RUSSIAN/UK UPDATE – Adverse impact of the UK Bribery Act 2010 on Cross-Border Corporate Transactions in Russia.
The UK Bribery Act 2010 has far reaching territorial application and can even apply to Russian companies.
Affected companies must now have in place adequate internal anti-bribery procedures and ensure the same compliance of any of its associated persons. Strong contractual protections may prove necessary to limit exposure to prosecution under the Act.
The increased scrutiny may lead to fewer deals being concluded successfully and a short-term decrease in foreign investment in Russia.
The UK Bribery Act 2010 (the Bribery Act) came into force on 1 July 2011, with implications reaching far beyond the United Kingdom. This article provides a brief analysis of how the Bribery Act is likely to affect deals and investment in Russia.
The Bribery Act aims to combat corruption, for example by requiring companies to put in place proper procedures preventing bribes being paid or taken.
Broadly, the Bribery Act creates four offences:
Offence 1: bribing another person
Offence 2: being bribed
Offence 3: bribing a foreign public official
Offence 4: failing to prevent bribery
Offences 1, 2 and 3 can be committed by both individuals and companies. Senior company directors may be concerned to know that they could be prosecuted personally for Offences 1, 2 or 3 where it can be shown that the company committed one of those offences with the director’s “consent or connivance”. Whilst “consent” is a concept that is readily understood, “connivance” is broader and there is no official guidance on exactly what that means. It is likely to include indirect encouragement or tolerance of a bribery offence.
Offence 4 applies to a company where a person “associated” with the company has committed Offence 1, 2 or 3. The wide drafting aims to bring as many companies as possible into the realm of the Bribery Act. Foreign companies and individuals “associated” with an English company or doing business in the UK are likely to fall within the Bribery Act.
Other than denying the accusation, the only defence for a company accused of failing to prevent bribery under Offence 4 is that “adequate procedures” to prevent bribery were in place. There is some guidance about what might make procedures “adequate”, but to a large extent this depends on each company’s specific circumstances. Top-level management should be involved in putting in place appropriate procedures which they consider adequate.
Consequences of being found guilty of an offence under the Bribery Act are severe. They can include the payment of unlimited fines, debarment from EU government contracts or even prison sentences of up to 14 years.
Effect on Russian companies
Russian companies may be subject to the Bribery Act if they are doing business in the UK (for example, through a branch in London) or if they have a business relationship with a UK company.
An affected company should take English legal advice and review the procedures which it has currently in place to prevent its employees, agents and other associated persons from committing bribery offences.
Before entering into a joint venture, companies subject to the Bribery Act should conduct thorough due diligence on a the historic conduct and internal anti-bribery procedures of the prospective joint venture partner. Joint venture partners are likely to be associated with each other and each could be prosecuted for an offence committed by the other party. A company should seek contractual protections in the shareholders’ agreement to protect itself from such liabilities. For example, it may be appropriate to ask for an undertaking from the prospective joint venture partner not to cause the company to be in breach of the Bribery Act, along the lines of the FCPA compliance undertakings that currently exist in most agreements with US investors.
Foreign investment in Russia
Local practices are one of the factors which should be taken into account when considering whether the procedures already in place are adequate. Foreign investors subject to the Bribery Act may need to review the adequacy of their internal anti-bribery procedures before making the decision to invest in Russia due to Russia’s historical track record and its current ranking in the Corruptions Perception Index.
We often see foreign investments being structured as joint ventures with Russian partners. As mentioned above, where the Bribery Act applies to the investor, thorough due diligence on a prospective Russian joint venture party must be conducted. Unsatisfactory results or a lack of transparency may require the investor to walk away from the intended investment.
Foreign companies doing business in Russia often use customs agents to help navigate the complex regulations governing cross-border trade. The conduct of such agents should be carefully monitored, as the agent will be associated with the company for the purposes of the Bribery Act. A foreign company could therefore find itself being prosecuted for failing to prevent a customs agent from paying a bribe.
Impact on deals
We expect to see investors increasing their due diligence on business partners, agents or joint venture partners following the Bribery Act.
In private M&A, a potential purchaser needs to review a target company’s anti-bribery procedures and historical conduct very carefully. Once the acquisition is completed, a buyer within the scope of the Bribery Act may end up being prosecuted for the target company’s past behaviour. Due diligence is therefore crucial.
Depending on the results of the due diligence, parties may chose to walk away from deals or seek strong contractual protections in the form of warranties and indemnities. Negotiating such protection provisions is also likely to flush out information about the prospective partner’s internal anti-bribery procedures.
In cross-border joint ventures, we expect to see an increased use of anti-bribery undertakings in shareholders’ agreements. While it is difficult to monitor the conduct of a joint venture partner, such undertakings allow a certain degree of control and, at the very least, give the right to compensation if the partner commits a bribery offence for which the company is later prosecuted.
Due to its far reaching territorial application, the Bribery Act is proving to be an unexpected contribution to President Medvedev’s anti-corruption campaign. Russian businesses with a UK branch may have been surprised to find themselves subject to what has been called the strictest anti-bribery law in the world.
However, increased levels of due diligence and heightened focus on contractual protections may mean that deals take longer to negotiate and, where such negotiations fail, that more deals are walked away from.
Foreign investors subject to the Bribery Act need to scrutinise Russian business partners and local practices before they can make any investments. While this ties in with President Medvedev’s anti-corruption agenda, it may lead to a short-term decrease of foreign investments into the Russian economy.
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