Member Article

Government guidance that suggests parent companies are unlikely to be snared by anti-bribery legislation that catches a subsidiary could lull businesses into a false sense of security. While it is unlikely that a subsidiary or joint venture partner operating independently and caught by the Bribery Act would make its parent liable, there is other legislation ready to catch the owner.

The Bribery Act guidance indicates that a parent organisation benefitting indirectly from a bribe made by a subsidiary – especially if that subsidiary is independently managed – is unlikely to be liable under the Act, which requires there to be ‘specific intention’ for an offence to be committed.

However, under the Proceeds of Crime Act 2002 (PoCA), the parent can be forced to give up – ‘disgorge’ – any proceeds it made as a result of the subsidiary’s illegal actions, which are deemed ‘proceeds of corrupt conduct’.

Parent companies should not, therefore, breathe a sigh of relief at the Government’s Bribery Act guidance without also reflecting on the PoCA legislation. The recent actions of the Serious Fraud Office (SFO) concerning enforcement action against Mabey and Johnson Ltd illustrate how this could work.

On 12 January 2012, the SFO announced it had recovered £131,201 (US$200,000) in dividends paid to shareholders of Mabey Johnson's parent company, Mabey Engineering (Holdings) Ltd. They were the result of the subsidiary's illicit activities.

This followed a number of penalties imposed on Mabey and Johnson following its self-referral to the SFO in early 2008, having discovered that corrupt practices had won it business.

The SFO recovered this sum under the PoCA, which does not require proof of intent; it simply enables monies to be recovered where they have been obtained through unlawful conduct.

The Act does not require that the investor or beneficiaries of those monies have any tie to the UK. The power is also available even if no proceedings had been bought for an offence. This case is significant because for the first time the SFO sought and recovered payments already issued to investors.

SFO director Richard Alderman said it will continue to use these powers to recover dividends resulting from corrupt activities, which will have far-reaching effects for shareholders and investors – including institutional investors – worldwide.

Alderman emphasised that all investors have an obligation to familiarise themselves with the business practices of the companies in which they invest, laying particular emphasis on institutional investors who have ‘the knowledge and expertise to do it’.

This applies even where foreign parents have UK subsidiaries that are operated independently.

It follows that some overseas businesses may have to think again if they believed they could, to some extent, remain at arms length from their UK subsidiaries in relation to corrupt practices or the procedures they have put in place to prevent them.