Question

I constantly read the your posts on the Bribery Act. The applicability of the Bribery act to Indian entities operating in UK and UK entities operating in India are undoubtedly clear.

Richard Alderman had in a recent interview indicated the following:

“What we will be doing will be to look for the most difficult cases. That is our challenge and I believe it is a challenge that is supported by the community, whether business or social. The most difficult cases will be those involving companies (whether UK or foreign) operating in a range of challenging environments that want to continue to use corruption in order to undermine ethical companies. Our ethical companies want to see fair competition. They can compete on equal terms because of the quality of what they produce. They cannot though compete properly when there is corruption. They want me to do something about that and I certainly want to do that when the foreign companies are within our jurisdiction. [Our emphasis] This will be a high priority for the SFO and we should be actively looking for these cases”.

Considering this context, I have a few queries in this regard:

a. The nature and impact on Indian Parent for potential violation by a UK subsidiary; and

b. The impact on Indian Parent if the violation is in India unrelated to UK business

from a reader in India.

Answer

Thank you.  We receive many questions about the application of the Bribery Act in these type of circumstances.

The relevant sections of the Bribery Act are section 7 (the corporate offence of failure to prevent bribery) and section 8 (the definition of Associated Person).  Broadly in the context of this question under the corporate offence of failure to prevent bribery, the threshold challenge for the prosecution to get over is whether the Indian parent company is carrying on business in the UK as a result of having a UK subsidiary.

There is (some) comfort in the Ministry of Justice Guidance in this regard which says:

“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]

The threshold question: Carrying on business – the SFO view

We have written about this before. Richard Alderman, Director of the SFO, said this after the publication of the guidance on the subject of subsidiaries in answer to whether having a subsidiary alone amounted to the parent carrying on business:

“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 in the view of the SFO.

The SFO has taken the position that in assessing whether it takes the view that an Indian (or other overseas parent company) is carrying on business in the UK it will look to see if that subsidiary is operating “independently” of its parent company.

In the context of independence the SFO will look to various factors, including for example, whether the UK subsidiary has common directors or senior officers with the Indian parent company, how the group treasury operates (in other words money flows and reliance upon the parent for financing), the extent to which the Indian parent company directs or influences the activities of the UK subsidiary and whether the UK parent has other connections with the UK.

The SFO may take the view that depending on the answers to these questions the Indian Parent does carry on business in the UK.

The threshold question: Carrying on business – our view

From a legal perspective, the question of whether the SFO test of independence of a subsidiary is the right test in order to ring fence a parent company will be a question for the courts.

The are clear legal arguments which go both ways.

For example, it is worth keeping in mind that in a Financial Services regulatory setting the UK courts have taken the view that a very limited connection with the UK is sufficient to amount to carrying on business for example in the Fradley case.

That said it has traditionally been difficult to pierce the corporate veil, in other words to attribute liability for the acts of one company to another, under English law.  The failure to prevent bribery offence under Section 7 of the Bribery Act gets over this using the Associated Person concept.

It remains to be seen if the courts adopt a narrow interpretation of carrying on business to limit the Associated Person concept and how wide they determine the Associated Person concept runs (again the Ministry of Justice guidance tried to limit it but similar caveats apply).

They may, or may not.

In our view, the area of what amounts to carrying on business in the UK combined with what is, or is not, an Associated Person is one of the likeliest areas for litigation under the Bribery Act.

Put another way, the SFO may be wrong.

As we said earlier in the year here we would be delighted to put the argument(s) in a test case which will undoubtedly be heavily dependent on its specific facts.

One thing is certain.  Assuming that the Bribery Act does NOT apply on the basis that having a UK subsidiary is NOT enough to amount to the Indian parent carrying on business in the UK carries with it the potential risk of investigation and prosecution by the SFO.

(a) The nature and impact on Indian Parent for potential violation by a UK subsidiary

This could implicate the Indian parent company.  The question will be (1) is the Indian parent carrying on business in the UK (which we covered above) and (2) in the context of the specific potential bribery violation was the UK subsidiary an Associated Person of the Indian parent in relation to that conduct.  This will be fact specific.

If the parent company does carry on business in the UK then the conduct of its Associated Persons worldwide (although see below for our practical observations) is potentially in the cross-hairs of the SFO.  The question will be whether the subsidiary bribed another person intending to obtain or retain business for the Indian parent, or to obtain or retain an advantage in the conduct of business for the Indian parent.  Again, this will be fact specific.

(b) The impact on Indian Parent if the violation is in India unrelated to UK business

The Bribery Act has global long arm jurisdiction and covers worldwide conduct.  So for example, if the violation is in India and is unrelated to the UK business this would not impact the legal analysis above.   In simple terms a violation in India unrelated to the UK business could be captured by the Bribery Act.  In fact capturing and prosecuting that type of conduct is a very clear objective of the new law and of the SFO.

However, the practical analysis (see below) is likely to nuanced.

Wrap up & practical analysis

On any view the answer to your questions will be fact specific.

From various statements the SFO has made, it is clear that it is most interested in foreign bribery cases if UK PLC is disadvantaged.  In these circumstances it is clear the SFO take the view the UK public interest is engaged and that it would like to investigate and prosecute.

So, if an Indian company with a UK subsidiary pays a bribe directly or indirectly through an Associated Person which disadvantages a UK company the SFO will be interested and keen to test the boundaries of the long arm jurisdiction of the Bribery Act.

If a bribe is paid by the Indian parent company outside the UK and UK PLC is not disadvantaged the UK public interest in investigation and prosecution of the bribe is less clear.

With limited resources and competing interests it is questionable if the UK SFO would take action even if technically it viewed the conduct as falling within the ambit of the Bribery Act.

All the above presupposes that the Indian business has NOT put in place ‘Adequate Procedures’ to prevent bribery across the group worldwide and therefore cannot take advantage of the defence under Section 7.

In this context it is worth noting that above we have discussed the likelihood of prosecution.  There is another angle to all this.  That is the commercial angle.  We anticipate (indeed we are already seeing) that businesses are being asked by global trading partners who are subject to the Bribery Act and concerned about their own exposure what procedures the local partner(s) have put in place to prevent bribery.

As a result there are good reasons from a commercial and risk reduction perspective of putting in place Adequate Procedures to prevent bribery.  One clear objective of the Bribery Act is therefore already on the way to being met.