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Make it your business to know theirs

Forensic partner David Dearman explains the implications of the Bribery Act 2010 which may catch many unprepared.

Warning fraud ahead

We look at how resilient UK organisations are to fraud

We look at how the ongoing struggle to prevent and mitigate fraud has led to the development of an arsenal of measures to fight it.

A new weapon in the fight against fraud

the Bribery Act and the quest for the Holy Grail

Welcome to your new look Forensic Update

Welcome to our Spring 2011 issue of Forensic Update. It would be rare for us to have no articles at all about bribery or fraud, but this issue we

bring you an abundance of both. The Bribery Act has been widely discussed in the media, but we offer our own assessment of the likely fallout and how it could affect businesses across the globe. Though the government is yet to issue its promised detailed guidance, we suggest some of the precautions that companies will want to put in place in preparation for the Act’s enforcement.

On the fraud side of things, we revisit the subject of VAT Missing Trader Intra-Community (MTIC) fraud, popularly known as carousel fraud. We examine some of the recent successful actions by taxpayers in defending themselves against this charge where the vast majority of recent cases have been won by HMRC.

Also in this issue, you will find articles on how to make your clients’ organisations more resilient to fraud. We also feature a light-hearted hit parade of nonetheless serious frauds of 2010. Don’t fall victim yourself.

I hope you enjoy this issue of Forensic Update. If you have any feedback, or suggestions for topics we might cover in future issues, please get in touch.

1 PKF – www.pkf.co.uk

Hugh Mathew-Jones Partner, PKF (UK) LLP

WWW.PKF.CO.UK

In this issue

A new weapon in the fight against fraud

Warning Fraud Ahead

Dont get caught in the carousel

Make it your business to know theirs

The bribery act and the quest for the holy grail

Frauds of the year (part 2)

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For further information on any of the articles in this issue, please email:forensicupdate@uk.pkf.com Do you think you have a suitable story for Forensic Update? Contact the Editor, Nick Green, at nick.green@uk.pkf.com.

Contact Forensic UpdatePKF provides financial investigations, dispute resolution and expert witness services, including: litigation, investigations and disputes | fraud and financial investigations | employer covenant reviewsbribery and corruption | business intelligence | forensic technology | matrimonial disputes | competition and regulation | professional negligence | personal injury, fatal accident and clinical negligence | criminal defence | counter fraud defence

Frauds of the year (part 1)12

Hugh Mathew-JonesPartner

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The Centre for Counter Fraud Studies (CCFS) at University of Portsmouth is Europe’s premier academic centre of knowledge about fraud. Now it has joined forces with PKF’s Forensic Services team to produce the most comprehensive report ever undertaken into this highly pressing issue. PKF Counter Fraud Director, Jim Gee asks: how resilient are UK organisations to fraud?

Fraud is a problem which undermines the stability and financial health of organisations from across the economy, in the private, public and not-for-profit sectors. It is far from being a victimless crime; just a few of its many devastating consequences include additional costs piled on consumers, a reduction in the quality of public services paid for by taxpayers, undermined job security for employees, reduced value of companies for shareholders and, perhaps most heinously, denying the beneficiaries of charities the full benefit of the donations made on their behalf.

The report by PKF and CCFS covers organisations, budgets and turnover which represent in value more than a fifth of the UK’s Gross Domestic Product (GDP). Its scope embraces almost every sector of economic activity, and as such it provides an unprecedented insight into the strength of existing arrangements to protect ‘UK Plc’ against fraud.

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The report also considers all aspects of what it takes for an organisation to be resilient to fraud. These include:

• understanding the nature and cost of fraud as a business problem

• designing and implementing a strategy which is tailored to address this problem

• maintaining a structure which can implement this strategy successfully

• using the structure to take a range of pre-emptive and reactive action

• measuring, identifying and delivering results.

Key findings

The report casts fresh light on a number of key issues. Here are some of the most revealing.

• The majority (54%) of voluntary sector organisations do not have a counter fraud strategy.

• A quarter of public sector bodies do not include fraud and corruption on their risk registers.

• 65% or private sector companies and 80% of voluntary sector organisations do not provide professional training for their counter fraud staff.

• Over half (51%) of voluntary sector organisations do not have a programme of work to create an anti-fraud culture.

• 39% of public sector bodies and 68% of voluntary sector organisations do not use data analysis to detect fraud.

• One third of voluntary sector organisations have no clear guidance in place about how investigations should be conducted.

• Over 30% of private sector companies and voluntary sector organisations do not have a clear policy about applying sanctions where fraud is found.

• 58% of voluntary sector organisations and 35% of private companies have no clear policy on the recovery of fraud losses and over 35% of both do not use the law fully to do so.

• 43% of public sector bodies, 50% of private sector companies and 76% of voluntary sector organisations do not regularly review the effectiveness of their counter fraud work.

Treating fraud as a business cost

There has been much laudable work done over the last decade with the aim of treating fraud as a business issue like any other. Increasingly fraud has been seen as something to be quantified and assessed, with clear metrics showing the speed of progress in reducing its cost and impact. But historically, this has not always been the case. Past anti-fraud ‘measures’ have ranged from simply hoping that it will not happen, to at best reacting only when it inevitably does. Such head-in-the-sand attitudes simply do not constitute a viable approach today (indeed, they never did).

Fortunately it is now possible to do much better. The counter-fraud profession has developed significantly, exemplified in the 13,000+ people who now hold Foundation, Advanced, Degree or Masters level Counter Fraud Specialist or Certified Fraud Examiner qualifications in the UK. Proper professional standards are also making a major difference.

However, to date no-one has considered the relative progress that different economic sectors have made, how far they have to go, or where the progress has been hardest to achieve.

It is hoped that research such as this report will help to make a real difference. By expanding the extent of knowledge that organisations hold about their own arrangements, we can help to ensure that they make more informed and more effective decisions.

How does your organisation measure up?

This groundbreaking research project has allowed the creation of Europe’s most comprehensive database of fraud resilience information. PKF now offers a low cost ‘Fraud Resilience Check’ for interested organisations, benchmarking them against others and thus revealing the relative strength of their resilience and protection against fraud.

PKF and CCFS will repeat this research each year and continue to report our findings. We believe that the vast honest majority of UK citizens have a right to know how well the organisations upon which they rely on are protected against the dishonest minority who would defraud them.

For more information, and to find out how to make use of PKF’s benchmarking service, please contact: Jim Gee, Director of Counter Fraud Services on 020 7065 0557 or email jim.gee@uk.pkf.com

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MTIC fraud, also known as carousel fraud, first came to prominence in the

early 2000s. In a typical MTIC fraud, a VAT registered business acquires high value goods from another EU member state, sells them to another VAT registered business in the UK, then goes missing before it is due to pay the VAT to HMRC on its VAT return. The output VAT collected on its sale of the goods is the ‘profit margin’ of the fraud. The goods are sold through a number of UK companies before being removed from the UK to another EU member state. This removal is zero rated, the exporter extracting the VAT evaded from the tax authorities by reclaiming input tax on the purchase of the goods. In sophisticated, organised frauds, the companies in the cross border supply chain are working together.

Carousel fraud normally involves high value, easy to handle goods, such as mobile phones and computer equipment (especially CPUs). In recent years though, the practice has expanded to include other items such as games consoles, razor blades, confectionary, alcohol and even non-tangible services - particularly the trading in emissions allowances (‘carbon credits’).

The EU has lost billions of Euros to carousel fraud and has had no alternative but to make changes to the law and encourage member states to concentrate huge resources on tackling it.

The courts are now focused firmly on establishing whether a trader knew or should have known that its supply chains were tainted with carousel fraud, and consequently whether HMRC can legitimately deny VAT recovery on its purchase of stock. PKF’s forensic accountants are often called upon to help law firms with collecting evidence from complex transaction trails. It is essential to keep on top of current case law trends to ensure the right evidence is gathered to support a client’s case.

The legal framework

In the UK, HMRC’s first response was to aggressively block the exporter’s VAT recovery on a particular shipment of goods that was believed to be part of a fraudulent supply chain, whether or not complicity in the fraud had been proved. But by 2006 some high profile cases in the European Court of Justice (Bond House and Axel Kittel) had set limits around HMRC’s powers by defining the circumstances under which VAT recovery could be blocked. Broadly speaking, the legal tests are:

• Was the business directly involved in the MTIC fraud?

• Did the business know about the MTIC fraud?

• Did the business have the means of knowing that there was MTIC fraud in the supply chain?

Businesses setting up deals to buy typical ‘MTIC goods’ are now expected to make ‘reasonable checks’ on the integrity of their

Steve Habayeb Director of Forensic Services

Don’t get caught in the

carouselThe risk of being unwittingly caught up in a ‘carousel fraud’ – a VAT Missing Trader Intra-Community (MTIC) fraud – has blighted the mobile phone and computer industries for nearly a decade. Now it is spreading into other types of goods and services. Steve Habayeb reveals how forensic accountants can help to support a client’s case.

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supply chains, following a list published by HMRC. The list of checks is lengthy but broadly focuses on establishing the legitimacy of customers and suppliers, the commercial viability of the transaction, and the existence and viability of the goods in question. Practical examples include verifying the supplier/customer’s VAT registration number, obtaining written and signed trade references, carrying out credit checks and making personal (i.e. face to face) contact with new suppliers.

If these checks indicate the presence of fraud, HMRC suggests the business should pull out of the deal and report it to HMRC. If a business does not conduct reasonable due diligence on a deal that is later found to be linked to fraud, HMRC can argue that the trader had the means of obtaining knowledge of the fraud but decided to ignore it.

The current picture

Since then, a reverse charge system of accounting for VAT has been introduced in the UK to stop the opportunity for fraud on sales between VAT registered businesses of mobile phones, computer chips and emissions allowances. Under the reverse charge accounting mechanism, it is the responsibility of the customer, rather than the supplier, to account to HMRC for VAT on these products.

However, the UK courts are still processing a large number of cases from the pre-reverse charge era. Now the high level case law has bedded in, most MTIC cases in the VAT tribunals focus on weighing up the evidence to decide whether the individuals running the business knew or should have known about the fraud. In the last couple of years, the vast majority of cases that have come to the courts and VAT tribunals have been won by HMRC, to the extent that a taxpayer victory

is newsworthy based on rarity value alone. Some recent successful actions by taxpayers are discussed below.

MobilX and Blue Sphere

In a case brought by MobilX and Blue Sphere, the High Court gave a more detailed exploration of the ‘means of knowledge’ test when deciding that HMRC cannot block input tax simply on the basis that it was ‘more likely than not’ that the transaction was connected with fraudulent evasion. Instead, HMRC must show that the trader should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with MTIC fraud. This increases the evidential burden on HMRC and creates an area in which detailed forensic examination may be appropriate to establish the true position.

Masstech Ltd

Masstech Ltd, suppliers of laboratory and medical equipment, successfully appealed against HMRC’s bid to block VAT recovery on its purchase of 10,000 disposable alcohol test strips. The case was largely won because the goods concerned were not typical MTIC goods and their nature was reasonably consistent with the company’s main business activity – the Tribunal decided that it was understandable that the company director was unaware of MTIC fraud and the need for increased diligence when carrying out the deal. There is however more to be read between the lines of this case – the Tribunal seemed surprised by the laxity of the company’s checks on the deal and frustrated that HMRC had not presented a better case. As things stood, it could only put this down to a general naivety and lack of business acumen on the part of the director (used successfully as a defence before).

Brayfal Ltd

HMRC refused VAT recovery on a purchase of mobile phones by Brayfal Ltd when MTIC fraud was identified elsewhere in the supply chain. In this case, the Tribunal decided that Brayfal had carried out all the reasonable enquiries that were required to prove, on the balance of probabilities, that it had no actual knowledge – or means of knowledge – of the fraud. This decision was reached in spite of the fact that Brayfal did not always conduct the full list of due diligence checks suggested in its working practices. The Tribunal concluded there was no evidence to show that these further checks would have made Brayfal aware that its transactions were tainted by fraud.

Getting help from PKF

HMRC’s internal legal team is currently inundated with cases of MTIC or ‘carousel’ fraud. If every case came to court, its backlog would take an estimated 75 years to clear. The quality of HMRC’s evidence gathering has suffered accordingly. Not only has it lost cases it could have won (by better examination of the vast quantities of paperwork), but the taxpayers’ interests are also being damaged in cases where HMRC assumes guilt based on a small and unrepresentative sample of transactions and payments.

MTIC fraud by its very nature produces a significant volume of documentation, and often features concerted efforts to conceal the fraud. Law firms representing businesses which find themselves caught up in MTIC disputes can benefit significantly from the instruction of forensic accountants.

In PKF’s experience, such cases often involve significant volumes of documentation presented in an ad hoc, piecemeal fashion.

These documents need to be properly organised, summarised, analysed and presented so as to reflect the true underlying trading circumstances of the organisation clearly, concisely and accurately, and present this to the courts. Any prosecution action, or defence against such actions, requires the provision of a clear audit trail that identifies all related suppliers and customers, trading terms, pricing, margins and cash flows. In such circumstances, advisers with extensive experience can make all the difference – saving you from a dizzying ride with HMRC.

For more information please contact: Steve Habayeb, Director of Forensic Services on 020 7065 0303 or email steve.habayeb@uk.pkf.com

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But the majority of measures out there are about dealing with fraud that has already taken place. There is a pressing need for counter-fraud services that can pre-empt fraud, reducing the threat before it materialises.

The problem with such preventative measures, of course, is that until now it has been hard to gauge whether the money spent on preventing fraud is well-spent. If one cannot predict with any accuracy the likelihood of a threat, nor how much it might cost an organisation, then someone can always claim that the preventative measures are excessive.

PKF’s new Counter Fraud Services have been designed to solve this problem. The new approach is to treat fraud simply as a business cost. Using the latest research, it is possible to measure with unprecedented

accuracy the cost of fraud to the business – and thus take measures to reduce that cost.

Fraud as a business cost

The work of PKF’s Counter Fraud Services is to help clients accurately measure the scale of their losses, and by reducing them, deliver significant financial benefits. This work draws upon the latest global research, involving 132 measurement exercises in 66 organisations from 9 countries, across 32 different types of expenditure with a total value of £3 trillion sterling equivalent. The research indicates that the average losses resulting from fraud amount to 4.6% of an organisation’s expenditure. Counter Fraud Services have been shown to reduce such losses by up to 40 per cent within 12 months, amounting to as much as a 12 to 1 return on the cost of the work.

a new weapon in the

fight against fraudThe ongoing struggle to prevent and mitigate fraud has led to the development of an arsenal of measures to fight it. Forensic accountants have become experts in detecting, investigating and reducing the damage caused by fraud, deploying their expertise in a continuous arms race with the fraudsters themselves.

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PKF has formed a strategic partnership with the Centre for Counter Fraud Studies (CCFS) at University of Portsmouth. The CCFS is Europe’s premier academic centre of knowledge about fraud and is chaired by Jim Gee, PKF’s Director of Counter Fraud Services. The team is thus able to combine specialist, hands-on experience with the latest academic research and rigour, and the results have proved very effective.

Together, PKF and the CCFS have compiled the most comprehensive fraud resilience database in Europe, thus creating the capacity to undertake cost-effective Fraud

Resilience Checks, benchmarking clients against their peers across the private, public and voluntary sectors. Clients are provided with confidential reports identifying where counter fraud arrangements can be strengthened. Further services are available to assess and develop anti-fraud cultures cost effectively, and to undertake fraud displacement research (revealing why fraudsters choose to target a client organisation and what can be done to ensure they don’t).

The highest standards

Over the last decade, a new counter fraud ‘profession’ has developed with around 13,000 people trained and accredited at foundation, advanced, degree and masters levels across the UK. It is now the default position that people working in this area should be professionally trained. In support of this development PKF now provides professional Accredited Counter Fraud Specialist training, as well as the UK’s first training courses on the accurate measurement of fraud losses (and error losses), and the accurate assessment of performance, savings and the related return on investment.

Just as important as protecting organisations from fraud, is the need to safeguard individuals (and by implication, their organisations) against the threat of identity fraud. With the development of technology and the growth of social networking, this is a rapidly developing problem. PKF’s Counter Fraud Services can use highly specialised techniques to conduct investigations where others cannot, and can continuously and proactively scan to see if personal details have been hijacked. Individuals whose profile makes them especially vulnerable to identity fraud will find this low cost service particularly relevant to them. A similar service is also available to organisations to prevent their corporate identities from being hijacked, and to protect their brands.

The battle against the fraudsters will undoubtedly continue long into the future – but organisations can now defend themselves more effectively than ever before.

For more information please contact: Jim Gee, Director of Counter Fraud Services on 020 7065 0557 or email jim.gee@uk.pkf.com

Even more reports of fraud hit the headlines during 2010, with 318,420 reports compared to 292,799 in 2009. The reports describe an astonishing variety of various big and small-time scams. Here are some of the worst that last year had to offer.

Emma Golightly (To Jail)Holly Golightly made her living beguiling gentlemen with her vivaciousness so they would part with their dollars, but Emma Golightly (real name Emma Charlton) wangled cash by telling her paramours that she had terminal cancer. She also claimed to be the editor of Vogue – carrying a miniature dog to add to the illusion – and a millionaire running a chain of photographic studios. In fact she was a con artist who spent £250,000 on holidays, chauffeur-driven cars and restaurants. She was prosecuted and jailed for three years.

Hamming it up Spanish ham inspectors put 17 tonnes of pig meat into quarantine as they cracked down on a massive fraud involving Spanish hams that – purportedly – come from the haunches of free-range pigs that feast daily on acorns. Authorities in southern Andalucia said that, to provide the quantity of Iberico hams that now hang from supermarket and delicatessen meat counters, the region would have to double the number of locally bred, acorn-fed pigs. Prices can rise as high as £1,300 for a single pata negra ham.

Li Yi – What A Cheeky Monk One of China’s most famous monks, who counts some of the country’s most senior figures among his followers, went on the run after being exposed as a fraud. Chinese government officials said that ‘Supreme master’ Li Yi, a 41-year old Taoist monk, had faked a long list of improbable super powers. Mr Li had claimed that he could sit cross-legged under water for more than two hours because of his Taoist abilities and that he could withstand 220 volts of electricity circulating throughout his body. Mr Li used his fame to sell health and philosophy programmes to his 30,000 followers at the Shaolong Taoist Temple near Chongqing which cost up to 9,000 yuan (£900) a week.

Frauds of the year Part 1

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Although the Justice Secretary Ken Clarke stated recently that the new anti-bribery laws could ‘cost British firms foreign trade’, most business chiefs and MPs are behind the drive to tackle the threat that bribery poses to economic progress and development globally. Up until now, it has been reasonable to expect that it would be very difficult to prosecute a UK based company in relation to acts of corruption taking place overseas. Furthermore, it was also considered difficult to prove that senior individuals in the UK office of a company operating overseas were even aware of some of the activities taking place in the territories in which the company operated. The Bribery Act dismisses those premises by introducing the concept of ‘failing to prevent bribery’.

The only defence to the corporate offence is to prove that a business ‘had adequate procedures designed to prevent persons associated with it from undertaking such conduct’. There is very general guidance in relation to the principles for bribery prevention, but no prescriptive list of controls or actions that businesses should take.

Much of the work required needs to be performed internally. The key aspects to consider revolve around clear practical

policies and procedures that are embraced and communicated throughout an organisation and which are implemented effectively.

There are also several key areas where outside assistance can be very valuable. The need for this specialist input is most apparent in those areas where the necessary experience or skills are not already available in-house. It can also be useful as a sense-check, or to provide comfort over the reliability of internal procedures or capabilities.

Watch your back The requirements of the Bribery Act extend beyond a business’s direct employees. Parties who work for or with the organisation are also covered, so the organisation – and potentially the organisation’s senior officers – could be liable for any wrongdoing on the part of subsidiaries and their employees, agents, joint ventures and consortia parties. Organisations will thus want to go to extra lengths to ensure always that these business relationships are transparent and ethical. Just as businesses often hire business intelligence services to provide ‘know your customer’ (KYC) services, these services can screen potential, or existing, overseas agents or third parties. PKF’s team is particularly well placed to provide such

Make it your business to know theirs

When the Bribery Act is finally implemented your and your client’s businesses could face an unlimited fine for bribery – even if nobody within your organisation has ever contemplated bribing anyone. The implications of the Bribery Act 2010 may catch many unprepared. Forensic partner David Dearman explains.

The full implementation of the Bribery Act is looming on the horizon, and UK companies – particularly those with operations outside the UK – need to be braced for the potential consequences. The line between best practice and prosecution is becoming even thinner, and doing nothing is increasingly not an option.

Under the new Act, prosecutors will be able to target the overseas operations of any business, UK or non- UK registered which conducts operations in the UK. Given the four new specific offences of bribery, prosecutors will be especially on the lookout for instances of bribing foreign public officials, and of buying influence at commercial counterparts – which will include the offence of failure by an organisation to prevent a bribe being paid on its behalf. As a result, facilitation payments made by agents or joint venture partners in overseas markets may well be targeted by law enforcement, even if these are more difficult to prosecute.

With this in mind, it is clear that it has become more important than ever to know as much as you can about the overseas businesses with which you or your clients have any kind of working relationship. The actions of one of these partners may well backfire upon you and land you in court. Heightened vigilance Increasingly, PKF’s Business Intelligence team is becoming involved in examining the methods by which overseas selling agents, appointed by UK companies, assist their Principals to win business locally.

Up until now, the focus of this type of work was broadly to examine how well-connected the local agent was and how impressive was his previous track record. The focus is now shifting, and extends towards a consideration of the particular methods engaged by the agent to secure success.

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To find out how PKF’s Forensic and Business Intelligence services could help you protect your business against bribery and corruption issues, please contact David Dearman on 020 7065 0304 or email david.dearman@uk.pkf.com.

services in the regions of Eastern Europe, the former Soviet Union, the Middle East, the Indian Sub-Continent, and South-East Asia including China.

The Bribery Act makes it simply good practice to conduct a detailed due diligence review of all proposed business partners, employees or agents, wherever in the world they are situated. You need to know about their business reputation and standing, and about any other entities or parties with which they are linked. It also pays to know about the local accounting and business customs when getting involved with other territories.

As ever, the best defence is prevention. By having suitable controls and procedures in place, you can greatly reduce the risk of bribery and corruption (and thus of potential prosecution). A first step towards improving your controls is to obtain a benchmarking against comparable organisations, to find out

the specific risks that your business faces, and its greatest areas of weakness, so you can then take steps to counter them. It is also important to have a strong anti-bribery culture within your organisation. Talk to PKF to find out more about our benchmarking and culture assessment services.

If you do suspect that bribery or corruption has taken place within your

organisation or in connection

with it, you need to act

quickly. PKF can perform a discreet

investigation, finding out exactly

what has happened and giving professional advice on the best response, including the decision on whether or not to self-report. Our services range from covert surveillance to detailed investigation and analysis of systems and data.

Whatever your business circumstances, the risks of bribery and corruption need to be addressed. You can act now to ensure that your house is in order, or gamble that the future cost of current inaction will not be too high.

A confession to make A French priest who drove a Ferrari, lived with a mistress and had 28 bank accounts was jailed for fraud. Father Antoine Videau amassed a fortune equivalent to £2 million over 20 years by stealing donations to the church and rent from church property. He even siphoned off £500,000 from the estate of an archbishop after he was made executor of the senior churchman’s will. He fleeced nuns by renting out their convent for private events and spent church funds on a ‘pilgrimage’ to Las Vegas. Father Videau, 64, received a three-year prison sentence in Corsica for crimes that led to him being known as the ‘Playboy Padre’.

frauds of the year

That Old Trick…Japan has long boasted of having many of the oldest people in the world, but that was before the police found a body of a man, thought to be one of Japan’s oldest at 111 years, mummified in his bed, dead for more than three decades. His daughter, 81, hid his death to continue collecting his monthly pension payments. A woman, who would have been the

oldest woman in the world at 125, is also missing, and probably has been for a long time. When Tokyo city officials tried to visit her at her registered address, they discovered that the site had been turned into a city park – in 1981. To date the authorities have been unable to find more than 281 Japanese who had been listed in the records as 100 years old or older.

They really were terroristsA ruthless couple terrorised almost £2 million out of vulnerable families by claiming that they were linked to the IRA. Travellers Dennis McGinley and wife Bianca spent the money on plush caravans and a fleet of luxury cars. The biggest losers were a North Yorkshire farmer who was defrauded out of £1 million and a father and son who lost £800,000. Two companies were stripped of

their assets and closed down

and victims were forced to travel around the UK making payments to McGinley.

McGinley was jailed for eight

years and his wife for three and a half years after they admitted conspiracy to defraud.

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the Bribery Act and the quest for the Holy Grail

The legislation has been drafted very broadly, and covers a great range of behaviours. This wide-ranging scope appears to be a quite deliberate policy: essentially, if it looks like a bribe and smells like a bribe, it is a bribe – and will be covered by the Bribery Act.

It is understandable that those policing this area will be very happy to have this sort of legislation. Often it can be difficult to prepare and present a case, despite significant evidence of wrongdoing. Legislation that is far reaching and with little wriggle-room for defendants should simplify the investigation and prosecution of corrupt behaviour.

There are many positive aspects to the Bribery Act, but on closer inspection it appears to cover an enormous amount of very common behaviour. Some of this behaviour may appear wrong to the vast majority of business people, but other areas such as corporate hospitality and overseas facilitation or ‘grease’ payments are extremely common. There is also no allowance for local custom or practice. Many business people will be horrified to think that they could face personal charges of bribery and corruption for seemingly standard business practice. Additionally, many businesses fear the prospect of being charged with the new offence of ‘failure of a commercial organisation to prevent bribery’.

The UK’s outdated legislation relating to bribery and corruption has long been in need of modernisation. The Bribery Act, looks like manna from heaven for prosecutors and investigators. Forensic Services Manager Ben Morrison comments.

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will be prosecuted…unless they go too far. Of course, ‘too far’ hasn’t been strictly defined so we will just have to guess – an appalling position for business leaders to find themselves in.

Studies have shown that people are more likely to accept laws (even those they do not agree with) if they believe that the laws are enforced fairly. By creating very strict laws and then openly stating that they will not be fully enforced, UK businesses and society are actually being given an unpalatable message: abiding by the law isn’t that important, instead just make sure that you don’t get caught doing anything “too bad”! This Act could contribute to an increased perception that breaking the law is commonplace and no longer a major concern.

Of course the SFO will want to make headlines at some point to demonstrate its effectiveness and to show off its new powers. This is understandable: for years

the SFO’s failures have been writ large whilst its many successes have appeared as footnotes. However, this pressure to take successful action could lead to low-hanging fruit being picked. Rather than going for the most complicated and heinous crimes, those cases that are easier to bring to Court, or with defendants that are eager to settle, will be more tempting.

For the vigilant, the Bribery Act is a timely reminder of our responsibilities and an opportunity to ensure that our business methods are appropriate. For the careless or unlucky few, it could be a bridge too far. You have been warned!

For more information on this subject, or on any aspect of our forensic services, please contact Ben Morrison, Senior Manager on 020 7065 0661 or email ben.morrison@uk.pkf.com

The general principle being applied appears to be that bribery is wrong – no arguments so far. It is not just those at the bottom of the chain whose lives can be blighted by the impact of bribery – those ‘honest’ organisations who refuse to bribe can also suffer as work is given to less scrupulous competitors. By making it easier to investigate and prosecute wrongdoers, the Bribery Act should help to ensure that there is a more level playing-field and that ‘honest’ businesses are not damaged by bribery.

A reckless crusade?

If only it were that simple. There may be an opposite effect to that intended by the Bribery Act. Well-run businesses with good corporate governance will incur further costs in updating anti-corruption and bribery procedures and controls. Those who are intent on bribing to win business will continue to do so. They may need to be more subtle, and think of more discreet ways of achieving this, but bribery will not disappear. Many businesses have already questioned their appetite for risk and whether they can continue to deal in some emerging markets and areas where bribery is considered more common. This effectively punishes the ‘honest’ businesses twice over: they incur additional costs and are unable to profit from work in many rapidly developing markets. All of this at a time when the UK economic outlook is far from strong.

The territorial reach of the Bribery Act enables action to be taken against overseas businesses if they have a connection to the UK. Given how stringent the Bribery Act is (compared with other

overseas anti-bribery legislation) this will provide a significant incentive for some businesses to avoid London’s capital markets or to close UK subsidiaries or branches. Richard Alderman (the Director of the Serious Fraud Office) has repeatedly stated that he intends to use his new powers to pursue overseas businesses, so as to ensure that UK businesses are not disadvantaged by the Act. This is very laudable; but realistically, how is the SFO (with its limited man-power and budget) going to police overseas businesses effectively? It is inevitable that their efforts will be more focused on UK businesses – leaving overseas businesses with comparatively less regulation and competition.

An unholy confusion

Even if the requirements and powers of the Bribery Act are considered the ultimate legislative Holy Grail for both the UK and (hopefully) other countries, it is perhaps too much too soon. Probably the most worrying aspect of this legislation is the lack of certainty in the guidance and the use of ill-defined prosecutorial discretion. What we have is a situation where tighter laws have been introduced, but on the basis that they may not be fully enforced. It seems more important to have appropriate laws that are then enforced tightly. Further guidance is expected shortly from both the Ministry of Justice and the SFO, but no change is expected to be made to the actual legislation itself. The prosecutorial discretion means that businesses may effectively continue with some contentious business practices and not worry that they

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