Marketing Fear

Britain is cracking down on corruption among British companies worldwide, and its efforts could have a far-reaching impact on Hong Kong and mainland firms.  After years of legislative inaction against corporate corruption, Parliament in April passed the 2010 Bribery Act – the world’s strictest on bribery. The legislation affects not only British firms but any company that conducts any part of its business in the country, as well as those that provide services to British companies.  This law is similar to the Foreign Corrupt Practices Act in the United States which not only applies to U.S. Companies but also to companies with ties in the U.S as is mentioned below.

“It is a very wide net – particularly when you look at Hong Kong, with the historic British connection,” said Richard Tollan, a partner at law firm Mayer Brown JSM and a former detective inspector in Hong Kong’s commercial crime bureau.  It could be a wide net as countries like England, who are broke and are at the same time trying to level the playing field for domestic firms, use laws like this to get a piece of the action without the specter of raising taxes.  It also is conveniently referred to “as a very wide net” by lawyers like Mr. Tollan who often use fear to generate additional billings.

“It’s a hot topic among professionals and the more astute corporates in Hong Kong,” Tollan said of the new law. “It is not unheralded – it comes in the wake of three or four years of Hong Kong attuning itself to increased answerability to long-arm overseas jurisdictions for domestic bribery.”  This is even more reason to move corporate entities and headquarters to Hong Kong where they are out of the “long-arm” reach of nearly bankrupt countries like the U.K. and the U.S.

Until the British law was passed, the United States had the strongest anti-corruption legislation in the world in the shape of the Foreign Corrupt Practices Act, or FCPA. It may appear to govern only US companies, but in recent years it has affected a number of non-US firms. German carmaker Daimler-Chrysler, Berlin-based Siemens and Britain’s BAE Systems have all agreed to settlements after being investigated for bribery by authorities in the US and other countries.  Look for the US to increase FCPA enforcement and proceedings as another tool to collect revenue and supposedly level the playing field for domestic manufacturers.

Britain’s Bribery Act has upped the ante, no longer limiting the definition of bribery to foreign officials. More significantly, the legislation creates a separate offence for a company that fails to prevent a bribe being paid for or on its behalf.  “As compliance officers, and counsel, there is a positive obligation on corporates to put in place adequate procedures designed to prevent people from committing bribery,” Tollan said.  I’d guess that their firm puts these procedures in place.

Firms can defend themselves against bribery charges if they can show that they have “adequate procedures” in place to prevent bribery.  “Suddenly, these corporates are taking a look at themselves and their policies. That’s what is causing the interest among the savvier corporates,” Tollan said. “There is [now] a positive obligation on corporates to put in place adequate procedures specifically designed to prevent people being involved in corrupt practices.”  Hong Kong and mainland firms should look at their procedures, as they may find themselves subject to the British legislation, Tommy Helsby, chairman of Eurasia at global risk consulting firm Kroll, said.  I think they used “procedures’, ‘in place’ and ‘adequate procedures’ more times than was necessary.

A large Chinese manufacturer with a European marketing office in Britain could fall under the law’s jurisdiction, he said. Hong Kong firms that act as agents for foreign corporations wanting to source manufacturing in China should also be aware of the new law, Helsby said.  I don’t believe that Chinese companies that are domiciled in the mainland are subject to foreign judgments in the U.K.

“I think they should be expecting to find a lot more concern on the part of their foreign clients about how they do business. And it will become a competitive advantage to show that you have a robust compliance system on bribery. Because if I’m Marks & Spencer or Primark, a big UK purchaser of Chinese manufactured goods, I want to make sure that I’m not caught out by the actions of my agent.  In my humble opinion it will be difficult to extend the obligation to the acts of independent agents, especially when there are contractual agreements between the company and agent which outline responsibility and indemnify the company against their illegal acts.

“If I’m looking at two intermediaries, and one is talking about the UK anti-bribery, and another one is busy winking about `getting the job done’, I know which one I’m going to choose,” he said.  Winking about getting the job done is not acceptable anymore in China and if your employees or agents tell you otherwise than you should replace them.

So far, it’s unclear how much outreach has been done to spread the word among local companies in Hong Kong. The British government is expected to publish guidelines for “adequate” anti-bribery procedures. Many companies are waiting for those guidelines before moving ahead, Tollan said.

But for many Hong Kong companies, anti-corruption procedures could be an entirely new concept.  A survey released in April of top firms in Hong Kong, Singapore and South Korea found nearly half “failed to display any evidence of taking significant steps to counter bribery”. Experts in Responsible Investment Solutions studied anti-bribery policies of nearly 2,000 FTSE All-World Developed Index firms for the survey.

A spokesman for the Hong Kong Trade Development Council, the statutory body tasked with connecting companies with opportunities in Hong Kong and on the mainland, said it had not yet issued any guidelines to local companies.

“Our London office is monitoring the situation concerning the introduction of the anti-bribery bill in the UK and whether there is any possible impact on Hong Kong companies doing business with the UK,” the spokesman said.  The danger of running afoul of this legislation could hurt business not only in Britain, but also in the European Union. The EU has a directive banning companies convicted of bribery from doing business with its governing body.

“The potential liability of the senior executive to be sent to jail, it’s like a rifle shot,” Helsby said. “If you’re hit, you’re dead, but you have some chance of dodging the bullet. The EU procurement issue is a like an artillery barrage. The damage is much broader. The breadth of that ban could be catastrophic.”  Senior executives going to jail for unknown acts of their agents or employees, not likely and it is irresponsible to use fear as a means for generating revenue, especially when prudent financial decisions and good management are what have always led foreign corporations to success in this part of the world.  Is it a good idea to discuss this with your lawyer or advisor when the final regulations and guidance are published – yes, but, I wouldn’t lose any sleep worrying about going to jail.