The consequences of fraud, cartel activity and corruption have seldom been far from the boardroom agendas of large multinational organisations in recent years. This stems from the increased activity of regulators on both sides of the Atlantic and the swingeing financial penalties being imposed for these offences.
In this article we highlight some of the key similarities and distinctions in transatlantic regulation as well as the employment law issues that result from regulatory investigations/prosecutions — an area that is so often overlooked.
The differences in social, cultural and political attitudes which drive strategic decision-making in these areas will inevitably cause a degree of friction and disparity in approach, in seemingly similar systems.
US corruption laws
Historically, the extent of US jurisdiction in the area of corruption has been a real differentiator. The Foreign Corrupt Practices Act (FCPA) 1977 dramatically extended the scope of US jurisdiction in circumstances where corrupt payments are made to foreign officials. It is not an overstatement to say that no matter where in the world a corrupt act is alleged to have occurred, the US will have jurisdiction in all but a very limited number of cases.
The UK’s domestic laws on bribery and corruption are longstanding but patchy. In terms of tackling foreign corrupt payments, it was not until 2001, with the enactment of The Anti-Terrorism Crime and Security Act (ATCSA), that this was really possible. Although the Government maintains the ATCSA merely acted to confirm the UK’s ability to prosecute foreign corruption cases, in reality no prosecutions were seriously contemplated prior to 2001. Following the changes to the law, the fact remains that, notwithstanding a number of ongoing investigations, the likelihood of successful prosecution remains low unless the victim jurisdiction offers full co-operation — as is the case in the Iraqi oil-for-food programme.
A further key distinction is that the US has specifically designed legislation to combat the corruption of foreign nationals, whereas the UK has attempted to amend existing legislation — a fact which the Organisation for Economic Co-operation and Development continues to criticise. Also, in the US the regulators have a host of criminal and civil law sanctions at their disposal. In the UK this is not the case. In addition, the absence of equivalent ‘books and records’ provisions in the UK is a real stumbling block.
An important differentiator between US/UK authorities is the diverse range of enforcement options open to US regulators, such as: plea-bargaining; non-prosecution agreements; deferred prosecution agreements; and imposing monitors. In the UK it is more black and white — either there is a prosecution following an investigation, or there is not.
Some statistics will help to demonstrate the gulf in the current level of successful enforcement actions. At the beginning of 2008 there were estimated to be 77 pending FCPA investigations involving corruption. By the end of 2007, the Department of Justice and Securities Exchange Commission brought a combined total of 32 enforcement actions and imposed fines and penalties in excess of $135m (£68m). To date, notwithstanding 17 ongoing foreign corruption investigations being conducted by the Serious Fraud Office, there has never been a successful prosecution.
There is a general consensus in the UK that the corruption laws are in need of reform. A number of previous attempts to change the law have failed but it is anticipated that a new corruption bill will be on the cards later this year. With the increasing level of fines imposed by the US and the widespread publicity, it seems that the UK’s position may not be sustainable.
Fraud focus
The approach in the UK has historically been to target fraudulent behaviour. The new Fraud Act 2006 is a good example of this. The US, on the other hand, has tended to target the methods by which the fraud is perpetrated. In contrast to corruption, the UK has a pretty good reputation of bringing cases for fraud. However, as will be noted from the recent report by former New York city prosecutor Jessica De Grazia, the success rates over the past few years have varied quite considerably in both countries.
The US regulators appear (and perhaps quite rightly) to be leading the way following the subprime mortgage scandal. On 19 June, 2008, two former managers of hedge funds at Bear Stearns were arrested and charged with securities fraud. Many commentators see this as just the beginning, but only time will tell if UK regulators attempt to tackle this issue quite as aggressively as their US counterparts.
On cartels
The US was several steps ahead of the UK (and indeed the rest of the world) in developing laws against cartels and other anti-competitive behaviour. The US has had laws against cartel activities since the late 1940s. In contrast, the UK has only had competition laws since 1998 and specific cartel laws since the enactment of the Enterprise Act (EA) in 2002.
One significant difference between the EA cartel offence and the Sherman Act offence is that the US offence is one of strict liability, whereas in the UK the key is to prove dishonesty beyond reasonable doubt.
Following the introduction of the EA, the approach adopted by the US and the UK is broadly similar. Due to the lack of previous legislation, the UK was able to adopt methods that have proved successful all over the world. The advantage of having harmonised laws and enforcement powers is that (unlike in the cases of fraud and corruption) it makes co-operation on a multi-jurisdictional level much easier. The recent convictions in the Marine Hose case is a good illustration of this.
In 2006-07 at least 20 cases were opened under the CA or EA that specifically targeted cartel activities. The Office of Fair Trading (OFT) has also handed out some significant fines — £121m to BA in relation to price-fixing offences. It is unlikely the OFT will ever reach the volume of fines that are achieved in the US but it is clear that adopting proven methods of enforcement has yielded results.
Employment law perspective
In respect of fraud and corruption investigations, an employee is usually at the centre of the allegations and this is often so in respect of allegations concerning cartels. Notwithstanding this, the constraints of employment law are often overlooked despite the fact that they pervade almost every stage of the process and can have significant consequences. To adhere to the constraints, legislative and contractual provisions must be considered together with legislation governing the processing of data.
It is also necessary to consider data privacy. In the UK, the Human Rights Act 1998 needs to be considered when searches of employees’ offices or email are being contemplated, while the Data Protection Act 1998 is concerned with ensuring that personal data is handled fairly, securely and with respect for the individual’s privacy. The privacy legislation does not prevent material being accessed but it should not be assumed that there is an automatic and unrestricted right of access. In the US, unless the investigation touches on one of the sectors for which there is privacy legislation and involves the protected data, there is no privacy implication.
In the UK it is generally expected that there will be an express contractual provision to suspend an employee pending an investigation but, even where there is no express power, employers in the UK are generally entitled to take precautionary steps to protect their interests and property. If the Financial Services Authority will have an interest in the matter, there is an expectation that the employee should be suspended. In the US, employers can do as they wish while they investigate: put employees on leave with pay; on leave without pay; or allow the employee to remain in the post.
In the UK, any disciplinary proceedings will need to be both procedurally and substantively fair; this is a not a consideration in the US as there is no strict regime of employment rights for qualifying employees. In the US, employers will typically inform the employee of the reason for dismissal but it is not mandatory and no particular process must be observed.
The final part of the equation from an employment law perspective is how the wrongdoing came to light. If the investigation commenced because of an internal alert (statistically, corporate fraud is usually detected from within), then the individual who raised the alert is protected by whistleblower legislation in both countries.
It seems that although there is a more comprehensive array of regulation in the US, with potentially harsher consequences to be faced by the individuals concerned, the UK offers a far greater procedural protection for employees when regulatory investigations and prosecutions are undertaken.
Gerallt Owen is a partner and Michelle Haste a counsel at Crowell & Moring in London.
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