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THE INTERNATIONAL LAWYER A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Lawyers, Guns, and Money: The Bribery Problem and the U.K. Bribery Act* LAWRENCE J. TRAUTMAN** AND KARA ALTENBAUMER-PRICE*** Abstract With expanding U.S. business operations around the globe, the potential for significant exposure to international corruption increases along with the increased risks associated with anti-bribery laws. Companies who employ citizens of the United Kingdom, maintain an office in the United Kingdom, or are service providers to any United Kingdom organizations, are subject to the U.K. Bribery Act and may be held liable for unlimited fines and jail terms that increase to ten years. Regardless of their countries of origin, multinational companies will inevitability be impacted by the U.K. and U.S. anti-bribery statutes. The United States’ Securities and Exchange Commission (SEC) and the United Kingdom’s Serious Frauds Office (SFO), Financial Conduct Authority (FCA), and Prudential Regulation Authority (PRA) are increasing their coordination to work together in the areas of common regulatory interest, including cross-border enforcement cases. Any attempt to assess corporate risk for a U.K. Bribery Act violation requires an understanding of how the statute operates and is enforced. At its core, the U.K. Bribery Act creates four distinct “categories of offenses: (1) bribing another person; (2) taking bribes; (3) bribing foreign public officials; and (4) the failure of a commercial organization to prevent bribery.”1 We begin with a brief discussion of the international bribery * The authors wish to extend particular thanks to the following for their assistance in the research and preparation of this article: Bill Banowsky, Mark Berg, Ann Bruder, Seth Fisher, Stephen Korotash, Marc Steinberg, and Alexandra Wrage. JEL Classifications: F13, F23, G18, G28, G38, K14, K20, K22, K33, K42, L14, L21, L51, M14, O17, O38. ** Lawrence J. Trautman has a JD from Oklahoma City Univ. School of Law; MBA, The George Washington University; and BA, The American University. Mr. Trautman is past president of the New York and Metropolitan Washington/Baltimore Chapters of the National Association of Corporate Directors. He may be contacted at Lawrence.J.Trautman@gmail.com. *** Kara Altenbaumer-Price has a JD, summa cum laude, from Texas Tech University School of Law; Bachelor of Journalism, cum laude, The University of Texas at Austin. Ms. Altenbaumer-Price is Vice President, Management & Professional Liability Counsel for USI, the largest privately-held broker of commercial insurance in the United States. Kara works in USI’s Management & Professional Services group, where she consults with USI’s director & officer of insurance and other management liability clients on issues related to corporate governance, private securities litigation, and regulatory securities enforcement. She may be contacted at firstname.lastname@example.org. 1. COVINGTON & BURLING LLP, ANTI-CORRUPTION MID-YEAR REVIEW (July 2011), available at http:// www.cov.com/files/Publication/01a3d761-b8ca-421f-9932-b0fef03c4219/Presentation/PublicationAttach- 481 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW Electronic copy available at: http://ssrn.com/abstract=2276738 THE INTERNATIONAL LAWYER A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 482 THE INTERNATIONAL LAWYER problem. Next, because the U.K. Bribery Act is relatively new, we provide an explanation and analysis of the act, along with a description of the SFO’s revised policies published on October 9, 2012. An analysis of many of the key differences between the Foreign Corrupt Practices Act (FCPA) and U.K. Bribery Act is then presented. Now that more than two years have passed since implementation, an assessment of this law’s impact is presented. As the world continues to grow smaller and commerce increases, corporate officers and directors must necessarily become familiar with the provisions of the U.K. Bribery Act. I. Overview With U.S. business operations expanding around the globe, the potential for significant exposure to international corruption increases along with the increased risks associated with anti-bribery laws. Companies who employ citizens of the United Kingdom, maintain an office in the United Kingdom, or are service providers to any United Kingdom organizations are subject to the U.K. Bribery Act and may be held liable for unlimited fines and jail terms that increase to ten years.2 Regardless of their countries of origin, multinational companies will inevitability be impacted by the U.K. and U.S. anti-bribery statutes. The SEC and the United Kingdom’s SFO, FCA, and PRA3 are increasing their coordination to work together in the areas of common regulatory interest, including cross-border enforcement cases.4 Tracey McDermott, Director of Enforcement & Financial Crime at the FCA, states, “we continue to look at the way in which firms manage the risk that staff or agents of firms may accept or offer bribes to secure new deals.”5 Any attempt to assess corporate risk for a U.K. Bribery Act violation requires an understanding of how the statute operates and is enforced. “The [U.K.] ‘Bribery Act’ replaces a patchwork of statutory and common law offenses dating back to 1889 and is designed to modernize and simplify the current anti-bribery restrictions in the United Kingdom.”6 At its core, the U.K. Bribery Act creates four distinct “categories of offenses: (1) bribing another person; (2) taking bribes; (3) bribing foreign public officials; and (4) the failure of a commercial organization to prevent bribery.”7 ment/68ac553e-2122-49fa-b270-b38b69ff5215/Anti-Corruption%20Mid-Year%20Review%20-%20Beijing .pdf. 2. Bribery Act, 2010, c. 23, §§ 7–8, 11–12 (U.K.), available at http://www.legislation.gov.uk/ukpga/2010/ 23/pdfs/ukpga_20100023_en.pdf. 3. See UK’s FCA Wastes No Time in Setting Priorities; 15% Budget Increase, INS. J. (Apr. 10, 2013), http:// www.insurancejournal.com/news/international/2013/04/10/287819.htm (observing that the new Financial Conduct Authority and the Prudential Regulation Authority replaced the Financial Services Authority on April 1, 2013). 4. AARON STEPHENS & WILLIAM DEVANEY, US AND UK WHISTLEBLOWING PROGRAMMES: IMPLICATIONS FOR US AND UK FINANCIAL INSTITUTIONS AND OTHER COMPANIES 1, 13 (2013), available at http:// us.practicallaw.com/resource/9-525-9018. 5. Tracey McDermott, Dir. of Enforcement & Fin. Crime, Fin. Conduct Auth., Keynote Address: Financial Crime in the FCA World (July 18, 2013), available at http://www.fca.org.uk/news/speeches/financialcrime-in-the-fca-world. 6. JONES DAY, A NEW WEAPON IN THE ARSENAL FOR THE FIGHT AGAINST CORRUPTION: THE U.K. BRIBERY ACT OF 2010 (Apr. 2010), available at http://www.jonesday.com/files/Publication/79cd836f-68294b74-bc38-f0cff1ec49ec/Presentation/PublicationAttachment/f77034b9-035e-45a3-bf41-f11708369196/ New%20Weapon.pdf. 7. COVINGTON & BURLING LLP, supra note 1. See Bribery Act, 2010, c. 23, §§ 1–2, 6–7 (U.K.). VOL. 47, NO. 3 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW Electronic copy available at: http://ssrn.com/abstract=2276738 THE INTERNATIONAL LAWYER A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW LAWYERS, GUNS & MONEY 483 We begin with a brief discussion of the international bribery problem. Next, because the U.K. Bribery Act is relatively new, we provide an explanation and analysis of the act, along with a description of the SFO’s revised policies published on October 9, 2012. An analysis of many of the key differences between the Foreign Corrupt Practices Act8 and U.K. Bribery Act is then presented. Now that more than two years have passed since implementation, an assessment of this law’s impact is presented. As the world continues to grow smaller and commerce increases, corporate officers and directors must necessarily become familiar with the provisions of the U.K. Bribery Act, as well as the FCPA; failure to do so may put their companies and themselves at grave risk. Any attempt to assess corporate risk for a U.K. Bribery Act violation requires an understanding of how the statute operates and is enforced. II. The Bribery Problem In any of its various forms, bribery, corruption, or extortion takes an unacceptable toll on all citizens of the world. This research was conducted to provide an analysis of the U.K. Bribery Act that will hopefully benefit entrepreneurs, business executives, and corporate directors as they seek to conduct business around the world. A deeper dive into research and thinking about the difficult issues surrounding corruption produced a realization that the global and domestic culture of bribery, extortion, and corruption is an amorphous cancer eating away at our societies with the very real potential to destroy commerce between nations and produce destructive global civil unrest. This is not an original thought; it seems apparent that following the global financial crisis of 2008-09, bribery does not seem to be a plague likely to go away at any time during the near future. Richard Alderman, who was Director of the U.K.’s Serious Fraud Office (SFO) until April 2012, has observed, I have been following . . . the events of the Arab Spring with the very greatest of interest. I have also been looking at what has been happening recently in India, China, Russia, and other countries. When I look, in particular, at the Arab Spring I see that corruption is one of the top issues raised by the citizens of these countries as one of their main grievances against the government or, indeed in some cases, the former government. Some say that bribery is part of the culture of those countries and that we must respect it. The citizens of those countries have demonstrated very clearly to my mind that this is not part of the culture that they are prepared to accept any longer.9 8. We discuss the FCPA in greater detail in a separate article. See generally Lawrence J. Trautman & Kara Altenbaumer-Price, Foreign Corrupt Practices Act: An Update on Enforcement and SEC and DOJ Guidance, 41 SEC. REG. L. J. 241 (2013), available at http://ssrn.com/abstract=2293382 (discussing the FCPA in greater detail than in this article) [hereinafter Trautman & Altenbaumer-Price, FCPA Update]; see also Virginia G. Maurer & Ralph E. Maurer, Uncharted Boundaries of the U.S. Foreign Corrupt Practices Act, 20 J. FIN. CRIME 355 (2013). 9. Richard Alderman, Dir., Serious Fraud Office, U.K., Address at the Risk Advisory’s DC Dinner (Oct. 5, 2011), available at http://www.riskadvisory.net/analysis/story/serious-fraud-office-director-aldermanspeaks-at-risk-advisorys-dc-dinner. WINTER 2013 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 484 THE INTERNATIONAL LAWYER Transparency International has observed, “recent events in the Middle East have brought into stark relief the desperation people felt about levels of corruption in their countries.”10 These events confirmed Transparency International’s research “that Egypt, Lebanon, Morocco and Palestine all suffer from unchecked executive power and lack access to information laws and whistleblower protection legislation, greatly hindering citizens’ ability to report and stop corrupt practices.”11 Alexandra Wrage, international attorney and President of Annapolis, Maryland-based TRACE International, has written that, when it comes to bribery, international competitors must play by the same rules to “minimize the ‘prisoners’ dilemma” because “bribery is wrong . . . uneconomical, inefficient, costly, distorting of proper incentives and outcomes, risky, and generally unprofitable. It is, in short, a poor way to do business.”12 Several years have now passed since implementation of the U.K. Bribery Act. Accordingly, within the next few pages, an attempt is made to document the act’s impact to date and discuss likely future developments. Much has been written during recent years about the FCPA.13 But, because the U.K. Bribery Act 2010 is relatively new, less has been written on it, and it may take years to understand how and to what extent the United Kingdom authorities enforce the act.14 Since practitioners tend to focus on the requirements mandated by these statutes and germane compliance mechanics, even less focus tends to be given to the subjects of bribery and extortion, the extent to which it is encountered, and the economic analysis of the law of bribery. In 2011, Yockey observed that “[b]ribery blights lives, undermines democracy, and distorts markets.”15 Donnelly and Kellogg state that the scourge of corruption “stretches from multinational firms in the United States, to manufacturers in China, to farmers in Latin America. It has led to water scarcity in Spain, child labor in China, illegal logging in Indonesia, unsafe medicine in Nigeria and poorly constructed buildings in Turkey, where collapses have killed people.”16 Transparency International states that 10. TRANSPARENCY INT’L, ANNUAL REPORT 2010 84 (Alice Harrison & Michael Sidwell eds., 2011), available at http://archive.transparency.org/publications/annual_report (follow “Transparency International Annual report 2010” link). 11. Id. 12. ALEXANDRA ADDISON WRAGE, BRIBERY AND EXTORTION: UNDERMINING BUSINESS, GOVERNMENTS, AND SECURITY 124 (2007). See also STEPHEN YAN-LEUNG CHEUNG, P. RAGHAVENDRA RAU & ARIS STOURAITIS, HOW MUCH DO FIRMS PAY AS BRIBES AND WHAT BENEFITS DO THEY GET? EVIDENCE FROM CORRUPTION CASES WORLDWIDE (Mar. 30, 2012), available at http://ssrn.com/abstract=1772246 (Analysis of 116 prominent bribery cases, involving 107 publicly listed firms from 20 stock markets that have committed bribery of government officials in 52 countries worldwide during 1971–2007, concluding that their results have the following “policy implications”: “[m]easures that promote shareholder monitoring of managers (director liability, shareholder lawsuits) may help reduce bribery. Institutions that promote transparency (democracy, freedom of the press, education, disclosure of politician sources of income), institutions that promote enforcement (police reliability), and measures that eliminate regulatory rigidities may also help reduce bribery”). Id. at 32. 13. See Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1; see also Lawrence J. Trautman & Kara Altenbaumer-Price, The Foreign Corrupt Practices Act: Minefield for Directors, 6 VA L. & BUS. REV. 145 (2011) [hereinafter Trautman & Altenbaumer-Price, FCPA: Minefield]. 14. See Bribery Act, 2010, c. 23 (U.K.); Trautman & Altenbaumer-Price, FCPA Update, supra note 8, at 273. 15. Joseph W. Yockey, Solicitation, Extortion, and the FCPA, 87 NOTRE DAME L. REV. 781, 783 (2011), available at http://ndlawreview.org/wp-content/uploads/2013/05/Yockey.pdf. 16. Francis X. Donnelly & Sarah Kellogg, Understanding Corruption, GW BUS., Fall 2011, at 9, available at http://business.gwu.edu/magazine/fall2011/understanding-corruption.cfm. VOL. 47, NO. 3 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW LAWYERS, GUNS & MONEY 485 “[r]ecent high-profile scandals have shown that corruption does not always make for lucrative profits, but rather hefty fines, damaged reputations and jail sentences. Corruption also distorts markets and creates unfair competition.”17 But, “bribery in business persists, and is perceived as widespread. Almost a fifth of more than 1,000 executives surveyed by Ernst & Young claimed to have lost business due to a competitor paying bribes; more than a third felt that corruption was getting worse.”18 Moreover, “[i]t is not uncommon for domestic firms and multinationals to pay bribes to secure public procurement contracts . . . . Given the enormous influence that private interests wield in many public spheres . . . .”19 As governments devote “huge sums to tackle the world’s most pressing problems, from the instability of financial markets to climate change and poverty, corruption remains an obstacle to achieving much needed progress.”20 Huguette Labelle, chairwoman of Transparency International, says, “[c]orruption has a devastating effect on people, especially the poor.”21 Ms. Labelle observed that “[e]xperts surveyed for our 2011 Corruption Perceptions Index saw public sector corruption as a serious problem in the vast majority of 183 countries.”22 Non-profit membership association TRACE International provides multinational companies and their sales intermediaries “consultants, representatives, suppliers, distributors, agents, etc.” with cost-effective training and other anti-bribery compliance solutions.23 TRACE International reports that since 2002, “[t]he United States has pursued approximately 2.5 foreign bribery enforcement actions for every enforcement action pursued by all other countries combined . . . . The United Kingdom continues to rank second . . . .”24 A. A FEW THOUGHTS ABOUT BRIBERY AND EXTORTION Bribery and extortion are closely related concepts. Black’s Law Dictionary defines bribery as “[t]he corrupt payment, receipt, or solicitation of a private favor for official action;”25 commercial bribery as “(l) [t]he knowing solicitation or acceptance of a benefit in exchange for violating an oath of fidelity, such as that owed by an employee, partner, trustee, or attorney; . . . (3) [c]orrupt dealing with the agents or employees of prospective buyers to secure an advantage over business competitors.”26 Others have defined bribery as those “instances where public officials (mis)use their authority.”27 In addition, “govern17. TRANSPARENCY INT’L, ANNUAL REPORT 2010, supra note 10, at 31. 18. Id. 19. Id. 20. Id. at 78. 21. Donnelly & Kellogg, supra note 16, at 9. 22. TRANSPARENCY INT’L, ANNUAL REPORT 2011 (Rachel Beddow & Michael Sidwell eds., 2012), available at http://issuu.com/transparencyinternational/docs/annual_report_2011_en/1?e=2496456/1960061. 23. TRACE: ANTI-BRIBERY COMPLIANCE SOLUTIONS, GLOBAL ENFORCEMENT REPORT 2012 11(2013), available at http://www.traceinternational.org/data/public/GER_2012_Final-147966-1.pdf. 24. Id. at 2. 25. BLACK’S LAW DICTIONARY 217 (9th ed. 2009). 26. Id. 27. Seung-Hyun Lee & David H. Weng, Does Bribery in the Home Country Promote or Dampen Firm Exports?, 34 STRAT. MGMT. J. 1472, 1473 (2013) (citing Daniel Treisman, What Have We Learned About the Causes of Corruption from Ten Years of Cross-National Empirical Research?, 10 ANN. REV. POLITICAL RES. 211 (2007)). WINTER 2013 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 486 THE INTERNATIONAL LAWYER ment corruption refers to circumstances where officials demand money for their own benefit rather than the state’s purposes.”28 Extortion is defined as “(1) [t]he offense committed by a public official who illegally obtains property under the color of office; esp., an official’s collection of an unlawful fee (2) [t]he act or practice of obtaining something or compelling some action by illegal means, as by force or coercion.”29 While anti-bribery statutes encourage firms to adopt vigorous compliance programs to combat bribery and corruption, Yockey reports that “the problem is that no matter how elaborate a firm’s compliance efforts might be, they can do little to curb the market for bribe demands. Firms report that they continue to receive demands for bribes from foreign officials on a daily basis.”30 1. Types of Bribery The Transparency International 2008 Bribe Payers Survey, conducted by Gallup International “examine[d] the frequency of three different types of corruptio ..