InfraRead Issue 8 19 Sep 2016 2016 Anti-Corruption Summit

On 12 May 2016, the UK hosted a landmark international anti-corruption summit which concluded with a strong global declaration against corruption and over 40 participating countries each committing to specific action plans. The UK’s commitments to combatting corruption are some of its most ambitious and significant to date, with proposals having direct impact on both domestic and foreign businesses, including those in the infrastructure industries. 

Corruption and the infrastructure sector

The perception of the infrastructure sector as being vulnerable to bribery is nothing new. In the most recent edition of the Bribe Payer Index, Transparency International ranks the infrastructure sector as the world’s most bribery-prone industry.¹ Corruption has traditionally plagued the infrastructure and construction sectors due to their unique characteristics. Companies who build infrastructure are required to obtain various permissions from governments or local authorities, including planning permissions and licences. The process is often lengthy and complicated, and thus prone to abuse. In addition, infrastructure and construction projects are usually large in scale and often unique and project-specific. This makes it difficult to compare costs between projects, allowing scope for the concealment of inflated expenditure. Furthermore, there are often numerous parties involved, such as joint venture structures with local partners or multiple layers of contractors and subcontractors, creating a complex project structure which hampers the tracing of any suspect payments. As the global appetite to expose and punish corruption increases, many countries are introducing anti-bribery and corruption legislation, some with extra-jurisdictional reach, and are increasing their enforcement activities. The likelihood of companies and individuals being prosecuted for bribery will therefore inevitably increase.

Global movement to tackle corruption

On 12 May 2016, the UK government hosted a landmark international anti-corruption summit in London to tackle corruption at home and abroad. The summit, attended by leaders of more than 40 countries as well as representatives from major international organisations such as the OECD, the International Monetary Fund (“IMF”), the United Nations and the World Bank, concluded with a strong global declaration against corruption, as well as specific action plans and commitments by participants.

Ahead of the summit, the IMF published a report highlighting the impact of corruption on growth and economic development. The report quoted recent estimates which put the annual cost of bribery alone at about US$1.5 trillion to US$2 trillion (roughly two per cent of global GDP). It noted that the overall economic and social costs of corruption were likely to be even larger, since bribes constitute only one aspect of many possible forms of corruption. In light of such troubling statistics, the global urgency to tackle the issue was made clear by participants at the summit. The then UK prime minister David Cameron spoke of “building a global movement against corruption”, with US Secretary of State John Kerry urging the “global community to come together and have no impunity to corruption”.

UK’s ambitious plan and impact on the infrastructure sector

To demonstrate their commitment to addressing this issue, all countries present at the summit signed the Global Declaration Against Corruption, committing to expose corruption wherever it may be found, to pursue and punish those who perpetrate, facilitate or are complicit in it, to support the communities who have suffered from it, and to ensure it does not fester in government institutions, business and communities. As host country to the summit, the UK announced some of its most ambitious and significant plans to date to address the issues of corruption. If implemented, many of these proposals will have a significant impact on businesses both domestic and abroad.

Open Contracting Data Standard

The UK has promised to implement the Open Contracting Data Standard (“OCDS”) for contracts administered by the UK’s central purchasing authority, the Crown Commercial Service. This would mean, for the first time, that the entire process of awarding public sector contracts, from the bidding stage right through to implementation, would be disclosed to the public. It would obviously have a very significant impact on those companies who are active in developing public sector infrastructure.

The move is intended to address public demand for relevant data to be made more readily available and more consistent in its format so it is easier to analyse. The difficulties in analysing the public data which is currently available creates hurdles for new suppliers or businesses wishing to bid for public sector business and also, crucially, makes it difficult for third parties, such as non-governmental organisations, to hold the government to account for the way in which public money is spent.

The change would ensure a clear public record of how government money is spent on public contracts and, importantly, its outcome. In addition, the disclosure of all data and documents at all stages of the process is designed to support fair and effective contracting and to encourage organisations to increase contracting transparency.

The UK government will begin trialling the principles of the OCDS on High Speed Two, a major rail infrastructure project which is currently in procurement. It is intended that the OCDS will be fully implemented in Crown Commercial Service contracts by October 2016, followed by the rest of government.

The UK is the first G7 country to commit to this standard. Following the summit, a number of other participating countries, including Mexico, announced that they were also planning to demonstrate movement towards full transparency by applying OCDS to their major projects.

A related initiative is the UK government’s plans to introduce a conviction check process to prevent corrupt bidders with relevant convictions from winning public contracts. A number of countries have made similar commitments, which include the sharing of conviction information across border.² It is clear that there is a strong global appetite for transparency, and many countries are planning to implement a uniform (or similar) approach.

Potential revival of the offence of failure to prevent economic crime

In February 2016, construction and professional services company Sweett Group PLC was sentenced under Section 7 of the UK Bribery Act 2010 and ordered to pay £2.25 million for its failure to prevent bribery in relation to a hotel construction project in Dubai. Sweett Group PLC pleaded guilty and admitted that its subsidiary had paid £680,000 in bribes to secure a £1.6 million consulting contract in relation to the project. This was the first corporate conviction under the Section 7 “failure to prevent” offence since the Bribery Act had come into force.

Before the summit, David Cameron announced the UK government’s intention to create a new offence, stating that “… in addition to prosecuting companies that fail to prevent bribery and tax evasion, we will consult on extending the criminal offence of ‘failure to prevent’ to other economic crimes such as fraud and money laundering so that firms are properly held to account for criminal activity that takes place within them.”³ The plans to begin the long-awaited consultation on extending the scope of the “failure to prevent” model beyond bribery were confirmed by the UK government on 12 May 2016, with a view to beginning the consultation process in summer 2016.⁴

This announcement overturned a previous decision by the UK government, in September 2015, when it had announced that it would “not carry out further work at this stage as there have been no prosecutions under the model Bribery Act offence and there is little evidence of corporate economic wrongdoing going unpunished”.⁵ However, the conclusion of the first Deferred Prosecution Agreement (“DPA”) in November 2015, followed by the first successful conviction under the “failure to prevent bribery” offence in February 2016, as well as the recent “Panama Papers” leak, may have given fresh impetus to revisit the issue. Furthermore, a second DPA has recently been secured, this time with a UK SME for its systemic use of bribes to obtain contracts to supply its products.⁶ It has been alleged that contracts worth a total of over £17 million were implicated by this conduct. This development may also accelerate the discussions surrounding expanding the offence to other economic crimes.

Under current legislation, obtaining convictions for economic crimes such as money laundering, false accounting and fraud can prove difficult, as the prosecution needs to prove that a very senior person within the organisation (such as the CEO or Managing Director) committed the offence. If the proposed new offence closely mirrors the “failure to prevent” model, it will effectively create a strict liability offence, and allow law enforcement agencies to more easily prosecute corporations for failing to prevent such a corporate economic crime.

Although we are still waiting to see the full details of the consultation, this potentially wide-ranging extension may require significant expansion to corporate compliance programmes. This will particularly be the case if, as would seem likely, the current Section 7 defence of having “adequate procedures” in place to prevent bribery, is also available to companies in respect of an expanded economic crime offence. An extensive explanation as to what might constitute “adequate procedures” will need to accompany the new offence. Enhanced risk assessments; the creation of policies and procedures; staff training and monitoring the business to detect and manage economic crime risks which extend beyond bribery are all ways in which businesses could stay ahead of the change.

Public Registry

The UK is already the first G20 country to create a public central register of company beneficial ownership information for all companies incorporated in the UK. UK companies are now required to hold a register of “People with Significant Control” and, since 30 June 2016, this information is available to the public via the public register at Companies House. The UK government has now committed to establishing a public register of company beneficial ownership for foreign companies who already own, or wish to buy, property in the UK, or who bid for UK central government contracts, including for infrastructure projects. If implemented, this would mean that any non-registered foreign companies would no longer be able to own or to buy property in the UK or bid for UK public contracts. The UK is also driving an initiative to establish the automatic exchange of beneficial ownership information. Over 20 countries including Afghanistan, France, Germany, India, Italy, Kenya, Nigeria, Spain and Switzerland signed up to this new pilot initiative, with an aim of assisting each other’s authorities in their respective investigations.

The UK government is aiming to conduct a consultation on registration of foreign ownership by the end of this year. This registry will help financial institutions and other businesses to conduct a thorough customer due diligence and will also assist HMRC and other government authorities abroad in their investigations.

Conclusion

The UK government is aiming to develop a cross-government anticorruption strategy by the end of 2016. The level of commitment from the UK government, as well as other countries, is a welcome step in the fight against corruption which overshadows many industries, particularly the infrastructure sector.

However, at present only limited information is available, with many of the proposals outlined above being high level policy pronouncements. In addition, given the UK’s decision in June 2016 to exit the EU, and with those who were closely associated with the above proposals, particularly the former prime minister, no longer within the new government, the future of the proposals appears unclear, at least in the immediate term.

Nonetheless, the plans proposed by the UK government are potentially significant for many businesses in the infrastructure sector, and companies in the UK and abroad will be eager to see the details and be given the opportunity to participate in the anticipated consultations. We will be tracking these developments with interest.

1. Bribe Payers Index 2011, Transparency International: http://www.transparency.org/ bpi2011/results.
2. These countries include: Afghanistan, Brazil, Columbia, Georgia, Germany, India, Italy, Jordan, Kenya, Malta, New Zealand, Nigeria, Norway, Spain, Switzerland, Tunisia, the UK, Ukraine and the US.
3. Article; The Guardian; 11 May 2016: “The fight against corruption begins with political will”: www.theguardian.com/commentisfree/2016/ may/11/fight-against-corruption-begins-with-political-will.
4. Government Press Release: https://www.gov. uk/government/news/new-plans-to-tackle-corporate-fraud.
5. Parliament Q&A: http://www.parliament. uk/written-questions-answers-statements/ written-question/commons/2015-09-09/9735.
6. SFO secures second DPA, 8 July 2016: https:// www.sfo.gov.uk/2016/07/08/sfo-securessecond-dpa/.