Companies risk fines for facilitating payments abroad
Category: Frauds & Scandals
Contributed by CMS Hasche Sigle / May 08 2012 /ILO / Tobias Teicke
White Collar Crime – Germany: Introduction
In the National Integrity System Report for Germany published in January 2012, Transparency International demanded that facilitating payments to foreign public officials be prohibited under German law. Previously, in its Third Evaluation Report on the enforcement of the Organisation for Economic Cooperation and Development (OECD) Anti-bribery Convention, the OECD working group had also asked for rectification by the German legislature. Under German law, facilitating payments to foreign officials are not usually subject to fines. Nevertheless, German companies run the risk of having to pay considerable fines for rendering facilitating payments under the US Foreign Corrupt Practices Act, the UK Bribery Act and, in certain cases, German law.
The term 'facilitating payment' is generally understood to mean an informal payment of a smaller amount to an official so that he or she will accelerate or perform a routine official act to which the company is, in principle, entitled (eg, issuing visas or customs clearances).
Facilitating payments can be divided into two categories. They can be initiated by an official who indicates that he or she will not perform an official act that he or she is obliged to perform under the respective law at the specific time or in any case will not perform it within the customary period. In some cases, such payments are referred to as 'actual facilitating payments'. Payments can also be made in order to have the requested official act performed faster than usual, contrary to the regular administrative procedure. In some cases, such payments are referred to as 'expediting payments'. In the first case, the party rendering the payment wishes only to ensure that the official act to which it is entitled is performed, as the official has indicated that it will be delayed or not be performed at all unless an additional payment is made. In the second case, the party rendering the payment obtains an advantage (in terms of time) for itself, sometimes to the detriment of a third party, although the respective foreign law does not provide for such an acceleration or preferential treatment, and the accelerated performance of the official act is thus contrary to the official's duty.
However, it is hard to make a clear distinction between these two groups when payments are rendered abroad. Both cases frequently concern the acceleration of performance of an official act. In many cases, neither the company nor the investigating authorities will be able to assess whether a payment is intended to prevent the official from arbitrarily drawing out a procedure or to accelerate a usually lengthy procedure to the detriment of a third party.
Risk of fines under Foreign Corrupt Practices Act
Although the Foreign Corrupt Practices Act explicitly exempts facilitating (and expediting) payments to foreign officials from fines, there is a risk for German companies that the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) will impose considerable fines on a company that renders such payments.
German companies listed on US stock exchanges fall within the scope of the act. The DOJ considers itself competent in this context for foreign subsidiaries of US parent companies. In addition, the act's corruption regulations apply to each natural person or corporate entity – whether US or foreign – that carries out any act in furtherance of corrupt practices from the territory of the United States. The DOJ considers these prerequisites to be satisfied if there are only the slightest points of contact to the United States (eg, bank transfers via a US bank account or telephone calls made or emails sent from the United States).
The corruption parameters set out in the act are not generally applicable to any facilitating payment to a foreign official whose purpose is to expedite or secure the performance of a routine government action. However, the US authorities are more likely to apply this exemption restrictively. In some cases, for example, even in the case of minor individual payments, an exemption for facilitating payments was denied based on the high total amount of the rendered payments. Moreover, the courts rarely review such cases because many companies are willing to pay fines to the prosecuting authorities within the framework of out-of-court settlements.
In addition, facilitating payments can violate accounting provisions (Section 78m of the act), since the recordal of corrupt payments often violates accounting principles. In cases where the exemption for facilitating payments as set out by the anti-bribery provisions appears to apply, companies run the risk that a considerable fine, based on a violation of accounting regulations, could be imposed on them by the SEC instead.
Strict UK Bribery Act regime
The UK Bribery Act, which came into force in July 2011, imposes fines (to an unlimited amount) on companies for making facilitating payments. The broad scope of application means that the act has major relevance for German companies.
According to Section 7(5) of the act, all companies that carry on a business or part of a business in the United Kingdom, regardless of where they are domiciled or were established, are subject to the act. The question of when a company can be deemed to carry on a business in the United Kingdom remains open and is to be determined by the courts. The facilitating payment itself need not be related to the United Kingdom.
Section 7 states that a company will be fined when an associated person bribes a foreign public official without the company having implemented adequate procedures designed to prevent such conduct. The Ministry of Justice's Guidance to the UK Bribery Act sets out six principles for the implementation of such prevention measures.
In addition, the Joint Prosecution Guidance of the Serious Fraud Office (SFO) and the director of public prosecutions should provide clarity on the prerequisites for prosecuting facilitating payments, because – unlike in Germany – whether criminal acts are prosecuted in the United Kingdom is at the discretion of the authorities. According to the guidance, certain factors weigh in favour of prosecution – for example:
·large or repeated payments;
·facilitating payments being accepted as standard procedure;
·payments that may indicate an element of active corruption;
·clear and appropriate policies not being followed correctly by individuals.
Other factors can work against prosecution – for example:
·a small, single payment;
·payments coming to light as a result of a genuinely proactive approach involving self-reporting and remedial action;
·clear and appropriate policies correctly followed by individuals; and
·the payer being in a vulnerable position arising from the circumstances in which the payment was demanded.
Although the SFO does not expect facilitating payments to be eliminated immediately after the act has come into force, it does expect companies to pursue a zero-tolerance approach to facilitating payments and to ensure that payments cease within a certain period of time. It has set down certain discretionary criteria for facilitating payments made after the entry into force of the act (eg, recording of payments, information of authorities, written guidance for employees), but these are likely to apply for only a short time.
Lower risk of fines under German law
As Germany has no corporate criminal law, according to Sections 30 and 130 of the Regulatory Offences Act, fines can be imposed on companies only when an employee has committed a relevant crime. In addition, the company must have failed to take appropriate supervisory measures that would have made it substantially more difficult for the employee to commit the crime. The only relevant crimes in this regard are granting an undue advantage (Section 333 of the Criminal Code) and bribery (Section 334 of the code). Facilitating payments to foreign officials may be considered to be only bribery, depending on the circumstances.
No criminal liability is imposed for rendering facilitating payments based on the crime of granting an undue advantage pursuant to Section 333 of the code when payments were made to foreign officials. According to this provision, there is criminal liability only if a German official is offered, promised or given an undue advantage for providing a (rightful) service (Section 11(1), No 2 of the code).
The criteria for bribery (Section 334 of the code), on the other hand, also include bribing foreign officials (Article 2 of the Act Combating International Bribery). In addition, the official must breach his or her official duties by performing the act. However, since facilitating payments are generally rendered for the purpose of causing an official act which the official is obliged to carry out and to which the party rendering the payment is entitled, facilitating payments are usually not subject to Section 334 of the code. According to German case law, the prerequisites of bribery can be fulfilled only if:
the facilitating payments are made for the purpose of accelerating a decision by the authority contrary to the duty of the authority; and
the accelerated processing causes other parties to be disadvantaged.
Although it is difficult to prove that there was preferential treatment contrary to the duty of the official under the respective foreign law and that third parties suffered a disadvantage, this risk of liability should not be underestimated.
Effective precautionary measures reduce risk of fines
As set out above, there is a risk for German companies that fines will be imposed when they render facilitating payments. The implementation of effective compliance systems can reduce such liability considerably. For some companies, successful business abroad seems inconceivable without facilitating payments. Although facilitating payments lead to detrimental cost increases and are generally subject to fines under the relevant foreign law, some companies consider the payments to be the lesser of two evils when compared to the economic consequences of a refusal to pay (eg, a loss of production). However, in light of the high risk of fines, it is vital to rethink this approach.
When setting up a compliance system, the agents acting for a company abroad should be effectively integrated into that system. Before beginning to work with them, they should be carefully examined based on references and should present their business practices in detail. The fixed-term contracts should contain an anti-corruption clause and day-to-day business should be documented through figures and the regular specification of services. If the company discovers non-compliant behaviour of an agent in the course of its regular monitoring, it should terminate the relationship immediately and, if applicable, press charges. In order to reduce seriously the liability risk, the compliance-relevant measures should be documented in writing. All of these measures can reduce the risk of facilitating payments significantly and thus contribute to the implementation of the rule of law in emerging markets, which is the basis for successful and sustainable business.
For further information on this topic please contact Tobias Teicke at CMS Hasche Sigle by telephone (+49 40 37 63 00), fax (+49 40 37 63 040 600) or email (firstname.lastname@example.org).