Anti-corruption

The Small Business, Enterprise and Employment Act

One of the last acts of parliament was to pass the Small Business, Enterprise and Employment Act (“the Act”), which received Royal Assent on 26 March 2015.

Ostensibly, the primary purpose of this piece of legislation is to encourage entrepreneurship in the UK by helping small businesses to compete, grow and innovate. However, the Act itself is somewhat of a legislative hotchpotch, addressing various issues discussed by the government in recent years, ranging from insolvency and corporate transparency to employment law.

The main effects of the legislation are to:

  • Enhance the transparency of the ownership of UK companies;
  • Improve the ability of small and medium-sized businesses to access finance;
  • Reform aspects of the UK restructuring and insolvency regime.

From an anti-corruption perspective, the Act is very good news. In particular, provisions that deal with corporate transparency and disqualification of directors are likely to be of great assistance to those seeking to trace ownership of companies, as well as clamp down on corrupt practices. These aspects are discussed below.

Beneficial Ownership

The Act introduces some important changes to the Companies Act 2006, which includes a requirement for companies to identify persons with “significant control” over a company and also to keep a publicly available register of those persons. “Significant control” is defined as having more than 25% of a company’s shares or 25% of the voting rights or the rights to appoint of control the majority of the board of directors or the company. The significant control can also be through a partnership or trust. Further guidance from the government on the definition of “significant control” is expected by October 2015.

Furthermore, the measures also impose a proactive disclosure obligation on companies and individuals to investigate and register the details of persons with significant control on the appropriate company register. Once enacted, this requirement will apply to most companies. Listed companies are considered exempt on as they must already comply with certain disclosure obligations.  Limited Liability Partnerships are also exempt, although it is expected that the requirements will be extended to them also.

The register of persons with significant control over the company will include the following information:

  • Name, address, and date of birth (although this will be protected from disclosure to the public – thereby making identity theft more difficult)
  • Nationality – or, if an entity, the law under which it is governed.
  • The date on which the person become a beneficial owner, and the nature of their control or interest.

A company can impose sanctions if a person with significant control does not comply with the disclosure obligations. The Act also provides for criminal penalties for the company, its directors, secretary, and persons with significant control if they do not comply.

Corporate Directors and Shadow Directors

 The Act makes it much harder for an individual who has committed misconduct to act as a director. New grounds for disqualification have been introduced into the Company Directors Disqualification Act 1986, with the effect that the Secretary of State can now apply for a disqualification order if a director has committed certain offences outside Great Britain.

Section 87 of the Act introduces a new provision into the Companies Act 2006 that requires that all directors must be natural persons – it is now prohibited to appoint corporate directors. One year after the new Companies Act 2006 section coming into force, any corporate directors will cease to be directors. This should have the effect of reducing the number of companies, particularly shell companies, that are used for money laundering and criminal activity.

The Act also amends the Companies Act to provide that the general duties of directors also apply to shadow directors where and to the extent they are capable of applying.

Summary

Secret beneficial ownership of companies often hinders corruption and fraud investigations and claims.   The Act has created the world’s first public register of beneficial ownership of companies.   This is a historic achievement, although it will also increase compliance costs of private companies.

The timetable for implementation of the various measures under the Act is as follows:

  • Corporate directors to be prohibited, with exceptions (October 2015, with a 12 months’ transitional period for existing corporate directors).
  • Unquoted companies to keep a public register of people with significant control (January 2016). Details of these people to be provided to Companies House annually (April 2016).
  • Annual “confirmation statements” to replace annual returns (April 2016).
  • Private companies to be able to keep their statutory registers (e.g. registers of members and directors, and the new register of people with significant control) at Companies House, instead of having to keep their own registers (April 2016).
Asset recovery

Using insolvency powers to make claims for fraud: important Supreme Court decision

Companies are habitually used as part of a corruption scheme. Such companies often have only a single director, or a small number of directors, and are beneficially owned by the wrong-doers.

Insolvency powers can be effective tools to obtain compensation for victims of fraud or corruption, in the right circumstances.

A state could, for example, apply to Court for a liquidator to be appointed over a company used for corruption.

Amongst other things, a liquidator is entitled to bring claims against the company’s former directors for their wrongdoing in involving the company in a corruption scheme. Claims can also be made against third parties dishonestly assisting with or participating in that wrongdoing. The intention is to repatriate recoveries to the victim state (subject, of course, to the rights of any other creditors).

A liquidator’s claim against directors could be based on breaches of the obligations (“fiduciary duties”) they owe to act in the best interests of the company. Involving the company in criminal conduct, or other wrongdoing, is plainly a breach of those duties. There are various others claims that might be available, including the powers of an insolvency court to require those knowingly participating in fraud to contribute to the debts of the company.

The effectiveness and availability of the insolvency powers has been confirmed and emphasised by the much anticipated decision of the UK Supreme Court in Jetivia SA & Anor v Bilta (UK) Ltd (In Liquidation) & Others.

The Court decided:

  • Directors could not defeat a claim by liquidators on the basis that the wrongdoing of the directors should be attributed to the company, even where all directors and shareholders had knowingly participated in the wrong-doing. It therefore rejected the directors’ argument that the company was itself a “wrongdoer” and unable to sue its former directors because of the English law principle that a claimant cannot rely on its own illegal actions to make a claim.
  •  The English Courts have power to require fraudulent foreign defendants to contribute to the debts of an insolvent company.

However, the Court also emphasised that victims remain entitled to make a claim against a company that has been used to receive or launder the proceeds of corruption or fraud.   In those circumstances, the acts of the directors are attributable to the company they have caused to be involved in wrongdoing.

Click on the following for: our longer explanation of the case; the full judgment; and a summary of the case published by the Supreme Court.

Asset recovery

Privy Council Clarifies When Innocent Bank is Liable to Victims of Theft

To what extent must a bank make inquiries as to the commercial purpose of a transaction, particularly a transaction involving an offshore structure? And when is a bank liable to compensate a victim of theft for receiving funds deriving from stolen assets and using them for its own benefit?

These were the questions addressed in Credit Agricole v Papadimitriou by the UK’s Privy Council (the court of final appeal for the UK’s overseas territories and Crown dependencies, and for Commonwealth countries that have retained it as the ultimate appeal Court; its decisions are authoritative in English law as it comprises judges from the UK Supreme Court).

It is an important and potentially far-reaching decision.

An honest bank, which had unknowingly received stolen funds and used them to repay itself a loan made to the fraudster, was required to compensate the victim of the theft. It must do so because it failed to investigate the commercial purpose of the transaction under which it received the funds in circumstances where the unnecessarily complex structure and cost of the transaction were indicative of money laundering.

The impact of the judgment may reverberate around the risk departments of financial institutions (or, indeed, other regulated entities). It is relevant where stolen funds, or funds deriving from stolen assets, have been used, for example, (a) to discharge a loan or overdraft, (b) to pay substantial fees for a transaction or (c) where the bank has enforced security taken over a stolen asset.

The case concerned the proceeds of sale of artworks stolen from a private collector. It could equally apply to assets or funds stolen by a public official from a bank, or to bribes, which the bank has used for its benefit, for example to pay fees or to pay-off a loan or overdraft. A bank facing a claim from an aggrieved state could be found liable if it failed to seek an explanation when it had serious cause to question the proprietary of a transaction.

The rationale of the case is not, however, applicable where the Bank has simply received funds into a customer’s account and transferred them away on the customer’s instructions. In those circumstances, a claim would only be available against the Bank if it has been dishonest.

Finally, it is noteworthy that the Privy Council reached its decision applying the standards of money-laundering legislation in place in 2000, not the much higher requirements that apply under the present money-laundering regime.   In our view, this suggests that the courts will apply a much higher standard to more recent conduct.

Read the full article

Bribery

What are the civil claims and remedies for bribery in England?

In our latest briefing, we consider the various civil claims and remedies available to states that are victims of bribery. The law of England, and the law of other common law jurisdictions, allow states to pursue claims not only against the bribe-payer and recipient, and but also against those who assisted in the bribery scheme. Those “assisters” are not confined to companies or other legal entities used to pay or receive bribes, or to launder their proceeds, but could extend to advisers such as lawyers and accountants, or to financial institutions. Depending on the type of claim deployed and the circumstances, a state can seek to recover the value of the bribe, the bribe itself or property acquired with it, or compensation for all of losses that have been suffered. There are also powers to rescind or terminate contracts with the wrongdoers.

The range of available claims and remedies inevitably creates complexity, and careful analysis of the facts is required to choose the right claim. Should a state terminate the contract and seek its losses for the other side’s breach or should it rescind the contract, putting each party back in the position they were in before the contract was agreed (less the bribe)? Where a bribe-taking public official has hidden his ill-gotten gains in inaccessible jurisdictions, are there any third parties who assisted his breach who would be susceptible for a claim? This note considers only the English position: there will be additional complexity, nuance and also opportunity if there are competing candidates for the applicable law.

Our briefing, “Civil claims for bribery”, appears here.

Anti-corruptionAsset recovery

International enforcement of English asset recovery judgments: an overview

Civil proceedings brought by the state are one mechanism to recover the proceeds of crime, or to claim compensation for corrupt acts: as discussed in our previous post Recovering the proceeds of corruption: an overview.

Typically, substantial corruption cases are international in scope and the proceeds of a corrupt transaction are often laundered through and to countries other than the victim state. This international context means that (1) there are a number of countries in which civil claims can be made; and (2) corrupt assets may be located in multiple countries. It is normally inefficient and costly to bring proceedings in each of those jurisdictions. Instead it is often preferable to make a single claim leading to a judgment which can successfully be enforced in each country where assets are located.

The English courts are an attractive jurisdiction for civil asset recovery cases, as they offer judgments which are enforceable and respected in many foreign countries. Cooley’s briefing “International enforcement of English asset recovery judgments” outlines and discusses the various routes to enforcement of an English judgment abroad. It is available here.

Bribery

Can I sue a bribing competitor in England?

Companies are competing to win a contract. One pays a bribe to exclude its competitor from the bidding process, or to win the contract. If caught, it faces prosecution under the UK’s Bribery Act 2010, as do its bribing directors or employees. The bribing company also risks termination of its contract and claims from its customer.

But could it also be sued by its aggrieved competitor for compensation?

In England, and other common law countries, the answer is yes. And the available claims are not limited to wasted bidding expenditure. Lost profits can also be recovered.

The issue was tested in England in the recent case of Jalal Bezee Mejel Al-Gaood v Innospec Ltd. The defendant, Innospec, had previously admitted paying bribes in criminal proceedings in both the UK and the US. It had also settled a civil claim made against it by a manufacturer of competing chemicals in New York.  The Claimant sued in England.  It lost the case on the basis that it would not have won the contract in any event.   But the case confirms that such a claim is viable.   Our fuller briefing on the case appears here.

Asset recoveryBribery

Who owns a bribe: the bribed public official or the defrauded state?

A public official receives a bribe to award a contract.  Does the bribe “belong” to the official or to the state that he or she represents?

The answer to the question can matter a great deal to the success of a claim. But the issue has been controversial and the answer was for a long time unclear in English law, particularly in recent years.

The English position has been conclusively resolved by the the United Kingdom’s Supreme Court.  It decided that the bribe belongs to the state. The decision ensures that English law is identical to other major common law jurisdictions.

This is important for a number of reasons:

  • First, if the official becomes insolvent, all of the funds can be claimed by the state in preference to the claims of other (innocent) creditors.
  • Secondly, if the funds are invested in assets that increase in value, such as property in a rising market, the state will be entitled to recover the entirety of those assets.  This means the state takes the benefit of the increase in value. In the absence of ownership, this would be more difficult, if available at all, because the increase in value is not itself usually a result of any wrongdoing.
  • Thirdly, claims based on ownership offer more effective mechanisms to trace and recover funds.
  • Fourthly, a claim by the state may be subject to less onerous requirements that claims must be brought within a certain period.
  • Fifthly, the state may be able to obtain better rates of interest on sums awarded to it. That can make a difference when bribes are substantial and uncovered only after a significant period of time.

Our fuller briefing on the English legal position, linking to the judgment, appears here.