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Bribery Act could lead to money laundering 'trap', warn lawyers

Mon, 23 May 2011 11:48 GMT

Source: Content partner // Thomson Reuters Accelus

A pile of one pound coins is seen in central London 17/06/2008 REUTERS/Toby Melville

Money laundering legislation could be used to "trap" UK firms in instances where prosecutors are unable to take full advantage of the stringent measures enacted by the Bribery Act 2010, according to lawyers.

These concerns have arisen following assertions by Richard Alderman, director of the Serious Fraud Office, last month that the crime-fighting body would increasingly use the Money Laundering Regulations to prosecute rogue directors who engaged in bribery. Arun Srivastava, head of Baker & McKenzie’s financial services group, said he believed that the controversy which had surrounded the act, which will take effect in July, had obscured the fact that many firms might now have greater exposure to prosecution for money laundering. In a client briefing the law firm pointed to the recent SFO case against MW Kellogg Limited which saw the firm hit with a £7m fine after its overseas subsidiary was found to have engaged in bribery. The case has highlighted the risks UK firms face in receiving dividends from subsidiaries where the payments have been financed from unlawful activity. The SFO brought the case against Kellogg under the Proceeds of Crime Act 2002.

Baker & McKenzie said that the case demonstrated that firms' exposure under PoCA could be greater than under the Bribery Act; that liability arose whether or not the UK arm was involved in any wrongdoing or whether the event occurred in the UK. It added that the adequacy of the firm's procedures did not provide protection if a firm acquired knowledge or suspicion of unlawful activities engaged in by a subsidiary.

Srivastava suggested that it would be much easier to bring a prosecution under PoCA as opposed to the Bribery Act. He said that the SFO would only have to demonstrate that a UK company suspected that funds it had received were dirty rather than actually know for sure. "You don't have to show that the UK people were involved in the payment of bribes, you just have to show that they became aware of the fact there was an issue [with the funds]." He pointed out that suspect funds were often "flushed out" by internal or external auditors. This then created an issue, as once a firm became aware of the fact, it could be prosecuted under PoCA. The fact that firms could potentially have been receiving the benefits of a particular contract for many years was "problematic".

Mergers and acquisitions

He said that issues could also arise in an mergers and acquisitions context and firms needed to investigate thoroughly any new businesses they acquired. The PoCA offence could arise where a UK company acquired a firm that had been behaving corruptly. The fact that the UK arm could retain the economic benefits of that corruption would raise issues. Similarly, if due diligence uncovered knowledge or suspicion of that corruption then there could be culpability. Srivastava said that firms would have to consider "stripping out" the corrupt business from the "clean business". He warned that firms would still be vulnerable to money laundering prosecutions even if they followed the Ministry of Justice's adequate procedures guidance. The procedures, if maintained, offered a defence against bribery prosecutions, but they might not be enough to deflect action as Bribery Act liability only arose when the subsidiary acted for the account of the parent company. "It emphasises the need for stricter controls over the activities of subsidiaries particularly those in higher-risk jurisdictions," he explained.

Srivastava said that money laundering reporting officers needed to focus on the PoCA issue as it was quite possible they had been looking more towards the risks presented by clients when preparing for the Bribery Act. "There may be a need to broaden out where you think money laundering risk is coming from," he said. In a wide-ranging interview with Thomson Reuters last month, Alderman said that the UK's money laundering was a "tough" system with "fierce" offences that could be used to prosecute bribery and corruption. He said that the SFO had been looking at how it might use its powers for a while and pointed out that directors risked 14-year prison sentences for falling foul of the law.

The Bribery Act, which takes effect on July 1, introduces one of the toughest pieces of anti-graft legislation in the world. Wrongdoers face up to 10 years' imprisonment while firms could face unlimited fines.