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Accountants are vital to anti-corruption Compliance

Tough and far reaching new anti-corruption laws mean that companies have to be more vigilant than ever.

The local and global anti-corruption landscape is changing rapidly. Chartered accountants, either in business or in the profession, have to keep abreast of new developments to ensure that they play a meaningful role in the prevention of corruption in the organisations which they serve. Anti-corruption compliance is the new watch-phrase in global boardrooms, and chartered accountants have a responsibility to not only understand compliance obligations,

but also to help organisations to develop meaningful and robust anti-corruption controls.

The new SA Companies Act has introduced extensive anti-corruption requirements

It is a business imperative for CAs(SA) in South Africa to be familiar with the changes to the South African Companies Act, which, by way of Regulation 43 (promulgated in April 2011), has introduced extensive anti-corruption obligations. However, CAs(SA) that serve multi-national companies should also have a business understanding of two key global sets of extra territorial anticorruption laws.

The US Foreign Corrupt Practices Act (FCPA) was the first anti-corruption law that rigorously pursued cross border bribery For more than 25 years, the United States was the only country in the world that through the extra territorial reach of its FCPA, rigorously investigated bribes paid outside of its own borders. The world is getting fed up with bribery and corruption which have become endemic in approximately two thirds of the globe.

Many countries are imposing tough new anti-graft measures.

The UK Bribery Act is arguably the most radical extra-territorial anti-graft law to date

Importantly for SAICA members, the United Kingdom, via the robust United Kingdom Bribery Act (UKBA), has created a new anti-corruption compliance regime which is even more powerful than the FCPA in many respects. Failure to adhere to anti-bribery compliance obligations based on these and other new anti-corruption laws can result in substantial and potentially debilitating fines being imposed against companies.

This article summarises critical aspects of these global and local anticorruption laws.

The South African Companies Act (61 of 1973) – Regulation 43

All listed companies, as well as medium to large enterprises and all State owned companies in South Africa, have to comply with the anti-corruption compliance requirements of South African law, specifically the anti-corruption provisions incorporated into the Companies Act, (Act 71 of 2008). Regulation 43 of that Act has introduced a requirement for companies to establish social and ethics committees which have to monitor their activities with respect to a host of good corporate citizenship and ethics promoting obligations.

The social and ethics committee also has a corruption reduction responsibility, as the regulations require the committee to monitor the company’s efforts to adopt and implement The Organisation for Economic Co-operation and Development (OECD) recommendations on reducing corruption. Additionally, the regulations require companies to observe the United Nations Global Compact. Its Principle 10 requires the company to take active steps to reduce corruption.

The OECD recommendations require companies to:

• Not pay or demand bribes

• Have an anti-bribery/corruption policy

• Develop internal processes and controls to mitigate the risk of bribery

• Keep fair and accurate books and records

• Perform an anti-bribery risk assessment to identify bribery risks in the organisation

• Perform due diligence on agents, intermediaries and consultants to ensure that they do not pay bribes on behalf of the company

• Educate employees and agents on anti-bribery processes and publicise its anti-bribery initiatives

• Avoid unlawful political contributions.

Ethical companies should have no difficulty whatsoever with the implementation of these

recommendations, which amount to good corporate governance, and spell out the key procedures that are required to mitigate the risk of bribery. Failure to comply with Companies Act requirements will result in the company being issued with a directive to comply, and if that compliance order is flouted, the company may face a fine of up to R1 million.

This million rand penalty pales into insignificance when compared to penalties imposed for anti-corruption non-compliance elsewhere.

The United States Foreign Corrupt Practices Act of 1977 (FCPA)

For many years the FCPA has been a major driver of ethical corporate behaviour on the part of companies registered in, or associated with, the United States (US), where the fear of the combined efforts of the Securities Exchange Commission (SEC) and the Department of Justice (DOJ) compels big business to take robust measures to prevent corporate bribery, or face substantial penalties.

The FCPA, which is a federal law, targets the payment of bribes by businesses linked to the US to foreign government officials. The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments, or foreign political parties, with the intent of obtaining or retaining business. It also requires businesses to keep proper books and records.

Record penalties for corporate corruption were imposed against Siemens AG when the multi-national company settled FCPA charges with the Department of Justice, the Munich Public Prosecutor’s Office and the SEC. These included multiple guilty pleas and $1.6 billion in fines and penalties, including $800 million in disgorgement of bribe-tainted profits to the US authorities.

This case demonstrates how regulators in different jurisdictions are cooperating with each other more than ever. According to the DOJ, this was the largest monetary sanction ever imposed in an FCPA case. The DOJ cautioned companies that it would continue to crack down on FCPA violations around the globe.

(See U.S. v. Siemens Aktiengesellschaft, 2008 – Case No. 08-367.)

As is demonstrated by the Siemens settlement, there is no double-jeopardy defence for offending companies, and the same set of facts can give rise to a multitude of prosecutions.

The Siemens settlement related to bribes paid by various Siemens subsidiaries in Argentina, Venezuela, Bangladesh and Iraq, where the bribes related to the United Nations Oil for Food Programme. The corrupt payments were improperly recorded in the books and records of the company. In December 2012, Siemens paid €300 million (Euro) to the regulators in Greece to settle an enforcement action.

What is notable about the Siemens prosecution is that the violations generally took place in subsidiaries in remote regions. This is an important factor for local companies, as many South African corporates are expanding their business operations into Africa at a rapid rate. They will have to implement stern measures to manage the corruption risk and ensure that management in their remote subsidiaries avoid the payment of bribes. In this regard, it is difficult for companies to do business in Africa without being faced with bribe solicitation.

The 2012 Transparency International Corruption Index reflects that two thirds of the African continent scored less than 3 out of 10, which is indicative of endemic corruption. Assistant Attorney General, Lanny A. Breuer, head of the US DOJ’s criminal division, said in an official statement that: “The Department of Justice’s commitment to rooting out foreign bribery is unwavering; wherever possible, the department seeks to find and hold accountable all the players in corrupt deals – from customers who know that bribes are being paid on their behalf to those actually making the payments.” Breuer added. “….foreign bribery has a steep cost – a cost that can be avoided through full compliance with the law.”

The FCPA enforcement statistics bear out Breuer’s comments, as more than $1.8 billion dollars was gathered in FCPA settlements and penalties from 22 companies in 2010, a year in which 53 individuals were indicted or tried.

In 2011 the DOJ and the SEC cumulatively gathered $508.6 million from FCPA breaches. During 2012, the DOJ and SEC recovered more than $260 million from 25 companies as a result of successful global enforcement actions.

The United Kingdom Bribery Act of 2010 (UKBA) As previously mentioned, for years the United States was the only country that rigorously investigated bribes paid to foreign government officials. Now, however, the United Kingdom has gone even further than the US regulators by introducing the United Kingdom Bribery Act (UKBA), which prohibits not

only bribes paid to foreign government officials, but also bribes paid to anyone else. Even more dramatic however, is the British regulator’s provision for a new corporate offence, namely the failure of a commercial organisation to prevent bribery. Section 7 compels

companies to put policies and procedures in place to mitigate the risk of bribery.

The UKBA is new legislation; there is accordingly no legal precedent as to how the Serious Fraud Office (SFO), which is entrusted with UKBA enforcement, will go about establishing jurisdiction. In addition, there are no clear indications of the anticipated penalties that it will impose. It was already imposing heavy fines prior to the UKBA. It is anticipated that the SFO will follow a similar route to the US, which is criticised for using the penal provisions of the anticorruption legislation as a revenue generator in these times of recession.

Section 12 of the UK Bribery Act provides that the courts will have jurisdiction not only over section 1, 2 or 6 offences committed in the UK, but also over offences committed outside the UK, where the person committing them has a close connection with the UK by virtue of being a British national, or a resident in the UK, a body incorporated in the UK or a Scottish partnership. However, in terms of section 7 prosecutions for failing to prevent bribery, the requirement of a close connection with the UK does not apply. Section 7(3) makes it clear that a commercial organisation can be held liable for conduct amounting to a contravention of section 1 or 6 on the part of a person who is neither a UK national, nor a resident in the UK (or a body incorporated or formed in the UK).

In addition, section 12(5) states that it does not matter whether the acts or omissions which form part of the section 7 offences, take place in the UK or elsewhere. Thus, provided the organisation is either incorporated or formed in the UK, or that it carries on a business or part of a business in the UK (wherever in the world it may be incorporated or formed), the

UK courts will have jurisdiction. This latter stipulation will bring many South African organisations within the reach of UK authorities.

The extraordinarily broad jurisdictional reach of the Bribery Act means that liability could apply to non-UK-based companies that “carry on business” in the UK, regardless of whether the challenged conduct involved activities in the UK. The UK Bribery Act has several other notable differences from the FCPA, and in many ways, it appears to be much broader than

the FCPA. Portions of the Act are applicable to any entity that runs a business, or part of a business, in the UK, whether or not the underlying conduct has any substantive connection to the UK.

Serious Fraud Office (SFO) director, Richard Alderman, explained in a June 23, 2010 speech: “I shall have jurisdiction in respect of corruption committed by those corporates anywhere in the world even if the corruption is not taking place through the business presence of the corporate in this jurisdiction. What this means is this: Assume a foreign corporate with a number of outlets here. Assume that quite separately that foreign corporate is involved in corruption in a third country. We have jurisdiction over that corruption.”

It is accordingly a business imperative for South African companies that are listed in the UK, that have business operations within the jurisdiction, or are otherwise associated with the United Kingdom, to ensure that they are compliant with the UKBA.

Some companies in South Africa that have UKBA compliance obligations have taken a relaxed approach to anti-corruption compliance, believing that there will be an extensive window period before the SFO initiates enforcement action. This approach may prove costly, as it is likely that the SFO will, just as US regulators have done to alarming effect in recent years, seek to make examples of non-compliant multi-national organisations which profit from bribe induced contracts.

In its guidance notes on the UKBA, the Ministry of Justice recognises the fact that no bribery prevention regime will be capable of preventing bribery at all times, and further, that the objective of the Act is not to bring the full force of the criminal law to bear upon well run commercial organisations in which an isolated incident of bribery occurs.

Accordingly, the UKBA provides the commercial organisation with a defence if it can show that, while bribery did take place, the organisation had taken “adequate procedures designed to prevent persons associated with [the organisation] from undertaking such conduct”. Under the Act’s explanatory notes, the burden of proof in this situation falls on the

organisation, with the standard of proof based on a balance of probabilities.

The guidelines set out six non-prescriptive fundamental principles that commercial organisations should consider when adopting “adequate procedures” to prevent bribery being committed on their behalf.

The 6 principles are:

1. Appropriate procedures – the commercial organisation’s procedures to prevent bribery by

persons associated with it should be proportionate to the bribery risks it faces, having due regard to the nature, scale and complexity of the commercial organisation’s activities. The organisation should have a robust anti-bribery policy in place with procedures designed to foster compliance by employees, business partners, as well as agents and intermediaries.

2. Top-level commitment – top-level management of a commercial organisation must demonstrate commitment to preventing bribery by persons associated with it.

3. Risk assessment – the commercial organisation should assess the nature and extent of its exposure to potential external and internal risks of bribery on its behalf by persons associated with it.

4. Due diligence – the commercial organisation should apply due diligence procedures, taking a proportionate and risk-based approach in respect of persons who perform or will perform services for or on its behalf, in order to mitigate potential bribery risks.

5. Communication (including training) – the commercial organisation should ensure that its bribery prevention policies and procedures are embedded and understood throughout the organisation via internal and external communication, including training that is proportionate to the risks that it faces.

6. Monitoring and review – the commercial organisation should monitor and review procedures designed to prevent bribery by persons associated with it, and should make necessary improvements.

By adhering to the above ministerial guidelines, South African companies subject to the KBA should be able to resist prosecution for failing to prevent bribery, in the event that a bribe is paid by an employee or agent.

Robust “adequate procedures” will not only facilitate compliance to the UKBA, but will simultaneously ensure that South African companies are compliant with local Companies Act requirements. However, once the procedures are properly implemented, they will dramatically increase the organisation’s anti-corruption controls, and in so doing, assist the company to avoid becoming the target for potential FCPA enforcement action.

The local and global anti-corruption laws have extensive books and records requirements that CAs(SA) should monitor in keeping with their roles as custodians of the financial integrity of organisations. Special controls, including pre-approval procedures around key bribery risk areas, such as gifts, travel, entertainment, donations and corporate social                                    responsibility programmes, have to be developed, audited and monitored.

Anti-corruption due diligence checks focused on addressing bribery risks escalate the standard merger and acquisition (M&A) due diligence process to much higher levels of scrutiny. The identification of politically exposed persons (PEPS) – current or former government officials – is also a critically important anti-corruption compliance procedure. All of these are exciting new areas where CAs(SA) have a role to play, along with legal advisors, to ensure that clients traverse a route free of corruption, particularly in international business transactions.

In the current global and local anti-corruption compliance environment, it would be reckless for any company board not to pay serious attention to creating an anti-bribery culture within their organisation. The cost of non-compliance to anti-corruption requirements is a risk that has to be appropriately managed within every organisation. All companies should have dedicated anti-corruption policies and procedures in place, and CAs(SA) have to help companies to reduce corruption, whether they are active members of the management team or internal or external auditors. ❐

Author: Steven Powell, BProc, LLB, an Advocate of the High Court of South Africa, is the Director of the Forensics Services Division at Edward Nathan Sonnenbergs.