t's well known that the United Kingdom's Ant-Bribery Act imposes severe penalties on British subjects engaging in bribery.
Why should a Delaware limited partnership governed by Delaware law care whether the partnership complies with the act? The partnership ought to care, because the act applies not only to U.K.-based partnerships, but also can extend to those who merely do business in the United Kingdom, wherever they are domiciled.
Thus, the act can be triggered by a bribe committed outside the U.K. by an American employee of a Delaware limited partnership if that partnership simply does some business in the U.K. The risk of non-compliance with the act is heightened because of the vicarious liability imposed by the act — partnerships can be prosecuted because of bribes to or from persons “associated with” them, regardless of where the bribe takes place and whether the partnership even knew of the bribe.
Why should an investor care whether a partnership in which it invests violates the act? Because, even the threat of criminal prosecution of the partnership for violating the act is likely to severely impair partnership value. The pages of this periodical are replete with examples of how relatively minor allegations involving a fund's subsidiary holding companies can cause an investor stampede for the exits. The good news is that a partnership can largely shield itself (and its investors' money) from vicarious liability if it implements the relatively simple plan for preventing bribery outlined in the act.
Sections 1 and 6 offenses: A Section 1 offense under the act includes an offer to make a bribe as well as actual bribery, and extends not only to government officials, but also to private individuals. A Section 6 offense involves the bribery of foreign public officials holding office outside the U.K. While the U.S. Foreign Corrupt Practices Act covers much the same territory, Section 6 has met with controversy as it prohibits what is commonly known as “facilitation payments” — those made for facilitating the performance by a public official of a routine governmental action. Such payments are typically demanded by low-level, poorly paid officials in exchange for expediting services to which one is legally entitled without such payments.
Section 7 offenses: A major expansion of anti-bribery law is found in Section 7 of the act. It creates vicarious criminal exposure for partnerships if bribery is committed by persons “associated with” a partnership that has failed to implement “adequate” measures to prevent bribery. An “associated person” performs services on behalf of the partnership in any capacity. Thus, Section 7 embraces a whole range of persons connected to an organization who might be capable of committing bribery on the organization's behalf, including employees, agents or subsidiaries and potentially those in joint ventures.
While it is clear that Section 7 offenses apply to U.K. residents and entities formed in the U.K., the act has broad extraterritorial reach. Section 7 extends jurisdiction to foreign entities that have a “close connection” with the U.K., which means conducting business with British citizens, U.K. residents and importantly, nationals of its overseas territories, such as Bermuda, the British Virgin Islands and the Cayman Islands. Further, Section 7 offenses can occur in any part of the world, provided the organization carries on any part of its business in the U.K.
How to mitigate liability: An American partnership investing in largely American assets nevertheless risks liability under the act so long as it carries on some business in the U.K. or otherwise has a close connection with the U.K., or its operations involve citizens of, or individuals with close connections to, the U.K., including citizens of British offshore territories.
So, how does such a partnership protect itself from Section 7 violations?
The act provides a defense to criminal prosecution if the partnership has in place “adequate procedures” designed to prevent persons associated with the partnership from violating the act. The U.K. Ministry of Justice has identified the “adequate procedures” in its guidance on the act, which sets forth the following principles:
Principle 1 — proportionate procedures. The organization must implement procedures to prevent bribery that are proportionate to the risks it faces and to the nature, scale and complexity of the organization's activities.
Principle 2 — top-level commitment. Top-level management must be committed to preventing bribery by fostering a culture within the organization in which bribery is never tolerated.
Principle 3 — risk assessment. The organization must periodically assess and document the nature and extent of its exposure to potential external and internal risks of bribery.
Principle 4 — due diligence. The organization must adopt and implement due diligence procedures, taking a proportionate and risk-based approach, in order to mitigate identified bribery risks.
Principle 5 — communication. The organization must ensure its bribery prevention policies and procedures are understood throughout the organization.
Principle 6 — monitoring and review. The organization must monitor and review procedures designed to prevent bribery and make improvements where necessary.
Best solutions: So, what can both the investor and investment management do to improve protection of their respective interests, given the wide reach of the act? Management should implement the procedures outlined by the guidance to immunize management and its fund from liability. Investors need to insist that investment management adopt the procedures described in the Ministry of Justice's guidance, obtain written assurances that management will comply with the act and adopt all procedures outlined in the guidance. Only by both investors and investment management taking such action can a partnership largely mitigate the financial meltdown that could invariably result from a threatened prosecution under the act.
Marc R. Lieberman and Mark E. Lasee are partners in the Scottsdale, Ariz., office of Kutak Rock LLP. Mr. Lieberman is chair and Mr. Lasee a member of the law firm's public pension/alternative investment group.