What are the implications of the UK Bribery Act 2010 for funds, companies and organizations operating in Central & Eastern Europe? The report is kindly provided to us by the Bulgarian office of Wolf Theiss - Central & Eastern Europe’s largest and also one of its most successful business law firms.
Failure to prevent advisors & consultants
The Act is particularly relevant for funds, companies and organizations operating in Central & Eastern Europe as it introduces an offence of ‘failing to prevent bribery’. This offence covers not only the organization itself, but also those entities ‘associated with’ it including local advisors and consultants. As to the natural defence of ‘it’s normal over there’, the Act is clear that the test of what is expected is ‘a test of what a reasonable person in the United Kingdom would expect’ This short report considers the application of the Act to funds and investors operating in Central & Eastern Europe and the steps that those organizations should take to manage their compliance obligations.
Public & Private bribery: The Act makes it an offence if a person promises to give, or gives, a financial or other advantage to another to induce that other person to act improperly or to reward improper performance. The Act applies to both private (commercial) bribery, and bribery of public officials.
The offence will be committed even if the promise or reward is given to a different person than the intended beneficiary, and it is immaterial whether the reward is promised directly, or through a third party.
I’m not British and I’m not investing in the UK? The Act applies to individuals ‘closely connected’ to the UK. This includes British citizens, foreign citizens who are ordinarily resident in the UK, and firms and entities incorporated in the UK. If a person or firm falls into these categories an offence will be committed even if it takes place outside of the UK.
As regards the corporate offence of failure to prevent bribery, the Act goes even further:
The Act applies to funds, partnerships and companies that are either incorporated in the UK or which carry on a business or part of a business in the UK. Although the courts will be ultimately determine whether an entity carries on business in the UK, if an entity has a business presence in the UK, it is likely to be caught. As regards subsidiaries, the Guidelines to the Act published last week state that ‘having a UK subsidiary will not, in itself, mean that a parent company is carrying on business in the UK’.
Penalties: Where a fund, company or organization commits an offence its directors and senior officers (where they also have a ‘close connection’ to the UK) may be prosecuted.
Navigation for funds & investors in CEE
This report focuses on the corporate offence in Section 7 of the Act, being the ‘Failure to Prevent Bribery’ within an organization.
In the Guidelines the UK Government states that ‘The objective of the Act is not to bring the full force of the criminal law to bear upon well run organizations that experience an isolated incident of bribery’. And, indeed, the Act provides companies with a clear defence:
‘It is a defence for C to prove that C had in place adequate procedures to prevent persons associated with C from undertaking such conduct’.
Established companies and entities, particularly those within global organisations, are used to firmwide Codes of Ethics and compliance policies – and the Guidelines set out six principles for compliance procedures:
- Proportionate: Compliance adequate to the bribery risks the organization faces.
- Top-level commitment: Leadership on codes of ethics, training and communication by senior management.
- Risk Assessment: Properly assessing the risk of potential bribery both generally and for specific projects.
- Due diligence: Properly reviewing and identifying projects, business and external consultants. The Guidance makes clear that ‘organisations will need to take considerable care in entering into certain business relationships’.
- Communication: Effective (and applied) training and communication to all individuals within an organization that may be exposed to bribery.
- Monitoring & Review: Paper procedures will not suffice if compliance is not monitored. Organizations should appoint either internal or external compliance checks.
Advisors, consultants & agents For British nationals, foreigners living in the UK, or funds managed from the UK or with a UK presence, it is, perhaps, time to re-assess the risks involved in conducting business in regions like Central & Eastern Europe.
Country & Business Risk The Guidelines reflect the compliance assessment required to comply with the United States Foreign Corrupt Practices Act, whereby companies should already assess whether their operations raise any ‘red-flags’.
If an entity is only operating in Finland, it may not need extensive procedures; conversely if an entity is operating in those countries in Central & Eastern Europe that score low on transparency surveys, it will need more detailed procedures.
Similarly, if an entity is operating in an industry where corruption is more likely, for example where it is dependent on concessions or licensing, or where there have been known corruption cases (such as in the medical devices or energy sectors), it will need a solid set of procedures.
Managing Third Parties Business relationships are a natural part of any successful transaction. However, for those persons and entities that are subject to the Act, it is also critical that such relationships are properly assessed, and that relevant compliance procedures are passed through to advisors, consultants and agents.
In assessing advisors, consultants and agents, items to consider are whether the external party itself has compliance procedures in place; whether it is clear (or unclear) what work is being provided for the remuneration being paid; whether invoices are correct or require adjustments; whether the external party requests payment to made offshore or to another entity; and whether any available reports about the advisor’s previous conduct raise concerns.
Many large global corporations have required external advisors to sign-up to their internal compliance processes and to complete detailed compliance documents for a number of years now. Effective and secure advisors will have no problem in doing so for UK based funds or funds where a director or senior manager is British or is living in the UK.
Enforcement within CEE
Although the focus is currently on the Bribery Act, it is important to reflect that many countries within Central & Eastern Europe have, themselves, enacted anti-bribery legislation.
Austria, Bulgaria, Croatia, Czech Republic, Romania, Serbia and Slovakia all have legislation making it a criminal offence to commit private or public bribery with prison sentences ranging from 5 to 15 years. Croatia, Romania and Serbia have particularly strong corporate offences in their legislation and an entity that commits bribery may be compulsorily liquidated.
Notably, enforcement action in Central & Eastern Europe has also significantly increased in the last five years and national prosecutors have been open to using both bribery and other criminal laws, such as fraud or breach of trust, to bring enforcement action.
The introduction of the UK Bribery Act certainly provides the incentive for funds, investors and companies operating in Central & Eastern Europe to review their current compliance procedures.
An effective compliance process will involve leadership from the top; training (and sign-off) from people within the organization; due diligence on business partners, advisors, consultants and agents; and supervision and audit.
About Wolf Theiss
Wolf Theiss is Central & Eastern Europe’s largest and also one of its most successful business law firms.
We do much of our business by facilitating, negotiating and supporting transactions between business owners, banks and investors and succeed because we are entrepreneurial and give our support generously.
We advise on compliance with international and local anti-bribery and similar laws for entities operating in Central & Eastern Europe. We are able to translate international requirements to local circumstances and sit down with management teams and employees to ensure understanding.