The implementation of the keenly-awaited UK Bribery Act has been delayed to allow greater clarity in its provisions and definitions, but Carl Winkworth and William P. Barry of law firm Richards Kibbe & Orbe argue that there is no reason for hedge fund and private equity managers to wait until final publication of the legislation to begin implementing anti-corruption compliance programmes.
The UK Bribery Act has been heralded by some as a tough new anti-corruption measure, and criticised by others for the absence of clear guidance on how corporates should design policies and procedures to promote compliance with the act’s provisions.
The minister of justice announced recently that implementation of the act will be delayed to provide time for publication of additional guidance. While one hopes that the development of additional guidance will assist hedge fund and private equity managers in fine-tuning their compliance programmes, there is no reason to wait until final publication to begin implementing procedures.
The Bribery Act applies both to bribery of public officials and private persons and prohibits the giving or receiving of a financial or other advantage to induce or reward a person to perform a ‘relevant function’ (a function of a public nature or an activity connected with business) improperly. It also prohibits attempted bribery, or the mere offer or request of an inducement or reward.
The act also outlaws bribery of foreign public officials. It prohibits giving or offering a financial or other advantage to a foreign public official with the intention of influencing the official in order to obtain or retain business.
In addition, the act seeks to punish corporate organisations that fail to prevent bribery. When a person associated with the organisation, including employees, agents and consultants, commits any of the offences described above, the organisation is guilty of the offence of failure to prevent bribery unless it can show that it had ‘adequate procedures’ in place to prevent bribes from being paid. Implementation of the act has been delayed for three months to allow time better to define what constitutes adequate procedures.
The Bribery Act provides for enormous extraterritorial reach. It will apply to offences by British nationals, corporates or persons ordinarily resident in the UK (regardless of whether the act or omission took place outside the UK) and to any act or omission that forms a part of the offence if such act or omission occurs within the UK.
In addition, the corporate criminal offence of failure to prevent bribery will apply to commercial organisations that have a business presence in the UK (regardless of whether the bribe was paid in the UK or the UK part of the business was even involved in the bribe). Violation of the act carries potential penalties of 10 years’ imprisonment for individuals and an unlimited fine for companies.
Particular risk areas for hedge funds
Regardless of what specific definition of ‘adequate procedures’ emerges, hedge fund and private equity fund managers should be prepared to implement anti-corruption compliance programmes that include procedures tailored to their particular businesses and risk profile, training for employees and agents, and a process by which the compliance program can be audited.
The three most common anti-corruption compliance risk areas for hedge fund and private equity managers are private equity investments, joint ventures and portfolio companies; agents and consultants; and travel, entertainment and gifts. In transactions with state-owned or controlled enterprises or sovereign wealth funds, these risks are even higher.
The challenge of monitoring and imposing controls governing the firm’s primary operations as well as the interplay of portfolio companies, joint ventures, consultants and agents can be daunting. Ignorance of misconduct will not protect a parent or principal from liability. We offer some useful guideposts below.
Regarding private equity investments, joint ventures and portfolio companies, alternative managers should consider the following steps: identifying risks, planning the timing and scope of due diligence, drafting transactional documents that contemplate anti-corruption compliance, and engaging in post-transaction monitoring.
It is critical to involve legal and compliance professionals at the outset of each deal. The firm could be exposed to liability in circumstances where an illicit payment took place prior to acquisition or where the firm’s investment does not rise to a level where it has control of the portfolio company or joint venture.
Agents and consultants are often necessary when transacting business in a foreign jurisdiction. The firm must conduct appropriate due diligence before entering into such relationships, which may include screening potential agents with respect to reputation, background and qualifications and requiring anti-corruption representations.
Firms should also evaluate whether potential agents are providing services that are consistent with their expertise and are being paid at a rate commensurate with the market. The agent’s assignment and any expenditures or payments to agents should be well documented.
As regards travel, entertainment and gifts, firm personnel should be educated with respect to the broad definition of what constitutes a foreign public official under the Bribery Act, the US Foreign Corrupt Practices Act and other relevant anti-corruption regulation.
Expenditures for travel, entertainment and gifts should not be lavish or excessive. Even reasonable expenses for foreign public officials should be pre-approved by the compliance department, well documented, and be for a legitimate business purpose.
Carl Winkworth is a partner in the London office and William P. Barry is a partner in the Washington, DC office of Richards Kibbe & Orbe
