Bribes and Kickbacks

On 17th December 1997, the UK and other of the world’s leading industrial nations signed the Organisation for Economic Co-Operation and Development (OECD) Convention on combating bribery of foreign public officials in international business transactions. In June 1997, following the Law Commission’s review of the law on corruption, the Government issued a consultation paper with a view to clarifying and consolidating the laws relating to bribery. The Law Commission is due to publish its report on the topic around the end of this month. In addition, recent EU initiatives on corruption call for the criminalisation by all member states of bribery of community and other national officials.

As a result of these initiatives, it is likely that there will be a widening of the English law on bribery, possibly tending towards the US bribery laws, although falling some way short of that jurisdiction’s Foreign Corrupt Practices Act of 1977 which is discussed in more detail below.

This article reviews the current law on bribery and kickbacks, and the potential liability of a company for the acts of its agents and employees who bribe others. It also offers practical guidance for minimising the risk of a company unwittingly laying itself open to civil or criminal actions for bribery committed by its agents.

Nature and extent of bribes and kickbacks

Bribes can take many different forms. The essential element of a bribe is that it is a benefit accruing to a representative of a principal which is given in an attempt to influence his judgment, usually to enable the bribe giver to win or retain the business of the principal. A kickback is a specific type of bribe in which the bribe payer, usually the supplier of goods or services to the principal, overcharges the principal, paying some or all of the overcharge to the principal’s representative in return for awarding a contract to that supplier or continuing to place business with it.

Bribery is much more commonplace than might be expected. Moreover, a number of arrangements which some might consider to be harmless in fact include acts of bribery or, if they fall short of bribery, may still involve the payment of secret commissions for which the payer of those commissions may face a civil claim.

Recent surveys suggest that corruption is rife, particularly in Eastern Europe, former Soviet Bloc countries, Nigeria, Ghana and Iran. Estimates given by those involved in corruption suggest that around 5% of the cost of a project may be paid in bribes. Those contracts most at risk are thought to be the supply of aircraft, ships, military supplies, telecommunications projects and privatisations. However, any supplier who is keen to obtain a contract may agree with the client’s purchasing manager to make payments to him personally in return for the award or continuation of a supply contract. The arrangement may seem insignificant in the context of the contract but, if the supplier is found liable to pay damages to the client, having already paid bribes to the client’s manager, the cost and other implications of such bribery become more serious.

Criminal provisions

The giving and taking of bribes is a criminal offence in certain circumstances. The three existing English statutes relating to bribery are:

• The Public Bodies Corrupt Practices Act 1889
• The Prevention of Corruption Act 1906
• The Prevention of Corruption Act 1916

The 1889 and 1916 Acts deal exclusively with the bribery of UK public officials and make it an offence to bribe a member, officer or servant of a public body.

The 1906 Act is wider and deals with the corrupt transactions of agents. The 1906 Act creates four distinct offences. It is an offence for:

• an agent corruptly to accept (or agree to accept) a bribe from any other person in relation to its principal’s affairs or business;
• any person corruptly to give (or agree to give) or offer a bribe to an agent in relation to the affairs or business of the agent’s principal;
• an agent knowingly to use with intent to deceive its principal any false account or misleading document (whether in respect of a bribe or otherwise);
• any person knowingly to give to any agent a false document as referred to above.

The word “agent” is defined widely as “any person employed by or acting for another”. “Bribe” includes a gift or valuable consideration of any kind. Offences under the 1906 Act are punishable with a maximum of 7 years imprisonment or an unlimited fine, or both, and are arrestable.

The 1906 Act only applies where one element of the corrupt transaction (that is, the offer, acceptance, or agreement to accept) takes place within England and Wales. No offence is committed under English law where the agreement to pay a bribe and the actual payment of it takes place in another jurisdiction (although an offence may be committed in the other country).

The position is less clear where the agreement to bribe and the receipt of the bribe take place abroad, but the payment of the bribe is made from England. The 1906 Act criminalises the “giving” of bribes. It has generally been thought that the payment would need to be received in order for the “giving” to be complete, in which case the giving would take place in the country of receipt. However, this is by no means clear, and it may depend upon the method used to transmit the payment . It may also be possible for the court to treat such conduct as the “offering” of a bribe, which would fall within the 1906 Act definition.

Companies should therefore be wary of such arrangements. Moreover, proposals contained in the Government statement of June 1997 would criminalise acts carried out in this country which are preparatory to an act of corruption abroad. Accordingly, whilst not a criminal offence under the current law, if the new proposals are enacted, it would be an offence for the Board of a UK company to authorise the use of bribes abroad in order to secure business, even if all elements of the bribe itself (agreement, payment and receipt) take place abroad.

Company’s criminal liability

Where the directors or managers which constitute the “directing mind and will of the company” are involved in bribery, the company as well as the individuals involved will be liable. Where an agent of the company gives the bribe, he will be personally liable, but the company will only be liable if it can be shown that it in some way empowered the agent to make the bribe such that it may be vicariously liable.

People involved in the giving and accepting of bribes will usually be guilty of the common law offence of conspiracy to defraud.

Civil law consequences

When a dishonest agent accepts a bribe or takes a secret commission in relation to his principal’s affairs, the agent and the bribe giver will be jointly and severally liable to the principal:

1. in restitution for the bribe; and

2. in tort for any loss sustained by the principal over and above the amount of the bribe.

This is so whether or not the giving of secret commission was contrary to the criminal law.

It appears that the agent will also hold the bribe on constructive trust for the principal, and the bribe giver may be liable for assistance in breach of trust. The principal therefore has a proprietary claim for the bribes, which may be particularly useful where the agent or bribe giver is insolvent or where property purchased with the proceeds of the bribe has increased in value (the principal will be entitled to claim the increase as well as the underlying sum, plus interest).

Furthermore, every contract made under the influence of bribe is voidable by the principal. Where the contract has not been performed, the principal may opt to rescind it, and need not give credit to the bribe giver for the value of the bribe: this is so even if the principal has subsequently discovered the bribe and recovered it from the agent.

The bribe giver will be liable even if it thought that the agent would tell or had told its principal about the bribe/commission; likewise, where it originally arranged for the bribe not knowing of the agency but, despite learning of the agency, continued regardless.

The bribe giver may, in some circumstances, consider that the principal was contributorily negligent as it should have been aware of the bribes. Such arguments have not succeeded. However, the position may be different where the bribe giver can show that the principal was actually aware of the bribe and did nothing to stop it.

In summary, particularly where the bribe giver has deeper pockets than the agent, the bribe giver may find itself paying the bribes twice without any recovery: the first time to the agent as a bribe and the second to the principal as a result of a claim for restitution. It may also be liable to account to the principal for any profits which it made on the infected contracts.

Directors may also be personally liable to reinstate any company assets which they have misapplied in paying bribes.

Company’s civil liability

The general rule applying to employees (as opposed to agents) who commit wrongful acts is that the employer is liable only for those acts which the employee committed in the course of his employment. However, in relation to employees and agents where allegations of bribery are involved, the Courts have taken a different approach.

The key question is the extent to which the agent or employee had actual or ostensible authority to make the bribe. Where the bribe is made with the approval of the directors, the company will be liable. If not, in order for the company to be liable it must have put the agent in a position to give bribes. The determination of this question will involve examination of the company’s policy and procedures in relation to bribery, and any internal documents or other directions on bribe giving and taking will be disclosable in proceedings as well as the official company statement of policy.

Whether the company is liable for its agent will depend upon the facts of the individual case including the degree of autonomy given to the agent, whether the company was disclosed as a principal and whether bribe giving is a normal occurrence in the course of negotiations for the type of contract and country in question. In attempting to avoid liability, it is likely that the company would have to show that it had taken steps to enforce its anti-bribery policy, but that it had been deceived by its agent.

The Foreign Corrupt Practices Act 1977

UK companies should also be aware of a US statute, the Foreign Corrupt Practices Act 1977 (the “FCPA”).

The FCPA has extra-territorial effect and makes it a crime for US companies or individuals (whether by themselves or through their agents) to bribe foreign officials in an effort to attract or retain business.

The definition of “bribe” is wide and potentially includes giving anything of value to a foreign official (or to another for his benefit, e.g. a member of his family) with a view to winning or retaining business. For instance, paying the expenses of an official with the intention of influencing his impartiality may breach the FCPA.

There are three exceptions to the rule:

• payments to expedite or secure routine Governmental action, for example, the giving of permits, licenses, visas and work orders etc.
• entertainment expenses are allowed where these are reasonable and bona fide costs relating to the promotion of particular products or services or the performance of a contract. Prior approval of significant expenses may be obtained from the US Justice Department.
• where a payment is specifically lawful under the written laws of the foreign country (although this is rare).

Whilst the FCPA does not apply directly to a UK company or firm operating outside the US, it may have a knock-on effect on connected US individuals or companies. The FCPA applies to:

• any US national who is involved in any way with the payment of bribes, even where he is employed by a UK company
• a US company if its UK subsidiary, its branch or a company with which it operates a joint venture is responsible for the payment of bribes
• any company which issues its securities in the US e.g. a UK company which is listed on the New York Stock Exchange
• UK companies with US subsidiaries may also be affected.

The penalties for a violation of the FCPA can be grave both for the company, which may be fined, and the officers and employees of the company, who may be personally fined or imprisoned. There may also be tax implications for the US parent company and the possibility of competitors suing for civil damages and treble damages under RICO (the Racketeer Influenced and Corrupt Organisations Act).

Practical steps to protect against liability

Particularly at risk are companies who use local agents in countries where bribery is commonplace. Companies should consider taking the following steps:

(I) Obtain undertakings from agents:

• not to offer any inducement to third parties or otherwise breach anti-bribery legislation applicable to the principal (including English bribery laws and the FCPA).
• to keep records of all payments and transactions relating to the principal’s business and allow the principal to inspect those records as and when required.
• to obtain identical covenants from any employees or sub-agents working in relation to the principal’s business.

(II) consult local lawyers to ensure that none of the arrangements with the agent (whether subject to English law and jurisdiction or otherwise) is illegal under local law.

(III) before employing an agent, particularly a local agent abroad, undertake background checks against him, for example, a NEXIS search and any local searches which might be available.

(IV) once the arrangements are in place, continue to monitor the position and carry out random checks of the agent’s paperwork.

(V) be suspicious of unusual payment requests, for example, for payments in cash or through foreign bank accounts not in the name of the agent

(VI) review news stories in the agent’s location in order to pick up on any allegations of bribery or corruption in the region.

(VII) where hiring of agents is a regular part of the company’s business, adopt standard procedures covering the above steps. Keep records of all checks for future reference.

(VIII) if gifts or hospitality are offered to a customer, ensure that these are of such a nature that no suggestion of an ulterior motive may be raised and they are of the type which may be reciprocated by the customer. If in doubt, ensure that the gift is disclosed to and authorised by the customer’s management.

Conclusion

The OECD Convention entered into in December 1997 called for a toughening of the laws against bribery including stricter accounting and auditing requirements to prevent and monitor bribery, suspension from competition for public procurement contracts companies who have been found guilty of bribery, extradition of individuals found guilty of bribery, and the non-deductibility of bribes for tax purposes (Australia, Austria, Belgium, France, Germany, Ireland, Luxembourg, The Netherlands, New Zealand, Portugal and Switzerland all allowed some form of deductibility for tax purposes prior to the signature of the OECD treaty).

In light of the developing laws on bribery, companies may wish to review and, where appropriate, renegotiate the terms of their existing contracts. Companies should also develop precedents and procedures for entering into new contracts and for monitoring their performance.