UK: Corruption - Bribery Overseas Now a Crime in the UK

The Anti-terrorism, Crime and Security Act 2001 was passed in December after a stand off between the Government and House of Commons on one side and the House of Lords on the other. John Sissons, a consultant to Herbert Smith, discusses one of the less publicised aspects of this legislation, namely the introduction of measures dealing with bribery by United Kingdom companies and individuals of foreign officials and commercial agents that takes place overseas. In this article, he pays particular attention to the position of oil companies.

These measures introduced by the new legislation mean that the law of the UK in relation to bribery has changed in a fundamental way. It has long been an offence to offer or make corrupt payments in the UK. Traditionally, however, UK law does not (save in exceptional circumstances) create criminal offences in relation to the acts of a UK citizen or company carried out entirely overseas. Such matters are left to the law of the place where the relevant acts take place. Now, bribery and corruption fall within the rare category of cases where such criminal liability does arise. It is now an offence for a company or individual to offer or pay a bribe to an overseas public official or commercial agent, even if all the acts constituting the crime took place overseas. Previously, companies may have adopted a somewhat relaxed attitude if put into a position where a dubious payment to a third party (perhaps described as an introductory commission) was necessary to secure or conduct business. Particularly in cases where the third party was closely connected to senior individuals within the government of the country concerned, it was unlikely that any serious investigation would be undertaken in that country, let alone a criminal prosecution. Now, overseas corrupt payments would give rise to the possibility of criminal prosecutions in the UK against the company and the individual managers making and arranging such payments. There are also tax implications.

Theses changes to the law come, not as a result of some sudden revelation linking bribery to terrorism, although there is evidence of such a connection, but from persistent pressure from organisations such as the Organisation for Economic Co-operation and Development ("OECD") which have for long argued that corruption in less developed countries distorts markets, hinders development and discriminates against the poor. In 1998 the UK ratified the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. It did so on the basis that the UK law already fulfilled its obligations under the convention. Various commentators had argued for some time that this was not so. A review of the UK law undertaken on behalf of the OECD indicated that the UK had not met its obligations. In March 2001 the Select Committee of the House of Commons on International Development produced a report critical of the government’s failure to introduce legislation to comply with the convention requirements. Although the OECD convention only deals with corruption of public officials, the Anti-terrorism, Crime and Security Act 2001 goes further and deals with bribery of foreign overseas agents. This is consistent with the Council of Europe Criminal Law Corruption Convention which the UK has signed.

Criticisms of the UK law have not been confined to the criminal law’s previous inability to deal with bribes paid overseas. In March 1998 the Law Commission published a review of the criminal law of corruption. It described the law as it then stood as being "obscure, complex, inconsistent and insufficiently comprehensive".

The Law Commission made a series of recommendations suggesting that the law needed wholesale revision. They put forward a detailed proposal for a new comprehensive statute dealing with corruption. In particular, it was proposed that there was a need for a new statutory definition of corruption, saying that existing meanings are "by no means clear" and recorded the view of one commentator saying that the judicial authorities on the subject were in "impressive disarray".

In June 2000 the government published a paper for discussion "Raising Standards and Upholding Integrity: The Prevention of Corruption." The proposals within the paper largely adopted the recommendations of the Law Commission and involved the wholesale reform of the law. Some 18 months later, however, the Anti-terrorism, Crime and Security Act 2001 has introduced only some of these proposals, largely confined to those which extend the jurisdiction of the UK courts to deal with corruption taking place abroad. We are left having to deal with the existing definitions of corruption which were the subject of the Law Commission’s adverse comments.

Many multinational corporations and those undertaking international trade will be familiar with the United States of America’s Foreign Corrupt Practices Act of 1977 ("FCPA"). Major corporations often use the FCPA provisions as the basis for their internal codes for employees faced with circumstances in which they might be expected to make corrupt payments to those with whom the company is doing business. The FCPA deals expressly with what have become known as "facilitation payments" and provides that payments made to overseas officials for routine government action such as obtaining licences and permits (actions which, it is said, the officials should be performing in any event) do not constitute a criminal offence in the USA.

Such facilitation payments attracted some attention in the United Kingdom during the taking of evidence during the recent hearings of the Parliamentary Select Committee on International Development. Evidence given revealed interesting insights into the problems faced by multinational companies (including, in particular, those in the oil industry) in dealing with bribery and corruption. The committee was told that the power industry (including petroleum and energy) come after only public works/construction and the arms and defence industries in their propensity to pay bribes. Evidence was given by industry participants showing the difficulties in, on the one hand, behaving by ethical standards and, on the other, getting business done in markets where making extra payments to individuals to perform their duties is an expected, if not lawful, practice. Distinctions were made between grand corruption and petty corruption or facilitating payments.

A senior executive from a major oil company gave evidence to the Select Committee of the economic pressures leading to the making of facilitation payments. Circumstances might arise where an essential and urgently required piece of machinery was held in customs and would not be released until a payment was made to a customs officer. The oil company distinguished such payments from bribes. It defined bribery in terms of the US FCPA and OECD Convention as an undue reward to someone to influence their behaviour and incline them to act contrary to the principles of honesty and integrity. Facilitation payments, on the other hand, were regarded as being a normal means in some countries of obtaining routine low-level actions or approvals. In other words, they are not intended to influence anyone to do anything improper. Instead, they are intended to make someone perform the duty which they ought to perform in any event. Whilst witnesses to the committee all agreed that grand corruption was completely unacceptable, facilitation payments were regarded more as a rather unfortunate fact of business life. The report of the Select Committee did not feel able to take the same view. The committee regarded facilitation payments to public officials as corrupt and could see no real distinction (save in the size of the sums involved) between these and payments of large secret "commissions" to government servants or politicians for the purposes of gaining new business.

During the course of evidence it was suggested that signature bonus payments of the kind frequently required in the oil and gas industry where themselves in some way corrupt or liable to be used for corrupt purposes. Such bonuses are paid "up front" by an exploration company on the entering into an agreement to develop a resource. They are a common means of providing to the country with the resource an immediate benefit whilst demonstrating a commitment by the investor. Whilst such payments might be substantial, they usually are proportional to the expected value of the resource. Problems arise where there is a lack of transparency regarding such payments. The absence of transparency gives corrupt officials the opportunity to divert those funds away from the State; it does not mean necessarily that the oil company is complicit in the payment of a bribe. Oil companies may now seek to deal with this situation by publishing the details of payments made under agreements of this kind together with related taxes and levies, thus giving transparency to the payment process and minimising the suggestion that the payments are in some way corrupt.

The Anti-terrorism, Crime and Security Act 2001 does not seek to draw the distinction between "facilitation payments" and the other forms of perhaps more serious corruption. Thus, UK companies and citizens face a harsher regime than those faced by their US competitors. Not only does the UK law outlaw facilitation payments, it extends to corruption made to any commercial agent and not just foreign government officials, as is the case in relation to the US FCPA.

Under the law as it previously stood, it was at least arguable that a bribe paid overseas, not being unlawful in the UK, was deductible for tax purposes (although it should probably have been properly categorised as a gift and thus disallowed under the provisions of section 577 of the Income and Corporation Taxes Act 1988). Now that argument cannot be used. Suspicious commission payments to third parties will have to be treated with particular care, not only in relation to the payment authorisation process, but also as to their accounting treatment.

UK companies conducting trade overseas, whether or not in the same position of those witnesses to the Select Committee who admitted to making facilitation payments, will have to consider with some care their internal guidelines on conducting business overseas. Whilst they will wish to ensure that those guidelines are in accordance with the new criminal provisions in the UK, they will also have to deal with the inherent uncertainties associated with the criminal law of corruption which the Law Commission wished to see reviewed but which were not addressed in the hurriedly drafted legislation put through the legislative process with such speed in the last weeks of 2001.

The Parliamentary Select Committee stated in its report last year:

For further information on these changes to the UK law, please contact John Sissons or Peter Burrell who deal with a wide range of contentious regulatory matters.

"© Herbert Smith 2002

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