Pitfalls and precautions around high bribery risk jurisdictions

Operating in high-risk countries, especially through intermediaries or third party resellers, will expose banks and other financial institutions to the danger of prosecution under the Bribery Act – unless they take adequate precautions to prevent becoming involved in corruption

UK pharmaceutical group GlaxoSmithKline (GSK) has admitted that it is looking into allegations of bribery in Poland, Iraq, Jordan and Lebanon. These admissions come only months after the company became embroiled in a bribery scandal in China, where it was accused of funnelling as much as £320 million to doctors and government officials to boost sales. The unique point about the GSK incident is that it is the first (announced) investigation into a major corporate where alleged corrupt practices took place after the UK Bribery Act came into force in July 2011.

Although there is no evidence that GSK has not implemented adequate procedures as required by the Bribery Act, practitioners and experts have widely commented on the seeming apathy around the Bribery Act in the commercial world. If sophisticated institutions have not put in place adequate procedures to prevent bribery, it begs the question: have they put in place adequate procedures to prevent other types of crime?

It is interesting to note that there is ongoing consideration to extend the Bribery Act to include a new offence for corporates that fail to prevent financial crime committed by their employees. Financial crime is defined widely in this context and covers "crimes of dishonesty or fraud" – money laundering, counterterrorism financing, financial sanctions and benchmark fixing are just a few examples. As with the corporate bribery offence, the failure to prevent financial crime, if introduced, would be one of strict liability, with the only defence being the existence of adequate procedures.

So, how can institutions protect themselves against the risk of committing bribery or financial crime? Implementing adequate procedures is the answer. The UK Ministry of Justice (MoJ) guidance on adequate procedures for anti-bribery relates to corporates, while the Financial Conduct Authority (FCA) and Joint Money Laundering Steering Group guidance on financial crime and money laundering relates to financial institutions. But mere knowledge of adequate procedures isn't enough – genuine implementation is needed and this requires a thorough risk assessment of business operations, the creation of bespoke procedures and, finally, implementation throughout the institution's global operations.

Operating in red flag jurisdictions poses greater challenges and requires more robust procedures, in order for these to be seen as "adequate". In fact both the MoJ and FCA guidance stress the importance of "proportionality" and this can mean that more rather than less is required in higher risk locations. Such measures must address cultural challenges in differing locations, for example the regularity of facilitation payments in many countries, despite their criminalisation under the Bribery Act.

As GSK may well have discovered, the health care sector faces particular problems in red flag jurisdictions. With many transactional counterparts, such as hospitals and medical practitioners, being classified as "public officials", and agents and distributors deemed to be "associated persons", companies are increasingly vulnerable to prosecution under the Bribery Act if they fail to implement a robust compliance programme.

Added to this difficulty is the sales-driven nature of some sectors, including the pharmaceuticals sector, and therefore the need to rely on local third parties to drive the business. Such agents' questionable sales practices are often well-embedded and therefore harder to influence and monitor.

In order for these companies to meet such challenges in emerging markets, the focus must be on their sales agents and distributors, with an enhanced due diligence – proportionate to the risks raised by the location – prior to the undertaking of any relationships. The monitoring of agents' profit margins is important: the higher the margin, the increased risk of the payment of bribes. A move away from commission-based remuneration is also important, with payment in this way adding a heightened chance of corrupt practices due to the added pressures on the agents.

These precautions, coupled with signed anti-corruption undertakings, right to audit clauses and ‘on the ground' induction to ABC (anti-bribery and corruption) policies will work to reduce the risk of bribery in red flag jurisdictions.

The case of GSK has served as a reminder to institutions that regulators are serious about prosecuting economic crime. It comes at a time when UK regulators have been empowered to prosecute crime with a new tool, deferred prosecution agreements, in their armoury and the power to impose a 400% fine, as well as increasing co-operation from regulators overseas.

It is not adequate for London headquarters simply to pay lip service to adequate procedures – they must implement adequate bespoke procedures across the global business. Where many institutions are failing is in grasping a genuine understanding of the red flag jurisdictions in which they operate. But every stage of the implementation of adequate procedures – risk assessment, industry analysis, training and continued monitoring – must be carried out with an understanding of jurisdictional challenges at its core.