Adequate Procedures, Long arm jurisdiction - are you subject to the law?, MENA (Middle East & North Africa), Offshore, Russia, US Foreign Corrupt Practices Act & Dodd Frank - Written by Barry & Richard on Wednesday, June 15, 2011 23:54 - 0 Comments
The Bribery Act: The view from offshore
We’ve spent time in courts in Bermuda, BVI, St.Lucia, Antigua etc. with Ben and Ben’s colleagues….on the other side! So we’re delighted to post this article on the Bribery Act and its implications offshore:
There has been a lot of press attention in the UK on the Bribery Act but less attention on its offshore implications.
While UK criminal laws are generally domestic, the Bribery Act does not just apply to UK corporations and UK residents. The Act has broad extra‑territorial effect. There are two key extra‑territorial features:
(1) “Connected persons” can be prosecuted in the UK for offences committed anywhere in the world.
(2) Companies which carry out part of their business in the UK can be prosecuted for Section 7 offences committed anywhere in the world.
Under the Act, an offence is committed if any act or omission forming part of the offence is committed in the UK, but Section 12 of the Act provides that an offence is also committed if a person does something abroad which would be an offence if committed in the UK and that person has a close connection with the UK. A close connection with the UK exists where a person (legal or natural) committing the acts, in the UK or in other jurisdictions, is domiciled or incorporated in the UK, is a British citizen, a British overseas territories citizen, a British national (overseas), a British overseas citizen and so on. In short, the Act provides that citizens of British overseas territories are closely connected with the UK and fall under the provisions of the Act.
This has implications for the offshore worlds, since many offshore jurisdictions are British overseas territories – for example, the British Virgin Islands, Turks & Caicos, Cayman and Bermuda. The Act, in short, imposes a new bribery code on much of the offshore world. Under the Act, Bermudians for example can be prosecuted in the UK for bribery offences committed anywhere in the world.
In practice, the Serious Fraud Office (“SFO”) and other UK prosecution authorities may not prioritise investigating or prosecuting minor cases of local bribery committed in overseas territories, leaving the policing and prosecution of these offences to local prosecutors and courts.
The risk cannot, however, be discounted. In jurisdictions where it is commonplace for offshore citizens (or British citizens living offshore) to act as non-executive directors on hundreds of boards in relation to companies carrying on business operations in high-risk jurisdictions such as Azerbaijan, there is now a risk of prosecution in the UK if those offshore citizens carry out offences under the Bribery Act in the course of their directorships. An example may assist in terms of illustration. A Bermudian sits on the board of a construction company. The company is incorporated in Bermuda but its operations are in Azerbaijan, where corruption is endemic. The company needs to make a payment to secure a contract. The Bermudian arranges the payment to be made in Azerbaijan. The payment is a bribe. Under Bermuda law, since the payment was made in Azerbaijan, it is unlikely an offence has been committed in Bermuda. The Bermudian could, however, be potentially prosecuted in the UK. Whether the Bermudian had the necessary knowledge, or mens rea, and should or must have known that the payment was a bribe will be a question for a UK jury.
Citizens of British overseas territories and British citizens who sit on the boards of offshore companies are now exposed under the Act to UK prosecution in relation to their offshore activities. Going forward, prudent directors of offshore companies will likely undertake additional due diligence when carrying out corporate acts.
The Act may have another, more local, impact upon offshore centres. In cases involving alleged high level corruption in overseas territories, where local prosecutors are either unwilling or unable to act, the British authorities now at least have the power to prosecute or threaten prosecution. Alleged corruption in some British overseas territories grabbed headlines in 2009. The Act gives the British Government new options in relation with such issues.
Unless an offshore company commits a bribe, or receives a bribe, within the UK, or that company also carries on business in the UK, the offshore company does not itself have the required “close connection”. The UK authorities have no jurisdiction to prosecute under the core offences of Sections 1, 2 and 6 of the Act where there is no close connection. Further, in terms of senior officer connivance, senior officers of offshore companies cannot be prosecuted for Section 14 offences unless their company commits an offence within the UK.
Nevertheless, offshore companies do have exposure under the Act. This is because Section 7 applies to any company, wherever incorporated, which carries on business in the UK. The UK criminal courts, accordingly, have wide extra‑territorial jurisdiction over companies’ failures to prevent bribery. Any foreign company “carrying on business or part of a business” in the UK can be prosecuted for a failure to prevent bribery under Section 7.
“Carrying on a business or part of a business” has the potential for wide application. As a result, until the UK courts give guidance, foreign companies with any UK presence may wish to err on the side of caution and assume that they are caught within the ambit of the Act and, if any associated person pays a bribe, the company is liable to prosecution for failing to prevent it.
The implications of Section 7 on offshore companies depend upon the relationship between the offshore company and the UK. Companies in British overseas territories are, in this sense, no different from any other foreign company. However, companies based in British overseas territories often do have close links with the UK. Such companies can be divided into three broad headings:
(1) Offshore companies with UK activities
An offshore company, wherever located, which carries on operations in the UK (and these may be quite nominal in practice – for example there is a debate as to whether a website pointed to the UK generating UK revenues would meet the criteria) will fall under the jurisdiction of the UK criminal courts in relation to the Act. It can therefore be prosecuted under Section 7 if an associated person pays a bribe on its behalf anywhere in the world. It should therefore minimise the risks of prosecution by putting in place anti-bribery procedures so it can invoke the Section 7(2) defence.
Such companies may also want to consider altering their legal and operational structure to insulate the rest of the group from the UK operation – to sever the UK business elements into a separate company. To minimise risk it may be advisable to incorporate a subsidiary and run UK operations through it, instead of using, say, a branch structure.
(2) Offshore companies with subsidiaries in the UK
Offshore holding companies which own UK operating companies may take comfort from the Guidance which stresses that having a UK subsidiary does not itself mean that the holding company is carrying on business in the UK.
However, they will need to keep in mind the following:
(i) First, there may be additional factors to indicate that the holding company is carrying on business in the UK via its operating company.
(ii) Secondly, the SFO appears to be sceptical that subsidiaries will demonstrate the necessary level of independence required for an affiliated company (e.g., the parent) to escape liability under the Act. Whether the SFO is right or wrong on this will ultimately be decided by the courts, but it does highlight that it will be critical to ensure that the UK operation is legally and operationally independent.
As a result, in many cases it may be easier for the holding company, rather than perpetually scrutinising its relations with its UK subsidiary, to adopt anti‑bribery policies for itself.
(3) Offshore companies with subsidiaries in the UK and subsidiaries in high risk territories
Many offshore holding companies have subsidiaries in the UK and others in other jurisdictions, including high‑risk territories such as Azerbaijan or Russia.
What would the position be if the Russian operating subsidiary committed a bribe? Could this be laid at the door of the offshore holding company under the Bribery Act?
In most cases, the person paying the bribe in Russia will be doing so as part of providing a service to the Russian operating subsidiary and to benefit the Russian operating subsidiary. In the majority of cases, no service is being provided to the offshore holding company.
In our view the holding company should, in most cases, be protected from prosecution under the Act by a properly set up group structure and using legally separate companies that are also operationally and financially independent. The offshore parent should, however, ensure that its group structure is set up to operate completely independently to successfully argue that the UK operation does not equate to the offshore company (or any of its affiliates) “carrying on business in the UK”.
Introduction of anti‑bribery provisions is prudent precaution. The safest course will in most cases be for the holding company, at a minimum, to put in place an anti‑bribery policy (if only for itself) to minimise such risks. Some multi‑national companies will no doubt go further and put in place group‑wide anti‑bribery policies, despite the costs and difficulties of their implementation.
The SFO has highlighted that it is interested in prosecuting overseas parent companies and testing the limits of the jurisdiction of the Bribery Act. The use of any structure to insulate a group from Bribery Act liability is at risk of being subjected to UK court scrutiny. Careful consideration will need to be given to it.
Pending guidance from the UK courts, offshore holding companies with UK operating companies seeking to minimise risks under the Bribery Act should consider the additional strategies:
(1) Extending any anti‑bribery procedures to the holding company.
(2) Ensuring that the holding company is run entirely independently from its operating subsidiaries.
The Act is a threat to the offshore world in the sense that the UK criminal courts now have jurisdiction over the citizens of British overseas territories in relation to bribery. It is also an opportunity. Increased onshore regulation has historically been a key driver of growth in the offshore world. Companies carrying out part of their business in the UK may seek to reduce the risks of UK prosecutions by turning to offshore structures to help minimise those risks.
If you’d like to read more about the offshore aspect Ben has written a more detailed note which can be downloaded here.
 There remains a US prosecution risk if the Foreign Corrupt Practices Act is engaged. The US prosecutors, in the well publicised case of Mr Tesler, who pleaded guilty this year to paying bribes in Nigeria, did not appear interested about legal niceties of the corporate structure.