Risks and opportunities as Bribery Act made law

FOLLOWING enactment of the UK’s Bribery Act, firms are seeking advice on how to develop “adequate procedures” to prevent bribery and ensure they have a defence to the new corporate offence, likely to be implemented by the end of the year.

Under the corporate offence, a corporate (including foreign entities that carry on business or part of a business in the UK) will be automatically criminally liable if someone performing services on its behalf, anywhere in the world, commits an act ofbribery to obtain or retain business for the corporate.

There is a defence if the corporate can show it had adequate procedures in place designed to prevent bribery. In doing so, issues are emerging that were not considered by parliament during the passage of the legislation and for which there are no straightforward answers.

For those in the insurance sector, the issues are amplified; they must consider not only their own compliance, but also how the new law may expose them to increased claims from insureds.

This will certainly affect those who write directors’ and officers’ and professional indemnity policies, and such insurers need to reconsider the risks they are writing and the questions they need to ask in order to assess that risk and price the business.

Another concern is the scope for foreign insureds to face liability under the corporate offence (ie, if it “carries on a business, or part of a business” in the UK). The act gives no guidance on what this means, but it is likely to apply where a corporate has a UK branch or possibly a UK subsidiary, depending on what that subsidiary does.

This exposure will require insurers to ask more questions about the operations of foreign corporates they cover to assess the risk of liability and claims.

In parliament, there was much debate on who may be a person “who performs services” for a corporate under the corporate offence. The government was unwilling to provide any comfort or guidance here and have left it to prosecutorial discretion.

In the context of insurance broking, this question could fundamentally affect brokers’ risk under the new act: is an underwriter or a prime broker who uses an intermediary to write business, who in turn uses layers of sub-brokers, liable under the corporate offence for the actions of the sub-brokers all the way down the chain?

This boils down to whether the sub-brokers were providing services “for or on behalf of” the prime broker. The act provides little guidance. It tells us the “capacity” in which the sub-brokers perform services for or on behalf of the prime broker “does not matter” and the question “is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between [subbroker] and [prime broker]”.

This uncertainty highlights the importance of ensuring brokers perform appropriate checks on their intermediaries and protect themselves in their contractual arrangements. This has recently been reinforced by the Financial Services Authority in its May 2010 report: “Anti-bribery and corruption in commercial insurance broking”.

The report’s fairly stark conclusion is that many brokers have failed to address and minimize risks created by their third party relationships owing to weak due diligence and monitoring.

Of course, every cloud has a silver lining – the law may present an opportunity for insurers to write innovative new lines specifically to cover the risk of liability under the corporate offence for the actions of third parties and/or for the risk of having to pay out under indemnities in this regard.