One man’s gift is another man’s bribe
How has the 2010 Bribery Act impacted Aerospace & Defence?
The recent BBC Panorama entitled ‘How Rolls-Royce bribed its way around the world” prompted me to revisit the 2010 Bribery Act. Crucially I wanted to understand whether Rolls-Royce’s business activities prior to the Act becoming law in July 2011 could be looked at retrospectively? And what punishments does the SFO have in its arsenal? In answering these questions, it is interesting to look at how the Aerospace & Defence industry is adapting in order to operate within the law.
The practice of gifting has been in operation since the earliest days of man with the Book of Proverbs stating that “a man’s gift makes room for him and brings him before the great”. However, the difference between gifting and bribery has historically been a very grey area. In any discussion of corporate bribery or corruption, the Aerospace & Defence sector invariably steps into the spotlight. In fact the new law came about as a direct result of the Serious Fraud Office (SFO) terminating its investigation into BAE Systems in 2006 due to issues of national security.
The rights and wrongs of the BBC documentary about Rolls-Royce are beyond the scope of this blog, with Rolls-Royce’s fate ultimately lying with the SFO. However, the programme served as a reminder that if Rolls-Royce was operating in a slightly murky world, then many of its peers and competitors inevitably were as well. So what has had to change?
The 2010 Bribery Act attempts to make the ‘grey area’ more black and white. Since 2011, an organisation can be held liable for failing to prevent any member of staff or associated person from bribing an individual or Foreign Public Official on its behalf. The Bribery Act extends extraterritorially so it does not allow for any cultural expectations or local customs when business occurs outside of the UK. The law applies to any company that is incorporated or formed in the UK, or conducts business or part of a business in the UK.
Legal experts have highlighted however, that the wording of the act leaves a number of ambiguities and it strikes me that two of these are very important. Firstly, an associated person is defined as ‘a person who performs services for, or on behalf of a company’. This is clearly a very wide definition and could potentially include any other contractual counterparties such as joint venture partners, distributors, consultants and professionals advising the relevant company. This is clearly a significant area of vulnerability for companies. Secondly, the SFO fails to specify the degree of control that must be exercised by the state representatives over a company’s affairs to qualify those individuals as ‘foreign public officials’. There is therefore a grey area as to who counts as a ‘foreign pubic official’, with a concern that any member of a management team with some link to government could be considered to be. Therefore some legal advisors have suggested UK businesses should err on the side of caution when dealing with foreign companies and regard them as state owned enterprises employing foreign public officials.
The global nature of the Aerospace & Defence industry means that companies have historically been reliant on a network of contacts around the globe to tout for, and subsequently win business. Often this network was kept at arm’s length by management. The new law dictates that such practices can no longer occur. As a result management teams are establishing in-country foreign sales teams and ensuring stringent controls are in place to hold them accountable.
Facilitation payments, which are payments to induce officials to perform routine functions, are illegal, as they were under previous law. Many businesses claim this is too stringent an approach though, as historically such payments have been customary and transacted on a daily basis. It feels as though we are in a fascinating period of transition as both corporates and governments are forced to address deeply embedded cultural practices which are now viewed as wrong by the UK, as well as most other western regimes.
Crucially, the Act is not retrospective and therefore the previous anti-bribery regime will continue to apply to bribery offences committed or attempted prior to 1 July 2011. This means that much of what the BBC highlighted in its Panorama programme falls under the old laws.
Ironically, the Act seems to have created another grey area when it comes to punishing those found guilty of bribery. The punishments available to the SFO are extremely subjective leaving significant room for interpretation. Companies are encouraged to self-report, but there is no guarantee that self-reporting affords any benefits. Fines must reflect the seriousness of the offence and have no upper limit. They must take into account the financial circumstances of the offender and be substantial enough to have a real economic impact, thus reminding management and shareholders of the need to operate within the law. However, it must be considered whether the fine would put the company out of business and whether this is an acceptable consequence.
As a context, it seems the US Department of Justice’s (DOJ) prosecution of Siemens in 2008 is probably the most comparable case. Siemens was found to have paid bribes on multiple transactions across a number of territories, earning more than $1.1bn of profit. It paid a total of $800m to the DOJ ($350m in costs and $450m fine), as well as $854m to the Office of the Prosecutor General in Munich.
The bribery act states there is a full defence if a company can prove it had adequate procedures in place to prevent bribery. This has therefore given rise the most obvious change in the Aerospace & Defence industry. Almost all the major companies now have specialist anti-bribery teams and they all dedicate a significant portion of the annual report to ethics.
Whilst the industry is changing its working practices, it feels as though it is going to remain under scrutiny because an investigation into one company inevitably triggers an investigation into another because they all work with and compete against each other. Perhaps the only limiting factor will be the SFO’s capacity. The Rolls-Royce investigation has reportedly occupied 30 investigators for three years this far, without reaching a conclusion.
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