Hot topics

The following Hot topics should be considered by companies (and their Audit Committees) in their response to and/or prevention of compliance breakdowns, specifically in the case of bribery/corruption violations.

Assessing market, territory, and “third-party” risk in business operations - the need for enhanced due diligence and corporate intelligence

A review of concluded bribery/corruption proceedings from 2008 and 2009 reveals that, in almost all instances, third party intermediaries (e.g., agents, customs brokers, distributors, subcontractors, freight forwarding agents, etc.) were used to make improper payments. The reputational and business risks associated with conducting business through such “third parties”, especially in emerging and expanding markets, are high. The dramatic increase in U.S. and international regulatory enforcement actions has added to the challenge that executives face in their global business operations. Obtaining reliable corporate intelligence reporting helps facilitate a continual feed of information to executives on the local operating environment and the spectrum of risk that international business will face in emerging markets, including the use of third party intermediaries.

UK Bribery Act

The UK Bribery Act  has serious implications for European companies operating within the UK. The Act replaces previous offences with a general bribery offence and a specific offence relating to the bribery of foreign public officials (both of which are applicable to individuals and UK-incorporated companies). It also introduces a specific corporate offence of failing to prevent bribery. Of particular note is that companies “carrying on all or part of business” in the UK can be found guilty of the offence of failing to prevent bribery in the absence of what is referred to in the Act as "adequate procedures". The offence is designed to make companies responsible for bribery committed on their behalf, a familiar concept found in the US Foreign Corrupt Practices Act. One key potential liability for companies is the ‘’failure to prevent'' bribery for, or on behalf of, the company by its employees, agents or subsidiaries. A defense is available if it can be shown by the company that ''adequate procedures'' designed to prevent bribery were in place. The burden of proof for the ''adequate procedures'' defense rests with the company and these procedures will therefore need to be evidenced. Companies found guilty of these bribery offences could face unlimited fines. In addition, they may be disbarred from tendering for UK government contracts. The act is effective as per July 1, 2011.

Foreign Corrupt Practices Act - FCPA

The US Foreign Corrupt Practices Act (FCPA) was enacted in 1977 to prohibit improper payments to foreign officials. The FCPA requires that companies maintain accurate books and records and an adequate system of internal controls, and prohibits improper payments intended to corruptly influence officials of foreign governments and certain other defined foreign government entities (e.g., political parties) and officials. After more than 30 years, the FCPA remains in the spotlight as more US and foreign private issuers run afoul of its provisions as US regulators are stepping up their efforts to enforce the law and work through the backlog of open cases.

Anti-Corruption Compliance Due Diligence during the merger and acquisition process

Put simply, the acquisition of targets engaged in corruption can significantly impact deal value. The risk of inheriting a target company’s ineffective anti-corruption compliance practice is highlighted by the possible answers to the following questions:

  • How sustainable is the target company’s business in the absence of corrupt activities?
  • How much will it cost to remediate the weaknesses in the target company’s internal controls?
  • What is the impact of regulatory action (penalties and fines) and civil claims from both a financial and reputational perspective?

With these questions in mind, it is important for companies to consider a risk based approach in determining the necessity to conduct anti-corruption due
diligence during the M&A process. One of the first factors to consider is where the target is listed and its respective enforcement jurisdictions. Other factors
include the territory and industry within which the target operates, the extent of its government business, the use of intermediaries to conduct business and
the robustness of the target’s compliance framework. It should be noted that no single factor may result in an assessment that a target has high corruption
risk exposure, but one should rather assess the factors as a whole to determine the actual risk of corruption and the related impact such risk could have on
deal value.

World Bank’s intensified attention on detecting, investigating, and sanctioning corruption

The World Bank has stepped up its efforts to fight corruption next to other multilateral banks, which can result in both fines and debarment. Since 1999, the World Bank has debarred 351 firms and individuals for their involvement in fraud and corruption in World Bank-financed projects (source: http://go.worldbank.org/RBU8LY2ND0). In 2009 The World Bank announced the debarment of seven firms and one individual for engaging in collusive practices under a major World Bank-financed roads project in the Philippines. Two of the debarments are permanent, the strongest possible sanction. In the same year, The World Bank fined Siemens US$ 100 million, including a 2-year exclusion from all World Bank financed projects, in connection with past bribery/corruption allegations.

  • Download our publication 'Confronting Corruption'

10A Investigation

The US Private Securities Litigation Reform Act of 1995 added Section 10A to the Securities Exchange Act of 1934. Section 10A added the auditors' responsibilities in reporting fraud to the securities laws by requiring that:

  • If an auditor becomes aware of a possible illegal act, the auditor must determine whether it is likely that an illegal act has occurred.
  • If it is likely that an illegal act has occurred, the auditor must, as soon as practicable, inform the appropriate level of management and assure that the audit committee is adequately informed of such illegal act, unless the illegal act is clearly inconsequential.
  • If the illegal act has a material effect on the financial statements, the auditor must, as soon as practicable, formally notify the board of directors if senior management has not taken, and the board has not caused management to take, appropriate remedial action.

Section 10A also contains a "safe harbor" protecting an auditor from liability in a private action as a result of his or her reporting an illegal act to the SEC.

Other long standing compliance topics

The above mentioned “hot topics” stand next to other compliance-related topics such as Export Controls / Economic Sanctions; Anti-Competition / Anti-Trust; and Anti-Money Laundering. If you would like to understand more about these topics, please do not hesitate to contact us.