Throwing light on the meaning of adequate procedures?

Throwing light on the meaning of adequate procedures?


Author: Andrew Pickin

The new 'corporate offence' introduced on 1st July by the Bribery Act 2010 has been the subject of much discussion.

This offence can apply where there has been a breach of Section 1 (active bribery) or Section 6 (bribery of a foreign public official) by a person associated with a company anywhere in the world. Section 7 provides that, in such circumstances, the company may be guilty of an offence for having failed to prevent bribery taking place.

The only defence to a prosecution, under the new offence, is for the company to prove that it had in place adequate procedures designed to prevent persons associated with the company from undertaking such conduct.

It follows that it is of vital importance to know how the adequacy of anti-bribery procedures will be assessed. The Ministry of Justice ("MOJ") has published detailed guidelines designed to help companies with this question. The MOJ has made it clear that this not a "one size fits all" question. In addition, they have made it clear that companies cannot assume their procedures are adequate simply by following a "tick box" approach.

A reality check

The points made by the MOJ are reinforced very strongly indeed by the decision of the Financial Services Authority ("FSA") in the case of Willis Limited ("Willis") published on 21st July 2011. This case did not concern the Bribery Act as such but is a decision of the FSA in respect of alleged breaches of the FSA's Principles for Business ("the FSA Principles"). In particular, a key part of the complaint made by the FSA was that in breach of Principle 3 of the FSA Principles, Willis had failed to take reasonable care to organise and control its affairs responsively and effectively with adequate risk management systems.

What makes the decision interesting is the insight it gives into Willis' compliance regime and the fact that this regime did not pass muster when it was subjected to real scrutiny. It is suggested that any company interested in thinking about the adequacy of its procedures in relation to the Bribery Act must take careful note of the Willis decision.

Where did Willis fall short?

The FSA fined Willis £6.895M for failings in its anti-bribery and corruption systems and controls. This is the biggest fine imposed by the FSA to date in relation to such systems and controls. How did these systems and controls fail the required standards and, in particular, the adequacy test? The shortcomings listed are numerous but there are five particular areas on which the FSA focused:

Explaining and justifying third party relationships
In the relevant period to which this case related, Willis failed to ensure that it established and documented an adequate commercial rationale to support its (at times) substantial payments to certain third parties in high risk jurisdictions ("Overseas Third Parties"), who assisted it in obtaining and/or doing business.

In this context, Willis did have certain procedures and documents in place. Unfortunately, the FSA found that there was no consistent demonstration by Willis of the business case for the appointment and use of certain third parties. Insufficient reasons, such as one-word explanations (eg "broker"/"co-broker"/"introducer") given in internal records were insufficient. Commission Sharing Agreements ("CSAs") were also signed with the third parties but were sometimes signed only prior to payment of commissions rather than at the start of the relationship. Generally, the guidance given by Willis to its staff as to the amount of detail it required in its internal reporting systems was found to be inadequate. Finally, no formal training was given to staff to enable them to understand what was required.

Due diligence
The FSA found that Willis had, during a certain period, failed to carry out adequate due diligence on Overseas Third Parties. Again, Willis had forms which it required employees to complete in relation to such business partners, but the FSA found these did not go far enough and, in particular, whether an Overseas Third Party was connected with the insured, insurer or public officials was not investigated or considered. The FSA pointed out that these are significant factors in assessing the risk that Overseas Third Parties might, in turn, make improper payments to help Willis win or retain business from overseas clients.

Review of relationships
Willis is also criticised for its failure to review relationships with Overseas Third Parties on a regular basis. The purpose of such reviews should have been to enable Willis to confirm it was necessary and appropriate for Willis to continue with the relationship. During one part of the period under review, Willis' policies did not make regular reviews mandatory. After a CSA had been signed, effectively the relationship was left to run on. Even where renewals of a CSA took place, "insufficient detail was recorded". It was recognised by the FSA that Willis may have possessed "informal and undocumented knowledge" about a relationship via an individual. That was, however, held to be not sufficient in the absence of proper documentation.

Inadequate monitoring of staff
In addition to the complaint that the commercial rationale for transactions with Overseas Third Parties was not recorded and adequate due diligence was not carried out, the FSA also found that Willis did not adequately monitor its staff to seek to reinforce the procedure which would have prevented this problem occurring. This point provides a reminder that there is often an HR as well as a substantive aspect to any form of compliance policy.

Information provided to management
Finally, it was found that the information provided to Willis' management committees etc was insufficient to ensure they could perform their role in overseeing compliance with the relevant policies and procedures.

Informing Our Understanding of the Bribery Act

The Willis case, it is suggested, is a reminder that:

  • the authorities will have high expectations of those choosing to work with intermediaries or business partners in high-risk jurisdictions. Previous anti-corruption cases bear out that the use of third parties, including agents and joint ventures involved in the winning and execution of contracts in high-risk jurisdictions, is a very common factor in cases prosecuted, particularly where government contracts are involved.
  • no one can afford to be complacent. Willis had compliance manuals, procedures and agreements. They did not get it off the hook. Full implementation of the procedures on a consistent basis, giving detailed reasons for decisions and in an environment where decisions are regularly reviewed and staff performance is monitored, are all required.
  • a company may be prosecuted under the corporate offence by the UK Courts even if the bribery took place far from the UK. In Willis, some of the payments under scrutiny were paid to individuals in Egypt and Argentina and the same principle could apply under the Bribery Act.
  • companies can inadvertently fail the adequate procedures test. There is no question in this case that Willis was deliberately or recklessly in breach, but even then they failed the test. This is also the case under the Bribery Act. A prosecutor under the corporate offence does not need to prove negligence, but simply to show that the procedures were inadequate to prevent bribery.
  • in an FSA environment in particular, compliance with procedures is particularly sensitive. However, it is suggested that for any company involved in transactions in high risk areas, some reflection on this decision in forming and implementing its procedures will be very useful.