Adequate Procedures, Financial Services, Long arm jurisdiction - are you subject to the law? - Written by on Thursday, May 12, 2011 23:56 - 2 Comments

Financial Services: AIM Nominated Advisers (NOMADS) & the Bribery Act

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For NOMADS there are two primary strands to the application of the Bribery Act (1) their own obligations and (2) the obligations of the company they are advising.

On (2) there has been much publicity around the “exemption” which appeared in the Ministry of Justice guidance which said this about the application of the Bribery Act to overseas companies listed on the London Stock Exchange:

“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 [long arm jurisdiction for the failure to prevent bribery offence].”

This “exemption” (which we assume was the result of a strong lobby from the City) has been controversial and is in stark contrast to the US approach which catches overseas companies in its Foreign Corrupt Practices Act (FCPA) net by way of them being US issuers if, for example, they are listed on a US exchange.

We have previously written about the mirage-like qualities of this so-called “exemption” here.

For NOMADS on top of the general problems highlighted in our mirage post there is yet another reason why the “exemption” is not quite the get out of jail free card some have painted it as.

But first let’s deal with the NOMADS own compliance obligations.

The NOMADS Bribery Act compliance obligation

First, the NOMAD will need to consider the application of the Bribery Act as it relates to its own business.

In this context NOMADS will need to ensure that they have put in place Adequate Procedures to prevent bribery.  Much have been written about those and we do not propose to focus on them again here.

As an FSA authorised and regulated firm a NOMAD must already have systems and controls in place to prevent bribery (and be in compliance with the Bribery Act) failing which it will risk enforcement action from the FSA regardless of whether there is a bribe or not.

Put another way, while the SFO must prove that a bribe has occurred in order to prosecute the FSA does not need to.  It simply needs to show that the systems and controls to prevent bribery are insufficient.  AON discovered this to its cost when it was fined £5.25 million for failure to have Adequate systems and controls in place notwithstanding that no bribe was ever proven.

Picking up on one area of focus which has attracted column inches in recent months, corporate hospitality.   While we do not consider (and never did consider) that this is, generally speaking, problematic we do expect more procedures and records of hospitality offered.  In short, more processes and bureaucracy.

Obligations to the London Stock Exchange?

The second primary strand when considering the Bribery Act and its application to NOMADS (and which potentially drives a coach and horses through the Ministry of Justice “exemption”) is the overriding general obligation on NOMADS under the AIM Rules for Nominated Advisers; namely that:

“The nominated adviser to an AIM company is responsible to the Exchange for assessing the appropriateness of an applicant for AIM, or an existing AIM company when appointed as its nominated adviser. Where a nominated adviser believes that an AIM company for which it acts as nominated adviser is no longer appropriate for AIM it must contact AIM Regulation.”

It is hard to imagine that a NOMAD will list an overseas company on the London Stock Exchange without conducting due diligence including on its anti-corruption policies and practices.  If policies are insufficient it is likely that they will require some comfort that the position is addressed.

If the diligence reveals that bribery is a problem and has been used to obtain contracts then the NOMAD will be required to make a disclosure to the Police under the UK’s money laundering laws.  This will be required on the basis that some or all of the assets of the company which it is proposed to list are the proceeds of crime and at risk of confiscation.  This raises interesting questions for any NOMAD.

There is potentially also a third strand.  Companies with corruption problems are customarily subject to stock price falls and a NOMAD associated with them will be cautious about the reputational risk which goes hand in hand with it.

It is anticipated that NOMADS will increase their due diligence of all companies which they are listing regardless of their connection with the UK.

Against this backdrop while the Ministry of Justice “exemption” may (subject to our mirage post concerns) rule out prosecution the overseas company and its advisers will still potentially face significant UK law challenges.

We are presently advising pre-IPO companies on these issues as well as their advisers to safely navigate them through.

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