Questions 1 – 3 relate to the topic raised within the following article. Paying over £350,000 in bribes and facilitation payments, FH Bertling executives made these corrupt payments to ensure that their bid for the ConocoPhillips ‘Jasmine’ shipping contract was successful and, separately, to obtain assurance that the inflated prices it charged for additional services were waved through by ConocoPhillips staff.
SFO Director, Lisa Osofsky said:
‘These senior executives failed to show any integrity, resorting to bribery to secure lucrative contracts and hide their illicit activities. It is our mission to bring criminals like these to justice. Bribery has no place in business in Britain or abroad. It undermines the rule of law, distorts our economy and damages the reputation of the UK.’
Identify and examine some mitigating actions that a regulated firm should consider to reduce the risks associated with bribery and corruption. Use examples to support your analysis (15 marks 533 words)
There are a number of actions which a firm can take to help reduce the risks of bribery and corruption violations. There are six principles which, if in place, can mitigate the risks to organisations. These principles are: proportionate procedures, top level commitment, risk assessments, due diligence, communication and monitoring and reviews.
One of the mitigating actions is to have an imbedded gifts and hospitality policy within the organisation, this policy shall set the tone for employees to ensure they are transparent. The policy should have the requirement for a formal record of all gifts and hospitalities given or received in the form of a formal register, which should be maintained and monitored by the firms Compliance department. The policy will in addition outline any limits for the giving and/or receiving of gifts or hospitality.
All gifts and hospitality, whether received or given must be recorded into the register irrespective of the monetary value. Any gifts or hospitality received, given, attended or organised if it is or can be perceived as a bribe, an inducement or a conflict of interest. The UK’s Bribery Act 2010 (“UKBA”), the FCA’s handbook, COBS 2.3A, US Foreign Corrupt Practices Act (“FCPA”) and MiFID II inducement rules outline the requirements and boundaries of the acceptance of suitable gifts and hospitality. Under sections 1, 6 and 7 of the UKBA, gifts and hospitality may be punishable. Excessive or lavishness of hospitality can be used to determine whether any violations have occurred.
Under Section One of the UKBA ‘intent to induce improper conduct’ is a test of whether or not gifts or hospitality can be interpreted as a bribe. Offers of gifts or hospitality must be made in ‘good faith’ and are not considered legitimate if the intention behind the offer is to advantage the individual making the offer. Another test the Act applies is the principle of ‘proportionality’. Gifts and hospitality are less likely to be construed as a bribe where they are proportionate to the nature, scale and complexity of an organisation’s business activities.
Ensuring that a companies has robust and adequate internal controls in place, which are independently monitored, recorded and shows tone from the top will ensure that any potential violations of the Act are promptly identified and resolved. An example of a company being fines due to lack of these provisions is Telefônica Brasil.
During 2019 the SEC fined a Brazilian company, Telefônica Brasil, a total of $4.125 million. According to the settlement agreement, Telefônica Brasil failed to maintain adequate internal controls over the hospitality program, which resulted in Telefônica Brasil providing tickets and hospitality to government officials who were directly involved with, or in a “position to influence, legislative actions, regulatory approvals, and business dealings involving the company (Volkov, 2019).
The recording of payments for World Cup and Confederation Cup tickets were not accurately recorded within Telefônica Brasil’s gifts and hospitality register resulting in failure of the FCPA’s accounting and recordkeeping provisions. The company therefore appears to have not enforced their corporate bribery and corruption polices. It is worth noting that the SEC was able to go after the subsidiary due to their American Depositary Receipts being traded on the New York Stock Exchange.
Specifically in relation to the risks associated with bribery and corruption, identify and explain the value of the work undertaken by some of the international agencies and organisations offering guidance to firms, both regulated and non-regulated. (15 marks 306)
Transparency International (“TI”) is an international non-government organisation with their headquarters based within Berlin, Germany. The organisation was founded on the 4th May 1993 with the aim of combatting global corruption.
“Since our beginnings in 1993, we have raised awareness about the far-reaching and devastating effects of corruption, and played a crucial role in lobbying for co-ordinated, multilateral action against it. We have created a coalition of organisations and individuals who are co-operating as never before to build just and honest governments, and sound and socially responsible business practices. And we continue to strengthen our knowledge base and resource network to assist the anti-corruption movement in its mandate” (Transparency International).
TI is mostly known for the Corruption Perceptions Index (“CPI”). The CPI is an index which publishes on an annual basis the perceived level of corruption for countries by ranking them on a scale of 100 being very clean to 0 being extremely corrupt. There are limitations however “as a corruption indicator are widely recognised. TI-S has sought to address these limitations through other kinds of surveys, notably the Bribe Payers Index (BPI), the Global Corruption Barometer (GCB) and through deeper research in the form of the National Integrity Systems assessments” (Norad, 2010).
The CPI highlights countries and relationships which involve politically exposed persons which is vital for company’s on-boarding processes.
“TI has played a significant role in lobbying governments to draft and sign the OECD Anti-bribery Convention (1997), the UN Convention against Corruption (UNCAC, 2003) and the various regional conventions”. (Norad, 2010).
TI also publishes best practice tools and guidance which are available from their website.
The work which TI produces is valuable to individuals and organisations as they assist in drawing attention to issues of corruption as well as implementing programmes which provide access to information, education and natural resources. Assisting both the public and private sectors.
It is worth noting that TI does not have the remit to investigate individual cases.
(From the viewpoint of a UK-based, regulated firm, from a sector of your choice, identify and explain the key differences between the UK’s Bribery Act 2010 and the US Foreign Corrupt Practices Act (FCPA) (15 marks; 573)
The UK’s Bribery Act 2010 (“UKBA”) and the US Foreign Corrupt Practices Act (“FCPA”) both promote the prohibition of corruption and bribery and, crucially, have similar goals. There are however several key differences between the UKBA and the FCPA.
These differences fall within the following categories: jurisdiction, foreign public officials, nature of offence, corporate liability, facilitating payments, enforcement, receipt of bribes, intent and penalties and maintain books and records.
For a bribery offence to have occurred within the UK, the act of bribery needs to have been committed by an individual or entity, UK or foreign, within the UK. The act captures individuals and entities outside of the UK but have connections or conduct business within the UK. The FCPA applies to individuals and entities who reside or are incorporated within the US as well as entities who’s securities are listed on a US stock exchange. The act captures foreign individuals and entities who conduct business within the US.
The UKBA only requires improper action for the bribery offence to have occurred with the act not only being limited to the bribery of public officials or private individuals but in addition also prohibits the acceptance of giving and receiving bribes. The FCPA states bribes must be made with a corrupt intention to obtain or keep services or goods and is in relation to foreign public officials. Furthermore, the UKBA introduces a corporate bribery offence for corporate and partnership entities for failing to prevent a bribe, the FCPA does not have such a provision.
The ULBA does not have any exemption for the facilitation of payments as these are deemed to be bribes to foreign officials whereas the FCPA allows for the exemption of facilitation of payments to a foreign official if the payment is made for day-to-day government tasks.
If an individual is found guilty of a bribery act with the UK, there is a penalty of up to 10 years in prison and/or an unlimited fine. Corporations can face unlimited fines, compensation orders or disqualifications. Where an individual has been found guilty of committing a bribery act with the US there is a penalty of up to 5 years in prison and fines capped to $250,000. Corporations can face fines capped to $2 million. Civil penalties are different.
The US Securities and Exchange Commission (“SEC”) announced that Barclays PLC will pay over $6 million to settle charges that it violated the FCPA by hiring the relatives and friends of foreign government officials in order to improperly influence them in connection with its investment banking business (SEC; 2019).
Barclays failed to devise and maintain a system of internal accounting controls around its hiring practices sufficient to provide reasonable assurances that its employees were not bribing foreign officials in violation of company policy and the FCPA (SEC; 2019).
This is an interesting case as the SEC issued cease and desist proceedings against Barclays in 2019 for violating FCPA with their hiring practices and subsequently was charged by the SEC. However, the Serious Fraud Office (SFO) within the UK has not taken any action. I believe the reason for no action from the United Kingdom is due to the jurisdiction in which the violation took place and that Barclays violated the books and records and internal accounting controls provisions of the FCPA. Companies conducting business in the U.S. must adhere to specified accounting and record-keeping provisions, the UK does not have a provision for this.
Mortgage fraud- Evaluate how the typology operates in practical terms and discuss the risks to, and vulnerabilities of, a UK-based financial services firm (15 marks)
Mortgage fraud occurs when individuals defraud a bank or private lenders through the mortgage process. This can be done by providing false details, failing to provide information required by law or knowing that the information used by others, such as the price of a house sale, might be misleading or untrue (FCA, 2016).
There are various reason for individuals being tempted to commit mortgage fraud. These reasons have been defined into two types known as fraud for housing and fraud for profit (Finney, 2019).
In 2017, a fraudster, Edwin McLaren and his wife was convicted on a number of charges relating to a property fraud scheme worth £1.6 million. He was jailed for 11 years. Mr McLaren targeted householders who were struggling and experiencing financial difficulties and tricked them into signing the ownership of their homes over to him and would either offer to buy their home or lend them money to clear their debts. In return he would receive what he claimed was a part-share ownership of their property. Their properties however was being transferred to the names of others; they lost the title deeds to their homes.
The police said in 2017 that the case was “one of the largest, most complicated property fraud investigations ever carried out in Scotland” (Bury, 2020). Approx. 48 properties were investigated.
A case like the above not only has an impact on the victims, leaving them out of pocket and in worse case situations homeless, but on the soundness and stability of the financial system.
Firms have many risks when it comes to mortgage fraud which can be managed by good practices of controls and systems embedded within firms, examples of poor practices are but not limited to: lack of staff awareness of what behaviours constitute to mortgage fraud, sale incentives which might encourage employees to ignore potential fraud, companies failing to enforce policies and procedures, poor remuneration structures, inadequate due diligence
Banks and private lenders have a responsibility to assist in the fight against financial crime and should have adopted robust systems and controls and verification process in place to highlight and capture any potential cases of mortgage fraud. Another tool available to financial institutions have is the option to file Suspicious Activity Reports to the National Crime Agency. The FCA’s Principle 3 states “a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”.
Consider the following organisations that are involved in fraud investigation and prevention:
• The Fraud Advisory Panel (20 marks; 598)
• CIFAS – The UK Fraud Prevention Service
Outline the key objectives of each and how it operates in practical terms and discuss the effectiveness of each organisation as part of the investigation and prevention process.
The Fraud Advisory Panel (“FAP”) was established within England and Wales in 1998. They operate as a charity and membership organisation and was an initiative created by the ICAEW.
The principle objective of the FAP is “the protection of life and property by the prevention, detection Investigation, prosecution and deterrence of fraud” (Fraud Advisory Panel, 2018). They achieve this by researching the causes and effects of fraud and the way improved “systems and techniques of preventing, detecting, investigating, prosecuting and deterring it, making the useful results of such research available to the public” (Fraud Advisory Panel, 2018). They educate organisations who have been affected or could potentially be affected by fraud by providing information on the regulatory and legal aspects. Lastly, they collaborate with “governments, public authorities, professional and other bodies, companies, firms and individuals concerning the development of general systems, standards, policies, regulations and laws with a view to the prevention, detection, investigation, prosecution and deterrence of fraud” (Fraud Advisory Panel, 2018).
The FAP delivers these objectives by charitable activities, such as conferences and training courses, throughout each year. They are conducted by the support offered by their members and other fraud professionals; “during the year more than 90 volunteers donated their time, knowledge and expertise to speak at our events, develop our policy positions and write our guidance and consultation responses” (Fraud Advisory Panel, 2018). The FAP have social media accounts and can be followed on Facebook, LinkedIn and Twitter.
The Credit Industry Fraud Avoidance System (“Cifas”) was founded within England and Wales in 1988 by the “major lenders in the UK consumer credit industry” (ICA, Unit 3, p.116). They are a not-for-profit membership association who offer fraud prevention service.
Cifas objective is “to detect, deter and prevent fraud in society by harnessing technology and working in partnership” (Cifas - about us, 2015).
A quote from Lady Barbara Judge CBE describes Cifas as “Cifas exists to protect our members and wider society from fraud and financial crime. It is a community of organisations sharing insight and intelligence, meaning it can protect the livelihood of millions of people, and make the UK a safe place to live an do business” (Lady Barbara Judge CBE, 2018). CEO, Mike Haley states “Cifas leads the way in fraud prevention, protecting our members and wider society from fraud and financial crime” (Haley, 2018).
The National Fraud Database and the International Fraud Database are two of the core fraud prevention databases which Cifas operate allowing organisations to exchange information on products and/or services which are considered to be fraudulent as well as confirmed cases of individuals acting fraudulently.
To ensure Cifas reaches its objectives, they collaborate with “fraud prevention, financial, public sector, academic and charitable organisations and law enforcement to raise awareness of fraud and promote best practice in fraud privation” (Wikipedia).
Both organisations are effective within their own rights, Cifas works to protect businesses, charities, public bodies and individuals from financial crime. They have 25+ years of experience within fraud prevention and financial crime, and work with a range of UK organisations to protect customers and the public. Cifas is useful to organisations where fraud has been identified allowing the organisations to identify the linked individual as these individuals would have been placed into the Cifas database. The FAP ensures that everyone who requires it has access to the knowledge, skills and resources to enable them to arm and protect themselves against fraud allowing members to keep up-to-date with the best practices, prevention strategies and insights to allow organisations and individuals to better protect themselves against the fight against financial crime.
- Denise Finney (2015). Mortgage Fraud: Understanding and Avoiding It. Investopedia
- FCA (2016) Mortgage Fraud
- Liz Bury (2020). Mortgage Solutions. Prosecutors seek to confiscate £5.3m from property fraud convict
- Michael Volkov (2019). Volkov. Telefônica Brasil Pays $4.125 Million for Hospitality-Related FCPA Violations
- Noard (2010). Evaluation of Transparency International. Research
- Transparency International. FAQS on Transparency International. What has Transparency International Achieved?
- US Securities and Exchange Commission (September 2019). Administrative Proceeding. File No. 3-19537
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