May 17, 2010

27625 The UK Bribery Act

I’ve been on an airplane quite a bit these past few weeks and this last week was no exception. The Conference Board of Canada was kind enough to invite me to address their Corporate Ethics Membership Council in Vancouver and on my return flight I was able to catch up on some reading. We have a few analysts on our EthicsPoint team and one supports me by looking at hundreds of websites and blogs that address trends in our industry and passing on the most important or informative of these for my review.

In all honesty, it is a necessity. I couldn’t possibly do what I do without Bryan keeping me “in the know” with information from a variety of sources. I read hundreds of pages a week on new developments which means that he must read thousands. (Note to self: remember to say thank you more often.)

Looking through this week’s folder, I found a tremendous amount of detail surrounding the new UK Bribery Act. The Bribery Act is the companion regulation, if you will, to the United States’ 33 year-old Foreign Corrupt Practices Act (FCPA). The Bribery Act has not yet been fully promulgated by England’s Secretary of State, but the hand-writing is clearly on the wall.

The Bribery Act extends its reach far beyond the FCPA and as it is currently written should send shivers down the spine of every multinational company with operations or sales in the United Kingdom. It does not just deal with corporations, it also empowers the Serious Fraud Office to set fines and demand jail time for individuals associated with answerable organizations, corporate managers & officers and even board directors. Like the FCPA, the Bribery Act also makes organizations responsible for the actions of their vendors, suppliers and agents.

However, the Bribery Act goes further than the FCPA in other areas as well, such as rejecting facilitation payments as acceptable behavior- this will be important to watch how this conflict of opinion plays out. Facilitation payments are payments for services or positioning to which you are entitled. For example, suppose your passport has expired and you need to travel immediately. You can fly to a passport office and stand in line to get an expedited passport, or you can overnight your information and pay $300 to a “facilitator” who will immediately furnish the passport you were entitled to receive. Under the FCPA, this type of payment is fine but the Bribery Act deems it as bribery.

The territorial reach of the Bribery Act is also broader than that of the FCPA. The US Department of Justice’s (DOJ) involvement is somewhat restricted and requires local cooperation. However, under the Bribery Act, even if a company “conducts business” in the UK, the Serious Fraud Office (SFO) has the jurisdiction to take a primary position in punishing organizations for misconduct.

As concerning as this jurisdictional reach may be, I began to realize that the typical fines imposed as a result of a bribery violation are ‘chump change’ when compared to the other related costs. For example, Daimler paid a combined $185 million dollar fine for bribery and improper influence. A tidy sum, but they reportedly paid over $400 million in additional legal and accounting support. This realization was an inflection point for me. It isn’t just the fines but also the related costs and business distractions associated with these types of violations that organizations should be concerned about.

To make matters worse, just as we saw with Sections 404 and 302 within the Sarbanes-Oxley Act, the oppressive fines, fees and reprioritization of management time do not discriminate between small to mid-sized businesses and larger corporations. Therefore, the 3 to 4 times expense ratio for legal and accounting fees to support the actual fine amount are the norm. This total magnitude is far more impactful and injurious to a small organization when you consider it as a percentage of EBIT.

There is hope, however. The Bribery Act and FCPA are mandates that can be mitigated, but it takes an acute understanding of the risks associated to the individual organization, a demonstrated plan of action to minimize these risks and an audit trail that the organization is walking the talk. The Federal Sentencing Guidelines established a direct link between the ‘Seven Essential Elements’ contained within Chapter Eight of the Guidelines and mitigation. I have long been both a student and believer of these seven elements and the mitigation value they hold for organizations.

This is a big proactive bill to fill (pun intended), but when you consider the financial and reputational consequences and damages, it is the most cost effective and prudent position for an organization to take.

What do you think?

Comments

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David Childers
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Ronald Reagan
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John Quincy Adams
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Aristotle
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Ray Kroc
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John Maxwell
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