The Implications of Insureds’ Illegal Conduct

Insurance Law360
January 17, 2017

By Deepa T. Sutherland and Hernán N. Cipriotti
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Allegations of corporate bribery and corruption are increasingly frequent. According to a recent report by PwC, the World Bank estimates that more than $1 trillion is paid in bribes each year and 55 percent of global CEOs remain concerned about bribery and corruption as a threat to company growth [1]. When insuring companies with a global presence, insurers and reinsurers therefore face a very real risk of their insured becoming implicated in bribery and corruption.

Insureds often operate in countries with a higher risk of falling foul of the increasingly tough anti-bribery and corruption legislation that has emerged in recent years in the U.K. and U.S., namely the Bribery Act 2010 and the Foreign Corrupt Practices Act of 1977 respectively. In many jurisdictions, large risks are written by local insurers as a front, with the risk being borne by U.S., European or London market reinsurers. While an insured’s illegality is relevant to (re)insurers in the context of potential moral hazard and avoidance defenses, (re)insurers need to be aware of the far reaching territorial application of the Bribery Act and FCPA and the penalties they impose.

U.K. Bribery Act

Illegal conduct by the insured could include attempting to influence or influencing government officials in order to obtain contracts, an advantage in a public tender, local taxation issues or diplomatic favors. It could also include facilitation payments which are routinely seen as “local custom” or “business as usual” in some countries.

Such conduct puts the insured in danger of falling foul of the U.K. Bribery Act. The “active” bribery offenses of offering, promising or giving a bribe to another person (section 1), or bribing a foreign public official (section 6) can be committed by a company overseas if that company is incorporated in the U.K.

However, it is the “passive” corporate offense of failing to prevent such bribery (under section 7) that is of greater concern for companies and a key issue for their boards. The failure of the company to prevent bribery on its behalf by associated persons anywhere in the world is a strict liability offense and does not require intention on the part of the company. This can affect a U.K. company’s activities overseas or those of a non-U.K. company carrying out any part of its business in the U.K. Such a company is guilty under section 7 if a person associated with that organization (employees are inferred to be associated persons) bribes another person intending to obtain or retain business, or an advantage in the conduct of business, for the organization. The company’s awareness of the conduct is irrelevant. Further, the associated person need not have been convicted of the offense; all that is required is evidence that bribery took place.

The Serious Fraud Office (SFO), the main prosecutor with responsibility for enforcing the Bribery Act in England and Wales, has shown its willingness to prosecute companies under section 7 and secured its first successful conviction for a section 7 offense in February 2016. Sweett Group PLC was prosecuted in respect of its activities in the United Arab Emirates and fined for failing to prevent bribery on its behalf by a subsidiary company in order to secure a contract.

The scope of section 7 is alarmingly wide for a global corporation: it holds a company responsible for bribery committed anywhere in the world, by a person who has no connection with the U.K. and who is performing services outside the U.K., as long as the corporate entity carries on any part of its business in the U.K. This last requirement is not defined in the act and it will be for the courts to determine its meaning in each case, taking a common sense approach. For a non-U.K. company, relevant factors include the independence of the subsidiary if there is a parent-subsidiary relationship, whether the company is directed from the U.K. and whether the company has a “demonstrable business presence” in the U.K. (a U.K. stock listing is probably not enough to trigger liability).

A company has a defense to section 7 if it can prove that it had “adequate procedures” in place to prevent bribery (the Sweett Group PLC was found not to have this defense), and the insured’s internal risk management procedures in this respect will therefore be relevant to (re)insurers at the underwriting stage.

Should an insured’s acts fall foul of the Bribery Act, this will have various implications for (re)insurers, not least because they will each be subject to their own in-house compliance policies and procedures. Since it is possible for the benefit of a contract that is the result of a bribe to constitute the proceeds of crime (“criminal property” under the Proceeds of Crime Act 2002, which is applicable to the proceeds of all crimes including those committed abroad), it also raises the further question as to whether, by providing coverage to a company guilty of Bribery Act violations, the (re)insurer risks committing offenses under anti-money laundering legislation by dealing with criminal property.

This will always be fact specific. POCA is not designed to prevent dealings with an otherwise legitimate organization that may be accused of bribery; multinational companies are frequently faced with local accusations and such allegations do not necessarily taint the entirety of that company’s operations. The key issues are whether the actual money in question in each transaction that the (re)insurer will enter into, such as receipt of premium and payment of losses under the policy, is the proceeds of the insured’s illegal conduct, and whether the (re)insurer knows or suspects that the property in question is criminal property — POCA requires a subjective suspicion that the actual money the (re)insurer is dealing with is the proceeds of crime and this means that the status of the property may change and become criminal property depending on what is known or suspected at the relevant time.

Issues to be considered include whether the monies in question can be traced back to the incidents of bribery and a specific sum can be delineated as being of itself the proceeds of crime, the contractual chain and flow of money from insured to (re)insurer, how was the risk placed (particularly in a reinsurance transaction), the role of the broker(s) in the chain and their own compliance checks carried out on the insured, and whether there is any suggestion that the policy is being used to launder money (which may have implications for (re)insurers in terms of paying settlement monies).

The above points are just some of the issues that may arise at the underwriting and claims stages. Most (re)insurers’ compliance departments will have a system of checks in place, but it should be borne in mind that the applicability of the legislation will depend on the facts in each case.

U.S. Foreign Corrupt Practices Act

The FCPA[2] was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.

The FCPA becomes more important every day as the interconnected nature of business results in an ever increasing number of cross-border business enterprises. Earlier this year, one of the largest corruption scandals in history was revealed as part of government investigations in Brazil, illustrating the type of scheme (re)insurers could potentially find their insureds to be involved in: one of the biggest engineering and contracting companies in Latin America, and the largest petrochemicals producer in Latin America (owned by the same holding company) were found to be involved in a multimillion dollar bribery corruption scheme.[3] As a result the company agreed to plea bargains and a massive leniency deal under which it would pay between $2.6 and $4.5 billion for its role in the scandal,[4] and long prison sentences for some executives.[5] A company of this size is likely to have entered into business dealings with a wide range of foreign companies (and local subsidiaries).

While the FCPA is more limited in scope than the U.K. Bribery Act and does not create affirmative duties on those dealing with entities involved in corrupt practices, both regulations aim at discouraging local actors from supporting or dealing with corrupt entities. The FCPA contains anti-bribery provisions, which prohibit corrupt payments to foreign officials to obtain or retain business; and accounting provisions, which require “issuers” to keep accurate books and records and to maintain an adequate system of internal accounting controls. The anti-bribery provisions apply to three categories of person or entity: (1) U.S. persons and businesses (“domestic concerns”), (2) U.S. and foreign public companies listed on stock exchanges in the United States or required to file periodic reports with the U.S. Securities and Exchange Commission (“issuers”), and (3) foreign persons and businesses while acting in the territory of the United States.

The FCPA prohibits issuers and domestic concerns, and their officers, directors, employees, agents and stockholders acting on behalf of such entities or persons, from using any “instrumentality of interstate commerce” corruptly in furtherance of a payment to any foreign official for the purposes of influencing decision-making, inducing the official to violate a duty or securing any improper advantage, in order to assist the issuer or domestic concern in obtaining or retaining business for or with any person.

Importantly, U.S. companies or persons are subject to these anti-bribery provisions even if they act outside the United States and even when no means of interstate commerce is used. Accordingly, a U.S. company can be liable for the conduct of its overseas employees or agents even if no money was transferred from the United States and no U.S. person participated in the foreign bribery.

While nothing in the FCPA imposes an affirmative duty on others who contract with an entity that may have violated the statute, such as an obligation to make any report, cease business relations or take any other related action in the course of dealings with the accused entity, (re)insurers should take an active role in determining whether local subsidiaries are in full compliance with the FCPA.

At the same time, the insureds themselves should have internal mechanisms set up to prevent this type of behavior and, at a minimum, implement accounting practices that will help identify instances of corruption or discourage the practice altogether. This is particularly important because there have been multiple instances where a subsidiary is the infringing entity and the parent company was held liable. Corporations and business entities can be subject to fines of up to $2 million for each knowing violation of the anti-bribery provisions, and there have been settlements in the hundreds of millions in the past.[6] Individuals are subject to a fine of up to $100,000 and up to five years in prison for willful violations.

Conclusion

The corruption scandals of recent years have led to increased public scrutiny into the operations of companies and demand for them to be held accountable. The wide ranging remit of the U.K. Bribery Act, along with the tougher stance of the U.K.’s SFO, is an indication of increasing anti-corruption enforcement in the U.K. As prosecutions under the Bribery Act increase, its principles will be tested in court, but in the meantime its implications for insureds remain a pertinent issue for (re)insurers to be aware of.

The U.S. government has similarly taken a fierce stand in enforcing the provisions of the FCPA, and it often collaborates with foreign governments to do so. Companies that fall within the jurisdiction of the act should be cognizant of corruption practices in countries where they do business. (Re)insurers writing risks in foreign jurisdictions should adopt a proactive stance in vetting the practices of their local subsidiaries as well as those of their (re)insureds.

Deepa T. Sutherland is a solicitor and Hernán Cipriotti is an associate with Zelle LLP in London. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice

[1] “A Christmas future: Bribery and corruption in 2022” by Mark Anderson - PwC, dated Dec. 7, 2016

[2] 15 U.S.C. §§ 78dd-1, et seq.

[3] Magalhaes, L. (2016). Odebrecht to Cooperate With Prosecutors in Corruption Probe. WSJ. Retrieved Dec. 18, 2016, from http://www.wsj.com/articles/brazil-police-target-odebrecht-in-corruption-probe-1458650937

[4] Samuel Rubenfeld, P. (2017). Brazil’s Odebrecht to Pay Up to $4.5 Billion to Settle Bribery Case. WSJ. Retrieved Jan. 3, 2017, from http://www.wsj.com/articles/odebrecht-to-pay-2-6-billion-to-settle-bribery-claims-1482325309

[5] Marla Dickerson, L. (2016). Odebrecht Ex-CEO Sentenced to 19 Years in Prison in Petrobras Scandal. WSJ. Retrieved Dec. 19, 2016, from http://www.wsj.com/articles/odebrecht-ex-ceo-sentenced-to-19-years-in-prison-1457449835

[6] Subsidiary of Tyco International Ltd. Pleads Guilty, Is Sentenced for Conspiracy to Violate Foreign Corrupt Practices Act. (2016). Justice.gov. Retrieved Dec. 19, 2016, from https://www.justice.gov/opa/pr/subsidiary-tyco-international-ltd-pleads-guilty-sentenced-conspiracy-violate-foreign-corrupt; and VimpelCom Limited and Unitel LLC Enter into Global Foreign Bribery Resolution of More Than $795 Million; United States Seeks $850 Million Forfeiture in Corrupt Proceeds of Bribery Scheme. (2016). Justice.gov. Retrieved Dec. 19 2016, from https://www.justice.gov/opa/pr/vimpelcom-limited-and-unitel-llc-enter-global-foreign-bribery-resolution-more-795-million