After initial indignation at US prosecutions of non-nationals for fraud and corruption, foreign companies are learning that cooperation can be a safer strategy than contestation when problems are unearthed. The UK’s adversarial legal tradition, and perceived lapses over arms deals, leaves its companies in especially exposed extraterritorial terrain.
The conviction of the 'NatWest Three' on Enron-related fraud charges after extradition to the US, and the 61/2 year sentence handed down to Conrad Black for embezzlement at the company that owns the Daily Telegraph, has drawn attention to the global reach of American financial regulations. US prosecutors will act against anyone involved in fraud in relation to companies with a base in America, or transactions that take place there. Extradition arrangements stepped up in pursuit of terrorists can be used to deliver those accused of white-collar crime.
A recent KPMG survey found that 46% of UK respondents "wrongly believe" they are immune to the Foreign Corrupt Practices Act (FCPA), which empowers the US to prosecute any company that deals corruptly with public officials abroad. Over 30% of legal and accounting departments have done nothing to inform employees of the UKs Anti-Terrorism, Crime and Security Act 2001, which empowers UK courts to try people for crime and corruption committed abroad with one in five companies professing no knowledge of the Act.
"Companies appear to be exposing themselves to increased risk of prosecution through a mixture of lack of awareness of the anti-bribery rules, and a lack of engagement even when they are aware," says KPMG Forensic partner Alex Plavsic, who warns that some may be suddenly be awakened to reality when the Serious Fraud Office (SFO) goes public with some prosecutions already in preparation. The US press has reported that five FBI officers have been fully assigned to preparing cases under the FCPA, which dates from the 1970s but was previously paid little attention.
US goes abroad with anti-corruption agenda
In its effort to rid business of corrupt practices following the 2001 Enron collapse, the US initially targeted its own companies. Several large energy firms are undergoing prosecution for bribing foreign officials, and insurance companies with exotic offshore locations whose tax advantages have also made them channels for money laundering - have also been called in for questioning in recent investigations.
But the current pursuit of Daimler, after its demerger from Chrysler, for alleged payment of bribes in Eastern Europe illustrates the seriousness of US extraterritoriality. US politicians and prosecutors have suggested that they need to take a lead in other regions, including Europe, because governments there have been much slower to create and enforce anti-corruption legislation. The German government, cooperating in the Daimler investigation, has also launched its own into Siemens, over external payments believed to total more than $1bn.
Top executives get toughest treatment - and UK is high on target list
"American prosecutors are certainly very successful in sending a message that if your are implicated in a fraud that in any way involves a US business you not only have local law encorcement but also ther US couerts to worry about," says Simon Bevan, head of the fraud team at BDO Stoy Hayward. He warns that while junior employees often get more lienient sentences than in other jurisdictions, "Those in senior corporate positions can expect harsher sentences than other fraudsters," if arraigned under the FCPA.
The UK is especially vulnerable because of anger in Washington, and various European capitals, at the government-ordered discontinuation of SFO investigations into the al-Yamamah Saudi Arabian arms deal - which has helped make BAE Systems one of the worlds biggest defence suppliers, now making acquisitions in the US. The US Department of Justice has launched its own probe into BAE Systems. Although the main recipient of controversial payments was Saudi Prince Bandar bin Sultan, the FCPA counts members of royal families as public officials.
From protest to pro-active compliance
Companies and managers that find themselves the target of corruption investigations can also be wrong-footed by the American plea-bargaining approach. Instead of contesting charges, with a risk of heavily penalty if convicted, it can often be safer as the NatWest Three discovered to accept a degree of guilt on the assurance of a shorter sentence. Without such cooperation, a conviction under the FCPA can result in up to five years in jail and unlimited fines.
US companies have moved on from protesting against their governments hard stance on graft to making it a source of competitive advantage. Commercial lawyers will converge on Frankfurt at the end of next month to discuss ways to build a "value-based anti-corruption compliance programme, starting with better internal controls to prevent corrupt practices but extending to contingency plans for cooperating with external investigations. Organisers C5 cite "an anti-corruption enforcement explosion," and point out that Europe already has around 2100 major investigations under way compared with 50 in the US.
Most top execs began work when declaring bribes to foreign officials made them eligible for a tax rebate rather than a jail term. Quick adjustment is now needed to the turning of the blind eye into that of the legal eagle.