In 1995 the UK signed up to the OECD's Anti-Bribery Convention. 16 years later we attempted to comply with our obligations by passing the Bribery Act 2010 (the Act). The Act was due to come into force on 1 April 2011 (April Fool's Day) 2011, but, perhaps for that very reason, it has been delayed and will now come into force on 1 July 2011.

The delay was due to the fact that the Ministry of Justice (MOJ) had failed to issue the guidance required on "Adequate Procedures". There has also been a storm of protest from the business community because, although introducing very onerous criminal sanctions, the drafting of the Act itself is unclear (e.g. as to the meaning of "carry on a business or part of a business in the UK").

Some fundamental questions remain. Is there a proportionality test in relation to corporate hospitality? Will even minor infractions of the Act result in permanent disbarment from public procurement lists? Will plea bargains be permissible? Will organisations have to carry out due diligence on their whole supply chain, or just agents? Will simply facing a charge under the Act equate to evidence that the organisation does not have "adequate procedures"?. Furthermore, the Act contains no exemptions for facilitation (or so called "grease") payments (compare the position under the US Foreign Corrupt Practices Act which has certain exemptions).

On 30 March 2011, the MOJ issued the long-awaited guidance (the Guidance) on the Act and on adequate bribery prevention procedures. It provides clarity with respect to some of the concerns mentioned above and enables businesses to take concrete steps to bring their house in order and revise their existing bribery prevention policies and procedures or consider and implement new ones reflecting the principles set out in the Guidance.

The Corporate Offence

The offence of failing to prevent bribery is a strict liability offence: the commercial organisation will be guilty if a person associated with it, bribes another person. The only defence will be the commercial organisation's ability to show that it has adequate procedures in place to prevent bribery. The definition of "commercial organisation" includes limited and unlimited companies (whether limited by shares or guarantee), general and limited partnerships and limited liability partnerships (LLPs).

Risks for PE Investors

Investors establish a PE fund and become the Limited Partners (LPs). Acquisitions of portfolio companies are made by the General Partner (GP) who holds those investments on behalf of the fund. If businesses/companies are acquired that have corruption issues, where will the Bribery Act buck stop?

Is it possible that the LP's could be prosecuted for the acts or omissions of someone associated with a portfolio company, or can liability for the corporate offence be contained at portfolio company or GP level only?

In the example above, "A" would have to be associated with the LP i.e. be a person who performs services on behalf of the LP. The capacity in which A performs the services does not matter; the fact that "A" is "labelled" as an employee of or agent for the portfolio company does not matter either. Rather, A's relationship with the LP and/or the GP will be determined by reference to all the relevant circumstances. Accordingly, the precise structure of the fund and the relationship between the LPs, GP and portfolio companies will be relevant. Furthermore, it is not unusual for the PE fund to hold a minority investment in a range of assets, and that accordingly, there might potentially be a number of distinct funds that could become tainted as a result of a misdemeanour in one of the underlying businesses.

On the face of it, on the basis that the individual "guilty" of corrupt practices, including offences under the Act, is an employee of the portfolio company, it should be possible to argue with some force the case that the liability for any such corruption is "ring fenced" within the portfolio company. That said, however, if a member of the GP is a director of the portfolio company, then, in that capacity (namely as a director of the portfolio company, or, indeed, as a shadow director/senior manager of such a company), the member of the GP will be exposed to potential liability in relation to the acts of anyone associated with the portfolio company.

PE Investors must do DD

Thorough due diligence will become even more important in order to ensure that the reputation of LPs and the GP is not tarnished because a target portfolio company has a poor record in relation to corruption, including bribery, as widely defined under the Act. That said, finding out about the problems is likely to be difficult – perpetrators are likely to cover their tracks.

Red flags as far as the MOJ are concerned are:

1. Geographical risks – where is the country in which the portfolio company does business, in the corruption league tables?
2. Sector risks – oil and gas, telecoms, IT, construction, pharmaceuticals and defence.
3. Use by the target company of third party agents – how ar e they selected, are any of them public officials, or r elated to or connected with public officials?
4. Does the target company have transparent and ethical accounting practices? Are there off balance sheet issues?
5. Are the sums paid to third party agents proportionate a nd properly accounted for in the books of the company?
6. Does the company have anti corruption policies as well as policies governing gifts, charitable donations, political donations and hospitality policies?

The Act's Extra Territorial Application and the need for Adequate Procedures

The corporate offence covers commercial organisations, including all companies and/or partnerships and LLPs incorporated in the United Kingdom or which carry on business or part of a business in the United Kingdom; a business incorporated in a foreign jurisdiction could be prosecuted if that business has an associated person who is a UK national.

In order to have a defence to the corporate offence, adequate procedures have to be in place. The Guidance sets out six guiding principles for a risk based regime which is said to be "flexible and outcome focused" (MOJ Guidance, The six principles). The principles which the MOJ consider should inform and govern the development of a commercial organisation's Adequate Procedures are as follows:

1. proportionate procedures – procedures which are proportionate to the bribery risks the organisation faces;
2. top level, board down, commitment;
3. a proper risk assessment of the nature and extent of the organisation's potential external and internal bribery risks;
4. thorough due diligence procedures in respect of persons who perform, or will perform, services for or on behalf of the organisation;
5. internal and external communication and training of its bribery prevention policies and procedures, including decision making, financial control, political and charitable donations, gifts, hospitality, promotional expenses, facilitation payments and whistleblowing procedures; and
6. a continuing process of monitoring and review.

The MOJ have made it abundantly clear that the development of adequate procedures must be a top down project, starting with a board commitment to eradicate corruption and ensure that the business operates in an ethical and corruption-free way. It will not be enough, to activate the defence to the corporate offence, simply to produce a beautifully crafted anti-corruption policy, rather, the commercial organisation will have to show that the policy has influenced the behaviours of those in the business and the processes of the business to effectively prevent corruption. Accordingly, the organisation will have to train its staff on the policy and also train any third party agents (on a weighted risk basis).

One of the concerns raised in relation to the draft guidance published in September last year was whether or not a commercial organisation would have to incur the expense of training its entire supply chain on its anti-corruption policy so that the supply chain is aware of the adequate procedures that the commercial organisation operates. The Guidance suggests that it may be appropriate to require associated persons to undergo training, and where a supplier is performing services for an organisation rather than simply selling goods, it may be an associated person. However, the Guidance also clarifies that, where a supply chain involves several entities, an organisation will only have control over the relationship with its immediate contractual counterparty. This suggests that, in such a case, it may be appropriate for the organisation to train only its immediate supplier/s, rather than the entire supply chain. The same applies in relation to due diligence (principle 4).

Overall responsibility within an organisation for the initiation, development and implementation of bribery prevention procedures and bribery critical decision making will depend on the organisation's size, management, structure and circumstances. In smaller organisations this could require the personal involvement of top-level managers whereas in large multinational organisations the board should be responsible for setting bribery prevention policies but delegating to management the task of designing and implementing adequate procedures. The policies should include "whistleblowing" provisions so as to encourage employees and/or agents to "blow the whistle" on any corruption. The policies should also be subject to regular review and monitoring to ensure that they are "fit for purpose". The review and monitoring process, depending on the resources on the commercial organisation and its risk profile, may have to be undertaken using an external third party (for example the organisation's auditors or lawyers).

What Can Be Done?

Policies and procedures should be reviewed as a matter of high importance as the Act will now come into force on 1 July 2011. Effective due diligence, designed to ensure that PE investors and the fund manager knows their business partners – whether they be companies or businesses acquired or joint ventures – will be essential. If problems with corruption are uncovered as part of the DD process, consider obtaining warranties and/or indemnities from the vendor. Careful drafting may well be required so as not to invalidate any such provisions on the public policy ground that a party cannot be indemnified against its own wrong.

The alternative – take Iago's advice to Roderigo: "Put money in thy purse". The consequences of such a cavalier attitude to the intentions behind the Act, however, could be almost as tragic as Othello's death, namely 10 years at Her Majesty's pleasure.