The ABC’s of Anti-Bribery and Corruption for UK Investment Banks
Monday 3rd September 2018
What is Anti-Bribery & Corruption?
In order to understand the various Anti-Bribery and Corruption (AB&C) controls and systems in place within Investment Banks to combat bribery and corruption we must first look to define each and assess their overall impact.
‘Bribery’ relates to a transactional offence through which a person gives and receives an advantage (bribe) in return for a relevant function or activity to be improperly performed in breach of a relevant expectation. Bribery is considered to be a subset of Corruption, considered in the same bracket as embezzlement and illicit enrichment.
‘Corruption’ relates to the abuse of entrusted power with the intention of bringing about personal gain and is an issue more commonly associated with the governments and institutions of developing countries. This idea that the prevalence of corruption is linked to poor economic performance is one supported by a concept noted by Campos et al (1999) that corruption is a key topic on which governments are being judged; pointing to the downfall of administrations in Ecuador and Zaire in the late 1990’s as examples. It must be considered however that the real impact of corruption at this government level is met with some ambiguity by scholars who point to the ‘East Asia Puzzle’ of thriving economies of countries such as China and Vietnam which have consistently ranked amongst the most corrupt countries in the world according to Transparency International yet also rank highly among those with the highest rates of economic growth.
What are the laws currently in place to deal with AB&C?
The UK has seen relatively new developments in relation to regulations combatting AB&C with the Bribery Act introduced in 2010, brought in to take a tougher stance on bribery and corruption in the wake of criticism received by the UK government for its lack of adequate Bribery and Corruption laws. The Bribery Act widened the scope of bribery to include more general offences such as the offer or promise of a bribe and the request or receipt of a bribe.
The Bribery Act introduced new offences relating to the bribery of foreign public officials which do not require the public official to have acted improperly as a result of the proposed bribe. The Act also looked to tackle the problem of bribery within commercial organisations by making it an offence for organisations to fail to prevent bribery committed on their behalf; ensuring that organisations adopt adequate procedures to defend against such offences.
What are the Controls employed by Investment Banks to combat Bribery and Corruption?
To quote the FSA Handbook, ‘identifying and assessing bribery and corruption risk is a prerequisite for an effective AB&C control framework’, which for Investment Banks can be achieved by keeping in line with the 6 prevention principles outlined by the Bribery Act. The Bribery Act lays out the 6 principles to be considered when implementing an effective AB&C framework, namely: Risk Assessments, Due Diligence, Proportionate Procedures, Monitoring & Review, Top-level Commitment and Communication.
Risk Assessments often look at various factors contributing to the Bribery and Corruption risk present and vary from firm to firm in terms of both number and range. Firms each have their own interpretation of the factors driving exposure to Bribery and Corruption; for instance the jurisdiction a client operates in or politically exposed persons affiliated with a client are common factors considered to drive a firm’s exposure.
Further pre-emptive measures adopted by Investment Banks look to the need for due diligence when dealing with third parties as another key part in battling Bribery and Corruption. Due diligence allows firms to adopt a risk based approach when doing business with third parties and identify and monitor any potential areas of concern for the business relationship. The extent of potential exposure through third parties or ‘Associated persons’ could include intermediaries, lawyers or contractors working on behalf of the firm. For employees, checks can be carried out in a similar vein to reveal instances which may give rise to nepotism, with examples within Investment Banks looking to situations where banks have come under criticism for hiring the children of foreign political figures with the intent of securing new business for the firm in that region. One recent case involving Credit Suisse notes the bank agreed to pay $77 million to the US Department of Justice and the Securities Exchange Commission (SEC) in July 2018 in relation to bribery charges centred around the hiring and promoting of individuals connected to Asian government officials from 2007 to 2013 to win banking business in the region.
In-house controls for AB&C look to the training and procedures made available to employees to ensure staff competency and aid staff in their understanding of the risks they are exposed to. Ongoing training combined with policies and procedures which are clear and kept in line with regulation can help mitigate the risks brought about by employees with a greater exposure to bribery and corruption risk. The need for transparency within a firm’s policies and procedures also feeds into employee’s awareness of the rules around gifts and hospitality to ensure they are used for legitimate purposes. Firms typically implement controls to prohibit any gifts which may constitute a bribe and may involve limits or senior management approval to further mitigate the risk posed; one such example could look to employees gaining management sign-off ahead of a client engagement. Monitoring and review of procedures is considered another prevention principle which considers a firm’s current procedures against changes to the bribery risks posed and often involve formal periodic reviews of AB&C controls to ensure are both to date with legislation and effective.
The importance of Senior Management involvement cannot be underestimated when discussing the effectiveness of AB&C controls as these individuals are typically responsible for instilling a culture of compliance within the firm. Senior managers are tasked with evaluating the inherent risks present to the firm and implementing effective frameworks to mitigate these risks. Often governance will also take the form of committees or boards which review Management Information (MI) containing information on the risk of bribery and corruption in the absence of controls to identify areas for improvement. As part of Senior Management’s role in combatting Bribery and Corruption, Communication is of vital importance to emphasise the ‘Tone from the Top’ down to all employees to set a zero-tolerance stance and in terms of providing employees with a confidential means to raise concerns (“Whistleblowing”) of bribery. External communications which may include codes of conduct also act as reassurance to future clients and can provide a deterrent to individuals who seek to carry out corrupt practices through the firm.
Why are these controls so important to Investment Banks?
The importance of AB&C controls is emphasised by cases which show the ramifications for banks which fall foul to Bribery and Corruption scandals; one such example being a former London-based unit of the South African Standard Bank who in November 2015 agreed to pay £21.7 million in fines and compensation to the Tanzanian government and a further $4.2 million penalty to the SEC in the US. The initial $21.7 million meant Standard Bank met an offering for a first deferred prosecution agreement from the Serious Fraud Office (SFO) after being charged with failing to prevent bribery under the Bribery Act (2010).
The charges stem back to a bribery scandal in Tanzania through which the Standard Bank unit entered into a $600 million private placement of sovereign debt to finance Tanzanian government projects over a period of 5 years. The original fee proposed of 1.4% by Standard Bank was raised to 2.4% with an additional agreement to pay 1% to a local Tanzanian company (EGMA); of whom one of the shareholders was Harry Kitilya, head of the Tanzania Revenue Authority (Government tax agency). This new arrangement of fees led to $6 million being paid into a new EGMA account in March 2013; which had all but gone in the space of 10 days without a trace after four cash withdrawals of up to $1.45 million.
The incident was subject to an internal investigation from Standard Bank prior to being reported to the SFO; and has since been considered settled in light of the penalties and compensation orders issued to Standard Bank. The repercussions for Standard Bank in terms of the financial penalties and reputational harm from the incident make it clear why effective anti-bribery and corruption controls are necessary to minimize a firm’s exposure to bribery and corruption risk.
What remedial action can be taken by Investment Banks who fall foul of Anti-Bribery and Corruption requirements?
Wolfsberg AB&C Guidance (2017) states that Financial Institutions should look to take individual action against violations of AB&C law and take steps to prevent re-occurrence as means for remediation. Remedial action from banks must be swift and demonstrable in order to minimise the impact of a violation and typically looks to improving the controls in place which could involve; tightening procedures, placing additional limits or systems on payments or aiding investigative agencies with any follow-on investigations from their case.
The SFO issued guidance on self-reporting overseas corruption in July 2009 which notes the consideration of remedial steps as a factor to be considered in the outcome of an investigation into the entity alongside issues such as the timing of any reporting to the SFO and the degree of cooperation offered by the organisation. This concept of “meaningful credit” is often witnessed through prosecutions under the Foreign Corrupt Practices Act (FCPA) in the US; whereby the effort and extent to which an organisation can remediate identified problems with their AB&C controls is a frequently cited factor in the resolution of FCPA cases.
What is in the pipeline with regards to Anti-Bribery and Corruption regulations and frameworks?
Looking to the future of AB&C frameworks, one recent introduction which deals with a longer-term vision of dealing with bribery and corruption issues in the UK is the UK Anti-Corruption Strategy 2017-2022 which provides a framework geared towards helping the UK government in its bid to act against corruption. This strategy lays out UK government actions against corruption with the aim of strengthening economic opportunities and public trust in UK institutions, including Investment Banks, while reducing threats to national security. The main principles introduced within this strategy which apply to Investment Banks involve the improvement of the integrity across the UK financial market and working with other countries to combat corruption with the knock-on effect of improving the global business environment.
To conclude, it is evident through the parallels drawn between the principles of the Bribery Act and the various controls implemented by Investment Banks that ensuring compliance with AB&C legislation is of the utmost importance to maintain integrity in the banking industry and promote good business practice. Through adopting the principles laid out in the Bribery Act, banks are better placed to avoid the potentially adverse media and regulatory enforcement that go hand in hand with such violations but must not underestimate the need for ongoing monitoring and assessment of AB&C controls to ensure an effective framework and minimise the risk posed from Bribery and Corruption.
Anti-bribery and corruption systems and controls in investment banks, Financial Services Authority (2012), URL: https://www.fca.org.uk/publication/corporate/fsa-anti-bribery-investment-banks.pdf
CORRUPTION AND ITS IMPLICATIONS FOR INVESTMENT, “The Impact of Corruption on Investment: Predictability Matters” - J. Edgardo Campos, Donald Lien, and Sanjay Pradhan (1999), URL: http://www1.worldbank.org/publicsector/anticorrupt/feb06course/corruption%20Chp1.pdf
Guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing (Section 9 of the Bribery Act 2010), Ministry of Justice - URL: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/181762/bribery-act-2010-guidance.pdf
Credit Suisse pays U.S. $77 million to settle Asia hiring corruption probes, Reuters, 2018, URL: https://www.reuters.com/article/us-credit-suisse-settlements/credit-suisse-pays-u-s-77-million-to-settle-asia-hiring-corruption-probes-idUSKBN1JV1XS
Standard Bank to pay $32.6m over Tanzania bribery scandal, The Guardian, 2015 URL: https://www.theguardian.com/business/2015/nov/30/standard-bank-fine-defer-prosecution-tanzania-bribery-scandal-
Standard Bank to Pay $4.2 Million to Settle SEC Charges, U.S. Securities Exchange Commission, 2015, URL: https://www.sec.gov/news/pressrelease/2015-268.html
Wolfsberg Anti-Bribery & Corruption Guidance, Wolfsberg Group, 2017, URL: https://www.wolfsberg-principles.com/sites/default/files/wb/pdfs/wolfsberg-standards/3.%20Wolfsberg-Group-ABC-Guidance-June-2017.pdf
Matthew joined FinTrU in October 2016 through our fourth Financial Services Academy after graduating from Queen’s University with a BSc in Psychology.
At FinTrU, Matthew works as part of a Global Compliance Management team which supports a NY-based team from a Tier 1 Investment Bank by carrying out Quality Assurance on Compliance Risk Assessments submitted by firm-wide contributors and preparing mid-year reports for Divisional CCO’s containing detailed metrics packs and analysis. Matthew has previously worked on a Global Financial Crime Project for the Tier 1 Investment Bank which involved clearing Negative News and Sanctions Screening alerts against clients and carrying out Enhanced Due Diligence (EDD) on both new and existing High-Risk clients. Prior to this, Matthew also worked for another Tier 1 Investment Bank on a remediation project which involved using client specific programs to clear alerts raised against clients.
Whilst at FinTrU, Matthew has completed three modules of his Investment Operations Certificate with the Chartered Institute of Securities & Investments (CISI) – Introduction to Securities and Investments, UK Financial Regulation and Combatting Financial Crime.