A more sober approach to the risk of bribery

The Bribery Act 2010 is taking some time to have an effect. There have been no corporate prosecutions, only 12 individual prosecutions and three convictions. Yet it is having a real impact in unanticipated ways.

Cultural changes

The Act imposes a burden on all commercial organisations not only to avoid committing the principle offences of “bribing” or “being bribed”, but also to ensure that they put in place, in advance and without any intention to commit a crime, a defence to any future prosecution for the crime of “failure to prevent bribery”. The Act achieves this by criminalising commercial organisations for bribery carried out by their associates (even without official sanction or knowledge) and offering only one statutory defence – having “adequate procedures… to prevent [bribery by associates]”. Hence, all sensible businesses have sought experts’ advice, adopted policies, trained staff, monitored practice, assessed risk and otherwise stretched themselves so that they might have a defence to crimes unknown and unintended. This has resulted in significant changes – most obviously to corporate hospitality policies –with some industries’ networking activities radically changed, such that in parts of the construction industry, for example, clients are hosting suppliers. Commercial agreements are now customarily subject to, and even conditional on, compliance with anti-bribery strictures. There is, as a result, a chastened and (literally) more sober approach to the risk of bribery – at least within the UK.

Pathway for future laws

The government has undoubtedly effected cultural change through this mechanism – and would quite like to do so again. The new attorney general, Jeremy Wright QC, announced this autumn that the government is considering proposals for similar offences of “corporate failure to prevent economic crime”. Wright wants to ensure that there are “the correct laws and structures in place to tackle fraud and corruption, and to improve detection of money laundering”. He explains: “The evolving nature of economic crime means we need to continue to find and develop new ways to expose and combat it”. Whatever your views on this, such structures are very effective at achieving heightened awareness of an issue. It remains to be seen which economic crimes would be subject to such an approach and, indeed, whether the government will, notwithstanding the apparent cross-party support, have the time and the mandate to put the legislation in place. Nevertheless, it is almost certain that preventing money laundering would be one of the targets and prevention of fraud and insider trading is also high on the list.

Overreaction in other industries

A good example of overreaction, caused by heightened awareness and potential for embarrassment, comes from the world of independent schools. All independent schools are commercial organisations, even those classified as charities. They have dutifully introduced or enhanced policies on bribery (second nature to an industry measured and judged on its policies). However, a specific issue has arisen which has caused much debate and which has brought greater awareness of the Act to the wider world.

Some senior schools are withdrawing discounts on fees for the children of heads of feeder prep schools. Why? Heads are in a position to advise parents and pupils on their choice of senior schools. Where an agent (the head) owes a fiduciary duty to his principal (the parent or pupil) because of a relationship of trust and confidence (inherent in giving advice as to future schools), the agent cannot make a secret profit or allow a conflict of interest to subsist – except, the law says, with informed consent and after full disclosure. Some schools have overreacted by withdrawing because of the risk of non-disclosure.

The better view is that senior schools can continue such discounts provided the two schools ensure full disclosure of the fact and extent of the discount to the governors of the prep school (as the employers of the relevant staff) and to the parents receiving the advice (as principal). This is the approach that well-advised schools are taking. Again, this is an example of cultural change, which is evident in the heightened awareness of risk and responsibility, increasing transparency and peculiarly un-English public display of probity.

The parallels with other industries are obvious – the regulation of financial advice already achieves such disclosures – but what of other advisers? Do you, as lawyers, ensure that referrers of clients to your businesses disclose what benefits or hospitality you provide to them? Do other agents routinely disclose benefits?

Consequences of taking bribes

This leads to the question of what might be the remedy where a secret profit is received. It is certainly the case that the agent is personally liable to account for it – but how?

In one of the few cases in which the Supreme Court has touched on the issue of bribery, FHR European Ventures LLP and others v Cedar Capital Partners LLC [2014] UKSC 45, it considered whether secret commissions received by an agent should be treated as the property of the principal or simply give rise to liability for compensation.

This issue has long been debated in a variety of courts. The counterargument to the view that the profit is held for the principal is that such a benefit is held on trust where it flows from an asset beneficially owned by, or intended for, the principal (or derived from an activity undertaken on the principal’s behalf).

In this case, the principal (FHR) engaged the agent (Cedar) to negotiate the purchase of the Monte Carlo Grand Hotel in Monaco. The agent failed to disclose the full extent of its agreement with the vendor for commission – and received €10m from the vendor on the sale.

The High Court ordered that the agent pay the principal an amount equal to the commission but refused to grant a proprietary remedy. FHR successfully appealed to the Court of Appeal against the decision that it had no proprietary interest in the secret commission. The agent appealed to the Supreme Court.

Why should it matter whether the remedy is an order for payment or an order for ownership? If the fiduciary is insolvent, a proprietary remedy may prioritise the profit ahead of other creditors. If the secret profit has gained value, or been invested in an asset which has gained value, a propriety remedy would give the claimant the benefit – or entitle the claimant to recover it from a third party.

The Supreme Court unanimously dismissed the agent’s appeal. The secret commission was to be treated as the property of the principal and not merely as giving rise to a claim for equitable compensation. The court held that it was not necessary for the agent to have derived the relevant benefit from assets which were, or should be, the property of the principal. All unauthorised benefits received by an agent in the absence of informed consent are now subject to a duty to deliver up to the principal the benefit obtained.

Commercial contracts

Those who advise on more complex commercial contracts (for example, Joint Contracts Tribunal or NHS contracts) will have seen extensive provisions relating to bribery. These provisions are gaining in importance and are appearing in less complex contracts. Typically, they demand contractual promises to comply with the laws, to not engage in criminal practices, to conform with the dominant party’s policies and practices, to blow whistles, to provide information, to assist and to keep records. Increasingly, they are accompanied by a request for an indemnity in respect of corruption, warranties and rights of termination. They may now, in the light of FHR v Cedar, seek to deal with proprietary rights to secret profit, to assurances of full disclosure and to restrict fiduciary duties and limit liability. If parliament enacts further laws criminalising failure to prevent different forms of “economic crime”, these demands on contracts will grow to deal with the risks arising from those crimes. In the meantime, the heightened awareness of the bribery laws puts pressure on lawyers to consider bribery in all contracts. Is it negligent not to advise a client to seek protection from others’ corruption? Given the scarcity of prosecutions and the severity required to sanction prosecutions, it is safe to conclude that we have not yet found the right balance. SJ

Mark Lucas is a partner at Barlow Robbins