Tuesday, 21 June 2011
Speech by Richard Alderman
Director, Serious Fraud Office
Can I say first of all how pleased I am to be here together with Vivian to talk to you at the invitation of Debevoise & Plimpton LLP to discuss private equity.
There were a number of occasions during the long process of gestation of the Bribery Act, together with the Guidance, when I asked myself what were the implications of the Bill, then the Act and then the Guidance for private equity.
I regarded this as an important question because of the key role that private equity has played now for many years in the UK economy, both in terms of investment here and also in raising and managing funds here for investment in many other countries.
There was a time when all of this was very much below the radar of media and wider public interest in the UK, but that time has well and truly passed. You will know how well informed that scrutiny is. My own perception, for what it is worth, is that there is considerable scrutiny of what private equity does in the UK, particularly about the role of private equity concerning well known and very visible companies, but very little scrutiny or knowledge about the way in which private equity is involved in investments overseas. One can never tell of course when that might change.
The answer I came up with when I thought about private equity over the last couple of years in connection with the Bribery Act and the Guidance may not have been entirely satisfactory to you, because I regarded this as a difficult question that would need to be addressed at a later stage. I saw nothing in the Act or the Guidance that would create particular issues for private equity that did not apply to other sectors of the economy, although you may tell me today that I was unduly optimistic in that view. What did seem to me though, was this. First, that a number of the general issues that there are under the Bribery Act will be felt very strongly and in a different way by private equity compared to other sectors. Secondly, I needed to know a lot more about the detail of the functioning of your sector before expressing any views on this.
I am particularly pleased therefore that Debevoise & Plimpton have set up this session today. I shall try and address the issues, but I see this more as a process of dialogue leading, I hope, to a much more informed position on the part of the SFO which would enable us I hope to give detailed guidance if needed on how the Bribery Act and the Guidance will apply to particular aspects of private equity investment.
I want to highlight a number of issues under the Bribery Act, but let me say first that this is not because I have any reasons to think that bribery is either endemic or even an occasional feature of private equity investment. I mention the issues because of the need to emphasise some points that have been of less pressing importance to other sectors.
First of all your business is a very complex one and there are very many different models of investment and different ways in which you use the funds that you collect from investors. There are all sorts of ways in which you use those funds. I hope though it is right to say that you are very active investors with a level of knowledge and due diligence that is very high because of the nature of what you do. You are, therefore, very well informed investors with a high degree of knowledge of what happens in the companies you invest in. In any dealings we have with you on cases we are likely to start from that assumption.
Let me turn at the outset to a fundamental question that I know has caused concern. You are all no doubt members of a relevant commercial organisation (whether a company or partnership and wherever based). You will, therefore, be concerned about which people are associated with you for the offence of failing to prevent bribery at the level of the relevant commercial organisation.
This question naturally arises in connection with the activities of companies in which you invest. Are company representatives that get involved in bribery associated persons so that you have a liability for failing to prevent bribery?
My view is that we shall need to look at the nature of your interest. If this is simply a portfolio investment and your role is simply one of owners, then employees and agents of the company are not performing services for you. It could be different though if you were far more actively involved in the management of the company and were running it.
There would also be issues if one of your representatives was a senior officer of the company. They will be guilty of an offence if they consent to or connive in bribery. They might be personally liable.
Let us look next at private sector to private sector bribes.
One feature of importance is the way that the Bribery Act (unlike the US Foreign Corrupt Practices Act) criminalises private sector to private sector bribery. A lot of the discussion so far has been about foreign public officials (and I shall discuss some issues later) but straightforward private sector to private sector bribery has been less evident in the discussions.
What is needed here? Well the test under the Act is whether or not the payment is being made in order to induce somebody to perform their duties improperly. What arrangements therefore are there with the management of companies that you are interested in, particularly with managers that will remain after any takeover? Are there incentive arrangements? We would want to look at this.
A related question is whether or not this is actually private sector to private sector when the person working for the other company is working for a State controlled enterprise. Is that person a foreign public official? If he or she is, then there is a different test. We are not looking for improper inducement, but an attempt to influence.
Who then is a foreign public official? This is the subject of litigation at the moment in the US and I am following this with interest. The test I use is one that was set out by the OECD in the commentary on the OECD Convention. What we look at is whether or not the foreign State is in a position to influence the foreign company. We therefore look at the relationship between the company and the State to see whether effectively this commercial organisation is being run by the State.
This can lead us into some tricky areas. We have received questions about banking officials in countries where the State has a very major interest in the Bank and exercises that interest very actively. Are those officials foreign public officials?
Our view is that in those circumstances the individual is likely to be a foreign public official. On the other hand if the State has a major interest but does not control the operations of the Bank, then I think we could have a different situation.
Another issue raised with us concerns due diligence either before or after acquisitions. I was told some time ago that there was considerable demand from those involved in mergers and acquisitions for some form of advance guidance on the SFO's position if corruption issues were discovered in the target company. It was for this reason that in our Guide on self reporting that was published in July 2009 we included a paragraph about a rulings process for just that type of situation. It has hardly every been used. I think that is also the experience of the DOJ's rulings process where there have been very few requests for rulings.
This may be for a number of reasons. One of them is that companies prefer to come and talk to us informally before they make the acquisition in order to get a feel for the SFO's response. We would welcome that.
What happens in practice though, it seems to me is that the acquiring company decides to take the commercial risk of making the acquisition without getting a view from the SFO. What we encourage companies to do in those circumstances is to come to us as soon as they can after the acquisition in order to talk to us about the issues that they are finding. Our position is that as a matter of policy it is beneficial overall if good ethical companies take over companies with a poor record for ethics and governance and bring them up to a much higher level. This is something that we would want to see and I do not want the SFO to do anything that stands in the way of that.
We would therefore be sympathetic if a company came to us and said that it had recently taken over another company and that there were a number of issues concerning corruption that had been identified. In those circumstances I can see little benefit in an SFO investigation at the corporate level (although those involved in the corruption in the acquired company might receive different treatment from us). What is important is that the acquiring company gets on and sorts out the problems that it has inherited. This is something that I would want to see. I would want the company to tell us about what it has found and about how it is proposing to deal with this. I would want to be satisfied that this is a genuine commitment and I would like to be kept informed from time to time about progress. In these circumstances I would want to let the company get on and do whatever was needed in these circumstances.
There is some evidence that companies are open to this, although I have to say that it is not a regular feature of our work yet. The risk for the company in not telling us is that we pick up information about bribes in the target company and we start an investigation particularly with our international partners. Perhaps the first you hear about it is when we turn up at the front door with a warrant. All of this is avoidable through sensible and prudent management with good advice from international lawyers who are used to dealing with the SFO in these matters and know what we would do.
Let me turn to hospitality issues. There was a great deal of fuss about this before the Guidance was published. Corporate hospitality is a feature of doing business. It is one of the ways in which you build up and refresh relationships, and relationships are key to doing business. Some were saying before the Guidance was published that there will be a complete bar on any hospitality whatsoever. Some of what was being said seemed to me to lack any sense of proportion. I was being asked for instance, whether or not the SFO would prosecute if an extra bottle of wine or a rather better bottle of wine was supplied at a dinner.
I recognise that these concerns were very genuinely held. I recognise as well that it was very important that people involved in commercial activities should not be in doubt about the scope of the law. I found it very helpful therefore when the Justice Secretary, Ken Clarke injected a very strong note of realism into this whole debate. He said that there is no question of people being prosecuted for taking clients to Wimbledon or anything of that nature. He stressed both in interviews that he gave in the media and in the guidance that the MoJ issued, that the overall question was whether or not the expenditure was sensible and proportionate. This is the principle that we have adopted. We find in our discussions with companies that by and large they know what the answers are to these questions and they know whether or not they can justify these payments. They have their shareholders to worry about as well as their senior management and auditors. They know as well whether they would like to see details of the expenditure on the front-page of newspapers, always a very good test.
It has occurred to me that your industry may be rather different here because of the nature of the individuals that you might wish to entertain and their leading role in major sources of funds. These could be senior investment officers in very large pension funds or indeed Sovereign Wealth Funds. This well may be an issue that is felt acutely therefore by private equity. Let me try and give you some guidance.
What is sensible and proportionate will need to be judged by reference to who you are talking about and what is generally regarded as acceptable and safe practice. When we are talking about senior individuals in large pension funds or Sovereign Wealth Funds, then you would not expect to put them up at very modest hotels after travelling Economy. It is not how it is done.
However, I would not expect you to agree that the individual should come for a month or a couple of months to stay at the most expensive hotel in London together with very many members of their family and for all of them to be given large amounts of spending money to be used whilst they are in London.
I would not expect you also to arrange a business trip of a few days for these individuals, followed by a month at your private island somewhere, which has a warm climate and excellent golf and fishing.
These examples do not seem to me sensible and proportionate, particularly if shortly after the end of the hospitality, the official awards you a billion dollar contract. Indeed perhaps more importantly, I doubt very much if a jury of 12 ordinary people from the streets of London would regard it as being sensible and proportionate.
I appreciate that there is obviously a degree of judgement to be used here but I would suggest that if you are in doubt, then you come and talk to us. Companies are doing this and they are talking through with us what they do and their policy on entertainment. We generally find that they know the answer and what they need from the SFO is reassurance.
Another issue that has caused a very great deal of trouble is small facilitation payments. You may have some issues about this in private equity although I suspect your issues are the same as the issues that the listed sector has. I am happy to deal with any questions about this but because there are specific issues for you, I propose to move on from this topic.
What about incentive payments? A number of companies have been to see us. They give incentives of a relatively modest amount to employees of other companies who are involved in placing their products. They are concerned that these could be regarded as bribes under the Bribery Act. We have talked through the arrangements. Normally we find that the arrangements are commercial and are entered into for commercial reasons. Our view is that they need to be transparent to all the parties and that the company that is ultimately funding the incentive payments needs to be sure that these are genuine incentive payments going to individuals and are not being used in order to provide a way of making bribes to third parties. We encourage a senior officer of the ultimate paying company to have responsibility for this and to make sure they are content that these payments are going for proper purposes.
We do not have a problem about all of this, although I should add that we have indicated some disquiet when the payments are not actually known to the employer of the individual receiving the payments. This seems to us unsatisfactory for all sorts of reasons and we have encouraged the company to think about this.
This may be the sort of issue that arises in connection with placement agents that you use particularly in other countries. I would encourage you if you were in doubt to come and talk to us about these arrangements and to seek any reassurance from us that you might need.
Another issue to mention briefly is the risk to you when you want to exit one of your investments. Prospective purchasers will conduct due diligence. They will undoubtedly look for FCPA and Bribery Act issues. What assurance or ongoing warranties will you need to give? What impact will there be on the price when issues are discovered that perhaps you should have discovered and sorted out before?
I am conscious of the time and so let me just turn to one other issue and that is your responsibility if any of the companies that you own pays bribes. You might at first think that this is nothing to do with you as the owners of the company. It might be that as portfolio owners you are not committing an offence of failing to prevent bribery. But it does not end there. First of all we will be looking at money laundering in order to see what money has been laundered as a result of the criminal conduct and to whom it has gone. It may be indeed that the owners have some knowledge of the contract that was obtained through bribery. We will be thinking about money laundering.
What we are also doing is this. We are stressing the responsibility of the owners of companies to ensure proper standards of governance and a proper anti-corruption culture. Owners should not stand aside and say this is nothing to do with them but is an operational issue for the company. It is not. As owners of companies, private equity (as well as the big institutional shareholders) has a responsibility to society to ensure that the companies in which they have a shareholding operate to the right standards. It may even be that it is a condition of investment by fund managers allocating funds to you to invest that you invest only in companies that are FCPA and Bribery Act compliant. This is something you will need to bear in mind. You may also need to look at your exposure as I suggested earlier if you are directors (whether executive or non-executive) in the companies in which you invest.
A feature of the SFO's work that you may hear about in due course is what happens when something goes wrong and the company gets involved in bribery. The owning company or partners may know nothing about this although they will have received the benefit through dividends or other distribution. We are looking at how we recover the benefit.
This is something I care about very much because I want to ensure that the companies have built a true anti-corruption culture. I am seeing this in many companies at the moment. What I am also seeing is that these companies are ensuring that those who do business with them are also building up that anti-corruption culture. All this is commercially driven and so is likely to be successful. I am very pleased about this. What has not happened yet has been a focus on the owners of the companies and their responsibilities. This is an area I want to develop over the next year or so.
I am conscious that there are many other issues relating to private equity that I have not touched on, and that you may feel that I have not dealt with issues relevant to the way that you do business. As I said at the beginning, this is part of a dialogue and a dialogue that I welcome. I will be interested in your questions. I am interested as well in how we take this forward so that private equity has much more visibility of the SFO's approach than before and the SFO has a much more informed understanding of the commercial and legal issues for those involved in private equity investments. This will mean that areas of uncertainty are minimised so that you can get on with your commercial operations with as much confidence as possible.
Thank you once again for inviting me here and special thanks to Debevoise for organising this session. I look forward to your questions.
