This article was first published in Asia Insurance Review, June 2011.

The long-awaited and much-discussed UK Bribery Act 2010 will come into effect starting July 2011. Patric McGonigal takes a look at the Act, its impact on insurers and the opportunities therein.

When in Rome, do not do as the Romans do (or when in Jakarta or Somalia or...). The 2010 Corruption Perceptions Index illustrates the very serious nature of the problem of corruption which exists in the world today: on a scale from 1 to 10 (ie, ranging from highly corrupt to very clean), nearly three quarters of the 178 countries which appear in the Index score below 5. For example, Italy is ranked 67 with a score of 3.9; Indonesia is at 110 with 2.8 and Somalia is ranked 178 with a score of 1.1.

Tackling corruption and supporting Growth

The UK's long-overdue response to the problem is the Bribery Act 2010 (the Act) which enters into force on 1 July 2011. There has been much discussion concerning what in some quarters is perceived to be an impractical piece of legislation. UK business has expressed concern that its ability to compete internationally will in many cases be undermined by what many describe as the toughest piece of anti-bribery legislation in the world.

However, the UK's Secretary of State for Justice has emphasised that there cannot be a choice between tackling corruption and supporting growth, stating that the Act will be "good for business because it creates the conditions for free markets to flourish". But are there some countries where bribery is so entrenched that any action by the regulating authorities needs to be tempered accordingly or, because of the risk of prosecution under the Act, will UK related entities in such countries now need to give serious consideration to taking their business elsewhere?

The Act

There are four offences under the Act: two general offences of paying and receiving bribes; one of bribing foreign public officials; and one concerning the failure of commercial organisations to prevent bribery, ie, the new so-called "corporate offence".

Among the main talking points to emerge are:

(i) the refusal (unlike under the US Foreign Corrupt Practices Act (the FCPA)) to recognise "facilitation" payments as acceptable;

(ii) the imposition on private companies of obligations in relation to the acts of an "associated person" (The meaning of "associated person" is deliberately broad in scope and does not depend on the capacity in which a person performs services. As such, agents, subsidiaries, contractors, suppliers, JVs as well as employees are caught by the Act. Thus, whereas in the past, there may have been instances of insurers making "customary" payments to public officials in connection with, for example, obtaining an account on a large state project, not only could the official be at risk of prosecution but so too will the insurance company (including its directors) and any joint venture partner, agent or intermediary who may have acted on its behalf); and

(iii) somewhat controversially, the Act's extraterritorial reach whereby corrupt conduct committed anywhere in the world by an associated person will be caught if the corporate entity concerned carries on business in the UK (regardless of whether or not the bribe is paid in connection with the business). Therefore, even organisations incorporated elsewhere but carrying on business in the UK should not assume that:

  • they will fall outside the reach of the Act; or
  • even if they have organised their procedures to comply with the FCPA they will no longer need to review those procedures in order to reflect the different requirements and scope of the UK Act.

Putting in place "adequate procedures"

An individual found guilty of one of the first three offences is liable to a maximum imprisonment of ten years and/or an unlimited fine. Commercial organisations convicted of committing the corporate offence will also be subject to an unlimited fine.

Where an organisation might be liable because an associated person has committed a relevant offence, the key defence available to that organisation will be for it to show that it had in place "adequate procedures" to prevent bribery from taking place.

The Act, therefore, places the onus on organisations to ensure that their own procedures (including, potentially, those of their associated persons) are suitably adequate. If a corporate entity is found not to have in place adequate procedures then the directors may face claims in connection with the failure. There is a specific offence committed by any director who consents or connives in the offence.

Guidance on what it is meant by "adequate procedures" was published by the Government on 30 March 2011. It is drafted at a deliberately high level, comprising general principles and illustrative scenarios which firms must interpret to fit their own business models.

These cover the use of intermediaries and agents, hospitality and promotional expenditure, political and charitable donations, facilitation payments and dealing with business partners. The theme throughout is one of proportionality and so, provided that, for example, corporate hospitality and promotional expenditure is reasonable, proportionate and not intended as a bribe, it will be permissible: "Bona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organisation, better present products and services, or to establish cordial relations, is recognised as an established part of doing business and it is not the intention of the Act to criminalise such behaviour."

Incidental routine business courtesy Exempted

Similarly, in relation to the bribing of a foreign public official, there must be a sufficient connection between the financial advantage and the intention to influence or secure business in order for there to be an offence.

As such, it is considered unlikely that the incidental provision of routine business courtesy will raise an inference that it was intended to have a direct impact on decision making, particularly where it is commensurate with the reasonable and proportionate norms for the industry. Examples are given in the Guidance but some shades of grey still exist.

As for facilitation payments, in most cases these are likely to fall foul of the offences of bribing another person and bribing a foreign official under the Act. However, the Guidance expressly notes that the Government: "recognises the problems that commercial organisations face in some parts of the world and in certain sectors. The eradication of facilitation payments is recognised at the national and international level as a long term objective that will require economic and social progress and sustained commitment to the rule of law in those parts of the world where the problem is most prevalent."

Quite how these offences will be enforced in practice by the UK regulatory authorities and how the courts will interpret the jurisdiction provisions in the Act remains to be seen.

Impact on insurers

The increased risks now faced by corporate entities carrying on business in the UK and within the recognised high risk regions of the world (Africa, Russia, Indonesia, India, China etc) will have a similar impact on the insurers who cover their risks.

In many cases, insurers will need to conduct greater risk assessment and due diligence with regard to the operations of the companies they insure in order to assess whether the risks insured could increase as a result of the new legislation and whether this in turn may have an impact on premium levels.

For example, insurers may want to consider excluding from cover claims arising from facilitation payments, particularly where they may have been an established part of an insured's approach to doing business in certain jurisdictions. Insurers also need to be aware of the increased risk of claims relating to individuals; individuals who are guilty of a principal offence or senior officers working overseas but with a "close connection with the UK".

D&O and PI insurers can Explore risk

Given the potential for an increased volume of claims in respect of defence costs incurred in relation to civil claims and investigation costs in relation to investigations by the regulatory authorities, insurers who write D&O and professional indemnity lines will be particularly interested.

Part of the process of risk reassessment will also involve the need to revisit proposal forms so as to include questions seeking to establish whether a prospective insured has "adequate procedures" in place; what "associated persons" there are that perform services for the insured; and whether those persons have complied with the insured's anti-bribery procedures.

D&O liability cover could cover the costs of investigations and defending a prosecution under the Act save where intention or knowledge of the crime is formally admitted or there is a conviction.

Of relevance in this context is the fact that although D&O insurers have in the past contributed to the costs incurred when the regulatory authorities have taken action under the FCPA and settlement agreements were reached, that may not be possible under the UK Act given recent strong indications by the courts that they will not permit such agreements to stand (R v Innospec).

Accordingly, where there is a finding of fault by the court, it is likely there will be no cover for any fines (either because they are expressly excluded or because public policy prevents cover in relation to criminal acts). Similarly, where a fraud and dishonesty exclusion is triggered, any defence costs already paid by insurers may be recoverable.

Comment

The difficulty with the Act and accompanying guidance is that it is high level and is stated not to be prescriptive or a "onesize- fits-all" document.

Although this might have some benefits, such as flexibility and it may suit larger businesses as it is more likely that they will be able to rely on existing anti-bribery policies and procedures, it also means that what might constitute an "adequate procedures" defence in practice remains uncertain.

This uncertainty might well remain until prosecutions are brought and the courts' approach to such defences becomes evident. After all, if a corporate entity had in place a clear and comprehensive anti-bribery policy but bribery nevertheless occurred, then it would seem that its procedures were by definition inadequate as they failed to prevent the bribery from occurring in the first place.

Organisations will need to develop and refine procedures appropriate to their own circumstances and should be using these final weeks before the Act comes into force to undertake a root and branch review of their business practices and reassess whether any protective measures and compliance procedures now in place are appropriate, given the nature of the risks and penalties faced. Similarly, insurers will want to know that this type of review has been conducted and acted upon.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.