Cocktail of problems: The conflict between anti-bribery compliance and client service

Anti-money laundering due diligence on clients is a substantial feature of any law firm’s activities. Knowing your client (KYC) has always been central to any such due diligence. Knowing your lawyer – due diligence by clients on their lawyers – is a practice that is less well known. However, international anti-corruption legislation is now making due diligence in the lawyer-client relationship a two-way process.

In October 2013, the International Bar Association, in conjunction with the OECD and UNODC, published a survey entitled ‘Anti-corruption compliance and the
legal profession’. It produced some
startling results.

The survey sought the views of corporates in relation to managing corruption risks associated with instructing external lawyers. To the question ‘according to your compliance standards, do external legal counsel pose a risk of bribery and corruption?’, only 19 per cent answered ‘no’. More than half of the respondents viewed as ‘risky’ the relationship between lawyers and public authorities, in particular the judiciary.

Unsurprisingly, the perception of risk varied significantly between countries and sectors. The pharmaceutical and energy/natural resources sectors were identified as particularly high risk.

However, law firms based in ‘low risk’ countries should not be complacent. Offices located in higher risk jurisdictions or associations with law firms in such countries were perceived to be a particular risk. Respondents to the survey identified generally a lack of adequate procedures to retain or exercise control over third parties that their external lawyers engaged.

Other findings included:

a marked increase during the past five years in both ‘pre-retention’ due diligence and ‘post-retention’ monitoring on external lawyers;

while the majority of respondents reported not having a policy for monitoring the anti-corruption compliance of existing legal counsel, those who did monitor employed a range of techniques including constant supervision, periodic certifications and regular ethical and reputational
checks; and

20 per cent of respondents reported that they ‘always’ or ‘frequently’
have to exert influence on their
external lawyers to improve their
anti-corruption compliance.

The survey notes that “although companies recognise and commend their lawyers’ ability to provide expert advice on many commercial issues, clients do expect a higher degree of anti-corruption knowledge and awareness from a profession so pivotal for the success of their business”.

The significance of the survey is clear:

1. law firms will be increasingly subject to searching questions from clients or prospective clients as to their anti-corruption procedures. Failure to demonstrate that sufficient procedures are in place could result in the loss of instructions;

2. law firms’ relationships with third parties, including other law firms in higher risk jurisdictions, will face particular scrutiny; and

3. corporate clients will expect a high level of anti-corruption expertise from their transactional lawyers.

Anti-corruption enforcement by the US authorities in recent years is having a real impact on the way in which corporates, in particular multinationals, respond to perceived risks.

Law firms who act for US multinationals will in all likelihood be familiar with the trend picked up by the survey. Anecdotally, the biggest challenge has been the adequacy of third-party due diligence. The survey revealed that many non-US corporates are now also imposing similar levels of due diligence on their external lawyers.

Protecting your firm

The starting point is to have in place anti-corruption policies and procedures that are proportionate to the risks facing your firm. Firms advising on transactional work in high risk jurisdictions should focus on two areas in particular:

1. ensuring that relevant lawyers have comprehensive training and;

2. ensuring that any local lawyers or other third parties have been subject to thorough due diligence checks.

Often the best way of broaching this sometimes difficult subject with third parties is to forward a copy of the firm’s anti-corruption policies in order to
demonstrate that what is being demanded of them is no more than the firm itself is required to perform.

Conducting transactional work for clients in jurisdictions where corruption is endemic presents a cocktail of problems for law firms. The problem is particularly acute for law firms with a UK presence, where the Bribery Act 2010 and the Proceeds of Crime Act 2002 (POCA) combine to make the submission of a suspicious activity report (SAR) almost inevitable.

Facilitation payments

Under the UK Bribery Act, facilitation payments are illegal. Although such payments have always been illegal under English law, the extraterritorial reach of the Bribery Act is new, the only exception being if the facilitation payments are permitted under local law.

Where, during the course of a transaction, evidence of corruption is unearthed, the position is straightforward – a SAR will be submitted (often jointly with the client). Where there is no clear evidence of corruption, the position is much more complicated.

Under POCA, transactional lawyers fall within the regulated sector and are required to submit a SAR where they suspect or where there are reasonable grounds to suspect money laundering. Transactional lawyers will not usually be covered by the ‘legal advice’ exception under Section 330(10) of POCA.

In countries where it is widely acknowledged that it is impossible to operate without making facilitation payments, must a SAR be submitted simply on this basis?

It would certainly seem to meet the test for suspicion set out in R v Da Silva [2006 4 All ER 900]: “It seems to us that the essential element in the word ‘suspect’ and its affiliates, in this context, is that the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice. But the statute does not require the suspicion to be ‘clear’ or ‘firmly grounded and targeted on specific facts’, or ‘based upon reasonable grounds’.”

The meaning of criminal property under POCA is very broad: “benefit is the property obtained as a result of or in connection with the conduct” (Section 340(8)).

So, it would be difficult to argue that carrying on a business or even owning property which required facilitation payments was not ‘connected’ with the conduct of the business. The value of the benefit is equal to the value of the property obtained. So, for example, if a business could not function without making facilitation payments, the ‘benefit’ would be the turnover of business.

Although the Supreme Court’s
decision in R v Waya [2013 1 AER 889] has now introduced a test of proportionality into the assessment of benefit, each case will be fact specific and it is therefore
safer to assume that turnover is the appropriate figure.

Managing the risks

Spare a thought for the client company for which things are likely to be worse. Although the client may not be regulated and would not commit an offence for failing to submit a SAR, the obtaining of consent is still important as it provides a defence against the principal money laundering offences. However, it provides no such defence to any offence under the Bribery Act.

So, the submission of a SAR could trigger an investigation which, in turn, could produce the evidence required to mount a prosecution, particularly if a company’s
anti-corruption procedures were found to be inadequate.

One can see how superficially tempting it would be for the company not to make
a SAR at all; however, the company is
stuck because its own transactional advisers are likely to be reporting the transaction in any event.

The real difficulty is that making facilitations payments tends to be an ongoing problem for the client. But where does this leave the law firm conducting transactional work for the client? ?On the face of it, the client is committing an ongoing criminal offence and the law firm cannot therefore continue to act. The problem is all the more acute as the law firm cannot explain to its client either its concerns or its decision to withdraw without running the risk of committing a ‘tipping off’ offence.

This issue is likely to become more of a problem over the coming years. The OECD, encouraged by lobby groups such as Transparency International, has made it clear that facilitation payments should be criminalised by all of its signatories. In the UK, the SFO has withdrawn its self-reporting guidance, suggesting a harder line against Bribery Act offences.

In the short-term, transactional law firms should encourage their clients to seek independent legal advice on anti-corruption issues before proceeding with transactions in high risk jurisdictions. Such advice would protect the client, as any such advice would be privileged and covered by the Section 330(10) exception. There would consequently be no requirement on the independent law firm to submit a SAR. The client would be able to discuss the issue freely and, together with the independent firm, devise a strategy for the transaction.

Although it may help with the issue of SARs, the problem of ongoing offences still remains. Can the independent law
firm continue to act, if it knows that its client will be committing ongoing criminal offences by continuing to make facilitation payments? Will the protection of Section 330(10) fall away because it could be argued that a criminal purpose was being furthered? This is essentially a professional ethics issue for which a degree of latitude is required from lawyers’ professional bodies – whether this will be forthcoming remains to be seen.

New system needed

However laudable its aim, one cannot help but think that the OECD’s approach of zero tolerance towards facilitation payments will backfire and drive such payments even further underground. Once companies begin to realise the obligations placed on their advisers by the UK’s anti-corruption and anti-money laundering legislation, either they will avoid conducting transactions in high risk countries at all or, if they do, the temptation will be to conceal or deny that facilitation payments take place at all.

The solution may lie in the establishment of a new system of SARs which relates specifically to facilitation payments demanded abroad. Rather than driving such payments underground, the better approach would be to encourage transparency by offering protection from prosecution by those who self-report – in the same way that the POCA ‘consent’ procedure works.

Facilitation payments are quite different in nature than other bribes. Those who make facilitation payments see themselves, with some justification, as victims rather than perpetrators of corruption. There is a clear distinction between the two.

At this stage, what is required is an accurate and reliable flow of intelligence about where, when and by whom such payments are being demanded. Armed with this information, the OECD would be much better placed to confront those countries where the problem is endemic and to demand action. Action at the macro rather than the micro level is what is required.

Ultimately, there may well be a place for zero tolerance of facilitation payments, but only when all the major economies have signed up to, and are properly committed to, such an approach.

In the meantime, companies subject to zero tolerance regimes such as the UK Bribery Act find themselves in an almost impossible position when doing business in countries where facilitation payments are the norm. An unintended consequence of the UK regime is the driving of a wedge between a company and its lawyers, in circumstances where good advice is desperately needed.

Andrew Oldland QC is head of the regulatory team at UK law firm Michelmores (www.michelmores.com)

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