Picture the scene. It’s summer, and your company holds a lavish gala reception for your existing and potential clients and customers. They go home with a few freebies – well wined and dined and perhaps a bit more willing to buy your products and services than they were before the event.

This type of hospitality has been going on since time immemorial, without anyone worrying too much about whether it might amount to bribery. But all that is about to change.

That’s because of the Bribery Act 2010, which is due to come into effect later this year. Its purpose is to reform the UK’s criminal law of bribery, bring the country into line with international best practice and reinforce the UK’s reputation as one of the least corrupt countries in the world.

The changes are significant, and businesses are likely to face a number of difficulties in complying with the new regime. The Act replaces the existing law on bribery with four offences: bribing another person (dealt with in section 1 of the Act); being bribed yourself (section 2); bribing a foreign public official (section 6); and commercial organisations failing to prevent bribery (section 7).

Strict liability

The offence involving commercial entities is a strict liability offence, so a company can be guilty even if no-one within the company knew of the bribery. As discussed below, this is a change to the existing law.

In addition, senior managers and directors can be held personally liable under the Act for offences committed by the commercial organisation if they are found to have consented to or connived in the commission of a bribery offence under sections 1, 2 or 6.

The jurisdiction of the Act is wide, and companies and partnerships carrying on business in the UK (wherever they are formed) as well as those incorporated in the UK are all subject to the Act. The corporate offence under section 7 is committed regardless of where it takes place in the world, and businesses are liable for the acts of their employees, agents, group companies and joint venture partners.

Under the Act, the maximum penalty for individuals has been increased to ten years’ imprisonment and/or an unlimited fine, while commercial organisations also face an unlimited fine. Apart from the financial penalties, a successful prosecution could also leave a company permanently debarred from tendering for public sector contracts and with serious reputational damage.

Under existing law it is difficult to convict a company of bribery unless senior management can be shown to have known of it. The strict liability nature of the new offence means that the only defence open to the commercial organisation will be to show that it had in place adequate procedures designed to prevent bribery by people working on behalf of the business.

The Act requires the government to give companies illustrative guidance on what adequate procedures might be. This guidance is still awaited, but is expected to be published shortly. Companies will have little time to digest the content of the guidance before the Act comes into effect.

UK disadvantage

For companies involved in business in foreign countries where it is customary to make facilitation payments (for example to obtain timely release of goods from customs) the Bribery Act contains no exemption for such payments, which are permitted under the US Foreign Corrupt Practices Act (FCPA).

The Act could apply to corporate hospitality when the intention is to ‘induce a person to perform improperly a relevant function or activity’, and there is no exemption for “reasonable” corporate entertainment which is permitted under the FCPA.

While routine and inexpensive hospitality is not likely to be construed as bribery, large and lavish events – which are common in certain business sectors – may well fall foul of the new law. There has already been speculation that the world of Formula 1 motor racing might disintegrate as a result.

Both of these differences could place UK companies at a disadvantage to their US counterparts. The Serious Fraud Office (SFO), which will be policing compliance with the Act, has stated that it does not believe facilitation payments are justifiable and that they should not be made.

The government believes that it should be left to the prosecutors at the SFO to decide whether bribery has occurred in any case, but this leaves an unsatisfactory level of uncertainty for companies until cases have been brought and the approach adopted by the SFO becomes clear.

In the first instance, the board of directors and/or senior managers should acquaint themselves with the new laws, and consider the need for their companies to implement any new policies and procedures to minimise the risk of corporate liability. In particular, organisations should consider the sectors in which they operate, the countries in which they do business and their relationships with third parties.

Procedural review

As part of this process, organisations should consider reviewing internal procedures for entering contracts (including effective due diligence) and check that their commercial contracts include standard clauses to prohibit bribery.

Where new policies and procedures are put in place, staff training will be needed to make staff aware of any changes, and companies will need to carry out monitoring to ensure compliance with any relevant policies on an ongoing basis.

In relation to corporate acquisitions and disposals, the question of whether a company has complied with the Act will become an important issue that will need to be investigated during due diligence.

From a buyer’s perspective it will be even more important to ascertain whether any part of the target company’s current or projected financial performance is underpinned by corrupt practices. If so, the buyer is likely to revise its valuation of the target or may abandon the transaction altogether.