Associated persons, International, Long arm jurisdiction - are you subject to the law? - Written by on Monday, April 18, 2011 0:38 - 0 Comments

A mirage? The Bribery Act “exemption” for overseas companies & subsidiaries

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Happy Easter.

Two big misunderstandings flowing from the guidance are that parent companies no longer need to worry about the activities of their subsidiaries and overseas companies have less to worry about.

There has even been suggestion that companies might structure their businesses to place bribe paying affiliates over seas and avoid prosecution.

We would caution organisations searching in the guidance for loopholes along these lines.  The claimed existence of such exemptions are illusory.

A mirage.

Subsidiaries – not off the hook

The question about subsidiaries revolves around the guidance and the following key sentence:

“having a UK subsidiary will not, in itself, mean that a parent company is carrying on a business in the UK, since a subsidiary may act independently of its parent or other group companies.” [our emphasis]

Richard Alderman, Director of the SFO, said this after the publication of the guidance on the subject of subsidiaries:

“Many have asked, over the last few months, about whether having a subsidiary in the UK is sufficient to enable the test to be satisfied. We have certainly had discussions in the SFO with a number of corporations based in the US and in other countries and, of course, the position becomes particularly complex where business structures operate under wholly different systems of law. We have to look at the simple test in the Bribery Act and ask whether or not that foreign corporation is carrying on business here. If it is, then corruption that it commits anywhere else in the world is within our jurisdiction…

…it is right for us to probe this in appropriate cases. We shall want to see whether or not the subsidiary is operating in that way. I think it right for us to look at that. If the guidance is satisfied and the subsidiary is operating wholly independently, then there will be no foreign company exposure to the Bribery Act.”

Based on discussions that we have had it is clear that the SFO preliminary view is that the chances of a subsidiary acting independently of its parent, while not impossible, are very limited when considering the likely set up of the subsidiary in the real world.  In other words, “in itself” is likely to be irrelevant.

Overseas companies…not off the hook

The Bribery Act incorporates long arm jurisdiction which catches overseas companies.  The SFO have made much over their new found long arm jurisdiction and, in part to answer critics who say that the Bribery Act is bad for UK business, have emphasised the SFO desire to prosecute overseas companies who undercut UK companies overseas.

A similar stance is, in reality, adopted by the US prosecution agencies where the majority of cases brought are against overseas (not US) businesses using US equivalent long arm jurisdiction and the provisions of the US Foreign Corrupt Practices Act which catch businesses who are issuers of Securities in the US in US parlance.

Against this back drop it was intriguing to see the UK guidance state this:

“The Government would not expect, for example, the mere fact that a company’s securities have been admitted to the UK Listing Authority’s Official List and therefore admitted to trading on the
London Stock Exchange, in itself, to qualify that company as carrying on a business or part of a business in the UK and therefore falling within the definition of a ‘relevant commercial organisation’ for the purposes of section 7 [the failure to prevent bribery offence].” [our emphasis]

This appears to be a significant deviation from the US position and the statements of the SFO.  Be warned.  The statement is misleading.

This is what the Director of the SFO had to say on the subject recently, post guidance publication:

“The Government has said in the Bribery Act guidance that ultimately this is going to be a question for the courts. Our role will be to bring the case before the courts so that the Judge can look at all of the facts and decide whether or not in the circumstances the test is satisfied. The Government though has given one indication of what it thinks (subject to the courts’ decision) the law is likely to be. This is that a mere listing on the UK Stock Exchange is not likely to be enough for the test to be satisfied.

I agree with this. A mere listing taken by itself with nothing else is unlikely to involve anything in the UK and certainly no economic engagement with the economy of the UK or a demonstrable business presence in the UK as it is put in the guidance.

The position is likely to be different though when there is economic engagement. What constitutes economic engagement or carrying on business in the UK as the Act puts it? When is the engagement so insubstantial that it can be ignored and when does it cross the line and become substantial and demonstrable?

It will be for the courts to decide on these and other issues. For example, what is involved in the company’s listing? Is the company trading in the UK? Is it raising finance? Is it spending time dealing with numerous stakeholders such as shareholders? What corporate functions are carried out in the UK? I think it is right that we probe this in particular cases in order to see whether, on the natural construction of these words, the activity involved does satisfy the test. Ultimately, this will be for the courts as the Government has stressed.”

In short the SFO anticipate that it will be a rare case indeed where the London Stock Exchange listing is, in itself, (those two magic words again) the only connection with the UK.  It will also take into account various other factors and will probe these to see if there is an arguable case for saying the company is carrying on business in the UK.  As we have highlighted before, the UK courts have in prior examples applied a low threshold to get over the carrying on business in the UK test.  We do not expect this to alter.

In a warning shot Richard Alderman had this to say:

“In my view it will be very unwise for companies to use a very technical interpretation of the Bribery Act in order to persuade themselves that they can continue to use bribery because they are not within the Act. They may have an unpleasant shock.”

We are away this week somewhere sunny (guess where…).

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