New First Principle of Adequate Procedures: Proportionality

New First Principle of Adequate Procedures: Proportionality

One of the more noticeable changes in the UK Bribery Act Guidance released last month and the Consultative Guidance, released last September, is found in the Six Principles of an Adequate Procedures compliance program. The Consultative Guidance listed Risk Assessment as Principle 1. However, in the recent final Guidance, Risk Assessment has  moved to Principle 3 and the new Principle 1 is Proportionate Procedures, which is defined as follows:

A commercial organisation's procedures to prevent bribery by persons associated with it are proportionate to the bribery risks it faces and to the nature, scale and complexity of the commercial organisation's activities. They are also clear, practical, accessible, effectively implemented and enforced.

Adequate bribery prevention procedures ought to be proportionate to the bribery risks that a company faces and a company still must assess these risks so an initial assessment of risk across the company is, therefore, a necessary first step. However, proportionality is overlaid above and across all the remaining Principles so if a company has a low risk profile, it may not need as robust an anti-bribery compliance program as a company with a higher risk profile.

The Guidance makes clear that although the level of risk will be linked to the size of the company, and the nature and complexity of its business, size will not be the only determining factor. Small businesses can face quite significant risks and will need more extensive procedures than other businesses facing limited risks. However, small businesses are unlikely to need procedures that are as extensive as those of a large multi-national company.

The level of risk that companies face will also vary with the type and nature of the third parties it may have business relationships with. For example, a company that properly assesses that there is no risk of bribery on the part of one of its associated persons will, accordingly, require nothing in the way of procedures to prevent bribery in the context of that relationship. By the same token the bribery risks associated with reliance on a third party agent representing a company in negotiations with foreign public officials may be assessed as significant and, accordingly, requires much more in the way of procedures to mitigate those risks. Businesses are likely to need to select procedures to cover a broad range of risks but any consideration by a court in an individual case of the adequacy of procedures is likely necessarily to focus on those procedures designed to prevent bribery on the part of the associated person committing the offence in question.

So what does this mean in practice? Since Proportionate Procedures is Principle 1, it takes precedence over all others. I recently attended a conference by Hanson Wade where one of the speakers discussed this concept of proportionality. Based upon his remarks and the text of the Guidance, I have created the following chart to provide some interpretation of what this may mean in practice for various sales models that a company may have in place.

Company Sales Focus

Contract Language

Questionnaire

Level One DD

Level Two DD

Foreign Law Firm Review

Level 3 DD

Foreign Business Partner Training

Large Multinational

Yes

Yes

Yes

Yes

Yes

Likely

Yes

LargeUKExporter

Yes

Yes

Yes

Yes

Yes

Maybe

Yes

Significant UK Company

Yes

Yes

Yes

No

No

No

No

EU OnlySales

Yes

Yes

Yes

No

No

No

No

UKOnlySales

Yes

No

No

No

No

No

No

The left hand column lists the type of business which may be subject to the Bribery Act. The categories across the top are the types of risk tools a company can use to manage its risks.

  •  Contract Language  This means legal terms and conditions which protect the company to the greatest extent possible from a foreign business representative engaging in conduct violative of the Bribery Act.
  • Questionnaire - This means that both the business person who desires the relationship and the foreign business representative commit certain designated information in writing prior to beginning the due diligence process.
  • Level One Due Diligence - This is an electronic database search of the relevant UK and US lists of known criminal, terrorists, money-launderers, etc., it should be used for foreign business representatives in low risk countries only.
  • Level Two Due Diligence - This is an electronic database search in the home country of the foreign business representative and should be performed in conjunction with a Level One search for all foreign business representatives in medium to high countries.
  • Level Three Due Diligence - This is a "boots-on-the-ground" due diligence investigation. It can include an interview of the proposed Foreign Business Party, its references and bankers, a review by the Commercial Attaché of the appropriate UK Ministry. It should be used in high risk countries and/or when Red Flags cannot otherwise be cleared.
  • Foreign Law Firm Review - This is a legal review of both your company's proposed Foreign Business Partner contract and a legal Memorandum of the rights and obligations of entering into such a relationship in the country in question.
  • Agent Training - Where your company should provide anti-bribery training to its Foreign Business Partners.

Many have decried the final Guidance as a cave-in by the UK Ministry of Justice, to UK business interests, to soften, if not gut, the Bribery Act. However, we believe that this Principle of Proportionate Procedures inserts a component of reasonableness due to the fact that what may be appropriate a world-wide multi-national company is not necessarily needed for a UK company selling primary, if not exclusively, in the UK or even in the EU.

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If you are in San Diego, the World Check FCPA Tour will be in your city this week. Please come out and here about the most current FCPA best practices.

Wednesday, May 4 from 8-10 AM PDT at San Diego Marriott Del Mar: Santa Fe Ballroom, in San Diego, CA. For information and registration details click here.

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My colleague Howard Sklar had an interesting idea. It was that he and I do a video chat each week on the past week's stories from the world of compliance. We have begun this journey and the results are "This Week in FCPA"; which can be found here.

Every week, Howard and I will get together and talk about the week's events in FCPA. This week, we talk about the UK Bribery Act, and how companies should react; we discuss the Johnson & Johnson deferred prosecution agreement and J&J's added undertakings; and we discuss the recent challenges to the idea that state-owned entities can be foreign officials. We also talk about what contract provisions should be in every contract, and whether audit rights are a good thing or not.

Visit the FCPA Compliance and Ethics Blog, hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and other forms of risk management for a worldwide energy practice, tax issues faced by multi-national US companies, insurance coverage issues and protection of trade secrets.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

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