This article was co-written by Ian Hargreaves (Head of Investigations, Fraud and Compliance) and Daniel Burbeary (managing associate). The article was first published in Corporate Vision.
Many multinational corporations which operate in the UK have overseas subsidiaries, and expect to receive increasing returns from those operations when business is booming. The ultimate parent company will also be expected to reward its own shareholders by paying out dividends, which can include repatriated returns from overseas subsidiaries.
Unfortunately, the old adage that if it looks too good to be true, then it probably is too good to be true still rings true. Recent corruption probes into some of the world's best known corporations and organisations, including FIFA, football’s global governing body, have placed problems caused by endemic bribery and corruption squarely back in the global spotlight.
Whilst corporations tend, understandably, to focus on the risks of criminal liability resulting from bribery and corruption, particularly for directors and senior officers (who can face personal prosecution), the payment of bribes to secure contracts or other business advantages can also have significant financial consequences over and above the obvious criminal penalties associated with the bribe itself. Individuals or corporate entities who have had nothing to do with the original bribery offence might be expected to have asked questions about the profits that were derived as a result, and may therefore be seen to have been complicit in allowing money to be laundered, by way of a dividend payment or other financial benefit, or face civil action if they are deemed to have received the proceeds of crime.
This article looks at the civil powers available to the UK Serious Fraud Office (“SFO”) under the Proceeds of Crime Act 2002 (“POCA”) to recover payments it considers to be derived from criminal activity. It also considers some other risks faced by corporations and their senior officers when subsidiaries are found to have obtained business through the payment of bribes.
The statutory regime
The statutory basis for the SFO’s civil powers to recover the proceeds of crime is set out in Part 5 of POCA.
Investigating agencies, including the SFO and the Crown Prosecution Service, can apply to the High Court of England and Wales (or the Court of Session in Scotland) for a civil recovery order compelling a defendant, or other third parties, to pay over property that represents the proceeds of criminal conduct. If the SFO can establish, on the balance of probabilities (i.e. to the civil standard of proof), that profits have resulted from corrupt corporate activities, no matter where that conduct has taken place, then those profits are deemed to have been made as a result of “unlawful conduct” and constitute “recoverable property”.
Applications for a civil recovery order brought under Part 5 of POCA are not criminal proceedings, and are not dependant on criminal proceedings also being brought. They are actions against property, as opposed to particular individuals or corporate entities.
A dividend can amount to “recoverable property” if it is possible to trace payments received under, for example, a contract obtained by bribes through to the payment of the dividend.
The introduction of the UK Bribery Act 2010 means both corporate entities, and their senior officers, face serious criminal consequences if found to have offered, paid or received bribes, or if (in the case of commercial organisations) they have failed to prevent bribery being carried out on their behalf and did not have adequate systems in place to mitigate such risks.
In addition, the anti-money laundering regime introduced by POCA and related legislation means that parent companies and investors must take steps to satisfy themselves as to the probity of the business operations of their subsidiaries or portfolio companies. If they do not, then there is a risk that a parent company whose subsidiaries (or an investor whose portfolio companies) pay bribes to obtain business, and which receives the benefit of that business - such as in the form of dividends - could commit a criminal anti-money laundering offence. In extreme cases, the parent company or investor could itself be deemed to have been involved in money laundering if it has received the proceeds of crime.
Even if the parent company or investor has not directly colluded in money laundering with the corrupt parties, there is a risk they might be held to have had some knowledge or suspicion of money laundering, such that a failure to report that knowledge or suspicion would itself amount to an anti-money laundering offence, with potentially serious consequences for those working in regulated professions and/or the designated money laundering reporting officer/s in any organisation.
Although the UK Bribery Act does not demand notification to the authorities of knowledge or suspicion of bribes being paid or received a corporate entity or investor will have no alternative but to report to the National Crime Agency the transfer or receipt of proceeds of crime, failure to do so being a criminal offence in its own right.
What does the future hold?
Several campaigning bodies have warned the SFO to use its criminal powers rather than fall back on deals with corporates through Deferred Prosecution Agreements. However, it seems inevitable the SFO will continue to use its substantial civil powers to claw back profits of corrupt activity from shareholders and other third parties who may have had nothing to do with, and no knowledge of, the bribes in question, as a supplement, or even a cost-effective alternative, to full blown criminal investigations and prosecutions.
Investors, in the meantime, should ensure they truly know the source of their investment returns, or risk losing them altogether.