By Helena Wahlund
Dec. 5 – It has become increasingly important for companies to have procedures in place in order to prevent corruption and bribery from taking place within their organizations. Following greater international cooperation between enforcement authorities as well as new enforcement techniques such as wiretaps and sting operations, the number of prosecutions under the U.S. Foreign Corrupt Practices Act (FCPA) has dramatically increased from just five in 2004 to over seventy in 2010. China Briefing dedicated an entire issue to the FCPA in May this year, and with the introduction of the UK Bribery Act five months ago, the global trend of taking action against noncompliance is showing no signs of losing strength.
Unlike the FCPA, the UK Bribery Act also covers business-to-business bribery and does not offer any exceptions for facilitating payments to foreign officials – an area that may be of particular concern to companies operating in China. Another key feature of the act is the new corporate offence of “failure to prevent bribery” (The Bribery Act, Section 7). According to Section 7, if bribery occurs on behalf of a company by a person associated with it, the company can be made liable and, what is more, there are no limitations as to the amounts that can be fined.
In addition, for a company to be liable under Section 7 of the UK Bribery Act, it is enough that it merely carries on part of its business in the UK – the company does not have to be incorporated in the UK for the act to apply.
However, with “adequate procedures” in place, companies can avoid liability – and in the long run contribute to fair competition and social and economic development in the communities in which they operate. Thus, emphasis is on making companies establish efficient procedures for bribery prevention. By being proactive in establishment and implementation of a strong compliance policy, companies that fall under UK jurisdiction can avoid the government knocking on its door.
To help companies establish adequate procedures, the UK Secretary of State for Justice Kenneth Clark has put forth six guiding principles for companies to consider:
1. Proportionate procedures
Bribery prevention procedures should be proportionate to the risks faced by the organization and to the nature, scale and complexity of its activities. This principle refers to both the prevention policies and their implementation, and thus, proportionality should govern all the other principles below. So, for example, relying on agents in negotiations with foreign officials generally involves a considerable risk of bribery occurring and companies therefore need to mitigate the risks involved. Conversely, companies that do not rely on third-party intermediaries might face a lower risk and therefore need less in the way of established procedures. In addition, whereas very small companies may be able to rely on oral communication to convey their policies, larger companies may need written communication.
2. Top-level commitment
Fostering a culture where bribery is unacceptable requires top-level management taking an active role and showing commitment to carrying out business in a fair and honest way. For example, top-level management in smaller companies may need to be involved in any important decision related to prevention procedures and risk assessment and actively communicate the company’s stance against bribery.
Commercial organizations should periodically assess the nature and extent of potential risks of bribery. These risks may vary depending on the location and sector within which the company operates and/or regarding different types of transactions. Entering a new market or conducting business in a country with a high level of corruption, as well as entering into public procurement transactions, generally gives rise to a high level of risk.
4. Due diligence
From a risk-based perspective, companies should also conduct due diligence on persons who perform or will perform services on behalf of the company. The risks involved in relying on third party intermediaries can, for example, be mitigated through performing due diligence on prospective agents. In this way, due diligence is both a way of assessing the risks involved and of mitigating those risks.
5. Communication (including training)
To ensure that the company’s prevention policies are understood throughout the organization, companies should make use of internal and external information channels to communicate the application of prevention policies and raise awareness of the risks faced by the organization. Companies should also establish “speak up” procedures; that is, provide a secure and confidential way for internal and external parties to raise concerns about bribery by persons associated with the organization, request advice, and make suggestions for improving company procedures.
6. Monitoring and review
The specific bribery risks faced by an organization may change over time. Companies should therefore monitor the effectiveness of their procedures and adapt them as necessary. Important changes may include governmental modifications in countries where business is conducted, negative reports in the press, and internal changes in the nature and scale of the company’s own activities.
Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. The firm specializes in assisting foreign enterprises with their tax obligations. For further advice, please email email@example.com, visit www.dezshira.com, or download the firm’s brochure here.
The Foreign Corrupt Practices Act and its Impact on China Subsidiaries
This issue of China Briefing Magazine is dedicated to helping companies understand the Foreign Corrupt Practices Act and establish controls to prevent (and, if necessary) resolve FCPA noncompliance. Priced at US$10.
China Briefing – Financial Management
This issue of China Briefing details FCPA regulations, fraudulent accounting practices within Chinese companies and due diligence issues for IPO listings. It also covers PRC GAAP regulations, compliance with them and the differences between EU and U.S. standards. Priced at US$10.