Can an investment adviser be held liable in a private action under Securities and Exchange Commission (SEC) Rule 10b-5 for false statements included in its clients' mutual funds' prospectuses? On June 13, 2011 the US Supreme Court said "no" in Janus Capital Group, Inc. v. First Derivative Traders. That answer brought a huge sigh of relief from not only investment advisers but also other outside professional service providers.
BACKGROUND
Janus Capital Group, Inc. (JCG) is a publicly traded company that created the Janus family of mutual funds, which are organized in a business trust as the Janus Investment Fund. The Janus Investment Fund retained JCG's wholly owned subsidiary, Janus Capital Management LLC (JCM), to serve as its investment adviser. JCG, which issued prospectuses, was sued in federal district court, along with JCM, on allegations that both entities violated federal securities laws because statements in prospectuses for certain individual Janus funds were misleading.
The district court dismissed the case, rejecting the argument that JCM could be liable whether or not it drafted the misleading prospectuses. The US Court of Appeals for the Fourth Circuit reversed, holding that "although the individual fund prospectuses are unattributed on their face, the clear essence of plaintiffs' complaint is that JCG and JCM helped draft the misleading prospectuses."
SUPREME COURT WEIGHS IN WITH BRIGHT-LINE RULE
The Supreme Court granted certiorari to address whether JCM, as an advisor, could be held liable in a private securities action for false statements included in the prospectuses.
Justice Thomas delivered the Court’s opinion, which Justices Roberts, Scalia, Kennedy and Alito joined. The Court focused on the word "make." Rule 10b-5, promulgated by the SEC pursuant to authority granted under §10(b) of the Securities Exchange Act of 1934, prohibits "mak[ing] any untrue statement of a material fact" in connection with the purchase or sale of securities.
According to the Court, "for purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. . . . One who prepares or publishes a statement on behalf of another is not its maker." The Court looked to speechwriting for comparison, noting this "rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit – or blame – for what is ultimately said."
The Court rejected the argument that both JCM and JCG might have "made" the misleading statements within the meaning of Rule 10b-5 because JCM was significantly involved in preparing the prospectuses: "This assistance, subject to the ultimate control of Janus Investment Fund, does not mean that JCM 'made' any statements in the prospectuses. Although JCM, like a speechwriter, may have assisted Janus Investment Fund with crafting what Janus Investment Fund said in the prospectuses, JCM itself did not 'make' those statements for purposes of Rule 10b-5."
Had the Court not created much needed clarity with a bright-line rule, many service providers – accountants, bankers, lawyers, investment advisers and the like – who are involved in preparing documents disseminated to investors would have remained at risk. The Court had previously held that there is no secondary "aiding and abetting" liability under Rule 10b-5 against those who do not "make" a statement, but contribute "substantial assistance." And now, given the Court's opinion in Janus, service providers can rest even easier, with a better understanding of what it actually means to "make" a statement under Rule 10b-5.
Thursday, June 16, 2011
Friday, May 20, 2011
FCPA-Inspired Bribery Act Projected to Hit the Oil and Gas Industry Hardest
The UK Bribery Act is scheduled to take effect on July 1, 2011, and according to a recent study by Ernst & Young, it will hit the oil and gas industry the hardest.
Ernst & Young's news release revealed some troubling statistics regarding bribery prosecutions under the US Foreign Corrupt Practices Act (FCPA) since its inception in 1977. In the study, Ernst & Young analyzed 118 FCPA cases involving 242 companies (including subsidiaries) and 167 prosecutions (an additional 30 are still pending) to determine which industries were most likely to be prosecuted. The data revealed that oil and gas companies were the most likely to be prosecuted under the FCPA, accounting for 18 percent of all prosecutions. Life sciences and consumer products were the second and third most prosecuted industries, accounting for 13 and 12 percent of prosecutions, respectively. Criminal fines were the most common outcome of an FCPA investigation in all three sectors.
Ernst & Young noted in the release that it expects the oil and gas industry to see the harshest impact of the UK Bribery Act, not because the sector is somehow predisposed to greater corruption, but because the sector operates in different parts of the globe. David Lister, a director at the firm’s Fraud Investigations and Dispute Services team, explained "There is no suggestion that individuals and companies within the oil and gas sector [or other sectors on the list] are intrinsically more corrupt than their counterparts in other sectors. Rather, it is the nature and locations of their businesses that exposes them to additional risk."
According to Ernst & Young, it elected to examine the historical data on FCPA prosecutions to forecast the impact of the UK Bribery Act because the Act’s provisions are similar to the FCPA and prohibit similar conduct. It is not exactly comparing apples to apples, however, because the UK Bribery Act, as written, is stricter than the FCPA, criminalizing the following three major areas that are not covered by the FCPA.
1. Bribery of private individuals and companies – The UK Bribery Act extends the prescribed conduct to include private commercial bribery, e.g., bribery between private individuals and companies, where a foreign official is not involved.
2. Offerors and acceptors of bribes are equally culpable – The FCPA only criminalizes the offer or payment of a bribe. The UK Bribery Act punishes not only the offer and payment of a bribe, but also the acceptance of a bribe.
3. Facilitation payments – Unlike the FCPA, the UK Bribery Act contains no exception for facilitation payments – monies paid to expedite the performance of a routine governmental action by a foreign official to which the payer is legally entitled – but rather, specifically prohibits their use.
Companies doing business in both the UK and United States should take note of the differences between the UK Bribery Act and FCPA, and will need to revise their existing compliance programs to reflect the more expansive provisions of the UK Bribery Act and the distinctions between the two.
Ernst & Young's news release revealed some troubling statistics regarding bribery prosecutions under the US Foreign Corrupt Practices Act (FCPA) since its inception in 1977. In the study, Ernst & Young analyzed 118 FCPA cases involving 242 companies (including subsidiaries) and 167 prosecutions (an additional 30 are still pending) to determine which industries were most likely to be prosecuted. The data revealed that oil and gas companies were the most likely to be prosecuted under the FCPA, accounting for 18 percent of all prosecutions. Life sciences and consumer products were the second and third most prosecuted industries, accounting for 13 and 12 percent of prosecutions, respectively. Criminal fines were the most common outcome of an FCPA investigation in all three sectors.
Ernst & Young noted in the release that it expects the oil and gas industry to see the harshest impact of the UK Bribery Act, not because the sector is somehow predisposed to greater corruption, but because the sector operates in different parts of the globe. David Lister, a director at the firm’s Fraud Investigations and Dispute Services team, explained "There is no suggestion that individuals and companies within the oil and gas sector [or other sectors on the list] are intrinsically more corrupt than their counterparts in other sectors. Rather, it is the nature and locations of their businesses that exposes them to additional risk."
According to Ernst & Young, it elected to examine the historical data on FCPA prosecutions to forecast the impact of the UK Bribery Act because the Act’s provisions are similar to the FCPA and prohibit similar conduct. It is not exactly comparing apples to apples, however, because the UK Bribery Act, as written, is stricter than the FCPA, criminalizing the following three major areas that are not covered by the FCPA.
1. Bribery of private individuals and companies – The UK Bribery Act extends the prescribed conduct to include private commercial bribery, e.g., bribery between private individuals and companies, where a foreign official is not involved.
2. Offerors and acceptors of bribes are equally culpable – The FCPA only criminalizes the offer or payment of a bribe. The UK Bribery Act punishes not only the offer and payment of a bribe, but also the acceptance of a bribe.
3. Facilitation payments – Unlike the FCPA, the UK Bribery Act contains no exception for facilitation payments – monies paid to expedite the performance of a routine governmental action by a foreign official to which the payer is legally entitled – but rather, specifically prohibits their use.
Companies doing business in both the UK and United States should take note of the differences between the UK Bribery Act and FCPA, and will need to revise their existing compliance programs to reflect the more expansive provisions of the UK Bribery Act and the distinctions between the two.
Wednesday, May 18, 2011
Global Cooling: A Cautiously Optimistic View of the Next Two Years
Global oil demand experienced some modest destruction last month (about 3.5%) and the IEA and EIA both released declining demand projections which many believe will continue through the third quarter of 2011. However, many stock analysts remain bullish on energy because of expected overall growth in demand attributable to Asia, former Soviet bloc countries (FSU), and Latin America. Projections put crude prices at around $105/bbl (Brent) at 2011 year end, $110/bbl (Brent) and gas at $5.25/mcf next year with those prices holding through 2013, so there is good reason to be optimistic.
One of the only variables in this scenario that could cause material demand destruction in the sector is taxation.
Globally, fewer countries are subsidizing gasoline now than they were five or ten years ago because the cost simply became too high and more countries are placing higher taxes on fuel. In the U.S., though unlikely this year, the looming threat of Obama-driven taxes on oil and gas as well as his proposed removal of development incentives for the industry (e.g., IDC deductions) could contribute to substantially higher prices at the pump.
What does this all mean? There are so many factors involved in the global commodities markets that it is difficult to make generalizations. However, taxation is one factor where generalization is simple:
Increased taxation will push up consumer prices and increase demand destruction.
“Taxation” of course means increased direct taxes on energy companies. It also means the removal of tax incentives for domestic development. Further, “taxation” means any legislation that has the effect of increasing costs or inhibiting development, thereby driving up prices (e.g., restrictions on U.S. offshore production, onerous anti-fracing legislation, etc.).
From an international perspective, don’t underestimate the fact that the areas with the greatest demand growth also have much higher rates of population growth and rapid urbanization and motorization. This means exponential demand on supply.
So what price is too high?
Today the economy is less sensitive to price increases than it was during the 1970s when spikes in oil prices contributed much of the inflationary pressures on consumers. Nonetheless, the stress on supply from increasing global demand (especially volatile global demand since China, while representing 11% of global production accounts for more than one third of all demand growth since 2005, and Latin America 7% of global production but 15% of demand growth) and the environmental movement (pushing increased taxation and restrictions on production) have the potential like never before to force unusually high prices.
Increased taxation could be the “tipping point” that creates a demand-destructive, high price scenario.
I would like to hear from you.
What are your perspectives on the near term?
What sorts of strategies are you, your clients, vendors and customers using based on their vision of the next few years?
Please leave a comment below.
One of the only variables in this scenario that could cause material demand destruction in the sector is taxation.
Globally, fewer countries are subsidizing gasoline now than they were five or ten years ago because the cost simply became too high and more countries are placing higher taxes on fuel. In the U.S., though unlikely this year, the looming threat of Obama-driven taxes on oil and gas as well as his proposed removal of development incentives for the industry (e.g., IDC deductions) could contribute to substantially higher prices at the pump.
What does this all mean? There are so many factors involved in the global commodities markets that it is difficult to make generalizations. However, taxation is one factor where generalization is simple:
Increased taxation will push up consumer prices and increase demand destruction.
“Taxation” of course means increased direct taxes on energy companies. It also means the removal of tax incentives for domestic development. Further, “taxation” means any legislation that has the effect of increasing costs or inhibiting development, thereby driving up prices (e.g., restrictions on U.S. offshore production, onerous anti-fracing legislation, etc.).
From an international perspective, don’t underestimate the fact that the areas with the greatest demand growth also have much higher rates of population growth and rapid urbanization and motorization. This means exponential demand on supply.
So what price is too high?
Today the economy is less sensitive to price increases than it was during the 1970s when spikes in oil prices contributed much of the inflationary pressures on consumers. Nonetheless, the stress on supply from increasing global demand (especially volatile global demand since China, while representing 11% of global production accounts for more than one third of all demand growth since 2005, and Latin America 7% of global production but 15% of demand growth) and the environmental movement (pushing increased taxation and restrictions on production) have the potential like never before to force unusually high prices.
Increased taxation could be the “tipping point” that creates a demand-destructive, high price scenario.
I would like to hear from you.
What are your perspectives on the near term?
What sorts of strategies are you, your clients, vendors and customers using based on their vision of the next few years?
Please leave a comment below.
Thursday, May 5, 2011
Another Stinker: New Corporate Tax Proposal Lurks in Halls of Congress
Legislative analysts are buzzing about a new corporate tax proposal coming soon to a Congress near you. The proposal will center around the taxation of "pass-through" entities (like S corporations) that have revenues of more than $50 million.
It involves reducing the corporate tax rate to 28% (the median corporate effective tax rate for companies in the "Russell 3000" was around 32% last year) and eliminating certain deductions (i.e., reducing the rate and broadening the base much in the way the state of Texas did with the so-called "margin" tax). This proposal would presumably be extended to MLPs and LLCs.
The eliminations or changes would include: (i) modification of accelerated depreciation, (ii) elimination of the domestic production deduction, (iii) taxing foreign earnings on a current basis, and (iv) other Obama Budget proposals.
Who would be most adversely affected by the proposal if it becomes law? Low cash and low effective tax rate companies, which will actually see an increase in their taxes due to a loss of available deductions. According to Standard & Poor's and Bloomberg, the energy sector had an overall cash tax rate of 12% and an effective tax rate of 32% last year. This places energy companies within the "middle" of this scenario. However, the possible impact on cash flow and funding could be significant on an indirect basis even for non-pass through companies since many funding sources are pass-throughs.
On the surface, lowering tax rates seems like a good idea. However, it is the elimination of deductions which will make life difficult for many companies, especially those in capital intensive businesses.
The U.S. combined corporate tax rate is over 39%, making it the second highest in the world (second only to Japan)! We must go much further than lukewarm tax reduction! This is the reason literally billions remain unrepatriated outside the U.S. (it seems the new proposal might contain a repatriation holiday but this is just a patch on a broken system).
When are the folks in Washington going to learn that U.S. companies cannot continue to remain competitive with such high rates?
Energy companies desperately need their cash to reinvest in new technology, exploration and rising costs. When combined with the impact on prices due to restrictions on domestic production, Congress is simply restricting the growth of domestic energy jobs and forcing Americans to pay more for their energy. Even if not directly impacted by the proposal, the indirect impact will be felt by many companies through funding sources and increases in the cost of many services.
It involves reducing the corporate tax rate to 28% (the median corporate effective tax rate for companies in the "Russell 3000" was around 32% last year) and eliminating certain deductions (i.e., reducing the rate and broadening the base much in the way the state of Texas did with the so-called "margin" tax). This proposal would presumably be extended to MLPs and LLCs.
The eliminations or changes would include: (i) modification of accelerated depreciation, (ii) elimination of the domestic production deduction, (iii) taxing foreign earnings on a current basis, and (iv) other Obama Budget proposals.
Who would be most adversely affected by the proposal if it becomes law? Low cash and low effective tax rate companies, which will actually see an increase in their taxes due to a loss of available deductions. According to Standard & Poor's and Bloomberg, the energy sector had an overall cash tax rate of 12% and an effective tax rate of 32% last year. This places energy companies within the "middle" of this scenario. However, the possible impact on cash flow and funding could be significant on an indirect basis even for non-pass through companies since many funding sources are pass-throughs.
On the surface, lowering tax rates seems like a good idea. However, it is the elimination of deductions which will make life difficult for many companies, especially those in capital intensive businesses.
The U.S. combined corporate tax rate is over 39%, making it the second highest in the world (second only to Japan)! We must go much further than lukewarm tax reduction! This is the reason literally billions remain unrepatriated outside the U.S. (it seems the new proposal might contain a repatriation holiday but this is just a patch on a broken system).
When are the folks in Washington going to learn that U.S. companies cannot continue to remain competitive with such high rates?
Energy companies desperately need their cash to reinvest in new technology, exploration and rising costs. When combined with the impact on prices due to restrictions on domestic production, Congress is simply restricting the growth of domestic energy jobs and forcing Americans to pay more for their energy. Even if not directly impacted by the proposal, the indirect impact will be felt by many companies through funding sources and increases in the cost of many services.
Friday, April 29, 2011
Don’t Believe The Hype: Tax Increase on Oil and Gas Companies Unlikely
A few days ago House Speaker Boehner told ABC news he was open to the idea of raising taxes on oil and gas companies. Boehner said that while “everybody wants to go after the oil companies” for gas prices that are climbing above $4 per gallon in many regions of the country, the industry also has “got some part of this to blame.”
“Listen, they’re gonna pay their fair share in taxes, and they should,” Boehner said. Boehner also said he does not believe “the big oil companies need to have the oil depletion allowances” and that “we certainly oughta take a look at” proposals to do away with some industry incentives.
Naturally, this has created a lot of buzz. However, a meaningful tax increase on oil and gas companies remains unlikely. Here’s why…
What you haven’t heard as much about is that Boehner’s spokesman quickly made clear that the congressman’s comments were not a change from his previous position, which is generally representative of many House Republicans and contains no real commitment to tax increases. Despite the hype following Boehner’s comments, there’s virtually no support among House Republicans for raising taxes on energy companies along the lines of the Obama proposals:
OBAMA ENERGY TAX HIKES
Proposed Tax/10 Year Federal Tax Revenue
Elimination of domestic
manufacturing deduction / $18.3B
Eliminate expensing of
intangible drilling costs / $12.5B
Eliminate percentage
depletion for oil and
natural gas wells / $11.2B
Increase geological and
geophysical amortization
period for independent
producers to seven years / $1.4B
In fact, far from tax increases, the House is likely to consider two bills next week that promote domestic production of oil and gas. Legislative analysts are also quick to point out that the Senate has voted on some of the tax increases favored by Obama and other Democrats twice in the past year and both times they failed to win even a simple majority (never mind 60 votes). Back in February a Senate vote on raising taxes on oil and gas companies received only 44 votes.
Unless something dramatic happens in the short term, those votes aren’t going anywhere.
Let me hear your opinion on which way the legislative wind is blowing! Please give us your comments.
“Listen, they’re gonna pay their fair share in taxes, and they should,” Boehner said. Boehner also said he does not believe “the big oil companies need to have the oil depletion allowances” and that “we certainly oughta take a look at” proposals to do away with some industry incentives.
Naturally, this has created a lot of buzz. However, a meaningful tax increase on oil and gas companies remains unlikely. Here’s why…
What you haven’t heard as much about is that Boehner’s spokesman quickly made clear that the congressman’s comments were not a change from his previous position, which is generally representative of many House Republicans and contains no real commitment to tax increases. Despite the hype following Boehner’s comments, there’s virtually no support among House Republicans for raising taxes on energy companies along the lines of the Obama proposals:
OBAMA ENERGY TAX HIKES
Proposed Tax/10 Year Federal Tax Revenue
Elimination of domestic
manufacturing deduction / $18.3B
Eliminate expensing of
intangible drilling costs / $12.5B
Eliminate percentage
depletion for oil and
natural gas wells / $11.2B
Increase geological and
geophysical amortization
period for independent
producers to seven years / $1.4B
In fact, far from tax increases, the House is likely to consider two bills next week that promote domestic production of oil and gas. Legislative analysts are also quick to point out that the Senate has voted on some of the tax increases favored by Obama and other Democrats twice in the past year and both times they failed to win even a simple majority (never mind 60 votes). Back in February a Senate vote on raising taxes on oil and gas companies received only 44 votes.
Unless something dramatic happens in the short term, those votes aren’t going anywhere.
Let me hear your opinion on which way the legislative wind is blowing! Please give us your comments.
Tuesday, April 19, 2011
China Unplugged
I recently returned from two weeks in China where, among other things, I participated in the China-U.S. Energy Summit. China is a veritable ant hill of activity. As anyone who reads a paper (or a blog) or watches the TV news already knows, China is booming. Besides the constant honking from Chinese drivers, the one constant during my trip was the sound of construction. Not surprisingly, China is also replete with newly minted millionaires and billionaires who have made their money from the expanding economy. Like their western counterparts, wealthy Chinese are eager to expand and diversify their portfolios. However, Chinese culture, and a traditional distrust of anything but "hard asset" investments, has lead many wealthy Chinese to place money into real estate. Of course, as recent experience shows, real estate is not all it's cracked up to be as an asset class. It should be a "no-brainer" then for these folks to want to invest in oil and gas right?
Wrong.
To my surprise, even some of the wealthiest and most sophisticated Chinese investors were unaware that private oil and gas investment was even available. A history of state (mainly military) control over natural resources has left would-be oil and gas investors ignorant of the potential upside of such an investment. Add to that the substantial restrictions on individual Chinese citizens for converting their currency, and you have a frustrated, yet potentially huge source of capital for new oil and gas development projects.
The good news for companies seeking capital is that there are some exceptions to the restrictions on private Chinese foreign investment, and potential investors are intrigued by the potential of oil and gas projects. For the companies with the patience to develop the long term relationships Chinese investors demand, literally billions await.
Wrong.
To my surprise, even some of the wealthiest and most sophisticated Chinese investors were unaware that private oil and gas investment was even available. A history of state (mainly military) control over natural resources has left would-be oil and gas investors ignorant of the potential upside of such an investment. Add to that the substantial restrictions on individual Chinese citizens for converting their currency, and you have a frustrated, yet potentially huge source of capital for new oil and gas development projects.
The good news for companies seeking capital is that there are some exceptions to the restrictions on private Chinese foreign investment, and potential investors are intrigued by the potential of oil and gas projects. For the companies with the patience to develop the long term relationships Chinese investors demand, literally billions await.
Thursday, March 31, 2011
The Clock Has Started Ticking: Guidance to the UK Bribery Act 2010 Published Today
The UK Government has today confirmed that the Bribery Act 2010 (the Act) will come into force on 1 July 2011 and has published the much anticipated final version of its Guidance for commercial organizations about how they can reduce their exposure to bribery offences under the Act. A Quick Start Guide has also been published that sets out the key points.
For the purposes of the Act, a bribe is effectively the giving or receiving (or the offer or promise to do so) of a financial or other advantage with the intention of bringing about the "improper performance of a function or activity". The Act consolidates existing offences of offering or receiving a bribe, bribery of foreign public officials and introduces a new corporate offence of failure by a commercial organization to prevent a bribe being paid or received on its behalf. It will be a defense for an organization to show that it has "adequate procedures" in place to prevent such bribery. The long-awaited Guidance is important as it provides clarification in relation to what will constitute "adequate procedures".
The final version of the Guidance is formulated around six general principles:
• proportionate procedures;
• top-level commitment;
• risk assessment;
• due diligence;
• communication; and
• monitoring and review.
These principles largely follow those contained in the draft Guidance, previously published. As emphasized by Lord Chancellor Kenneth Clarke in his announcement today, following these six general principles and combating bribery is very much about adopting a common sense approach to addressing the organization’s exposure to bribery.
The Government also appears to have heeded concerns raised in consultation on the draft Guidance and has attempted to minimize those concerns. The clear emphasis in the final Guidance is that a proportionate approach to the implementation of "adequate procedures" is very much all that is necessary. Small businesses and organizations operating in low risk areas will require only modest procedures to mitigate their risks under the Act. In contrast, large scale, multinational organizations operating in high risk areas will be under a more onerous obligation to ensure that their duty to implement adequate procedures is properly discharged.
Helpfully, the Government has also given further clarification in relation to the following areas:
• Corporate Hospitality: One of the main criticisms leveled at the draft Guidance was that it did not provide clear advice on what level of corporate hospitality could be provided without exposing the organization to an investigation and potential prosecution. The final Guidance seeks to address these concerns and wants to reassure businesses that "bona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organization, better to present products and services, or establish cordial relations" is not prohibited by the Act. The Government does not intend for the Act to prohibit "reasonable and proportionate" hospitality and promotional expenditure incurred in "good faith" for these purposes and that prosecutors would take into account the standards or norms applying in a particular sector when considering whether bribery had taken place. The Guidance makes clear however that it is still for businesses to establish and disseminate appropriate standards for hospitality and promotional or other similar expenditure. The Quick Start Guide states that tickets to sporting events, taking clients to dinner, offering gifts to clients as a reflection of your good relations or paying for reasonable travel expenses in order to demonstrate your goods or services to clients will not amount to bribery as long as they are proportionate to your business. Lord Chancellor Kenneth Clarke has assured businesses that the Act does not stop them getting to know their clients by taking them to events like Wimbledon, Twickenham or the Grand Prix.
• Facilitation Payments: As widely anticipated, the final Guidance makes it clear that facilitation payments (small payments paid to facilitate routine Government actions) are still unlawful, but says that it recognizes the problems that businesses face in some parts of the world and in certain sectors. The Quick Start Guide states that businesses can continue to pay for legally required administrative fees or fast-track services as these are not facilitation payments. The Guidance also recognizes that the common law defense of duress is likely to be available where individuals are left with no alternative but to make payments in order to protect against loss of life, limb or liberty. Separate prosecution guidance has also been issued today, stating that prosecutions will normally be instigated unless there are public interest arguments to the contrary. Large or repeated payments, or payments that were planned for or were accepted as a standard way of conducting business are stated as factors tending in favor of a prosecution.
• Commercial Organizations: Only a "relevant commercial organization" can commit the corporate offence under the Act. A "relevant commercial organization" is defined as a body or partnership incorporated or formed in the UK irrespective of where it carries on a business, or an incorporated body or partnership which carries on a business or part of a business in the UK irrespective of the place of incorporation or formation. The key concept here is that of an organization which "carries on a business". The Courts will be the final arbiter as to whether an organization "carries on a business" in the UK taking into account the particular facts in individual cases. As regards bodies incorporated, or partnerships formed, outside the UK, whether such bodies can properly be regarded as carrying on a business in any part of the UK will be answered by applying a common sense approach. The Government anticipates this to mean that organizations that do not have a demonstrable business presence in the UK would not be caught. It would not expect, for example, the mere fact that a company’s securities have been admitted to the UK Listing Authority’s Official List and therefore admitted to trading on the London Stock Exchange, would qualify that company as carrying on a business or part of a business in the UK.
• Associated Persons: A company will only be guilty of failing to prevent bribery if a bribe was paid by a person associated with it. A person is associated with a business if that person performs services for or on its behalf, which is to be determined by reference to all the relevant circumstances and not just by reference to the nature of the relationship. The final Guidance seeks to address concerns that businesses could be liable for third parties over whom they have no control. It states that associated persons could include employees; agents; contractors; suppliers where they are performing services rather than simply acting as a seller; joint ventures where the bribe is paid for a member of the joint venture and with the intention of benefitting that member; and subsidiaries if the bribe was made to benefit the parent company. The Guidance makes it clear however that indirect benefit is not sufficient to constitute an offence.
The Guidance also provides 11 case studies to assist organizations to identify what procedures they should introduce to prevent acts of bribery within their organizations and for which they may be culpable.
Is the final Guidance helpful? I believe it is, and the risk-based approach will be welcomed by most organizations. However, it does not (and in all fairness, could not) provide all the answers. Businesses will still have to be pragmatic in their assessment of their risk and take a common sense approach to the adequate procedures that are required to minimize those risks.
The final Guidance places great emphasis on "proportionality", "common sense" and "public interest". As the cuts in public expenditures begin to bite, it is anticipated that "prosecutorial discretion" will be exercised sparingly to target the minority of organizations that are responsible for the most serious bribes or for allowing the continued practice of corruption to exist within their business. However, every organization that is touched by this Act needs to review its risk profile and decide upon the antibribery and corruption program it requires in order to protect itself from enforcement action.
For the purposes of the Act, a bribe is effectively the giving or receiving (or the offer or promise to do so) of a financial or other advantage with the intention of bringing about the "improper performance of a function or activity". The Act consolidates existing offences of offering or receiving a bribe, bribery of foreign public officials and introduces a new corporate offence of failure by a commercial organization to prevent a bribe being paid or received on its behalf. It will be a defense for an organization to show that it has "adequate procedures" in place to prevent such bribery. The long-awaited Guidance is important as it provides clarification in relation to what will constitute "adequate procedures".
The final version of the Guidance is formulated around six general principles:
• proportionate procedures;
• top-level commitment;
• risk assessment;
• due diligence;
• communication; and
• monitoring and review.
These principles largely follow those contained in the draft Guidance, previously published. As emphasized by Lord Chancellor Kenneth Clarke in his announcement today, following these six general principles and combating bribery is very much about adopting a common sense approach to addressing the organization’s exposure to bribery.
The Government also appears to have heeded concerns raised in consultation on the draft Guidance and has attempted to minimize those concerns. The clear emphasis in the final Guidance is that a proportionate approach to the implementation of "adequate procedures" is very much all that is necessary. Small businesses and organizations operating in low risk areas will require only modest procedures to mitigate their risks under the Act. In contrast, large scale, multinational organizations operating in high risk areas will be under a more onerous obligation to ensure that their duty to implement adequate procedures is properly discharged.
Helpfully, the Government has also given further clarification in relation to the following areas:
• Corporate Hospitality: One of the main criticisms leveled at the draft Guidance was that it did not provide clear advice on what level of corporate hospitality could be provided without exposing the organization to an investigation and potential prosecution. The final Guidance seeks to address these concerns and wants to reassure businesses that "bona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organization, better to present products and services, or establish cordial relations" is not prohibited by the Act. The Government does not intend for the Act to prohibit "reasonable and proportionate" hospitality and promotional expenditure incurred in "good faith" for these purposes and that prosecutors would take into account the standards or norms applying in a particular sector when considering whether bribery had taken place. The Guidance makes clear however that it is still for businesses to establish and disseminate appropriate standards for hospitality and promotional or other similar expenditure. The Quick Start Guide states that tickets to sporting events, taking clients to dinner, offering gifts to clients as a reflection of your good relations or paying for reasonable travel expenses in order to demonstrate your goods or services to clients will not amount to bribery as long as they are proportionate to your business. Lord Chancellor Kenneth Clarke has assured businesses that the Act does not stop them getting to know their clients by taking them to events like Wimbledon, Twickenham or the Grand Prix.
• Facilitation Payments: As widely anticipated, the final Guidance makes it clear that facilitation payments (small payments paid to facilitate routine Government actions) are still unlawful, but says that it recognizes the problems that businesses face in some parts of the world and in certain sectors. The Quick Start Guide states that businesses can continue to pay for legally required administrative fees or fast-track services as these are not facilitation payments. The Guidance also recognizes that the common law defense of duress is likely to be available where individuals are left with no alternative but to make payments in order to protect against loss of life, limb or liberty. Separate prosecution guidance has also been issued today, stating that prosecutions will normally be instigated unless there are public interest arguments to the contrary. Large or repeated payments, or payments that were planned for or were accepted as a standard way of conducting business are stated as factors tending in favor of a prosecution.
• Commercial Organizations: Only a "relevant commercial organization" can commit the corporate offence under the Act. A "relevant commercial organization" is defined as a body or partnership incorporated or formed in the UK irrespective of where it carries on a business, or an incorporated body or partnership which carries on a business or part of a business in the UK irrespective of the place of incorporation or formation. The key concept here is that of an organization which "carries on a business". The Courts will be the final arbiter as to whether an organization "carries on a business" in the UK taking into account the particular facts in individual cases. As regards bodies incorporated, or partnerships formed, outside the UK, whether such bodies can properly be regarded as carrying on a business in any part of the UK will be answered by applying a common sense approach. The Government anticipates this to mean that organizations that do not have a demonstrable business presence in the UK would not be caught. It would not expect, for example, the mere fact that a company’s securities have been admitted to the UK Listing Authority’s Official List and therefore admitted to trading on the London Stock Exchange, would qualify that company as carrying on a business or part of a business in the UK.
• Associated Persons: A company will only be guilty of failing to prevent bribery if a bribe was paid by a person associated with it. A person is associated with a business if that person performs services for or on its behalf, which is to be determined by reference to all the relevant circumstances and not just by reference to the nature of the relationship. The final Guidance seeks to address concerns that businesses could be liable for third parties over whom they have no control. It states that associated persons could include employees; agents; contractors; suppliers where they are performing services rather than simply acting as a seller; joint ventures where the bribe is paid for a member of the joint venture and with the intention of benefitting that member; and subsidiaries if the bribe was made to benefit the parent company. The Guidance makes it clear however that indirect benefit is not sufficient to constitute an offence.
The Guidance also provides 11 case studies to assist organizations to identify what procedures they should introduce to prevent acts of bribery within their organizations and for which they may be culpable.
Is the final Guidance helpful? I believe it is, and the risk-based approach will be welcomed by most organizations. However, it does not (and in all fairness, could not) provide all the answers. Businesses will still have to be pragmatic in their assessment of their risk and take a common sense approach to the adequate procedures that are required to minimize those risks.
The final Guidance places great emphasis on "proportionality", "common sense" and "public interest". As the cuts in public expenditures begin to bite, it is anticipated that "prosecutorial discretion" will be exercised sparingly to target the minority of organizations that are responsible for the most serious bribes or for allowing the continued practice of corruption to exist within their business. However, every organization that is touched by this Act needs to review its risk profile and decide upon the antibribery and corruption program it requires in order to protect itself from enforcement action.
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