A new combatant in the fight against corruption has been addedto the US Foreign Corrupt Practices Act and the OECD Anti-briberyConvention. Britain's parliament has just passed a tough newbribery law, to come into force later this year.
The law is widely seen as a response to the UK Serious FraudOffice's investigation into BAE Systems past activities in CentralEurope. It is relevant to Romania.
The Bribery Act 2010 is aimed in particular at preventingbribery of foreign officials deciding upon high value transactions- such as procurement of supersonic aircraft, the construction ofmotorways and the upgrade of power plants. The law's jurisdictioncould not be wider. It covers all British citizens and companies,wherever they operate, as well as all companies operating in theUK, wherever they are incorporated. The law applies to any person"closely connected with the UK" who commits an offence whereverthat may occur.
The law clearly applies to a great many European firms andindividuals, including Romanian. It introduces a new offence ofcorporate failure to prevent bribery. A company will be heldresponsible for bribery committed by anyone acting on its behalf,employee, agent or subsidiary. The offence of failing to preventbribery is "strict liability", by which is meant that failure toput in place "adequate procedures" will result in prosecution,regardless of whether prosecutors can show corrupt intent.
So the management of a Romanian company located in Britainunable to demonstrate that it had adequately examined the recordsof its Romanian agents in Bucharest or elsewhere would be liablefor offences committed by them. The penalties include unlimitedfines or imprisonment for up to 10 years.
The Bribery Act is criticized by some, who claim that it putsfirms at a competitive disadvantage. They are right, at least inthe short term and certainly here. It will discourage firms fromusing local partners over whom they may have little control and towhom there may be attached greater risk. And in consequence, thelaw will disadvantage such firms in local tenders, where an abilityto know who and how much to bribe is more important that price andquality.
Paradoxically, the tougher law may increase the amount of moneystolen short term by driving up the transaction costs of itscircumvention. Firms will not be so eager to form a consortium witha local agent whose only role is to pay off local politicians.Instead, they will rely upon informal arrangements. Local proxiesfor public officials will be awarded contracts and then auction offwork to foreign subcontractors actually capable of providing theservice procured.
For as long as politicians (and their voters) are happy to paymore for less, there seems to be little hope of progress. And yetthe new law, by raising the risk of getting caught for so many morecompanies, will challenge the culture of impunity that pervades thepolitical and business elite in many countries.
We may expect the law to accelerate an internal decision of moreand more large companies to refuse to participate in the auctionfor local influence. And the proof of such will be if these firmsstart to lose public contracts.
The more firms compete on price and quality alone, the fewercontracts they will win, and the fewer contracts they win, thesooner they will exit the market. In the short term, this willplease corrupt firms and their political cronies. In the longerterm it is unsustainable. The time will come when voters will ceaseto tolerate a situation in which all public contracts are awardedto firms that are not only more expensive and less qualified butwhose owners are unknown as well.
Guy Burrow is a partner with Candole Partners.
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