By Ajay Shamdasani
Several Asian jurisdictions have passed legislation similar to the U.S. Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act (UKBA) in recent years as part of a bid to ensure the operations of multinational organisations are adequately regulated, according to a new report. The report, issued by law firm Herbert Smith in Hong Kong, found that while the FCPA and UKBA remain the key drivers of anti-corruption reform in Asia, firms had to deal with an increasing amount of similar local regulation.
The highest profile anti-corruption statutes in the ‘enforcement world’ remain the FCPA and the UKBA, which are foreign anti-bribery statutes that are extra-territorial in nature and which have been the subject of much attention in the media, said Kyle Wombolt, head of Herbert Smith’s Asian investigations and compliance practice in Hong Kong.
“While these statutes have been the focus of most of the attention, our report also focuses on the domestic enforcement environment across the different Asian jurisdictions. The reason for the local focus is that, in recent years we have seen increased attention to the operations of multinational organisations by a number of domestic regulatory and prosecutorial agencies in Asia,” he told Thomson Reuters. “Many of these organisations are now paying much more attention to the local regulatory environment.”
In late July, the law firm published the first edition of its “Asia Anti-Corruption Report”. The report, which is expected to be released twice yearly, aims to bring together the latest developments in cross-border and domestic anti-corruption matters arising out of business conducted in Asia.
The report examined the latest developments in anti-corruption for 19 Asian countries throughout Asia. It found that in recent years, an unprecedented number of FCPA enforcement actions were seen in the U.S. It also said the UKBA was expected to change the anti-corruption landscape for any organisation conducting all or part of its business in the UK.
The report found that many countries in Asia were implementing tougher domestic anti-corruption legislation, at a time when international companies increasingly look to Asia for expansion.
It said some firms find doing business in Asia is sometimes a double-edged sword: despite vast growth opportunities regionally, endemic corruption in some nations and deeply embedded cultural practices — like gift giving and entertaining clients — make it increasingly difficult for businesses to navigate international and domestic anti-corruption laws.
Similar rules, divergent enforcement
Wombolt said that while the various anti-corruption statutes in Asia were fairly consistent across jurisdictions, the key difference was enforcement.
“Generally speaking, those rules prohibit providing items of value or other financial advantages in return for obtaining an advantage in the business setting. What more often varies among jurisdictions is the nature of the enforcement environment, which can often be impacted by financial or political considerations,” he said.
Local customs or cultural norms can give rise to particular risks, Wombolt added. “Sometimes, the risks can materialise in a manner that implicates the broader foreign anti-corruption statutes and sometimes the implications may only be local,” he said.
The Herbert Smith report said that corruption is still endemic in many Asian nations.
Yet, the report also indicated an increased focus on enforcement of domestic anti-corruption laws in a number of countries, said Colum Bancroft, managing director at Kroll Advisory Solutions in Hong Kong. He added it showed: “As increasing awareness in certain countries that, at the macro level, corruption presents a threat to economic progress. Hong Kong seems to be leading the way in enforcement of domestic corruption legislation, with numerous high profile investigations and prosecutions instigated by the Independent Commission Against Corruption (ICAC).”
In March, the ICAC, Hong Kong’s anti-graft body, arrested Thomas and Raymond Kwok, co-chairmen of SHKP — the city’s largest property developer.
More broadly, the report also showed signs of an increasing desire to create and enforce anti-corruption laws on an international level, said Julian Russell, managing director of Pacific Risk, a boutique risk management firm in Hong Kong. “Such laws are becoming transnational and the desire to enforce them is rising owing to multi-jurisdictional crime,” he said.
John Bray, director of analysis for Control Risks in Tokyo, said rule variations in different jurisdictions were interesting and important, but secondary. “The primary drivers are international ones, particularly extraterritorial laws such as the FCPA and the UKBA. If companies are compliant with these laws they almost certainly will meet the requirements of local anti-corruption laws,” he said.
Compliance and legal teams in the financial services sector have generally come under greater scrutiny than pre-global financial crisis. The recent lack of public confidence in banking and financial institutions also suggests that there will be even greater regulatory attention paid to them going forward, said Lesli Ligorner, a partner with law firm Simmons & Simmons in Shanghai.
“For compliance officers and in-house counsel, it means they are going to have to be nimble and manage an industry that has traditionally not focused on all of its ‘touchstones’ with government officials or risk,” she said. Ligorner said that while some parts of organisations had robust compliance policies and programmes, some smaller investments or divisions might not receive adequate anti-corruption due diligence because it would hurt the bottom line. “Such thinking is dangerous both for FCPA compliance and in terms of successor liability,” she warned.
Ligorner said financial institutions would also see greater regulatory scrutiny because of growing risks. “The FCPA is only going to become more relevant to banking and financial institutions. As there are no international cases involving the UK Bribery Act, most companies and compliance programmes focus on the FCPA, as it is still seen as the ‘guiding light’,” she said.
Kroll’s Bancroft said the U.S. Securities and Exchange Commission (SEC) charging a former Morgan Stanley executive in Shanghai on FCPA violations in late April had important implications for compliance officers.
He said neither the U.S. Department of Justice (DOJ) — which has primary responsibility for enforcing the anti-bribery provisions of the FCPA — nor the SEC, which generally enforces the books and records and internal controls provisions, decided to charge the investment bank. He said the authorities noted as mitigating factors the firm’s cooperation with the inquiry, the thoroughness of its own internal investigation, the comprehensive internal controls that the firm had in place and the numerous anti-corruption training programs that it ran for employees. “Moreover, the executive in question had evaded internal accounting controls, which indicates possible deficiencies in the effective implementation of such controls,” said Bancroft.
Herbert Smith’s report highlighted the continued focus on enforcement of the FCPA, noting that since 2002, the DOJ and SEC have brought enforcement actions against 22 corporations and 15 individuals relating to business activities in mainland China alone.
In Morgan Stanley’s recent FCPA case, the DOJ and SEC gave it good marks for having an effective compliance program, said Control Risks’ Bray. “The case demonstrates the importance of prevention quite well,” he said.
The financial sector is also rife with potential third-party risks due to the use of financial intermediaries and finders.
Under the UKBA, companies can incur liability for bribes paid by third parties — such as contractors — on their behalf.
“With respect to third parties, this is an industry with a lot of finders and third-party intermediaries involved in deals,” said Ligorner.
Traditionally, financial institutions have not been overly concerned about how third parties might affect them under the FCPA.
“Yet, there are also other home regulators such as the UK Financial Services Authority (FSA). Within that, the particular thing for everybody [in financial services] is prevention and there should be a particular focus on intermediaries,” warned Bray.
Two cases not widely reported internationally involved the FSA’s finding that insurance brokers Aon and Willis had failed to implement adequate controls — specifically around intermediaries such as finders and introducers.
“The clear message from the FSA is that they [intermediaries and finders] should also be briefed on compliance [matters],” stressed Bray.
Similarly with the UKBA, a requirement exists to have adequate bribery prevention procedures.
Citing Herbert Smith’s report, Bray said such prevention was even more necessary in jurisdictions where domestic enforcement was weak. He added that commercial arrangements with third parties should be clearly documented and recorded, and that companies conduct due diligence enquiries before hiring them.
The U.S. Dodd-Frank Act may also be worrisome. The act has already seen some people being awarded large sums for whistle-blower actions related to financial institutions, said Simmons & Simmons’ Ligorner. “I expect that the numbers released by the SEC after the first full year that the whistle-blower provisions of the Dodd-Frank Act have been in effect will show a large uptick in the number of FCPA-related cases, particularly in Asia,” she said.
Another ongoing concern for institutions is anti-money laundering compliance, which also intersects with anti-corruption efforts.
Pacific Risk’s Russell said the Herbert Smith report should have highlighted that because corruption offences sometimes had strong transnational effects, bribes were often paid in countries different from where services were provided. “Hong Kong and Singapore have long been favourite … offshore centres where bribes are paid. The money laundering aspect of corruption is often overlooked,” he said.
This article was written by Ajay Shamdasani and originally published on trust