Cleaning up the Act

BRIBERY…it’s something that only goes on in foreign countries, typically involving large businesses in the defence, construction and pharmaceutical sectors. Right?

Think again.

2011 has been an unprecedented year of actual and alleged bribery cases in the UK and internationally, as well as other high profile and unsavory practices such as the much publicised phone hacking scandal. It has also been the year that the UK Bribery Act 2010 came into force on 1 July.

Unfortunately for him, the first conviction under the Act was Munir Yakup Patel who worked at Redbridge Magistrates’ Court at the time of the incident in August. A court clerk, he took a £500 bribe to avoid putting details of a traffic summons on a court database and infamously ended up with a six-year prison sentence.

Although Patel’s conviction is small fry in the bigger picture, and given that the Bribery Act is not retrospective and therefore an offence would have had to have taken place after 1 July 2011, it is hardly surprising that the first major charges have yet to be laid, but they will. And they may come in large numbers.

It is estimated that the number of active Serious Fraud Office (SFO) bribery related investigations is some 50 cases and likely to grow. The US Department of Justice has dramatically increased its number of prosecutions of foreign companies in 2011.

Enforcement activity is increasing worldwide. In recent months there have been investigations into Alcoa, an aluminium smelter in Bahrain. Engineering Group Alstom was fined in Switzerland. Bernie Ecclestone of F1 fame was a witness in Germany. Aircraft manufacturer Embraer’s shares plummeted amid allegations and an investigation into corruption. Most recently the CEO of an Australian company was jailed for 13 years in China. Even FIFA, the world’s governing body of association football, remains under the corruption spotlight with concerns expressed about its lack of governance.

Closer to home, a well-known Cumbrian businessman, William Lowther OBE CBE, was accused in Southwark Crown Court of bribing a Vietnamese public official by paying for the living costs and fees for that official’s son to attend Durham University. This case is a part of a major international bribery case initiated in Australia.

Richard Alderman, Director of the SFO, recently stated that besides the perpetrators, likely targets in the investigation of a bribery case will be senior managers or directors of a company, including finance directors. He has indicated that it could also include UK-based directors of foreign companies with an “interest in the UK”.

The SFO has set up its own hotline for those wishing to directly report fraud or corruption – “SFO Confidential”. Alderman has urged companies to ensure that, during the M&A process, they bring any concerns in their target company due diligence to the attention of SFO before contracts are signed. Afterwards, the due course of the law will prevail should a discovery be made.

Against this backdrop, the Bribery Act represents an opportunity for businesses to clean up their act if there is any wrongdoing and in the process actually do better business, both at home and abroad.

Companies need to get on with their business in a difficult economic climate. As domestic markets fall away, exporting beckons and that may be to countries where the risk of corruption is higher. The Guidance to the Bribery Act is helpful, especially to smaller companies and their advisors. It provides proportionate and appropriate procedures that a company should put in place to combat bribery risk. Much of it is good business common sense that will help the exporter succeed.

With shareholders waking up to the prospect of any wrongdoing affecting their investment(s), here are just a few questions the finance director should be asking:

• Has the company conducted a formal risk assessment of both the impact of bribery and the Bribery Act 2010 and what measures has it taken to mitigate that risk?

• Who in the company has taken on the responsibility for ensuring compliance with the Act?

• What accounting controls are in place to mitigate bribery risk?

• Is it possible that any bribery or corruption could have taken place in the business in recent years and what steps have been taken to address this, including reporting?

• Does the company engage with agents overseas, and if so how sure are you that they are not involved in bribery?

• Does the company have adequate procedures in place, as set out in the Guidance, to prevent bribery?

• Is the company prepared for an external investigation by the Serious Fraud Office? Is there a enforcement raid procedure?

• What is the assessment of the reputation impact of a bribery investigation and the costs?

• Will the company’s insurers cover the costs of an investigation, and in the worst case the defence of individual directors?

The act of bribery itself is damaging enough if found guilty by the authorities, but the worst case scenarios demonstrate that the financial fallout goes a long way beyond direct penalties and will impact on the share price; honest investors dislike dodgy dealings and companies that do not hold up to scrutiny often find their share prices in free fall as a result.

As custodian of the company’s financial affairs, the finance director has responsibility to ensure that the finance function is totally compliant with the requirements of the Bribery Act

As a member of the board it is vital that the finance director is fully conversant with the strategic aims of the business to increase business opportunities and the governance of its financial situation. With an eye on the responsibilities to shareholders, the finance director is in pole position to be aware of any failure by the company to mitigate bribery risk.

Bryn Edwards is a chartered accountant and finance director of Interchange Solutions