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Fraud Insights: Bribery and Secret Commissions

Posted on 21 September 2020

In 2019, the United Nations estimated that US$1 trillion is paid in bribes across the globe every year. This extortionate amount highlights the level of corruption in today's world. In response to this, governments and legislatures have introduced (and strengthened already existing) anti-corruption and anti-bribery measures.

By way of example, since ratifying the Organisation for Economic Co-operation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1999, Australia has enacted a succession of anti-bribery reforms. 2020 is likely to be the year that the offences of failure to prevent bribery of a foreign public official and failure to prevent bribery within corporate organisations will be introduced through the Corporate Crime Bill. This Bill is expected to have extra territorial reach for Australian citizens and is a significant amendment to the current anti-bribery laws, reflecting the global crackdown on corruption.

Similar developments are being made across Sub-Saharan Africa, a region historically plagued by corruption. The United Nations Convention against Corruption (2003) has been widely ratified and was followed by the African Union Convention in Preventing and Combating Corruption in 2006, which acts as the regional anti-corruption legal instrument. More recently in Kenya, an amendment to the Bribery Act was tabled in June 2020. This amendment would have introduced more severe penalties for a bribery conviction, including an increased fine and a maximum prison sentence of ten years.

In Asia, the Malaysian Parliament has also recently amended its anti-corruption legislation, the Malaysian Anti-Corruption Commission Act 2009, establishing a new corporate liability offence for corruption in 2018. This new offence has adopted some of the key features of the similar offence under the Bribery Act in the UK (see below). 

This piece will specifically examine the corrupt practice of bribery, which is the giving or soliciting of an advantage, financial or otherwise, in order to influence the receiver to perform their functions or activities, or to reward that person for having already done so. In the UK, bribery is both a criminal offence under the Bribery Act 2010 (the "Act") and a civil wrong under English common law.

The Bribery Act 2010 – Criminal Law

The main offences set out by the Act are contained in sections 1, 2, 6 and 7. Under sections 1 (bribing another person) and 2 (being bribed) of the Act, it is an offence to: promise, offer or give, or request or agree to receive or accept a financial or other advantage, in connection with the "improper performance" of a position of trust, or a function that is expected to be performed impartially or in good faith. Section 6 of the Act makes it an offence to promise, offer or give an advantage to a foreign public official, while section 7 provides that corporates can be found liable for failure to prevent bribery by a person associated with the organisation (although it is a defence for the organisation to prove it had in place adequate procedures to prevent such conduct). The maximum sentence under the Act is ten years imprisonment and/or an unlimited fine.

It is worth noting that the Act has extra territorial reach and these offences also apply to acts or omissions which take place outside the UK where the person offering the bribe has a 'close connection' with the UK. The offence relates to employees in the UK and both private and public office holders.

Deferred Prosecution Agreements ("DPA"s) are a further tool introduced in the UK in 2014. A DPA is an agreement between the prosecutor (the Crown Prosecution Service or Serious Fraud Office) and the defendant (an organisation) to suspend criminal proceedings provided the defendant meet certain conditions. The organisation must carry out the agreed terms, which could include paying a financial penalty or compensation, disgorging profits, implementing a compliance programme and/or co-operating with the prosecutor.

Bribery/Secret Commissions – Civil Law

For the purposes of civil law, a bribe was defined by Steel J in Petrotrade Inc. v Smith [2000] 1 Lloyd's Rep 486 as "the payment of a secret commission, which only means: (i) that the person making the payment makes it to the agent of the other person with whom he is dealing; (ii) that he makes it to that person knowing that that person is acting as the agent of the other person with whom he is dealing; and (iii) that he fails to disclose to the other person with whom he is dealing that he has made that payment to the person whom he knows to be the other person's agent".

This definition of the payment of a bribe or secret commission encompasses a broad range of practices, and generally covers the act of a fiduciary or agent receiving a payment without the informed consent of the principal. The payment does not need to be proved to have been for a corrupt purpose nor does it need to be proved that there was dishonesty or that the agent changed their behaviour upon receipt of the payment. It is also sufficient if the principal has some awareness of the agent's breach of fiduciary duty and does not need to know about the payment of the bribe itself. The wronged principal can seek remedies as against the agent who paid the bribe, the briber, and/or the agent who received the bribe, the bribee.

Principal as against the briber

Where a bribe or secret commission has been paid, the principal is usually entitled to seek the discretionary remedy of rescission. This would void the transaction which is tainted by the bribe, although the wronged principle can still claim the amount of the bribe from the briber or recipient despite the contract being rescinded. Damages can be sought as to the value of the bribe or secret commission paid and any damages for losses incurred.

Principal as against the bribee

An agent owes a fiduciary duty to its principal. The key duties owed by the agent are the 'no conflict' (not to place itself in a situation where its own interest conflicts or may conflict with the interests of the principal) and 'no profit' (not to profit from its position at the expense of the principal) rules. The act of receiving the payment of a bribe is a breach of these duties. The principal can seek the recovery for the value of the bribe and any losses suffered.

The Supreme Court in FHR European Ventures LLP and others v Cedar Capital Partners LLC [2014] UKSC 45 confirmed that a bribe or secret commission received by an agent in breach of his/her fiduciary duty attracts a proprietary remedy. A proprietary remedy enables the principal to trace the proceeds of the bribe or secret commission into other assets and investments. If the bribe or secret commission has been invested and its value has increased, the principal can also claim for the increase in value. A proprietary claim also gives priority to the principal over unsecured creditors in the event of the agent's insolvency. 

Martin Shobbrook, a Partner in the Fraud Defence and Business Disputes Team says:

"Bribery is often a complicated area involving civil and criminal issues arising from the same set of facts. An organisation may suspect it has fallen victim to wrongdoing through the payment of a bribe, which needs to be investigated further. After the investigation has been undertaken, the organisation should carefully consider its potential criminal exposure under the Bribery Act 2010 as well as its potential ability to recover losses from the wrongdoers through civil claims. The organisation will need to seek legal advice on its position, and individuals within the organisation potentially connected with or aware of the wrongdoing will need to seek separate legal advice. Whilst interests may be aligned initially, it is likely that all parties will need to consider their position independently. This is particularly the case where there may be parallel criminal and civil proceedings."       

Lily Davies, a Trainee Solicitor in the Fraud Defence and Business Disputes Team says:

"In Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83 the Court of Appeal examined the scope of the fiduciary duty owed by an agent to its principal. The Court held that there was no breach of fiduciary duty where the recipient of the secret commission. Here, Medsted failed to inform its principal of the amount of the commission. If the principal knew of the commission but not of the exact amount, then there was no breach, therefore limiting the scope of the fiduciary duty. In other circumstances, the Court may well consider whether the commission under consideration was "competitive" or reasonable, whether any implied representations were made in relation to the size of the commission or whether the parties were sophisticated or vulnerable. Where an unsophisticated and vulnerable party's agent receives a significant commission from another party, the Court may well consider that the exact amount of the commission should be disclosed to ensure the principal has given its informed consent to the transaction." 

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