White collar crime in the CEE - Allen & Overy 5 CEE corporate entities and their responsibilities The legal definition of bribery and persons who can be held responsible for it are

White collar crime in the CEEA guide to managing corruption risks

2012

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White collar crime in the CEE – A guide to managing corruption risks | 20122

© Allen & Overy LLP 2012

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Contents

Foreword 4CEE corporate entities and their responsibilities 5UK Bribery Act 2010 7The perceived levels of public-sector corruption 9U.S. Foreign Corrupt Practices Act 10Types of actions covered 12Examples 14Recommendations 15Conclusion 17Key contacts 18



Foreword

It is common knowledge that bribery is a criminal offence almost everywhere in the world. Bribery usually consists of promising or giving money or other advantage in exchange for services that are illegal, outside the scope of one’s duties or even actions that would be legal, if they were not motivated by the bribe itself.

On the other hand, the criminal liability of corporate entities has only been adopted in the CEE* quite recently, and it is still a new concept in both legal theory and practice.

The following guide provides a comparative view of the criminal liability of corporate entities in the CEE and the conditions that must be met to prosecute a corporate entity.

This guide also provides a brief overview of the circumstances in which entities in the CEE could face prosecution from the UK or U.S. authorities under the UK Bribery Act and the U.S. Foreign Corrupt Practices Act.

An increasing political will to identify, investigate and prosecute corruption cases imposes greater requirements on corporate entities globally to prevent and combat corruption.

* The CEE for the purposes of this brochure means Bulgaria, Czech Republic, Hungary, Poland, Romania, Russia and Slovakia

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CEE corporate entities and their responsibilitiesThe legal definition of bribery and persons who can be held responsible for it are similar in all CEE jurisdictions, due to the Council of Europe’s Criminal Law Convention on Corruption.

However, the rules in particular countries differ in the necessary relationship between the corporate entity and the person committing a crime, whether a corporate entity is liable or just responsible for the crime, and to what extent the management must be aware of the committed crime in order to be able to prosecute the corporate entity itself.

For example, in the Czech Republic, strict liability of corporate entities applies to the actions of its management and persons with a decisive influence, but not to the actions of employees. In Poland, on the other hand, the criminal liability of the corporate entity is only secondary to the responsibility of an individual who actually commits a crime, regardless of a position held in the corporate entity.

In Bulgaria* and Russia, corporate entities are not criminally liable; in practice, however, the corporate entity could be held accountable for an administrative offence. Romania has adopted the concept of the criminal liability of corporate entities; however, since the bribery must be committed intentionally, there is a requirement for the management to know and encourage or at least to agree with the committing of the criminal offence.

Among CEE countries, Hungary has the widest range of persons for whose actions a corporate entity could be held liable, including minority shareholders. Slovakia is among the jurisdictions that place no requirement of knowledge on the part of the management in order to prosecute the corporate entity itself, having from this point of view the strictest liability.

* Bulgarian input to this guide was kindly provided by SPASOV & BRATANOV LAWYERS’ PARTNERSHIP.



Country Corporate entities are responsible for the actions of Is there a strict liability?

Bulgaria a) directorsb) board membersc) persons entitled to act on behalf of the

corporate entity/representatives

NO – corporate entities are not liable for criminal offences, however they could face a fine if one of the persons listed in a)-c) commits a bribery-related offence and the corporate entity gained or could have gained a profit from this.

Czech Republic a) directorsb) board membersc) persons with a decisive influence on the management

(such as majority shareholders or controlling entities)d) employees or persons in similar position

YES – in the case of a) – c)

NO – in the case of d), a corporate entity would only be liable if its management failed to show that it put in place checks and measures to prevent the illegal action or if it ordered or consented to the illegal action itself.

Hungary a) directorsb) board membersc) persons entitled to act on behalf of the

corporate entity/representativesd) representatives of the abovee) employeesf) shareholdersg) any person

YES – in the case of a) – d)

NO – in the case of e) and f) it must be shown that the due care of the directors or board members could have prevented the criminal offence.

In the cases of (a) to (f) the offence must have resulted in or must have been aimed at achieving a benefit for the company.

NO – in the case of g) the persons listed in points a)-c) must have known about the offence, which must have resulted in a benefit for the company.

Poland a) persons entitled to act on behalf of or in the interest of the corporate entity

b) representatives of the above

NO – a corporate entity is responsible for the crime only if the following cumulative conditions are met:

(i) the crime led to or could have led to a profit for the corporate entity,

(ii) an individual has already been convicted of the crime, and

(iii) there is fault on the part of the board member or representative for choosing or supervising the individual who committed the crime.

Romania a) directorsb) board membersc) persons entitled to act on behalf of the

corporate entity/representativesd) employees

NO – as the crime must be committed intentionally to prosecute a corporate entity, the management must: (i) know; (ii) encourage; or (iii) agree with the commission of the criminal offence.

Russia a) persons entitled to act on behalf of the corporate entity/representatives

b) persons acting for the benefit of the corporate entity

NO – corporate entities are not liable for criminal offences, however they could face a fine if one of the persons listed in a) and b) commits a bribery-related offence

Slovakia a) directorsb) board membersc) persons entitled to act on behalf of the

corporate entity/representatives

YES – in all cases of a) to c).

When are corporate entities liable?

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UK Bribery Act 2010

On 1 July 2011, the UK Bribery Act (the UKBA) introduced a regime which, compared to the laws in the CEE, is much tougher on corporate entities concerning the range of persons for whose actions they could be held responsible as well as the lack of knowledge required on part of the management.

The UKBA applies to offences committed by British nationals or by persons who are ordinarily resident in the UK, regardless of whether the act or omission which forms part of the offence took place in or outside the UK.

The UKBA introduced a new offence: the failure of a corporate entity to prevent bribery. The corporate entity commits this offence when:

(i) a person associated with the corporate entity (an associated person);

(ii) bribes another person;

(iii) intending to obtain or retain a business advantage; and

(iv) the corporate entity cannot show that it had adequate procedures in place to prevent bribes being paid.

The most important aspects of the UKBA are its extraterritoriality and the strict liability of corporate entities.

Key aspects – extraterritorial effect

– corporate offence

– business presence

– adequate procedures

– perception of corruption

Most importantly, the corporate offence will apply not only to corporate entities established under UK law, but also to foreign entities which have a business presence in the UK, regardless of where the bribe is paid or whether the management knew about it.



Business presenceThe UKBA applies to corporate entities incorporated in the UK irrespective of where they carry on business and corporate entities which carry on a business or part of a business in the UK, irrespective of the country of their incorporation. There is no detailed guidance on whether a corporate entity has a business presence in the UK; however, it is anticipated that the courts will take a common sense approach and only apply the offence against corporate entities with a demonstrable business presence in the UK.

Associated personUnder the UKBA, a corporate entity is also liable if a person associated with it bribes another person intending to obtain or retain business or a business advantage. The definition of “associated person” has a very broad scope, including not only the management and employees, but also agents and external third parties performing services for the corporate entity. In practice, this means that a corporate entity could also be liable for the actions of some of its suppliers, such as a building contractor who provides a facilitation payment to obtain a construction permit.

Adequate proceduresThe only defence available to a corporate entity is to show that it had “adequate procedures” in place to prevent bribery. This effectively creates a burden on corporate entities to ensure that their anti-corruption procedures are sufficiently robust to stop any employees, agents or other third parties acting on their behalf from committing bribery. The most important steps to take are set out in the Recommendations part of this guide.

Importance of geographic and sector perceptionWhen considering the adoption of adequate procedures which the UKBA requires, and whose adoption could also be crucial in local CEE proceedings, the risks and exposure of each individual corporate entity must be borne in mind.

According to the Corruption Perceptions Index 2011, prepared annually by Transparency International, countries in the CEE and in particular Russia are risky regions with a high perception of corruption activities.

The adequate procedures should be also based on the risks of the particular sector. According to the Bribe Payers Index Report 2011, also prepared by Transparency International, the most corrupt area is public works contracts and construction, the least corrupt areas being agriculture and information technology.

Corporate offence under the UKBA

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Russia

Bulgaria

Romania

Slovakia

Czech Republic

Hungary

Poland

United Kingdom

Germany

The Netherlands

Highly Corrupt Very clean

7

14

16

41

54

57

66

75

86

143

The perceived levels of public-sector corruption

Global Rank

* The 2011 Corruption Perceptions Index – http://cpi.transparency.org/cpi2011/



U.S. Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act of 1977 (the FCPA) is a United States federal law designed to combat the bribery of foreign public officials, especially by U.S. businesses. The FCPA was among the world’s first foreign bribery laws and, according to the TRACE Global Enforcement Report 2011, between 1977 and 2011 the U.S. authorities launched 468 foreign bribery investigations.

Violating the FCPA can trigger serious criminal and civil sanctions and, in recent years, the FCPA has become a major enforcement priority of the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC).

The FCPA contains two key provisions: the anti-bribery provisions and the books and records provisions.

Key aspects – prohibition on corrupt payments to foreign public officials

– requirement to maintain accurate books, records and accounts for companies registered with SEC

– extraterritorial reach for U.S. persons, including foreign issuers of securities registered with the SEC

Anti-bribery provisionsThe anti-bribery provisions of the FCPA make it illegal to make, offer to make, promise to make or authorize the making of any payment or gift of money or anything of value, directly or indirectly, to any foreign government official for the purpose of influencing or inducing misuse of the payee’s official position in order to obtain or retain business, to direct business to any person or to secure any improper advantage. Furthermore, these provisions prohibit a person from giving money or anything else of value to any person knowing that any portion of it will be used to make a prohibited payment. These prohibitions apply equally to the officers, directors, employees, agents and shareholders acting on behalf of any such corporate entity.

Books and records provisionsIn addition, the FCPA contains accounting and record-keeping provisions, often referred to as the “books and records provisions”. These provisions require that companies with securities registered under the Securities Exchange Act of 1934 (the Exchange Act) and their subsidiaries keep records reflecting the status of their assets and maintain internal controls to assure that transactions are executed in accordance with management’s directions. Transactions must be properly recorded, and records of the company’s assets must be kept accurately. An SEC-registered parent may be subject to books and records liability if it submits consolidated financial statements that include a foreign subsidiary’s improper accounting.

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Parties affected by the FCPAThe FCPA generally applies to U.S. individuals and companies, companies with securities registered under the Exchange Act, and anyone who takes an act in furtherance of a prohibited payment while in the territory of the U.S. Generally, corrupt payments by foreign subsidiaries of U.S. companies do not automatically violate the FCPA if they take place wholly outside the territory of the United States. However, where the U.S. parent becomes aware of improper conduct by its foreign subsidiary, whether controlled or non-controlled, the parent should take immediate action to repudiate and stop the improper conduct, and a failure to do so may be viewed as an implicit authorisation of the conduct. Similarly, a foreign subsidiary may be subject to liability in the U.S. if it is determined to be acting as an agent of the U.S. parent.

The DOJ has emphasised the commitment of the United States to combat global corruption and thereby create a level playing field for U.S. businesses. The DOJ has also stated plainly its willingness to enforce the FCPA against foreign-owned companies, just as it does against American companies. Recent actions against foreign individuals and entities with minimal links to the U.S. have demonstrated clearly the expansive view taken by the DOJ with respect to its enforcement activities.

The FCPA provides several limited defences that may be used to excuse an improper payment, such as making the payment in accordance with a foreign country’s written laws, for a reasonable, bona fide expenditure (reimbursement of travel expenses), or if it was made in a “good faith” (e.g., the company took reasonable steps to prevent its agent from making improper payment out of funds given by the company to the agent).

There is a growing trend by the DOJ to expand the application of the FCPA. For example, U.S. authorities have claimed jurisdiction over an alleged bribery scheme on the basis that two foreign citizens sent emails relating to bribe payments to the U.S., and the bribe payments were made using a U.S. bank account.



Types of actions covered

Apart from bribery, there are also other offences for which corporate entities can be held responsible. The schedule below lists the various white-collar offences and whether corporate entities are liable in the respective countries and

under the UKBA and FCPA. Note that in the U.S. and the UK, other offences are covered by separate U.S./UK laws which are outside the scope of this guide.

Action Separate criminal offence for which corporate entity could be held responsible

Country: BU CR HU PL RO RU SK UKBA FCPA

Bribing public officials

N Y Y Y Y N Y Y Y

Bribing private persons

N Y Y Y Y N Y Y N

Bribing international public officials

N Y Y Y Y N Y Y Y

Indirect bribing N Y Y Y Y N Y Y Y

Bribe taking N Y Y Y Y N Y Y N

Improper book-keeping

N N Y Y Y N Y N Y

Machinations in insolvency proceedings

N N Y Y Y N Y N N

Fraud N Y Y Y Y N Y N N

Tax Fraud N Y Y Y Y N Y N N

Fraud or other machinations in public procurement

N Y Y Y Y N Y N N

Money laundering N Y Y Y Y N Y N N

Damaging of financial interests of the European Union

N Y Y N Y N Y N N

Ecological offences N Y Y Y Y N Y N N

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Here is an overview of sanctions applicable to corporate entities in various countries and under the UKBA and FCPA.

Bulgaria – administrative fine of up to approx. EUR0.5m

Czech Republic – fine of up to approx. EUR58.4m – winding-up – foreclosure – forfeiture – prohibition from certain business activities for one to twenty years – disqualification from public procurement for one to twenty years – prohibition of receiving grants and subsidies for one to twenty years – public release of the court’s judgement

Hungary – fine up to three times the benefit achieved or aimed to achieve with the criminal offence, but at least approx. EUR1,700

– winding-up – disqualification from public procurement for one to three years – prohibition on receiving grants from national or international organisations for one to three years – prohibition from certain business activities for one to three years

Poland – fine from approx. EUR250 to 1.25m (but no more than 3% of the yearly income) or from approx. EUR250 to 1.875m in case of repeated crime

– forfeiture – ban on marketing and advertising its business activity, products or services – prohibition on receiving grants, subsidies or any other form of public support – disqualification from public procurement – prohibition on receiving grants from international organisations – public release of the court’s judgement

Romania – fine of up to approx. EUR200,000 and complementary sanction consisting of: – winding-up – prohibition from certain business activities – closing of the company’s working units – disqualification from public procurement – public release of the court’s judgement

Russia – administrative fine of threefold, thirtyfold or a hundredfold the amount of the bribe itself

Slovakia – a fine of up to approx. EUR1.7m – forfeiture of property acquired as a result of giving or taking a bribe

UKBA – unlimited fine

FCPA – for wilful violations of the FCPA’s anti-bribery provisions, companies may be fined up to USD2m (per violation) or, where the violation results in pecuniary gain or loss, the greater of twice the gross gain or twice the gross loss

– for wilful violations of the FCPA’s books and records provisions, companies may be fined up to USD25m (per violation)



Examples

A product manager based in Poland is invited by a potential joint venture partner based in Romania to visit a production unit in Bucharest. While in Romania, the product manager is treated to lavish entertainment and is accommodated in a five star hotel. He is also taken on several non-business related trips around the region. It is made clear to him that if he recommends the joint venture to his company, he can expect such hospitality on a regular basis.

If the product manager accepts this arrangement, he will be guilty of passive bribery in Poland and in Romania.

The CEO of a group based in the UK makes a payment to a municipal officer in Slovakia to obtain planning permission for the construction of a factory which would not otherwise have been granted. To conceal the bribe, the payment transits through the Slovak official’s American bank account.

The CEO is guilty of active bribery of a public official in the UK and in Slovakia, and the UK group could be guilty of a failure of commercial organisation to prevent bribery under the UKBA.

In addition, because the payment has transited through a U.S. bank account, the CEO has committed an offence and could be prosecuted under the FCPA.

A U.S. pharmaceutical company has a subsidiary in Prague that has difficulties obtaining permits and other government approvals for distribution of medication in Bulgaria. The subsidiary is approached by a Bulgarian consultancy firm which has good contacts at various state agencies and proposes its services for a 15% commission on sales of medication in Bulgaria.

Depending on the legality of the actions of the Bulgarian consultancy firm, the Czech company as well as its U.S. parent could be held responsible for indirect bribery if any payments are made to public officials in connection with the permits or government approvals and the U.S. parent is deemed to have authorized or had knowledge of such payments. In these situations it is crucial to perform due diligence on the contract with the agent and the agent itself.

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Recommendations

The most important step to take is to put in place adequate procedures to prevent bribery within the corporate entity. Governments in the CEE have not prepared any guidance on adequate procedures, so when considering what is adequate, the UK government’s principles set out below could provide very useful guidance on the implementation of adequate procedures.

Guidance on adequate procedures – Proportionate procedures – depending on the industry in which the corporate entity operates or country of its main business activity

– Top-level management commitment – engagement of senior management is essential in setting the tone of an organisation

– Risk assessment – to design appropriate anti-bribery procedures, corporate entities must assess the risks they face

– Due diligence – corporate entities are expected to conduct a due diligence of those who might perform services on their behalf and, as a result, it is crucial to review all the existing supply agreements, and, if possible, to require the suppliers to sign certifications of compliance with the anti-corruption policies and add anti-corruption provisions in the supply agreements themselves

– Communication – corporate entities must ensure that their policies are clearly communicated, both internally and, where appropriate, externally

– Monitoring and review – corporate entities are expected to engage in a process of continuous improvement, whereby existing procedures are periodically assessed to ensure that they are fit for purpose

Key aspects – adoption and due implementation of the adequate procedures

– conduct due diligence on sales and marketing agents, consultants and distributors

– maintain controls over and records of gifts and hospitality

– maintain controls over and records of all other voluntary payments, such as charitable donations



Due diligence of contractual relationshipsForeign corporate entities and their subsidiaries often have to enter into contractual relationships with local agents and consulting firms to develop their businesses. The more corrupt the local market is or is perceived to be, the more careful a corporate entity must be. It is crucial to use a lawyer with knowledge of both the local laws and applicable provisions of UKBA and FCPA to review relationships with local agents and other business partners.

The review should consist of: (i) a background check consisting of reviewing references, ownership structure and individual directors of the local agent; (ii) having a clear and precise structure of fees and services provided by the agent, including reviewing whether the fees are reasonable and commercial; and (iii) including a clear anti-bribery policy in the contractual relationship and requesting evidence of the agent’s own anti-bribery measures and procedures.

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Conclusion

The implementation of adequate procedures to prevent bribery is the only possible defence under the UKBA, and even though they are not explicitly required in any of the CEE jurisdictions, the absence of adequate procedures could be considered an aggravating circumstance when determining a monetary penalty or other sanctions.

Corporate entities, regardless of the country of their incorporation, should adopt a risk-based approach to managing bribery risks, and the procedures adopted by each of them should be proportionate to the risks they face.

CEE OFFICES

*Associated office

Warsaw

Budapest

Bratislava

Bucharest*

Moscow

Prague

Allen & Overy´s contributing offices



Key contacts

Balázs Sahin-TóthCounsel – Budapest Tel +36 1 429 [email protected]

Markéta CísařováSenior Associate – Prague, CEE Coordinator Anti-bribery and Corruption Tel +420 222 107 [email protected]

Alexandra FasakhovaPartner – MoscowTel +7 495 662 [email protected]

Radu Diaconu Senior Associate – BucharestTel +40 31 405 [email protected]

Martin MagálPartner – BratislavaTel +421 2 5920 [email protected]

Jaroslaw IwanickiPartner – WarsawTel +48 22 820 [email protected]

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Budapest

Allen & Overy (Czech Republic) LLP, organizační složka V Celnici 4 110 00 Prague 1 Czech Republic

Tel +420 222 107 111

Prague

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White collar crime in the CEE - Allen & Overy 5 CEE corporate entities and their responsibilities The legal definition of bribery and persons who can be held responsible for it are