As discussed in a prior post (here), the U.K Bribery Act of 2010 is now set to take effect on July 1, 2011. In a guest post below, Anjali Das, a partner in the Chicago office of the Wilson Elser law firm, takes a look at the Act’s key provisions and requirements and then reviews the Act’s D&O insurance implications.
My thanks to Anjali for her willingness to publish her article as a guest post here. I welcome guest posts from responsible commentators on topics relevant to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly,
Anajli’s guest post follows:
As if companies and their directors and officers did not have enough to contend with in the wake of the global financial crisis and the U.S. government’s increasingly zealous prosecution of violations of the Foreign Corrupt Practices Act ("FCPA"), they will soon have to comply with the U.K. Bribery Act of 2010 ("Bribery Act") effective July 1, 2011, which far surpasses the FCPA in terms of potential liability exposure for bribery in the broadest sense of the word. In light of the potential long-arm reach of the Bribery Act, Directors and Officers ("D&O") liability carriers should familiarize themselves with the potential increased exposure to their insureds under the Bribery Act.
This article discusses the following the issues related to the Bribery Act:
- Four key bribery offenses under the Act:
- Imputation of bribery offenses by associated persons to the company;
- Six guiding principles for implementing effective anti-bribery policies and procedures;
- Potential coverage issues under D&O policies for investigations and proceedings under the Act
PART I: Overview of the Bribery Act
On March 30, 2011, the U.K. Ministry of Justice ("MOJ") issued long-anticipated Guidance on the Bribery Act which provides an overview of the four key offenses under the statute and six guiding principles to prevent bribery in violation of the Act.
Four Key Offenses Under the Act
As discussed below, the key offenses under the Bribery Act include: (i) active bribery or offering bribes (Section 1), (ii) passive bribery or accepting bribes (Section 2), (iii) bribery of a foreign public official (Section 6), and (iv) a company’s failure to prevent bribery (Section 7).
Sections 1, 2 and 6 apply with respect to acts of bribery that take place in the U.K. or if the person committing the offense has a "close connection" to the U.K such as a British citizen, resident of the U.K., or entity incorporated under the laws of any part of the U.K. A company may also be liable under Sections 1, 2 or 6 if the offense was committed by or with the consent of a company’s senior officer. Section 7 applies to companies that are incorporated or formed in the U.K. or "carry on business" in the U.K., regardless of whether the bribery occurred in the U.K. or elsewhere.
Active and Passive Bribery: Section 1 of the Bribery Act prohibits "active bribery" and makes it an offense for a person to offer, promise, or give "financial or other advantage" to another person with the intent to induce "improper performance" of a relevant function or activity. Section 2 of the Bribery Act is the flip side of Section 1 and prohibits "passive bribery". Section 2 makes it an offense for a person to accept or receive a financial or other advantage intended to induce or reward improper performance by the recipient or some other person. According to the MOJ’s Guidance, improper performance means "performance which amounts to a breach of an expectation that a person will act in good faith, impartially, or in accordance with a position of trust."
In the introduction to the MOJ’s Guidance, Kenneth Clarke, U.K. Secretary State for Justice, seeks to assuage businesses that the parameters of the Act are not intended to prohibit reasonable client development activities: "Rest assured, — no one wants to stop firms getting to know their clients by taking them to events like Wimbledon or the Grand Prix." Moreover, the Guidance itself suggests that "an invitation to attend a Six Nations match at Twickenham as part of a public relations exercise designed to cement good relations or enhance knowledge in the organisation’s field is extremely unlikely to engage section 1. . . ." However, more lavish hospitality intended as a quid pro quo to induce favorable treatment in a pending business deal (i.e., to get new business, keep business, or get some other business advantage) could be subject to greater scrutiny under the Act. The test is what a "reasonable person" in the U.K. would expect under the circumstances, and whether the prosecution can demonstrate evidence of intent to induce improper performance as defined by the Act.
Bribery of Foreign Officials: Section 6 of the Bribery Act, which resembles the anti-bribery provisions in the FCPA, prohibits the bribery of a foreign public official. As explained in the MOJ’s Guidance, an offense is committed when a person offers, promises or gives a foreign public official a financial or other advantage with the intent of: (i) influencing the official in the performance of his or her official duties, and (ii) obtaining or retaining business or other advantage in the conduct of business by offering the bribe. A foreign official includes any person who performs public functions in any branch of national, local, or municipal government in any country or territory outside the U.K. An example in the MOJ’s Guidance of a permissible transaction with foreign officials is a U.K. mining company’s offer to pay for reasonable travel and accommodation to enable the foreign officials to inspect the standard and safety of the company’s distant mining operations. In contrast, an offer to pay the foreign officials’ "five-star holiday" in an unrelated destination is questionable.
Failure to Prevent Bribery :Section 7 of the Bribery Act creates a new offense for corporate liability for failing to prevent bribery in the first instance. Under this section of the Act, a company will be liable if a person associated with it bribes another person with the intention of obtaining or retaining business or other advantage. Liability under this section applies to "relevant commercial organizations" which include: (1) entities incorporated or formed in the U.K., regardless of whether the entity conducts business in the U.K., and (2) entities that "carry on business" in the U.K., regardless of the place of incorporation or formation. The Act itself does not define the term "carry on business," and the MOJ’s Guidance merely states that this interpretation is subject to a "common sense approach". While the MOJ notes that the courts are the final arbiter of this determination, the Government itself does not expect that companies merely listed on the London Stock Exchange without a "demonstrable business presence" in the U.K. are subject to liability under Section 7 of the Act.
Imputation of Acts by Associated Persons
Corporate liability under Section 7 of the Act may be established through bribery conducted by "associated persons" which broadly encompasses any person or entity that "performs services" for the company. An associated person may include the company’s employees, agents, subsidiaries, or any other party that performs services for or on behalf of the company regardless of the "capacity" in which such services are performed. Significantly, this may include the company’s suppliers (that do more than merely sell goods) and direct contractors (as opposed to sub-contractors). As a result, there is an increased burden on companies to examine their supply chain and external business relationships with third parties for potential risk of bribery and imputation of corporate liability under the Act.
Ministry of Justice’s Six Guiding Principles
The MOJ has identified six "guiding principles" to assist companies in adopting effective policies, and procedures to prevent bribery. If a company can demonstrate that it has adequate anti-bribery procedures in place, this could be a complete defense to violation of Section 7 of the Bribery Act. These guiding principles include:
(1) Proportionality: The company’s anti-bribery policies and procedures should be "proportionate" to the size of the company and the perceived risks it faces. The procedures should be designed to mitigate identified risks and prevent deliberate unethical conduct on the part of associated persons.
(2) Top Level Commitment: The message of zero tolerance for bribery should be adopted, implemented, and/or communicated by individuals at the highest levels of the organization such as the board of directors.
(3) Risk Assessment: The company should periodically assess and document its perceived exposure to internal and external risks of bribery, including an analysis of bribery risk in the markets in which it conducts business (for country risk, sector risk, transaction risk, and business opportunity risk) and risk presented by various business partners/associates.
(4) Due Diligence: The company should conduct appropriate due diligence either internally or by external consultants prior to hiring and engaging other persons, third party intermediaries, agents, or business partners/associates to represent the company in its business dealings.
(5) Commmunication: The company’s anti-bribery policies and procedures should be communicated internally to staff and employees and externally to all business partners/associates that perform services for the company. Such communications may be made orally, in writing, and/or through training sessions.
(6) Monitoring and Review: The company should periodically evaluate its anti-bribery policies and procedures for effectiveness in light of changing business or political environments that may increase the company’s bribery risk in certain markets. These periodic reviews may be conducted through special internal systems such as internal financial control mechanisms, staff surveys, formal reviews by top-level management, and/or external verification of the effectiveness of the company’s anti-bribery procedures.
It is important to recognize that the MOJ’s guidelines for anti-bribery policies and procedures are not "prescriptive," and there is no "one- size-fits-all" approach that applies to all companies.
PART II: Potential Coverage Issues Under D&O Policies
These days, D&O policies routinely afford "worldwide" coverage, including coverage for foreign (non U.S.) proceedings against a company’s foreign subsidiaries and directors and officers of these subsidiaries. Therefore, U.S. companies that do business in the U.K., have subsidiaries, directors and officers, employees or agents in the U.K. may be subject to violations of the Bribery Act. As such, D&O insurers would be well-advised to consider the potential coverage implications under their policies for claims and investigations under the Bribery Act.
Potential coverage issues that might arise under D&O policies for Bribery Act violations, investigations and proceedings include, but are not necessarily limited to:
· Coverage for investigations
· Covered claims against a D&O versus uncovered claims against the company
· Allocation of defense costs
· Insured subsidiaries and their directors and officers
· Coverage for collateral litigation arising from Bribery Act violations
· Dishonesty and Personal Profit Exclusions
· Coverage for fines and penalties
Coverage for Investigations
Initially, it is important to consider whether a government investigation for potential violations of the Bribery Act gives rise to an insurer’s obligation to pay or advance the insured’s legal fees and expenses under a D&O policy. Like FCPA investigations, investigation costs for Bribery Act violations could be substantial – potentially exceeding millions of dollars. Consider for example the ongoing FCPA investigation of Avon Products, Inc. where the company reportedly spent $96 million in 2010 and $35 million in 2009 for legal fees related to its FCPA investigation.
Coverage for investigations under D&O policies has evolved dramatically in recent years. In some instances, the D&O policy definition of a Claim has expanded to encompass investigations of directors and officers by various government or regulatory authorities. Some D&O policies only afford coverage for formal investigations if a director or officer is served with a "subpoena" or identified as a "target" of an investigation by a governmental investigative authority. More recently, some insurers have expanded coverage to include informal investigations of directors and officers which do not require the issuance of a subpoena. Such informal investigations may include a voluntary request for production of documents, interviews, or testimony. This year, for the first time, a new generation of D&O coverage affords entity coverage for investigations "of the company" itself. However, entity coverage for investigations under these newest policies may be limited to claims for violations of securities laws and/or expressly exclude FCPA and Bribery Act claims. Thus, it is critical to analyze the specific policy wording to determine the scope of coverage for investigations.
Undoubtedly, there are numerous cases finding both in favor of and against coverage for investigations under D&O policies. This is a fact-sensitive analysis dictated in part by the precise policy wording and the circumstances surrounding the investigation.
For instance, a number of courts have held that subpoenas and/or Civil Investigative Orders issued by the SEC, DOJ, or other government authorities are covered claims under a D&O policy – particularly where the definition of a claim expressly includes an "investigative order". In MBIA, Inc. v. Federal Ins. Co., 2009 U.S. Dist. LEXIS 124335 (S.D.N.Y. 2009), the court held that subpoenas issued by the SEC and New York Attorney General ("NYAG") in connection with their investigations of MBIA constituted a Securities Claim which was defined as "a formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar document". The court rejected the insurer’s argument that a subpoena was not an investigative "order". At a minimum, the subpoenas were "similar documents" that triggered coverage under the policies.
In Ace American Ins. Co. v. Ascend One Corp., 570 F.Supp.2d 789 (D. Maryland 2008), the court held that an administrative subpoena issued by the Maryland Attorney General and a Civil Investigative Demand issued by the Texas Attorney General constituted a Claim which was defined by the policy as "a civil, administrative or regulatory investigation against any Insured commenced by the filing of a notice of charges, investigative order, or similar document". The court also rejected the Insured’s argument that the subpoena and Investigative Demand failed to allege a Wrongful Act. The court observed that the Maryland and Texas Attorney General’s Office were investigating violations of their respective state Consumer Protection Acts in connection with the company’s business activities.
In National Stock Exchange v. Federal Ins. Co., 2007 U.S. Dist. LEXIS 23876 (N.D. Ill. 2007), the court held that an SEC investigation commenced by a formal order of investigation was a Claim under the policy. In that case, the definition of a Claim included "a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document". It was undisputed that the SEC issued an order directing a private investigation and designating officers to take testimony. The court rejected the insurer’s argument that the SEC investigation was not a Claim "against an Insured Person for a Wrongful Act". The court observed that the scope of the SEC’s investigation included the company and its directors and officers for possible violations of securities laws.
In contrast, other cases have held that government investigations are not a claim under a D&O policy. In Office Depot, Inc. v. National Union Fire Ins. Co., 734 F. Supp. 2d 1304 (S.D. Fla. 2010), the court held that the D&O insurer was not liable to pay legal fees and costs incurred by the company in connection with: (1) the SEC’s investigation, or (2) the company’s internal investigation by its Audit Committee. First, the court opined that the SEC investigation was not a covered Securities Claim against the Company since the definition expressly excluded "an administrative or regulatory proceeding against, or investigation" of the company. Second, the court concluded that the SEC investigation was not a Claim against an Insured Person (D&O). The definition of a Claim included "a civil, criminal, administrative or regulatory, proceeding" or "investigation . . . commenced by service of a subpoena" or identifying an Insured Person in writing as the target of an investigation. Here, however, the SEC investigation was directed to the company – not to an Insured Person. The SEC’s formal order of investigation did not identify any specific D&Os or any specific wrongdoing by any of the D&Os. Third, the court found that the insurer was not liable for the company’s internal investigation because they were not a covered "loss" "arising from" a Claim or Securities Claim. Instead, the internal investigation, which preceded subsequent shareholder suits, was triggered by a whistleblower complaint regarding various accounting irregularities. Fourth, the court observed that the internal investigation costs did not "result solely from investigation or defense" of a covered Claim as contemplated by the policy definition of Defense Costs. The court held that the insurer was not liable for the legal fees and costs incurred by the company in response to: (i) the SEC informal inquiry, (ii) SEC formal investigation prior to the issuance of a subpoena or Wells notice on an Insured Person, or (iii) internal investigation by the Audit Committee.
In Diamond Glass Companies, Inc. v. Twin City Fire Ins. Co., 2008 U.S. Dist. LEXIS 86752 (S.D.N.Y. 2008) , the court held that expenses incurred by the insured in responding to a federal grand jury investigation were not covered under the insured’s D&O policy. In that case, the court opined that the investigation was not a "criminal proceeding . . . commenced by the return of an indictment, filing of a notice of charges, or similar document" as defined by the policy. The court observed that there was no claim against an individual insured, because the policy expressly stated that the individual must receive "written notice from an investigating authority specifically identifying such Insured Person as a target against whom formal charges may be commenced".
Of course, if prosecutors ultimately sue any directors or officers for violations of the Bribery Act, such a legal proceeding might be covered if the D&O policy broadly defines a Claim to include any civil, criminal, administrative or regulatory proceeding. On the other hand, if the company alone is the subject of a legal proceeding for violation of Section 7 of the Bribery Act, this may not constitute a covered Claim. Under many D&O policies entity coverage is limited to a Securities Claim against the company such as a lawsuit by shareholders in connection with the purchase or sale of the company’s securities. Such a narrow definition of Securities Claim may not apply to a company sued for violations of the Bribery Act to the extent the bribery does not involve a violation of securities laws, does not arise out of the purchase or sale of a company’s securities, or is not brought by a company’s shareholders.
Identifying the Insured
It is also critical to determine whether an "insured" is the subject of an investigation. As noted herein, many D&O policies offer worldwide coverage for a company, its subsidiaries, and their directors and officers. However, a subsidiary is a defined term that may be limited to entities in which the company owns a specified percentage of the subsidiary’s stock. Consider, for example, a company that has an overseas U.K. affiliate in which it owns 40% of the voting stock. That affiliate and its directors and officers are the subject of an investigation or proceeding for violations of the Bribery Act. However, if the D&O policy only affords coverage to subsidiaries in which the company owns 50% or more of the voting stock, then the affiliate and its directors and officers are not insureds.
However, if both a covered subsidiary and one of its officers are sued for violations of the Bribery Act, this could give rise to a covered claim against the subsidiary’s officer and an uncovered claim against the company (assuming the policy does not afford entity coverage for investigations). In that event, the insurer may need to seek an allocation of covered defense costs (for the officer) versus uncovered defense costs (for the company). Some D&O policies contain express allocation language which state that the parties will make a reasonable effort to arrive at a fair allocation for covered versus uncovered defense costs and, in the event of a dispute, the insurer will advance those amounts which it determines are covered until the coverage dispute is ultimately resolved by negotiation, arbitration, litigation, mediation, or otherwise.
It is possible that Bribery Act violations may spur collateral litigation against a company and/or its directors and officers by shareholders, employees, customers, competitors, or other third parties. By comparison, FCPA violations have prompted a number of shareholder suits in the U.S. which may give rise to a covered Securities Claim. In addition, in the case of multinational corporations, Bribery Act investigations by U.K. authorities might provoke similar investigations or legal proceedings by foreign governments or U.S. authorities under the FCPA or other anti-bribery laws. Many D&O policies are claims made and reported policies. In other words, a claim is covered if it first made during the policy period and timely reported to the insurer. When there is a chain of bribery-related investigations or legal proceedings, potential coverage issues include the date the initial bribery claim was first made (and reported), and whether subsequent bribery claims are deemed to be related to the initial claim such that they are all covered under a single policy period.
D&O Policy Exclusions
Common exclusions in D&O policies include the fraud, dishonesty, and personal profit exclusions. These exclusions might be implicated if an insured is found to have engaged in intentional misconduct or unlawfully profited from his wrongdoing. Oftentimes, however, such exclusions are subject to a final adverse adjudication establishing that the insured engaged in such wrongdoing. In addition, such exclusions may be "severable" such that the wrongful acts of one insured cannot be imputed to another for purposes of triggering an exclusion.
Companies and individuals may be subject to imprisonment and/or fines for violations of the Bribery Act. As a general rule, most D&O policies do not afford coverage for fines or penalties. However, some D&O policies now afford very limited coverage for fines imposed under the FCPA. Thus, it is possible that similar coverage for limited fines or penalties might be offered for Bribery Act violations in the future.
Without a doubt, governments are demonstrating increasing intolerance of bribery in the corporate world by individuals and companies alike. To date, the Bribery Act far surpasses other anti-bribery laws, including the FCPA, in identifying the breadth of unacceptable business practices in both the private and public sectors that are subject to prosecution. U.K. enforcement authorities have emphasized the strong public policy rationale for adopting the Act’s stringent measures which are designed to encourage "free and fair competition," and have outright rejected the notion of greasing the wheels of commerce by so-called facilitation payments which are considered commonplace in some parts of the world. If the rigorous enforcement and prosecution of FCPA violations in the U.S. has caused companies pause for concern, the Bribery Act might possibly signal just cause for companies to scrutinize and re-think their transnational business activities to avoid future claims, prosecution, and legal expenses for potential violations of the Act.