery offence which comes up in due diligence reviews

If due diligence reveals that a company or its employees are likely to be guilty of bribery then the following immediate course of action is recommended:

• that the deal is put on hold and no assets be transferred;
• that a money laundering disclosure is made to the Serious Organised Crime Agency (SOCA); and
• consider self reporting to the SFO to seek an assurance that enforcement action will not be taken where remedial action is taken.

As a bribery offence may also give rise to a money laundering offence an anti-money laundering notification may also need to be made. Great care must be taken not to alert either the buyer or seller (as applicable) as to the notification, as to do so may constitute the criminal offence of "tipping off". Notifications are best handled by the solicitor dealing with the due diligence.

Following clearance from SOCA to continue acting, prospective buyers may, if appropriate, decide to:

• seek a price adjustment;
• require the seller to resolve identified corrupt practices or risks prior to completion, as a condition to the sale and purchase agreement;
• restructure the transaction to exclude "tainted" assets, that is, only acquire those parts of the target business which have not been affected by corruption; and/or
• seek warranty and/or indemnity protection.

In many cases, bribery may not become apparent through traditional due diligence investigations. Accounting records may also be manipulated and transactions given descriptions which hide the true nature of a payment. As a result, it is important for a prospective buyer to seek warranties and indemnities.

Indemnities should be carefully drafted as, in general terms, English courts will not enforce indemnities where the claim arises from illegal conduct. Personal liability can also attach to Directors.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

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