Introduction: Indian entities are often contractually mandated to implement bribery prevention procedures prescribed by the UKBA. We discuss why this is so and what prevention procedures should be implemented.
The (UK) Bribery Act, 2010 (‘UKBA’) affects all business that are incorporated or formed in the UK, or those that carry on a business or part of the business in the UK (irrespective of where in the world they are incorporated). The UKBA also applies to a person who is a British national, or ordinarily resident in the UK.
This implies that business entities set-up and operating in India (and not carrying out a business in the UK) are outside the purview of the UKBA. However, several commercial contracts between Indian and UK-based principals may provide for UKBA compliance obligations on the Indian party even when the Indian entity is not within the purview of the UKBA. This is because the UKBA requires those entities within its jurisdiction to ensure that the compliance levels are met even in regards to their ‘associated’ entities situated and operating abroad.
Risk mitigation is an important aspect under the UKBA. Guidance principals (‘guidelines’) issued by the Secretary of State for Justice (UK) provide that organisations are required to implement to risk mitigation under the UKBA. Under section 7 of the UKBA (Failure of commercial organisations to prevent bribery), a ‘relevant commercial organisation’ becomes liable if a person ‘associated’ with it bribes another person with the intention of obtaining or retaining a business or an advantage for the business of such commercial organisation. However, such an organisation can have full defence if they can show that they had adequate procedures in place to prevent such an occurrence.
In the case of a supply chain, the commercial organisation is expected to mitigate bribery risks by enforcing procedures not only within its organisation, but also contractually requesting the counterparty to apply similar approaches within its chain. This is where we will typically see a commercial organisation contractually requesting that the Indian entity it is engaged with should also implement appropriate procedures to satisfy the provisions of UKBA. This is to ensure that actions by the Indian entity that are contrary to the provisions of the UKBA do not lead to the commercial organisation becoming liable under the stringent UKBA provisions.
When such a request for implementing procedures under the UKBA arises, entities may be required to follow the principles issued under the guidelines. The following principles are not meant to be prescriptive in nature, and are designed to be flexible, allowing for organisations (both principal as well as associated) to devise procedures that correspond to their business operations and environment.
Principle 1: Proportionate procedures – The procedures implemented by an organisation to combat bribery should be proportionate to the risks it faces and the complexity of its activities. The term ‘procedures’ would include both bribery prevention policies, and the procedures that are in place to enforce such policies. Organisations should start with undertaking an initial assessment of the risks. The resultant procedures put in place should practically and realistically be able to achieve such organisation’s stated anti-bribery policy.
Principle 2: Top-level commitment – The top management of the organisation should be committed to ensuring that they foster a culture where bribery is absolutely not acceptable. The top-management is required to ensure appropriate communication of the organisation’s anti-bribery stance, and there should be an appropriate degree of involvement of the top-management in developing bribery prevention procedures. The organisation’s anti-bribery stance should preferably be communicated and drawn to people’s attention on a periodic basis, and the same should also be available in the organisation’s employee handbook or online for ease of reference. Typically, in large multinational organisations, the board should be responsible for setting bribery prevention procedures.
Principle 3: Risk assessment – Organisations should undertake periodic informed assessments to assess the potential external and internal risks of bribery committed on its behalf by persons associated with it. The risk assessment should evolve as the business of the organisation evolves. This includes when the organisation enters a market in a part of the world where it was previously not present. Typical risks can be categorised as (i) country risk, (ii) sectoral risk, (iii) transaction risk, (iv) business opportunity risk, and (vi) business partnership risk.
Principal 4: Due diligence – Organisations are required to undertake due diligence on a risk-based approach. In higher risk environments, due diligence may include direct interrogative enquiries, direct investigations, or general research on associated persons. Due diligence may also involve direct investigations into relevant individuals of the associated entity. In the case of an Indian entity, this would imply a due diligence to be conducted on persons in its supply chains as well.
Principle 5: Communication – Organisations must effectively communicate both internally as well as externally its procedures for bribery prevention. Organisations should also establish appropriate channels whereby internal and external persons can raise concerns about bribery on the part of associated persons. Such channels should provide accessibility and confidentiality to such persons to report the same. Training will also form part of anti-bribery procedures. Organisations are also required to communicate to the associated persons, the consequences for breaching contractual provisions relating to bribery prevention. Associated persons may also be encouraged to undertake anti-bribery training.
Principle 6: Monitoring and review – Since the bribery risk that an organisation faces will change over time, the procedures an entity applies to prevent bribery should also change. In order to ensure that adequate procedures are in place, an organisation should continuously monitor and review the nature and scale of its operations, and changes in external circumstances (e.g. government changes in countries in which they operate, or an incident of bribery, or negative press reports, etc.).
Under the UKBA, the penalty applicable on failure to prevent bribery is unlimited. The stringent penalties provided under the UKBA means that commercial organisations under UKBA jurisdiction are overtly careful not to be held liable for preventing corruption, arising either on their own account, or due to the actions of their associated persons. The UKBA also does not distinguish between bribing a public official (i.e. a government official) as opposed to a private person, and facilitation payments are also seen as bribery. In the case of a bribery of another person abroad, the UKBA disregards any local custom or practice prevalent in such foreign territory. The UKBA does not examine the question of whether an intention was present to obtain an advantage. Instead, the test to be applied is what a reasonable person in the UK would expect in relation to the performance or the activity. And if such performance or activity amounts to a breach of an expectation that a person will act in good faith, impartially, or in accordance with a position of trust, then such act falls within the ambit of the UKBA.
The mirror effect this has on Indian entities is that even though they are not directly under the ambit of the UKBA, they may still be contractually mandated to follow the same guidelines in respect of implementing bribery prevention procedures. While failure to maintain proper procedures resulting in bribery will not give rise to a penalty under UKBA on the Indian entity, it will adversely affect the UK entity, and the damages payable contractually by the Indian entity thereby might present a significant exposure for the Indian entity.
However, the imposition of the obligation under UKBA on Indian entities may not be needed in the event the Indian entity is not an ‘associated’ person. Section 8 of the UKBA provides that an ‘associated’ person is one who performs services for or on behalf of a relevant commercial organisation. While this would include employees, agents and subsidiaries, whether or not a person is performing a service for or on behalf of a commercial organisation would have to be determined by reference to all the relevant circumstances, and not merely by reference to the nature of the relationship between the two. The concept of an ‘associated’ person has been made broad so as to embrace the entire range of persons connected to the commercial organisation who might be capable of committing an act of bribery on behalf of the organisation.
Therefore, while a subsidiary established in the UK by a foreign entity may not by itself give rise to the assumption of the foreign entity carrying on business in the UK, the reverse (i.e. bribe paid by a subsidiary of a UK entity abroad) might make the UK entity liable under UKBA.
Indian entities must carefully scrutinise if they fall under the ambit of ‘associated’ persons when dealing with UK entities before agreeing to abide by UKBA requirements. If they are considered as an ‘associated’ person, then they may also be required to subject other entities in the chain to abide by UKBA requirements. Given the unlimited nature of the fines under the UKBA, there may be cases wherein UK entities will contractually seek unlimited damages in case of failure by the Indian entity in preventing bribery, and this may be a cause for significant concern. However, in many cases the demands of the UK entity would be justified, as it is they who would ultimately face the wrath of the courts for violation of the UKBA.
This post has been authored by Sayanhya Roy, Principal Associate with inputs from Anirudh Rastogi, Managing Partner at Ikigai Law.
For more on the topic, please feel free to reach out to firstname.lastname@example.org or email@example.com, Managing Partner.
Disclaimer: This article is meant for general informational purpose only and is not a substitute for professional legal advice. This article is based on the laws applicable in the UK as on the date of publication.