Firms must keep anti-bribery procedures effective and up-to date, or risk paying the price, write Suzanne Gill and Edward Craft
All businesses need to have appropriate risk control procedures in place, including in relation to financial reporting, anti-corruption and reputation protection. However, a 2013 Chartered Institute of Building report revealed that 48% of construction professionals believe that corruption is commonplace in the UK industry.
Corruption presents a particular risk in property and construction. Real estate has long appealed to those seeking to convert cash, and construction contracts, by their complexity, allow scope for manipulation. The wheels of our industry turn on conversation. Personality still plays a vital role and there is no substitute for face time. However, too much hospitality can be illegal. This means that property professionals must remain vigilant to the risks. It is probably helpful that we head to Cannes in early March, not June.
Bribery Act 2010
Fraud has always been unlawful. The direction of corporate governance best practice is a focus on risk management and the core function of the internal and external audit functions. Senior managers are increasingly subject to contractual clawback for impropriety. In addition, the modern approach set out in the Bribery Act 2010 (“the 2010 Act”) is being repeated elsewhere, including in relation to taxation compliance.
The 2010 Act created the new offence of failing to prevent bribery by an employee or agent. This offence can be committed by a body corporate with a link to the UK, regardless of where it is incorporated, and the ownership of assets within the UK will suffice. The only effective defence to this is being able to demonstrate adequate procedures were in place. However, the fact that the procedures have not worked is a demonstration of their inadequacy.
It is important to remember that a zero-tolerance approach has been adopted to bribery offences: to make a “facilitation payment”, however small, is an offence. The only test which is relevant is whether the payment (or the offer of it) sought to encourage improper performance.
In 2011, the UK Ministry of Justice published detailed guidance on the new law, including a checklist of six pointers:
- Proportionality. If your firm is at high risk of bribery, you will need to take more care.
- Ensuring top-level commitment. If the board has not discussed the issue, you are in deep water.
- Assessing the risk. Focus on all areas relevant to your particular business.
- Due diligence. This is common sense and brand protection as much as legal compliance.
- Communication and training. You need clear structures, including policies which are both understood and used by staff.
- Monitor and review. As with all areas of risk, a feedback loop is vital.
We have been living with the new regime for over five years now and most companies with a UK nexus will have adopted compliant anti-bribery procedures. However, it is important to revisit these and train new staff, to ensure those procedures remain fit for purpose. In short, no risk management programme can be allowed to gather dust.
High price of prosecution
The consequences of a successful criminal prosecution under the 2010 Act can be severe. As well as reputational damage, the potential penalties span from unlimited fines to imprisonment of up to 10 years, and may also result in director disqualification, the confiscation of assets, and debarment from participating in government contracts.
In February 2016, Sweett Group became the first company to be convicted under the 2010 Act for failing to prevent bribery. One of Sweett’s subsidiary companies had improperly attempted to secure a contract worth £1.6m through the payment of £680,000 of bribes. Sweett was ordered to pay a fine of £1.4m and nearly £100,000 in costs. In addition, assets worth £851,152 were confiscated. The punishment incurred, together with the significant internal costs and management time involved, clearly outweighed the overall return on the contract sought in the first place.
Fraud and corruption risks exist in complex business activities involving multiple counter-parties. It is essential that companies keep their procedures, policies and good practices up to date and fit for purpose.
RED FLAGS TO BEWARE
Property professionals need to be alert to transactions which might be disguised bribes, including in the following areas:
Finders’ fees
While the payment of a finder’s fee to an agent may be perfectly legitimate, it must be proportionate to the service performed and the value of the property or contract involved.
Suppliers
When making payments to suppliers and sub-contractors you need to ensure the services in question were actually performed and the price is fair. Payments to a sub-contractor, for example, for cleaning services that were never actually performed are likely to constitute illegal payments. Consumable supplies are particularly susceptible.
Planning
All payments in connection with planning permissions (section 106 agreements, CIL, etc) should be scrutinised to ensure that they are legitimate and paid to the correct recipient.
Conflicts of interest and connected parties
Awarding a contract to any person that is associated with a counterparty is best avoided. If doing so is necessary, it is vital to ensure it is done in accordance with company law, including the disclosure of all relevant facts to non-conflicted directors who are empowered under the articles to approve such a conflict, or otherwise approved by shareholders.
Synthetic corporate structures
When buying a property through a corporate structure, property professionals must understand all layers of that structure and trace both legal and beneficial ownership, not least to reduce risk of the deal being used for money laundering. This can become particularly complicated where non-transparent (including offshore) entities are involved.
Suzanne Gill is a commercial property partner and Edward Craft is a corporate partner at Wedlake Bell LLP
