By Mary Young (partner) and Laurence Clarke (senior associate) in the civil fraud team at law firm Kingsley Napley LLP
Bribery is often thought of in terms of envelopes stuffed with cash passed under the table in secret meetings. Whilst this no doubt still goes on, it is also the case that civil bribery can be committed without any intention to bribe. The courts have found even seemingly mundane transactions to constitute civil (as opposed to criminal) bribery, the effect of which can be significant. In civil bribery proceedings a successful claimant may obtain an order that the defendant repay any money/assets received and/or pay damages. Given the gravity of the penalties, companies and their board members would be wise to understand the circumstances where civil bribery might apply and that their secret weapon in the fight against a related claim can in fact be found in the most routine of places: the board meeting and, more precisely, the declaration of interest.
So what exactly is civil bribery, how it is established, what is its impact and what can companies and their directors do to prevent it?
What is civil bribery
Claims for civil bribery (a form of commercial fraud) can be brought in the civil courts of England & Wales by a claimant seeking to recover losses arising from an alleged bribe (i.e. a victim) or to void a contract that was entered into following the payment of an alleged bribe (i.e. a counterparty).
A person that is found liable in civil bribery is not necessarily also criminally liable and so may not be prosecuted by the police. However, criminal liability should always be considered by a defendant to a civil bribery claim.
Often, it can come as a surprise to company directors that they can be liable for the civil wrong of bribery when they had no actual intention of involving themselves in any wrong doing. This is because liability in civil bribery can arise in a wide set of circumstances, including even receiving an introducer’s commission on an investment. To be liable in civil bribery there simply needs to be benefit to a recipient which has created a conflict of interest which crucially has not been disclosed.
To explain briefly, the elements required to constitute a civil bribe are:
- A relationship between an agent and a principal (such as a director and a company);
- A benefit to the recipient (usually money but it has been found to be something as innocuous as a job offer or a signing-on bonus);
- Knowledge by the briber that the recipient is an agent for the principal; and
- Secrecy, where the principal is unaware of the benefit.
Applying this in a company/director context, a director may be liable if they receive a benefit (such as a commission) which puts them in a conflict of interest with the company if they have not disclosed that potential conflict to the board.
To determine whether a benefit might give rise to a conflict of interest, the receipt of the benefit should be looked at from the point of view of an outside or lay person. Would an outsider think there is a potential risk (whether there is or not does not matter) that the director could be influenced in their role as an agent of the company by receiving that benefit. If so, the receipt of that benefit could amount to a bribe, even if there was no actual intention to influence the recipient.
To use a worked example, taken from a recent Court of Appeal decision, an investment manager of a fund (the agent/principal relationship) was found liable in bribery for receipt of the proceeds of sale (the benefit) of a company he owned. This was treated as bribery because the purchaser of the company was a counterparty to contracts to which the investment manager had committed his principal (meaning the counterparty knew about the agent/principal relationship), and the principal had not been told about the sale (the receipt of the proceeds of sale was secret).
This is significant is because a claimant who successfully brings a claim in civil bribery can entirely unwind any contractual relationship that may have been “tainted” by the bribe, and seek to recover losses from the paying party or the recipient of the bribe.
In addition, the claimant may seek to recover the value of the bribe from either the payee or the recipient. This is even the case where the payee of the bribe believes the principal has been informed about the payment. It is the payee’s responsibility to check whether the principal is aware of the intended payment. It is not enough to simply rely on the recipient’s confirmations.
As such, a principal could end a contractual relationship with a counterparty if it transpired that the counterparty had paid an undisclosed commission to the agent of the principal. That principal could seek to recover any losses from the counterparty and require the counterparty to pay to it an amount equal to the commission paid to the agent.
This might seem severe, but liability for civil bribery has been developed by the courts with the intention of being punitive in nature so as to act as a real disincentive for corrupt practices.
In the example above, the contracts were deemed void by the Court. The investment manager and the counterparty were both found liable for the sums paid under the contracts, plus interest.
What can be done?
As secrecy is a necessary part of civil bribery, it makes sense that disclosure is the primary defence. If the agent or payee has disclosed sufficient information to allow its principal to provide fully informed consent (and if consent is given) then there is no secrecy in the arrangement and there can be no finding of civil bribery.
Guidance and education by senior executives to encourage directors to disclose interests in transactions is therefore crucial. Board members should routinely disclose financial interests, shareholdings and connections with external entities to ensure that any potential conflicts are brought to light and are open for examination during decision-making processes.
Disclosure at board meetings is also beneficial to the company as it is pivotal in promoting transparency, accountability, and ethical decision-making within organisations. It will ensure that the board is aware of any payments the company is making to third parties, or any payments being received by its directors and other agents. In turn this helps to protect and preserve the agreements it is entering into, and avoid circumstances in which they could be set aside for bribery. In addition, having a record of what has been disclosed to the board could also potentially safeguard the company from claims in vicarious liability should a director have failed to disclose an interest when given the opportunity.
This is in fact an ESG issue. Good corporate governance (the often-overlooked G in ESG), and responsible business practices will go a long way to promoting open discussions and disclosures about interests at board level and ultimately help in the fight against bribery and corruption.