No Bribery Please! We’re British!

guw_burrow2A new combatant in the fight against corruption has been added to the US Foreign Corrupt Practices Act and the OECD Anti-bribery Convention. Britain’s parliament has just passed a tough new bribery law, to come into force later this year. The law is widely seen as a response to the UK Serious Fraud Office’s investigation into BAE Systems past activities in Central Europe. It is relevant to Romania.

The Bribery Act 2010 is aimed in particular at preventing bribery of foreign officials deciding upon high value transactions – such as procurement of supersonic aircraft, the construction of motorways and the upgrade of power plants. The law’s jurisdiction could not be wider. It covers all British citizens and companies, wherever they operate, as well as all companies operating in the UK, wherever they are incorporated. The law applies to any person “closely connected with the UK” who commits an offence wherever that may occur.

The law clearly applies to a great many European firms and individuals, including Romanian.  It introduces a new offence of corporate failure to prevent bribery. A company will be held responsible for bribery committed by anyone acting on its behalf, employee, agent or subsidiary. The offence of failing to prevent bribery is "strict liability", by which is meant that failure to put 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 Britain unable to demonstrate that it had adequately examined the records of its Romanian agents in Bucharest or elsewhere would be liable for offences committed by them. The penalties include unlimited fines or imprisonment for up to 10 years.

The Bribery Act is criticized by some, who claim that it puts firms at a competitive disadvantage. They are right, at least in the short term and certainly here. It will discourage firms from using local partners over whom they may have little control and to whom there may be attached greater risk.  And in consequence, the law will disadvantage such firms in local tenders, where an ability to know who and how much to bribe is more important than price and quality.

Paradoxically, the tougher law may increase the amount of money stolen short term by driving up the transaction costs of its circumvention. Firms will not be so eager to form a consortium with a local agent whose only role is to pay off local politicians.  Instead, they will rely upon informal arrangements. Local proxies for public officials will be awarded contracts and then auction off work to foreign subcontractors actually capable of providing the service procured.

For as long as politicians (and their voters) are happy to pay more for less, there seems to be little hope of progress.  And yet the new law, by raising the risk of getting caught for so many more companies, will challenge the culture of impunity that pervades the political and business elite in many countries.   

We may expect the law to accelerate an internal decision of more and more large companies to refuse to participate in the auction for local influence. And the proof of such will be if these firms start to lose public contracts.

The more firms compete on price and quality alone, the fewer contracts they will win, and the fewer contracts they win, the sooner they will exit the market.  In the short term, this will please corrupt firms and their political cronies. In the longer term it is unsustainable. The time will come when voters will cease to tolerate a situation in which all public contracts are awarded to firms that are not only more expensive and less qualified but whose owners are unknown as well.

Guy Burrow is a partner with Candole Partners. Guy was managing director of Shell Romania for four years and a founder member of Romania’s foreign investors association. He was chairman of the advisory board of the British-Romanian chamber of commerce. He has lived in Bucharest since 1991.

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