Responding to the UK Bribery Act 2010

www.pwc.co.uk www.pwclegal.co.uk

Informing UK commercial organisations operating in emerging markets, specifically in BRIC countries.

November 2011

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Contents

Welcome 2 Overview 5 Background 5 Key offences and penalties 6 What are the penalties? 6

Why is it important to respond to the UK Bribery Act? 7

What should your business do? 8 Challenges 8 What the Act means for commercial 8 organisations doing business overseas Business and cultural challenges faced by BRIC countries 11

Managing the risks – recommendations 14 Principle 1: Proportionate procedures 14 Principle 2: Top-level commitment 15 Principle 3: Conduct a comprehensive bribery risk assessment 15 Principle 4: Due diligence 15 Principle 5: Communication (including training) 16 Principle 6: Monitoring and review 16 Corporate hospitality and facilitation payments 18 Recommendations to manage risks 18 How can we help? 19

Contacts 20

Responding to the UK Bribery Act 2010 1 Welcome

The Bribery Act 2010 (the ‘Act’) emerging markets about how best to Ian Powell came into force on 1 July 2011. prepare. The purpose of this report is to Chairman and Senior This far-reaching legislation has raise awareness of bribery risks, as well as potentially significant ramifications suggesting how commercial organisations Partner PwC UK for UK businesses that operate in can mitigate those risks and protect overseas markets, as well as foreign themselves from the potentially damaging commercial organisations that consequences of infringement – not least operate in the UK. in reputational terms.

The global reach of this legislation means While the focus of this report is on UK that UK organisations operating in foreign organisations going overseas, we would markets could be liable for prosecution in also encourage foreign commercial the UK if they are accused of engaging in organisations with interests in the UK to corrupt practices, as defined by the Act. seek appropriate professional advice regarding their potential exposure. With this in mind, the UK-India Business Council, the China-Britain Business I hope you will find this guide useful. Council, the Brazilian Chamber of Please contact us if you would like more Commerce for Great Britain, and the details about the Bribery Act 2010 or Russo-British Chamber of Commerce, advice on any wider corporate governance, together with PwC1, are working to inform risk or compliance issues. UK commercial organisations operating in

The Brazilian Chamber of Commerce The Brazilian Chamber is committed to Jaime Gornsztejn welcomes this initiative on behalf of sharing these achievements by monitoring Chairman its members. The Act has far-reaching the effects of the Act on its members, Brazilian Chamber of implications for their businesses and as well as educating the public, both in this report provides a helpful guide to the UK and Brazil, of the Act’s impact on Commerce in Great Britain explain its potential impact. various business sectors.

The internationalisation of its domestic The Chamber is actively engaged with commercial organisations, growing several seminars and programmes aimed diversified economy, and burgeoning at addressing the concerns and views of foreign direct investment into the country members and non-members. Doing have already seen Brazil make significant business with Brazil can be an engaging progress in the implementation of corporate and profitable experience, but as with all governance best practices. Brazilian businesses in new markets, your organisation business is facing a transformational needs to be aware of the legal requirements period with the introduction of better and compliance issues that can arise. corporate governance and accounting procedures followed by the convergence By visiting the Brazilian Chamber’s website of local accounting and auditing standards – http://brazilianchamber.org.uk – you can with International Financial Reporting find information on trade and business Standards (IFRS). between Brazil and the UK.

1 ‘PwC’ refers to PricewaterhouseCoopers LLP (a limited partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

2 Responding to the UK Bribery Act 2010 Russia perhaps has a perceived any other UK commercial organisations Stephen Dalziel reputation – within and outside the considering doing business in Russia, that Executive Director country – as a place where bribes are there is absolutely no need to give bribes Russo-British Chamber necessary to get things done. This or indulge in other corrupt practices in unfortunate image is largely a result Russia. A foreign commercial organisation of Commerce of the gangster capitalism of the has only to do this once – for example, by 1990’s. Following the Soviet Union’s passing money in a brown envelope – and collapse at the end of 1991, and the they are indelibly marked. Such reputations introduction of a free market are then almost impossible to lose. economy, criminal activity, corrupt officials and rampant inflation beset It may take a little longer to achieve the country. It seemed that the only your business aims by taking the ethical way to do any business was with route, but we always urge commercial threats or bribes. Many foreign organisations to adopt a long-term organisations that moved into approach to doing business in Russia. Russia at that time did nothing to If you are going in with the intention deter the locals from these practices of being in the market for ten years or and Russia rightly earned the more (a sensible timeline for the Russian nickname, ‘the Wild East’. market), what difference does it make if you need to spend six months finalising Fast forward 20 years and Russia is a very the first deal ethically – rather than rushing different country. Bright and enterprising it through in two? And at the end of that entrepreneurs have learnt how to conduct time, you’ll have a clean reputation, business ethically. The generation that has instead of being tainted by allegations of grown to maturity in the past two decades bribery (whether as recipient or donor)? has learnt that profits flow from the application of ethical standards. The common-sense approach to doing business in Russia should be to keep it The Russo-British Chamber of Commerce clean, honest and transparent. The profits (RBCC) always stresses to its members, and will speak for themselves.

Opportunities for British business These differences require a degree of Stephen Phillips in China are vast, varied and understanding and adaptability from Chief Executive growing, and the importance of the organisations that wish to achieve success. China-Britain market is increasingly recognised. However, they do not obviate good However, many UK commercial business practice and should certainly not Business Council organisations lack the understanding give rise to activities that would not be needed to unlock this potential. tolerated at home. Good business practice demands that commercial organisations The business environment in China has always have effective oversight of their changed dramatically over the last 30 staff, and of third-parties acting on their years. Markets have opened up and behalf. The Act has brought this need into Chinese commercial organisations and even sharper focus for UK commercial officials have become increasing aware of organisations of all sizes. international business practices. But the approach to business often differs from This report has been produced to clarify accepted practice in the UK. this new law and help UK commercial organisations understand what they need In addition, business practices vary across to do to ensure compliance. At the China- the different regions of China. And as UK Britain Business Council we are committed commercial organisations increasingly to providing UK commercial organisations access opportunities in fast-developing and with up-to-date advice on the impact of the emerging parts of the country, they should Act in China, as well as the full range of expect to encounter business partners and business issues that can arise there. other counterparts with limited exposure to foreign organisations.

Responding to the UK Bribery Act 2010 3 In a country as diverse as India, conform to the KYC regulations of Richard Heald enjoying predominantly dynamic capital and financial markets. Chief Executive domestically-driven economic The standards of the Indian private sector, UK India Business Council growth, the opportunities for UK UK PLC and the requirements of the companies are multiple. Recent Act are very much aligned. years have seen a rapid increase in the level of trade engagement with This does not mitigate the need for due India by UK companies, either through diligence for aspiring and existing the setting up of new ventures, participants in bilateral trade with India. expansion of existing businesses, The Act promotes greater transparency new export contracts and inbound and accountability in business. As such it investment from India. should not have the effect of discouraging UK businesses from exploring a complex As in many rapidly developing economies, and high-growth economy such as India's. the opportunities from great wealth creation bring accompanying dangers Of course, UK businesses of all sizes need in tow. Corruption is an issue in India. to find ways to venture into just such But the momentum is turning against markets. It can seem daunting, but many such practices. There has been civil unrest UK businesses are already operating in India recently in protest at some of the successfully in India through a multiplicity more flagrant examples. Politicians and of entry strategies and have been bureaucrats are increasingly being held generating profits from such activities. to account for their actions and there is a palpable sense that if India is to capture its This brochure seeks to demonstrate the rightful place at the top table of economic UK India Business Council’s commitment powers it must be seen to be enforcing best to helping UK businesses succeed in India. practice in global governance. Moreover, our collaborative approach with trade bodies from other emerging markets For UK commercial organisations, the seeks to respond to the interests of the obvious mantra is to avoid situations where business community and our common one might be compromised. This is not goal of promoting UK interests worldwide, always easy. Infrastructure – particularly while supporting greater competitiveness where public procurement and the and business integrity. requirement to obtain licenses is necessary – remains a specific area of concern. But We hope you will find this brochure much trade activity, even in the area of informative, and that it will catalyse your infrastructure, can be done in association market entry efforts. Please do get in touch with the private sector where standards are with us to learn more about entry strategies good and improving, where there is more and the work that we do to make the most transparent intelligence on counterparties of the India opportunity for UK PLC. and where there is a requirement to

It is absolutely essential not to lose ground to your competitors by avoiding emerging territories – but in order to survive in the long term, a clean reputation is essential.

4 Responding to the UK Bribery Act 2010 Overview

Background The UK Bribery Act 2010 (‘the Act’) The UK Bribery Act is in Business integrity is fundamental to the was passed into law on 8 April 2010 and many ways more onerous success of any commercial organisation. came into effect on 1 July 2011. While Around the world, businesses are bribery has been illegal for a long time in than the US Foreign Corrupt increasingly being held to account not the UK, the Act represents a significant Practices Act. only for what they achieve, both technically change to UK law in the area of business and financially, but also for how they and commerce. It was introduced achieve it. Bribery, wherever it occurs, partly in response to pressure from the can fatally undermine that achievement, Organisation for Economic Cooperation creating huge financial and regulatory and Development (the OECD), as well as risk for the organisations involved. increasing international criticism of the UK’s perceived deficiency in enforcing Bribery can also perpetuate corruption, existing anti-bribery laws. The Act is now underdevelopment and poverty in those widely seen as one of the toughest anti- countries where bribes are paid. This issue bribery laws in the developed world. is driving the international move towards greater anti-bribery enforcement. The overarching precept of the Act is that a commercial organisation must understand and document the risks it faces and take appropriate steps to address them. Any bribery prevention procedures should be proportionate to those risks.

Responding to the UK Bribery Act 2010 5 Key offences and penalties Regulators are also demonstrating their The Act sets out four key offences, which intent, through words and actions, to are outlined below. take a tougher stance against bribery and corruption. This entails increasingly close • Active bribery – offering, promising or collaboration and cooperation between giving a bribe. the various agencies involved. If and when • Passive bribery – requesting, agreeing to bribery is identified, there are penalties receive or accepting a bribe. for both the commercial organisation and the individual(s) responsible. • Bribery of a foreign public official. • Corporate offence of failure to prevent What are the penalties? bribery – liability is triggered by a Commercial organisations – an unlimited person acting for, or on behalf of, the fine (set at the court’s discretion). organisation paying the bribe. The defence is that the commercial Individuals – up to 10 years’ imprisonment, organisation had ‘adequate procedures’ an unlimited fine (set at the court’s in place to prevent such conduct. discretion), or both.

Where a commercial organisation commits Directors – may be subject to disqualification any of the first three offences, senior proceedings, potentially leading to officers may also be liable if they ‘consent disqualification from acting as a director or connive’. for up to 15 years.

The UK government is under considerable Public contractors – possible debarment pressure to enforce the new legislation. from public contracts. Transparency International’s 2010 2 Corruption Perceptions Index showed that While not stipulated in the Act, the UK’s score had dropped from 7.7 in collateral consequences for a commercial 2009 to 7.6 in 2010, falling three places in organisation could involve severe the international ranking from 17 to 20. reputational damage through negative This has further fuelled concerns over the press coverage, as well as disruption UK’s international reputation. of business. Conviction can lead to organisations being placed on blacklists and restricting their abilities to tender for certain types of project. In the case of individuals, consequences could involve disciplinary actions and/or termination of employment.

The Serious Fraud Office (SFO)3 has Under the Act, not only is also sent out strong messages about a new approach to the investigation and bribery an offence, but so prosecution of bribery allegations. This involves more emphasis on self-reporting is failing to prevent it. and cooperation in investigations by commercial organisations, with the threat that failure to self-report or to cooperate adequately will lead to heavier sanctions.

2 This measures the perceived levels of public sector corruption in 178 countries around the world, on a scale of 0 (highly corrupt) to 10 (highly clean). 3 The Serious Fraud Office, an independent Government department that investigates and prosecutes serious or complex fraud and corruption. This forms part of the UK criminal justice system with jurisdiction in England, Wales and Northern Ireland; however, it excludes Scotland, Isle of Man and the Channel Islands.

6 Responding to the UK Bribery Act 2010 Why is it important to respond to the UK Bribery Act?

International enforcement agencies such as the SFO in the UK, the Department of Justice in the US, as well as other bodies around the world, are increasingly collaborating on cross-border cases. This increases the likelihood of detection of bribery and successful prosecution. With the introduction of the Act, UK commercial organisations and others that do business in the UK have no choice but to deal with a new and more threatening anti-bribery regime, including the introduction of a new corporate offence of ‘failure to prevent’ bribery.

This means that commercial organisations must be able to demonstrate that they have ‘adequate procedures’ in place to prevent corrupt practices by their employees or by third parties acting on their behalf. This is critical for mitigating the risk of bribery and for effective damage limitation.

‘Adequate procedures’ is the only available defence when bribery is uncovered. Although the Act does not define ‘adequate procedures’, the Ministry of Justice has issued Guidance to accompany the new anti-bribery legislation and help commercial organisations comply. The Guidance is high level, principles-based The Guidance makes it clear that these and non-prescriptive in character. The six principles are intended to be flexible and key areas of focus are: outcome-focused and that any bribery prevention procedures should be Principle 1: Proportionate procedures proportionate to the level of risk. Principle 2: Top-level commitment Importantly, there is a clear message Principle 3: Risk assessment from government that the Guidance is Principle 4: Due diligence not a checklist, nor is it intended as a safe harbour. Whether adequate Principle 5: Communication procedures are in place will ultimately (including training) be a matter for the courts to determine, Principle 6: Monitoring and review. based on the facts of a given case.

Responding to the UK Bribery Act 2010 7 organisations need to review their behaviour to ensure they are in compliance What should your – and avoid being caught out. business do? Challenges In considering what the Act means for commercial organisations operating in overseas territories, it has been necessary to make certain assumptions and to treat the countries that are the focus of this report as if each country is a homogeneous whole. Although applicable to all UK entities, the Act will be particularly relevant to You need to understand your We appreciate this means that what follows commercial organisations operating in could appear to be based on a number of risk and scope your response. higher risk countries4. Some of the typical cultural stereotypes. Whilst that is not our business transactions and dealings that intention, it seemed important to address create these risks are: this issue at this point. With that in mind, • sales transactions, especially we take this opportunity to stress that we those involving government or realise that all countries and cultures are quasi-government entities complex and multi-faceted. To the extent that we have been forced to base what • movement of goods follows on any broad generalisations, • obtaining licenses, permits, regulatory we have done so simply to articulate clearances, and expediting bureaucracy succinctly some of the important messages that we are seeking to communicate. • negotiation of tax, duties etc • other dealings with government5, including government concessions What the Act means for commercial organisations • gifts, entertainment, travel expenses doing business overseas • sponsorship and certain other Commercial organisations operating in marketing activities overseas countries need to assess their • professional associations risk exposure very carefully – the scope of the Act is broad, extending to: • legal fees • development banks Any commercial organisation registered in the UK and having operations in the • outsourced accounting or tax services UK or in overseas territories either through • charitable or political donations a subsidiary, associate or agent; and any commercial organisation registered in • certain kinds of Corporate Social an overseas territory that does business, Responsibility ‘CSR’ activity or is part of a business, in the UK. • lobbying There is a potentially heightened risk • use of intermediaries including sales attached to UK commercial organisations agents, consultants and distributors operating in overseas territories. • related parties Commercial organisations that have or wish to expand into emerging markets • joint ventures will need to ensure that they do not • consortia breach any of the Act’s four key offences.

• mergers and acquisitions We define emerging markets as countries • use of company assets by third parties. showing steady growth in Gross National Product per capita and those that are In many ways the introduction of the Act implementing economic or political reform could require a fundamental reassessment programmes to increase their attractiveness of the bribery risks that commercial to foreign investment. The fastest growing organisations are facing and how those countries are usually grouped as ‘BRICs’ risks should be addressed. Commercial (Brazil, Russia, India and China).

4 Reference made to higher risk countries are based on the study conducted by Transparency International's 2010 Corruption Perception Index. This measures the perceived levels of public sector corruption in 178 countries around the world on a scale of 0 (highly corrupt) to 10 (highly clean). 5 There seems to be a lack of understanding about the scope of ‘government’. For instance, in some jurisdictions, this could include utilities, telephone companies, hospitals, development banks, sector regulators, and even companies on the Fortune 1000. The concept of mixed economy entities in certain territories means that the entity is partially owned by the government and the other part may be private or publicly-held entities.

8 Responding to the UK Bribery Act 2010 The UK has fallen three places from 17 to 20 in Transparency International’s 2010 Corruption Perceptions Index. The UK and the BRIC countries are ranked as follows:

UK Russia 20 out of 178 countries 154 out of 178 countries 7.6 out of 10 2.1 out of 10

India 87 out of 178 countries 3.3 out of 10 Brazil China 69 out of 178 countries 78 out of 178 countries 3.7 out of 10 3.5 out of 10

Responding to the UK Bribery Act 2010 9 Corruption Perceptions Index 2010 results

Very clean 9.0 – 10 7.0 – 7.9 5.0 – 5.9 3.0 – 3.9 1.0 – 1.9 No Data 8.0 – 8.9 6.0 – 6.9 4.0 – 4.9 2.0 – 2.9 0 – 0.9 Highly corrupt

Source: Transparency International

Fast-growing emerging economies present • Fear of finding the ‘unknown’ is a Just because a territory is outstanding opportunities for business. major deterrent to conducting risk While we acknowledge that each country assessments. There is an underlying perceived to be of higher is different, certain generalisations can be issue of form over substance and risk, it doesn’t mean you made, as there are several business and inadequately designed risk assessment shouldn’t do business there... cultural challenges that are common to procedures are widely viewed as ‘tick each of the BRIC and other emerging box’ exercises, rather than meaningful economies. Some of the recurring risks risk assessments may include: • Due diligence can be limited – or not • Lack of a strong ethical ‘tone at the top’ performed at all; where it does take at senior management level, coupled place, it can be driven by business with inconsistencies in actions, considerations rather than risk issues. behaviour and words Although these general risks can also be • Many commercial organisations still do found within organisations in developed not have anti-corruption policies and economies, they are more frequently procedures in place; and where policies encountered in emerging markets. and procedures are in place, there is often ineffective communication and inadequate training

10 Responding to the UK Bribery Act 2010 Business and cultural challenges faced by BRIC countries As noted above, certain business and cultural challenges are relevant across many countries. However, some challenges could be specific to each of the BRIC countries:

Brazil Compliance awareness has evolved significantly in recent years in Brazil. This is due to a number of factors including the increased global relevance of the Brazilian economy, and the increase in direct investments from foreign countries. In addition, several changes in Brazilian corporate law and the Civil Code are expected to introduce higher levels of corporate governance. However, even with the velocity of change in Brazil, there is still a gap in compliance awareness when compared to mature markets.

It is still unusual for commercial organisations in Brazil to have specific anti-corruption policies and procedures. The relative lack of risk assessment stems from a fear of finding the ‘unknown’. public at large. As things stand, With two large sporting events on the Although larger commercial organisations anti-corruption risk monitoring and review horizon (the 2014 FIFA World Cup and have, in recent years, established risk at local entities is nearly non-existent and the 2016 Summer Olympics), as well as assessment policies focused on Sarbanes- the difference between robust internal the discovery of large oil reserves near Rio, Oxley and internal controls, the risk of controls that mitigate risks and regular several major infrastructure projects are corruption has generally not been part of business activities is not well understood. now underway. As well as increasing the scope of any such initiatives. The monitoring of corruption risk is commercial organisations’ interactions rarely considered during the scope of with government, the public tendering However, anti-corruption due diligence local commercial organisations’ internal processes involved in these projects often is a growing trend for inbound multi- audit plans. also stipulate minimum requirements nationals analysing potential investments for the involvement of local commercial in Brazil. With the coming into force of the Although some family-owned businesses organisations. As a result, newcomers Act, several UK-based inbound corporate in Brazil have grown into relatively large to Brazil may feel under pressure to align investors and private equity groups have commercial organisations, many have yet with local commercial organisations implemented anti-corruption due diligence to implement internal controls and basic without undertaking the due diligence programmes. These are also taking place compliance elements such as codes of needed to understand whether local where foreign commercial organisations conduct and whistle-blowing hotlines. players can operate and maintain are hiring local assistance, such as agents compliance with anti-corruption laws or distributors. Since intermediaries may Certain trends are changing this. Because and regulations. This pressure may be involved in corruption-related activities, these organisations often rely on the come in various forms, and the ability UK-based commercial organisations, as capital markets and development banks to demonstrate local content to meet well as entities with applicability to the for the resources they need to grow their the requirements imposed by public Act, need to promote such exercises. operations, good corporate governance bidding processes is one of them. However, practices are being implemented in line increasingly, important players are getting An anti-bribery and anti-corruption with the requirements of the Stock organised beforehand and implementing culture is not yet widespread in Brazil. Exchange and lenders. Levels of awareness due diligence exercises in time to However, this is changing, as many more of corporate governance have increased participate in these bidding processes. government initiatives bring this issue to dramatically in Brazil during the last the attention of the media and to the ten years, although there is still room for improvement.

Responding to the UK Bribery Act 2010 11 Russia In the second category, it is not uncommon India Russia is making progress in addressing for commercial transactions to be affected The economic growth of India since the bribery & corruption risks. There is by the payment of bribes by one or more reforms of 1991 has resulted in the recognition at senior government levels, parties. Not surprisingly, procurement is dismantling of the power of State-owned and within the business environment, that particularly susceptible, with payments enterprises and the ‘Licence Raj’, and has such risks have a negative effect on the required in order to be allowed to tender, led to the creation of an increasingly country’s ability to attract foreign direct to receive privileged information, or to dynamic private sector. This, together with investment and reduce capital outflows. be successful in a bid. These types of a much more vocal, affluent, burgeoning, Anti-corruption laws have been overhauled payments are relatively prevalent and and aspirational middle class has pushed and the number of prosecutions of corrupt strong controls and vigilance are needed the combating of corruption to the top of officials is increasing year on year. There is to prevent them. the political agenda. an increasing focus from businesses (and not just inward investors) on a compliance Other aspects of bribery that are particularly The existing anti-corruption legislation in culture and ethical business practices. relevant in the Russian culture include: India, the Prevention of Corruption Act That said there is still a way to go to • Gifts: relationships are critical to the 1988, made it an offence to receive a bribe improve the perception of Russia as a conduct of business in Russia and gifts – but not to offer one. Actions of the trouble-free business environment. to generate and maintain good relations Supreme Court coupled with public letters are common from leading industrialists and prominent Where Russia is concerned, a distinction efforts of the civil society activists such as needs to be drawn between bribes that • Hospitality: relationships can also be Anna Hazzare are forcing a public debate enable business to take place, and bribes enhanced by taking business partners about the introduction of a new piece of relating to the business being conducted. In and government officials out for anti-corruption legislation, the Lokpal Bill. the first category, a key business challenge lunches, dinners and business trips, With the alleged involvement of big in Russia can be the potential for extortive along with various sporting and artistic commercial organisations in a spate of behaviour of the bodies that extensively events. These events are sometimes scams apparently weighing on his mind, regulate business across the country. This quite lavish and can have the ultimate Prime Minister Manmohan Singh on can take various forms, from the indirect to objective of obtaining an improper 21 October 2011 said government is the very obvious. Payments are frequently business advantage considering changes in law to make private demanded in order to accelerate the • Use of subcontractors or intermediaries: sector bribery a criminal offence. performance of duties by officials, which frequently recommended by large would otherwise be slow or refused for customers, especially by state-owned All this is symptomatic of a significant vague and ambiguous reasons. Examples commercial organisations, these can be change of mood emanating from the include payments of facilitation to get a pre-condition for winning business private sector. Even with the dismantling goods and equipment into the country, of the ‘Licence Raj’ and the privatisation • ‘Charitable’ or ‘sponsorship’ payments: offers to sign off official ‘audits’ without of state-owned enterprises, the public sometimes made by special non-profit notices of violations in return for a special sector remains one of the biggest organisations on behalf of commercial contribution and sometimes just pure employers in India and, as a result, the organisations to support current or harassment from enforcement authorities. governance structure in the public sector former government officials or has a far-reaching impact on how the Whilst some organisations succumb to the government initiatives, these may be country perceives corruption. It will take temptation of ‘faster, better’ service through viewed as a form of ‘protection’ money. longer to address the causes of corruption payment, many others who refuse to within the public sector. For instance, They highlight the need for constant succumb find that they are inconvenienced one of the reasons that corruption is so vigilance, as well as adequate policies and – but not wholly disadvantaged. On the prevalent in the Indian public sector is that supervision, when operating within the positive side, those organisations taking a its employees are poorly paid and it has Russian business environment. firm stance are often quickly recognised by often been accepted that salaries can be the extorters as ‘not worth the effort’. supplemented by low-value payments for routine, non-discretionary government approvals and services. When the Indian public sector is competing with a dynamic and constantly growing private sector, it is difficult for the government to match the salaries of its employees with those of the private sector. Collusion with agents, customers and vendors to obtain fictitious invoices and disguise such payments as mark-ups, commissions, stealth discounts or rebates is common.

12 Responding to the UK Bribery Act 2010 Even for mundane tasks – from securing a birth certificate, a passport or a visa, to obtaining a construction permit or indeed one of the average 73 licenses needed to construct a building – ‘facilitation payments’ are required to A final and relevant issue is worth The giving of appropriate gifts is quite navigate long waiting periods. mentioning. Candidates have been known common during meetings, not to mention to alter their qualifications in order to make traditional holidays. While this practice On a brighter note, technology is facilitating them appear eligible for jobs. Anecdotally, is sometimes seen as a way of building the change towards better governance. For it is estimated that some 25% of all and maintaining business relationships, example, in the area of real estate, where applications have some ‘material common sense should be employed with payments are commonly made to perform discrepancy’ contained within. With any gifts given or received, and it should regular government jobs, states are moving large-scale recruitment of candidates not in be remembered that gifts do not towards electronic repositories of title possession of strong ethics and necessarily need to be substantial to records to cut down on human involvement fundamental values, the risk of them breach anti-bribery laws. and hence, on avenues for seeking payments. committing fraud and corruption while on As good governance is increasingly being Building good relationships in the supply rewarded at the ballot box, one would the job is significant. There is also a chain is generally positive, but UK hope that these practices will become tendency to cover up mistakes and report businesses must be aware of the risks more widespread. only what one ‘wants to hear’ rather than ‘what is true’. involved, such as conflicts of interest, Most companies entering India will engage fraud and kickbacks. with the private sector. The private sector China While much progress has been made in is very much dominated by the ‘promoter’ The business environment in China has culture where individuals or families own become much easier for international business practices and in opening up the significant proportions of the company commercial organisations in recent years. country to oversee trade, Transparency stock. Accordingly, the existence of a Chinese businesses and officials are International’s assessment of China in ‘boss-subordinate’ culture in India is increasingly aware of international its Corruption Perceptions Index has widespread. Loyalties lean more towards business practices, and have gained remained more or less static for the last family and friends in closely held family- experience from working with non-Chinese 10 years at 3.5, placing China 78th in run businesses, often leading to a non- counterparts. However, there are still key the world rankings. This means that transparent working atmosphere. At the differences in the approach to business that commercial organisations doing business same time, the Indian use of advisors and can cause difficulties for UK commercial there should be constantly alert to the consultants is prevalent. Often such organisations looking to work with Chinese potential risks involved. individuals are not formally engaged, counterparts. but are instead friends of long standing or Facilitation payments are common. family members. This trend is also slowly Forming a relationship before agreeing a Third-parties may often not be aware but surely changing. There are a number deal remains an important part of the that these are unacceptable under UK law, of instances where companies that were business process. The role of relationships and so may make payments on an traditionally family-owned and controlled in China is often referred to by its Chinese organisation’s behalf without realising are looking towards professional managers name, ‘Guanxi’. This forms an important that this is problematic. to manage their businesses. part of cultural and social practices, as well as commercial behaviours, and the Cultural considerations also need to be In India, the giving of gifts is a way of life, competitive environment means that such factored into how training and messaging custom and culture. Instances of lavish relationships are often seen as a way of with staff are addressed. Chinese gifts at occasions such as festivals, getting ahead. organisations tend to be hierarchical, and promotions, weddings or other special staff members are less likely to question events are frequent and common. Gifts There can be a tendency to look for ways senior management decisions. This can can take various forms including offers to do business with family and friends, mean that western-style control systems of employment, charitable donations, and in some circumstances a relationship will be less effective. Also, when problems political contributions, sponsorships, travel may not be regarded as close until a way of and issues are known about, they are less and accommodation and use of corporate doing so has been found. As business with likely to be disclosed. assets. Refusal of such generosity may be friends and family can be quite common, taken negatively. staff and counterparts are less likely to feel It is also important to remember that it necessary to declare such interests to although the Act may make explicit Nevertheless, Indian corporate life is led their employer. reference to foreign officials, in China out in the open; corporate and social life the difference between officials and intermingles and dynastic marriages are The concept of ‘Guanxi’ does not necessarily businessmen can be blurred, particularly the norm. As such, it is easier to conduct relate to cash or gifts, though the exchange by the role of government/state-owned diligence on corporations and promoters. of favours can be used to build good ‘Guanxi’ enterprise in the economy. However, there are instances where such and payments to facilitate the conduct of promoters are running investments business do occur. Relationships can be through family trusts which are very seen as assets that can be bought and sold. difficult to conduct any diligence on. The country follows a common law approach and the court systems are robust, albeit slow. Responding to the UK Bribery Act 2010 13 Managing the risks – recommendations

Acting promptly to address any gaps Principle 1: Proportionate Proportionality will govern the scope of, or areas of weakness identified in procedures and approach to, other areas such as: your anti-bribery programme could The Ministry of Justice guidance • codes of conduct, policies and be your only defence. The following summarises the principle of proportionality guidance principles should all be areas of as follows: ‘A commercial organisation’s special focus: procedures to prevent bribery by persons • compliance-sensitive transactions associated with it are proportionate to the including gifts, hospitality, charitable bribery risks it faces and to the nature, and political donations scale and complexity of the commercial • organisational structures, accounting organisation’s activities. They are also and reporting lines clear, practical, accessible, effectively implemented and enforced.’ • the risk assessment process and the manner in which this is documented Large, complex multinational commercial • third-party due diligence organisations with high-risk profiles need to ensure that they are investing enough • human resource controls around resource in their anti-bribery programmes. hiring and promotions • sanctions and rewards for officers and Smaller organisations with less complexity employees and/or resources are not expected to build programmes and controls with the same • accounting and record-keeping controls level of sophistication. Commercial • authorisation and delegation controls organisations with genuinely lower risk exposures also need not go over the top. • monitoring and enforcement • periodic compliance certifications, That said, no business is entirely devoid of not only from employees but also with risk, so doing nothing is not the answer. third parties/intermediaries • auditing and review • reporting and whistleblowing • internal and external communications.

Are you confident that your bribery risks have been identified and adequately addressed?

14 Responding to the UK Bribery Act 2010 An undocumented risk assessment will be Principle 2: Top-level Integrity due diligence: The degree of little value if or when an incident occurs commitment of control that the organisation has and there is a requirement to evidence the The ultimate success or failure of an over the existing relationship with the way in which risks were managed. anti-bribery programme will depend third-party should also be taken into on the culture of the organisation and consideration; in particular: whether people believe that ethical The risk assessment should examine a • it is essential that risk-based behaviour matters to the way they are range of risk factors. The Ministry of compliance due diligence checks are evaluated and rewarded. Justice guidance identifies five generic types of ‘external’ factors: carried out on any third-parties that the organisation plans to engage Are your board members and senior • country executives ‘walking the talk’? • formal contracts with these third- • sectoral parties should require them to behave To demonstrate their commitment to • transactional in an ethical way and in compliance fostering an anti-bribery culture within with all relevant legislation, including • business opportunity the company, board members and senior specifically anti-bribery legislation executives need to consider a number • business partnership risk. • approval and monitoring procedures of issues: need to be established to check that Some of the areas that the risk assessment • senior management must indicate the payments made to the third-party would typically cover include: importance of the anti-bribery appear reasonable in relation to the programme by allocating resources to • the high-risk locations in which the service performed its development company operates • where they are engaging smaller • the board should devote appropriate • whether the business model includes third-parties, large organisations time to anti-bribery compliance issues large-scale projects, tenders or should consider taking steps to and to monitoring the effectiveness of long-term contracts support these smaller business the organisation’s anti-bribery partners in achieving compliance • the degree to which intermediaries programmes and controls with anti-bribery laws and regulations. are used to do business • specific compliance-related • whether the company has interactions Employees: HR should be conducting performance targets could be set in with government officials background checks on potential management objectives (including employees, particularly those in senior those of board members) and then • if a new business acquisition or joint or sensitive positions, looking out for assessed as part of the variable venture is planned evidence of involvement in illegal remuneration decision process • the gifts, hospitality and activity or any other question marks • board members and other senior entertainment activities employed. regarding integrity. management should undergo training Mergers, acquisitions and joint A bribery risk assessment should be to ensure they have appropriate ventures: Acquiring a business or repeated periodically to ensure that knowledge of the anti-bribery entering into a joint venture exposes the company’s procedures continue to legislation and its implications. an organisation to the risk that it may be relevant. unwittingly take on liability for the illegal acts of the target business or of a Principle 3: Conduct a Principle 4: Due diligence partner in the investment. Alongside the comprehensive bribery risk usual financial, commercial and legal due assessment Companies are exposed to vicarious diligence typically conducted in such The Ministry of Justice guidance states that: liability for the actions of others (referred situations, organisations should consider ‘An initial assessment of risk across the to as ‘associated persons’) who pay bribes steps to obtain insight into the risks, organisation is … a necessary first step.’ of any kind while doing something on behaviour and compliance programmes their behalf. An associated person is of such targets and joint venture Without having assessed what risks exist, defined as an individual or an incorporated partners. The circumstances of a given how can they be effectively managed? or unincorporated body who ‘performs transaction will dictate the extent to Once a risk assessment is completed, the services’ for or on behalf of the organisation. which such due diligence is feasible organisation is in a much better position Associated persons may include employees, prior to the transaction. After completion, to decide what measures need to be taken. agents or subsidiaries. further work will be required to integrate It should be remembered that risk is not the new business or entity into the wider necessarily proportionate to the size of the organisation and harmonise anti-bribery company, And it is not a ‘one-off’ exercise policies and procedures. – risks can change over time.

Responding to the UK Bribery Act 2010 15 Principle 5: Communication Principle 6: Monitoring Whistleblowing: Best practice (including training) and review guidelines for countering bribery and The vital foundation for any anti-bribery Monitoring and review activities are corruption typically require provision of framework is effective communication of critical to understanding whether the whistleblowing facilities. This involves the code of ethics or conduct, the anti-bribery programme is really working. establishing a mechanism whereby organisation’s core values and its individuals can report any suspicion of corrupt behaviour confidentially and, supporting policies. Monitoring and review can be thought of if they wish, anonymously. in two ways: Some things to consider whilst preparing • there are retrospective measures to Committing time and resources: for the training: review adherence to policies in The need for organisations to commit • for training to be effective, it should respect of existing transactions and sufficient time and resources to the be regular rather than once-only and relationships, such as might be development and embedding of an participation and feedback should be carried out by an internal audit or appropriate anti-bribery programme has monitored and evaluated similar function already been highlighted, but it is worth emphasising again. • employees need training to help them • there are real-time monitoring understand how bribery and activities involving the gathering and corruption can arise and to identify analysis of current information about situations when they and the business what is happening in the business, may be at risk with a focus on activities which have been identified as high risk through • because of the often subjective nature the risk assessment process. of the material, face-to-face training is necessary to supplement e-learning Both of these may have a role in modules for people in critical implementing effective monitoring positions and review. • training must be tailored to reflect realistic dilemmas staff may face, as well as the needs of particular roles.

16 Responding to the UK Bribery Act 2010 Implementation steps PwC has developed a 10-step implementation plan that will help organisations address all six of the Ministry of Justice principles

1. Assess risk

2. Evaluate existing controls Specify 3. Target operating model

4. Remediation planning

Build 5. Design enhancements

6. Roll-out

7. Implement Business takes ownership Implement 8. Test

9. Follow-up

10. Ongoing monitoring and Embed continuous improvement

Corporate hospitality and facilitation payments Reasonable, bona fide and proportionate ‘lavish’ is not defined and will, therefore, facilitate routine action) will be corporate hospitality is allowed. be open to interpretation. Organisations considered bribes for the purposes of Facilitator payments are not. The Revised should consider what is reasonable the Act. However, the Revised Guidance Guidance makes it clear that hospitality and ensure that their policies and does recognise that the eradication and promotional expenditure are procedures are properly communicated of facilitating payments will be a acceptable. However, there should be to an employee. long process and hints at the potential no intention for a financial or other for prosecutorial discretion to be advantage to influence the recipient in It is also clear from the Act and the exercised where facilitation payments discharging their role, and the event Revised Guidance that facilitator are discovered. should not be ‘lavish’. Unfortunately, payments (small payments made to

Responding to the UK Bribery Act 2010 17 Recommendations to These should be periodically checked in management involvement in overseeing manage risks order to monitor their effectiveness. business partner activity. A common pitfall is to devolve this responsibility due to Some recommendations for risk mitigation Considering cultural norms, as well as the language or logistical reasons. are set out below. Although these ever-changing and improving landscape of suggestions can be applied universally and Establishing relationships: it is common in corporate governance, policies and training are not country specific, we have drawn on Russia to use gifts, hospitality and favours to should include explanations about what our experience to show what they mean in help establish business relations. This does constitutes acceptable business practices practice in each of the BRIC countries: not need to be lavish entertainment and conduct, as well as explaining what or major ‘back-scratching’. A clear set of is not acceptable. This theme should be Brazil standards that is widely communicated to included in the frequent messaging, not all management and employees can help Doing business in Brazil should be just during annual training and disclosures ensure that an appropriate gift or business understood to be filled with bureaucratic of conflicts of interest. constraints, a complex tax system and a favour is not a bribe. Many organisations in Russia are now ensuring that there is a complicated labour regulatory environment. Russia Local people as well as corporate businesses pre-approval for all such expenses above There is no real need for organisations that try to cope with these challenges by finding certain designated limits. are new to the Russian market to conduct alternative ways to resolve issues or deal their business any differently to the way Regular reviews: Due to the somewhat with certain regulatory constraints. This they would ‘at home’. However there is a hierarchical and directive driven culture can result in creativity or flexibility in clear need for senior management caution of many Russian organisations, regular finding solutions and does not always have in business dealings to address the reviews around the business areas prone a negative context, although finding ‘the corruption challenges. The key areas for to corrupt activities can have a strong way’ may not always be legal or ethical. executive focus are creating a culture that prophylactic effect on behaviours within does not tolerate or condone bribery, the organisation when performed in The dramatic growth of Brazil’s economy has defining clear approaches to working with conjunction with appropriate messaging. increased the size of its middle class. Such local business partners, effective guidance growth is creating a new employment sector India on gifts, hospitality and ‘favours’ and eager to take on new roles in the job market. The focus of senior management should regular reviews of existing practices. It is therefore critical that investments should be on implementing a ‘zero-tolerance’ be placed on furthering the professional Creating a culture that does not tolerate anti-bribery policy. To effectively implement duties of potential candidates. bribery: As corruption is prevalent in the anti-bribery policy, an entity should certain areas, senior management need to designate a responsible person at a senior It is important to mention that Brazil follows adopt a clear zero-tolerance of bribery and level. Measures including an effective the ‘civil law’ system, with decisions being corrupt activity from day one. This needs to ‘Tone at the Top’, adequate training, regular based on the application of statutory laws be backed by clearly defined policies and communication and periodic refresher such as the Brazilian Federal Constitution, as guidelines. And senior management need courses will ensure an adequate mechanism well as several Codes, laws, decrees and other to be seen to be active in addressing the to deal with the menace of bribery. rules. Where there is no specific statutory risk and ‘walking the talk’. The Russian As a measure of effective deterrence, provision, the courts may decide on the basis management culture can be viewed as employment contracts should contain a of analogy and general use and customary quite hierarchical and directive driven so a specific clause on compliance with the policies. In contrast to ‘common law’, there is clear lead from the top is essential. Keeping entity’s anti-bribery policy. The designated no requirement for written clauses in bribery and corruption risks on the agenda authority should also strive to include the contractual agreements where the provisions in staff discussions and during day to day anti-bribery clause in contracts with all can be found in written legislation. business activities will help reinforce this third-party agents/consultants. message and create an understanding of Commercial organisations must create why ethical business behaviour is a priority To ensure effective internal controls, there strong policies related to anti-bribery and to the organisation. should be proper segregation of duties within compliance. Internal Controls departments the entity, as well as a ‘maker-checker’ Working with local business partners: must ensure employees act in accordance concept in key decision areas. The authority For very good reasons, not least language with them. Punishments, including and responsibility of each employee should and the vast size of the country, foreign dismissal, must be applied to employees be well defined. The entity should strive to businesses often need to conduct business that violate those policies. As significant introduce effective monitoring systems and in Russia through local business partners importance is placed on relationships in adequate whistleblowing and reporting or other intermediaries. Under the Act, a Brazil, a policy should be implemented to investigation procedures. ensure that those relationships in the UK party may now be held liable for the corrupt behaviour of an overseas workplace are kept above board and An effective control mechanism will include intermediary. Where a Russian conflicts of interest, as well as related regular and periodic risk assessments of intermediary is conducting business in parties, are disclosed and monitored. the existing anti-bribery programme to test Russia on behalf of a UK principal. Special its effectiveness. A good anti-corruption emphasis needs to be placed by senior An entity should designate a responsible policy should ideally include due diligence management on the activities of those person at a senior level to effectively implement procedures for vendors and third-party business partners. A thorough due the policies. For internal controls to be agents/consultants. effective and functioning as designed, proper diligence process is essential before working with intermediaries. And this segregation of duties should be ensured. It is advisable to keep intermediaries to a should be backed up with senior minimum, as fewer parties involved will

18 Responding to the UK Bribery Act 2010 Do you know your ABC? payments may be standard practice for the people you are working with, so explain Elements of an anti-bribery compliance framework carefully to third-parties and partners that it is important these are not paid on your behalf. ing Change S Mak tick ate own Dealing with staff: ‘Tone from the top’ and rpor ershi Co p ‘mood in the middle’ are both critical. As • Tone/behaviours at the top with other BRIC countries, in China it is • Compliance governance important to ensure that there are clear • Code of conduct/ethics • Policies and guidelines rules and regulations around what is • Procedures/internal controls acceptable – and what is unacceptable. • Compliance risk assessment • Sustainability/improvement C Top-down policies are essential and a o r p ‘zero-tolerance’ anti-bribery policy should

o t r r • Communications be implemented. This needs to be clearly a

o • Training • Compliance t

e p communicated to local staff, and the LEGAL • Legal p • Compliance

consultation • Internal Audit a necessity for measures should be explained

f • Whistleblower • Finance f

k carefully and patiently. Engage with staff to

a facilities • HR

t ILLEGAL

• Performance e S check that messages have been taken on

management p

r board. This also applies to working s • Business partners relationships with any third-parties. • Due diligence and background checks • Bank accounts • Gifts and hospitality How can we help? • Conflicts of interest and external appointments At PwC we have the right skills, experience and expertise to advise our clients on the O pe rks rating framewo particular risks and responses for your Em es organisation. We have developed a number bedded Process of specific diagnostic offerings of varying degrees of depth, tailored to client needs make operations more efficient and reduce their basic business principles and good and we can provide practical assistance in risk. Businesses should conduct due practice in the name of relationship helping with facilitated bribery risk diligence on their local representatives, building. Take time to form relationships, assessments using BRiskTM – our unique agents and key staff and ensure that but if the deal is genuinely good for both web-based diagnostic tool. remuneration is at market rates. sides, nothing else should be necessary to seal the deal. We also have extensive experience in The entity should have a well-articulated helping organisations prepare for this policy on gifts, employee expenses and Due diligence: Determine who you are legislation and from conducting similar hospitality. Any offer or receipt of gifts and doing business with and, in turn, who FCPA (Foreign Corrupt Practices Act) hospitality without a genuine business reason they are doing business with. Ensure that reviews and remediation. should not be permitted by the entity’s policy. proper due diligence is conducted to The policy should also address the issue of check that any partners or third-parties Simply implementing an Anti-Bribery charitable donations and sponsorships to are reputable. Check whether business is Policy is not enough. An organisation needs prevent any inappropriate use. being done with family and friends of to ensure it has an Anti-Bribery Compliance staff and third-parties. Programme that is capable of evidencing China ongoing and up-to-date controls and one The key to avoiding unnecessary risk is to You may need Chinese parties to sign up to which can communicate effectively, keep the business sense that would be certain standards of practice, and also ensuring a strong ethical culture within an employed in any other market. While there cooperate with due diligence background organisation. Implementing an effective are differences in business culture, most checks. Because your counterpart may not Anti-Bribery Programme can be a troubles arise when UK commercial be used to this practice, you will need to be significant undertaking. The difficulties organisations in China deviate from sensitive and may need to broach the issue and time it takes to embed processes and practices they would be comfortable with carefully – but important checks should not change cultural norms should not be in other markets. Be careful not to offend be skipped to avoid offence. underestimated. The stakes are potentially people, of course, but stick to what you high and the time to act is now. need to do and what is sensible. Having Gifts: Gift-giving is common in China and, clear policies in place is also important to within reason, it is not outlawed by the For large and complex anti-bribery and show that you have taken adequate Act. However, commercial organisations corruption projects, where clients need procedures if any problems are encountered. should have clear policies on appropriate legal as well as professional advice, we are sizes of gifts, and what gifts are and are uniquely equipped to provide both as a Guanxi: Relationship building will not acceptable. Do not feel compelled to seamless service by teaming with PwC continue to be important, particularly for give them. Legal. Working closely with our colleagues foreign businessmen who need to prove a in PwC Legal, we have the experience to deal is win-win. There is nothing Facilitation payments: Be brave enough structure relevant anti-bribery and necessarily wrong with this, but British to refuse to pay facilitation payments. Clear corruption advice so that it attracts legal commercial organisations must not forget guidelines on this will help. Facilitation professional privilege.

Responding to the UK Bribery Act 2010 19 The Brazilian Chamber of Commerce for Great Britain, the Russo-British Chamber Contacts of Commerce, the UK-India Business Council, and the China-Britain Business Council have joined efforts with PwC to produce this brochure to inform UK UK Bribery Act BRIC commercial organisations operating in paper contacts: BRIC emerging markets of the preparations they should make in light of the recently Forensics: PwC Legal: enforced UK Bribery Act. Tony Parton Ben Cooper Partner, Forensic Services Senior Solicitor, PwC Legal This collaborative approach seeks to respond Tel: +44 (0) 20 7213 4068 Tel: +44 (0) 20 7804 2108 to concerns among the business community [email protected] [email protected] while acknowledging the wide-reaching geographical interests of UK businesses. We hope it has been informative and helpful. Andrew Gordon PwC UK Emerging Markets Group: Partner, Forensic Services Brazilian Chamber of Commerce Tel: +44 (0) 20 7804 4187 Mukesh Rajani in Great Britain [email protected] Partner, Leader of India Business Group Jaime Gornsztejn Faisal Ahmed Tel: +44 (0) 20 7804 2709 Chairman, Brazilian Chamber Senior Manager, [email protected] of Commerce in Great Britain Forensic Services +44 (0) 20 7399 9281 Tom Troubridge Tel: +44 (0) 20 7804 6128 brazilianchamber@ Partner, Leader of China [email protected] brazilianchamber.org.uk Business Group www.brazilianchamber.org.uk PwC territory forensic leaders: Tel: +44 (0) 20 7804 4723 [email protected] Russo-British Chamber of Commerce Mona Clayton Partner, Forensic Services Brazil Alex Bertolotti Stephen Dalziel Tel: +55 (11) 3674-2141 Partner, Leader of Russia Executive Director, Russo- [email protected] Business Group British Chamber of Commerce Tel: +44 (0) 20 7213 1253 +44 (0) 20 7931 6455 John Wilkinson [email protected] [email protected] Partner, Forensic Services Russia www.rbcc.com Tel: +7 (495) 967-6187 Diego Chaves UK India Business Council [email protected] Senior Manager, Brazil Business Group Richard Heald Tel: +44 (0) 1895 522308 Vidya Rajarao Chief Executive, UK India [email protected] Partner, Forensic Services India Business Council Tel: (91) 80 4079 7002 +44 (0) 20 7592 3040 [email protected] [email protected] www.ukibc.com John Donker Partner, Forensic Services China China-Britain Business Council and Hong Kong Stephen Phillips Tel: +852 2289 2411 Chief Executive, China-Britain [email protected] Business Council +44 (0) 20 7802 2000 [email protected] www.cbbc.org

20 Responding to the UK Bribery Act 2010 www.pwc.co.uk www.pwclegal.co.uk

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© 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. "PwC Legal" refers to PricewaterhouseCoopers Legal LLP (the limited liability partnership registered in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited.

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