The Creep of Legislation Targeting Private Corruption

Introduction

While essentially all countries criminalise public bribery, laws regarding private corruption have been slower to emerge. Only a few nations that criminalise public bribery also prohibit domestic private bribery, and an even smaller subset of these countries criminalise transnational private bribery.^[2] Private corruption, however, affects both the private and public sectors.^[3] Aside from resulting in higher risks and decreased efficiencies for companies, private corruption affects the functioning of whole economies by increasing costs and reducing the quality of consumer goods and services, as well as threatening national security.^[4] Private corruption even affects how corporations structure themselves: studies have shown a causal link between multi­national corporations structuring foreign subsidiaries as wholly owned subsidiaries in countries and higher levels of perceived private corruption.^[5]

The effects of private corruption have become even more apparent in the wake of the worldwide privatisation movement, which involves the delegation of traditional systems such as education, prisons, healthcare and welfare to the private sector. Moreover, the ‘emergency spending’ environment in response to the covid-19 pandemic has provided new temptation and opportunity to engage in private corruption throughout the world. As governments increasingly transfer their functions from the public to the private sector, the effects of private corruption on the public are exacerbated.^[6] The public is thus increasingly the ultimate victim of private corruption.

Overview of regulation of private corruption

The regulation of private bribery varies across jurisdictions, from a total absence of regulation in many countries to the UK Bribery Act, which is widely regarded as the most severe private anti-bribery legislation in the world. While some countries have national legislation specifically targeting private corruption, others, such as the United States, target private corruption through a fragmented combination of existing laws.

United Nations Convention Against Corruption

The United Nations Convention Against Corruption (UNCAC), which was adopted by the United Nations General Assembly on 31 October 2003 and came into force on 14 December 2005, establishes standards, measures and rules to help Member States strengthen their anti-corruption legislation.^[7] While previous international corruption treaties had applied exclusively to public corruption, UNCAC specifically addresses private corruption by encouraging ratifying states to criminalise both public and private commercial bribery.^[8]

UNCAC includes preventive measures applicable to both the public and private sectors, including accounting standards for private companies, and mandatory and permissive criminalisation obligations. The Convention also includes obligations with respect to public and private sector bribery, trading in influence and illicit enrichment.^[9] Although the regulation of private bribery is not mandatory under UNCAC, the proposed measures for regulating and criminalising private bribery signal the international community’s disapproval of private corruption and the importance of taking action against it. To guide Member States in fulfilling their obligations under the treaty, UNCAC also produced a toolkit that proposes ways for signatory states to monitor and improve their anti-corruption frameworks.^[10] There are currently 187 signatories to UNCAC, including most countries in Latin America.^[11]

Regulation of private corruption in the United Kingdom and Europe

Both the United Kingdom and the European Union have been at the forefront of implementing legislation targeting private corruption. In the United Kingdom, the UK Bribery Act treats private and public bribery as the same offence through statutory language that prohibits active and passive bribery without differentiating between public and private actors.^[12] The merging of public and private bribery serves to underscore that private bribery is part of a larger family of bribery offences, and raises awareness of the existence and significance of private bribery.^[13] Many view this type of comprehensive bribery statute as essential to directing attention to the prosecution of corruption in private forms.^[14]

The European Union regulates private corruption through the Council Framework Decision 2003/568/JAI on combating corruption in the private sector, which encourages Member States to take measures to criminalise private corruption, though in a less comprehensive manner than the UK Bribery Act.^[15]

Regulation of private corruption in Latin America

In Latin America, only three countries have passed laws expressly criminalising private bribery, while Brazil has a proposed law criminalising private corruption pending in its Congress. Colombia, Chile and Venezuela have implemented legislation targeting private corruption with varying degrees of success.

In 2011, Colombia specifically incorporated commercial bribery into its Criminal Code under Article 250A by Law No. 1474, which carries a penalty of between four and eight years in prison as well as a fine.^[16] This law, however, currently only applies to bribery by a corporate representative and requires there to be damage to the company.^[17] Colombia may also punish private corruption through the existing crimes of illicit enrichment and embezzlement.^[18]

In 2016, Venezuela passed its Law Against Corruption, which specifically criminalises private corruption regardless of its effect on the public sector. Violations of this Law carry a penalty of between two and eight years in prison and a fine of 100 per cent of the bribe offered (irrespective of the amount potentially gained) or received. Companies found to have engaged in private bribery can also be removed from the state’s Sole Register of Persons that Engage in Economic Activities.^[19]

Chile recently criminalised private corruption by adding bribery between private parties and fraudulent administration to its Criminal Code with the passage of Law No. 21121 in November 2018. Under Article 287 of the Criminal Code, private bribery is now punishable by imprisonment and a fine for anyone who receives or offers a bribe.^[20] This addition to the Criminal Code also criminalises fraudulent administration of the property of another under Article 470, of which companies can be victims.^[21]

Mexico’s anti-corruption system

Corruption has long been an entrenched problem in Mexico. Companies doing business there cite diverged funds, money laundering and bribery as recurring concerns; a majority of Mexican businesses consider corruption to be ‘business as usual’.^[22] The pernicious effects of corruption have become even more apparent in the wake of government efforts to curb drug-related violence in Mexico.^[23]

In response to the scattered and impotent efforts that have characterised its anti-corruption efforts in the past, the Mexican Congress voted in 2015 to amend its constitution to renovate its anti-corruption apparatus, creating the National Anti-Corruption System (SNA) an organisation led by a board with civilian oversight that coordinates between existing anti-corruption institutions at the state and federal levels that had previously operated with limited resources or methods for coordination.^[24]

The SNA was created through the General Law on Administrative Responsibilities (GLAR), passed in 2015, which mirrors the US Foreign Corrupt Practices Act (FCPA) in many key respects. For example, GLAR applies to both individuals and corporations, requires companies to maintain internal compliance controls, and includes substantive anti-bribery provisions and significant monetary penalties for companies found to have engaged in corruption.^[25] Unlike the FCPA, however, the extraterritorial reach of GLAR is limited and its application to private corruption is unclear as it focuses on corruption in the context of securing public contracts.^[26] Accordingly, while the SNA includes provisions that could be used to target private corruption, it remains to be seen whether it will be used as such, given the government’s current priority of targeting public corruption.

Brazil’s attempts to regulate private bribery

In the wake of the Lava Jato (Operation Car Wash) and FIFA investigations, support has coalesced around the regulation of private corruption in Brazil.^[27] The FIFA scandal brought to light extensive private corruption among individuals involved in the 2014 World Cup in Brazil, including the conviction in the United States of José Maria Marin, who served as head of the Brazil’s 2014 World Cup Committee, for taking over US$6 million in bribes for media and marketing rights related to Brazilian and South American soccer tournaments.^[28] Marin’s conviction came in the wake of the larger FIFA case, which revealed widespread private corruption among soccer and media executives.

The Operation Car Wash investigation, which has uncovered widespread corruption in Brazil’s public sector, has further spurred interest in regulating private corruption in Brazil, as the scandal has entangled powerful private companies.^[29] While there have been various attempts to pass laws penalising private corruption, Brazil does not currently regulate commercial bribery.^[30]

Interest in regulating private corruption in Brazil, however, has grown in recent years. For example, the National Strategy to Combat Corruption and Money Laundering (ENCCLA), founded in 2003 by the Brazilian Ministry of Justice, is a network of more than 70 private and public institutions, including the federal police, federal prosecutors, Office of the Comptroller General, the Brazilian Securities and Exchange Commission.^[31] In 2018, ENCCLA selected private corruption as its area of focus and as such has taken the lead in creating proposals for measures to fight private corruption.^[32]

Furthermore, several bills are currently pending in the Brazilian legislature that would criminalise private corruption. For example, in 2020, a bill was introduced to criminalise the demand, request or receipt of undue advantages between a third party and a partner, officer, administrator, employee or representative of a private legal entity.^[33] Under this legislation, private corruption would be punishable by two to six years imprisonment and a fine.^[34] Similarly, a bill to reform the Penal Code through the proposed New Brazilian Penal Code includes a provision making private bribery a crime – specifically, Article 172 of the bill would criminalise the receiving of an advantage by an employee or representative of a company in exchange for favourable treatment by a third party. Companies could face fines, debarment from public contracts, confiscation of assets, and mandatory temporary or permanent winding up, and the individuals involved could face a prison sentence of between one and four years.^[35]

Although Brazil does not currently penalise private bribery as an independent crime, scholars have suggested that Brazil could start to prosecute private bribery through other existing laws that partially cover corruption in the private sector, such as those regulating unfair competition or fraudulent administration.^[36]

First, the unfair competition portion of the National Law on Industrial Property^[37] already criminalises commercial bribery between competing companies for anticompetitive purposes, but this law is limited in its application to the anticompetition sphere and to companies within the same industry. Because most instances of private corruption occur between provider and consumer companies rather than between competing companies, the unfair competition law has been insufficient to fully target private corruption, evincing the need for more comprehensive legislation.

Second, private corruption might alternatively be tackled under the existing law against fraudulent administration of financial institutions (Law No. 7492 of 1986). Although this law could be applied to certain types of private corruption, it is limited to regulating financial institutions. In addition, pursuing a fraudulent administration conviction based on private bribery might be held unconstitutional as not being defined with sufficient particularity as required by Article 5 of the Brazilian Constitution.^[38] While existing laws are insufficient to properly combat private corruption in Brazil, their increased use to target the activities they do cover should serve as a warning to the private sector of the government’s willingness to prosecute those who participate in private-to-private corruption.

Brazil’s increased enforcement activities against public officials who have participated in corruption also could indicate a willingness to target private corruption. At the very least, the sheer number of proposed laws targeting private corruption demonstrates that it is likely to be the government’s next focus in its fight to identify and eliminate corruption.^[39]

Laws regulating private corruption in the United States

The United States has a robust framework of laws, regulations and policies for targeting private corruption at the state and federal levels. While there is no specific federal law prohibiting bribery between private parties, 38 states have enacted commercial bribery statutes that criminalise private bribery and corruption at the state level, while other states prosecute commercial bribery under generic fraud statutes.^[40] States with specific commercial bribery statutes often define the crime as when one ‘confers, or offers or agrees to confer, any benefit upon any employee, agent or fiduciary . . . with intent to influence his conduct in relation to his employer’s or principal’s affairs’.^[41]

Private corruption is not per se criminalised at the federal level because the US Constitution reserves for states the power to prosecute most crimes absent a sufficient basis for federal jurisdiction.^[42] However, there are a variety of federal statutes that can be used to address private corruption, including the mail and wire fraud statutes, securities and antitrust laws, the FCPA and the Travel Act.^[43] Federal regulators and prosecutors have also targeted private corruption through various other federal causes of action, such as antitrust, securities fraud, conspiracy, the Money Laundering Control Act, the Hobbes Act,^[44] civil and criminal provisions of the Racketeer Influenced and Corrupt Organizations Act and 18 USC Section 666 (known as the federal funds bribery statute).^[45] These federal statutes have provided a solid framework for the federal prosecution of commercial bribery in the United States, which has increased in recent years.^[46] The Travel Act, the FCPA, and mail and wire fraud statutes have been of particular importance in the federal regulation of private corruption.

The Travel Act encompasses the federal prosecutions predicated on violations of state commercial bribery laws involving interstate travel or transportation in the aid of racketeering enterprises.^[47] Thus, a person who crosses state lines to commit an act of commercial corruption can be held liable under the state’s commercial bribery statutes and under common law tort causes of action.^[48] In states that lack a commercial bribery statue, the Travel Act can be used to prosecute acts of interstate bribery through the unfair trade practice laws of those states under the theory that bribery confers an unfair advantage in the marketplace.^[49]

The FCPA can also be used to target private corruption through its books and records and internal control provisions. In particular, the FCPA’s books and records provision requires publicly traded companies to maintain books and records with ‘reasonable detail’ to prevent the false or off-the-books accounts that, among other things, are often used to conceal commercial bribery. The FCPA also imposes on publicly traded companies the obligation to adopt appropriate internal accounting controls that, among other things, decrease the occurrence of bribery and other forms of corruption.^[50] Internal controls must be adequate to ensure to a reasonable degree that all transactions and assets are authorised by management.^[51] Indeed, the absence of such controls has been tied to financial fraud, commercial bribery and embezzlement by company employees.^[52]

The mail and wire fraud statutes have also been used to federally prosecute private corruption.^[53] These statutes, as amended by the honest services law, prohibit the use of interstate communications such as the mail system, phone or internet in furtherance of a ‘scheme to defraud’ a person of their tangible property rights or intangible right to ‘honest services’.^[54] Since the 1940s, courts have recognised a wide range of conduct, including bribery, kickbacks or undisclosed self-dealing in breach of a fiduciary duty, and even international conduct as a ‘scheme to defraud’ a corporation by denying its right to an employee’s ‘honest services’.^[55]

However, in 2010, the Supreme Court limited the applicability of the ‘honest services’ theory of the mail and wire fraud statutes to bribery and kickback schemes, eliminating undisclosed self-dealing from the statutes’ purview.^[56] Some believe the Court’s decision has had a chilling effect on the number of ‘honest services’ prosecutions brought in the United States, though the prosecution of top FIFA officials for ‘honest services’ violations in 2017 may suggest otherwise.^[57] Thus, while the mail and wire fraud statutes allow for the federal prosecution of private sector corruption based on the illegal use of mail or interstate wire communications for bribery and kickback schemes, the lack of clarity surrounding the boundaries of its application may hamper its usefulness and demonstrate the need for a more comprehensive federal framework regulating private sector corruption.^[58]

Given the aggressive pursuit of commercial bribery charges by US federal prosecutors in recent years, companies should be aware that even insubstantial involvement of the US mail, phone, internet or banking systems in carrying out acts of private corruption could trigger a federal criminal investigation.^[59]

Separately, the prevalence of anonymous shell companies in the United States has been a salient concern for international and domestic anti-corruption efforts, as they have been used to facilitate money laundering, organised crime, terrorism financing, and other illicit activities. Although the United States has a robust regulatory and enforcement framework to combat private corruption, a critical gap identified by both international bodies and domestic authorities is the lack of systematic disclosure of beneficial ownership information for a variety of legal entities in the United States.^[60] The absence of transparency amplifies the potential for abuse of shell companies as vehicles for corrupt conduct.

At the start of 2021, the United States took a significant step towards reducing this vulnerability by passing the Corporate Transparency Act (CTA), which was part of legislation considered to be the most significant reform to the country’s anti-money laundering regime since the 2001 Patriot Act.^[61] Significantly, the CTA mandates the creation of a government-maintained database of beneficial owner^[62] information and requires certain legal entities to report such information to the government – or else face criminal or civil penalties.^[63] Specifically, ‘reporting companies’^[64] must disclose their beneficial owners’: full legal name; date of birth; current residential or business address; and unique identifying number from an acceptable identification document or FinCEN identifier.^[65] Entities exempt from the reporting requirements include, among others, publicly traded companies and their wholly owned subsidiaries, companies that employ 20 or more employees on a full-time basis in the United States, companies that have an operating presence at a physical location in the United States, and companies that filed US tax returns demonstrating more than US$5 million in gross receipts or sales.^[66]

Although the information would not be public, FinCEN – the agency responsible for maintaining the database – may disclose beneficial ownership information to federal, state, and local law enforcement authorities engaged in investigations and national security or intelligence activity.^[67] The information may also be shared with foreign authorities under certain circumstances pursuant to a request by a federal agency on their behalf.^[68] In addition, FinCEN may disclose beneficial ownership information to financial institutions subject to customer due diligence requirements with the consent of the reporting company, and to federal regulatory agencies, subject to certain requirements, such as security and confidentiality protocols to be set by the US Treasury Department.^[69]

These requirements represent a significant change to the laws regarding corporate formation in the United States. While beneficial owners may still remain anonymous from private parties, their identities must now be disclosed to United States, or even foreign, law enforcement authorities. As a result, the use of ‘shell’ entities in the United States as part of schemes to engage in private corruption and criminal activity is likely to decrease.

Regulation of private corruption by multilateral development banks

As billions of dollars flow from multilateral development banks (MDBs) to governments in developing countries to address the pandemic and other development needs, the temptation and opportunity to engage in private corruption appear particularly ripe in the current ‘emergency spending’ environment. Unsurprisingly, in this climate, MDBs have placed renewed emphasis on updating their protocols to punish and deter a broad range of private corruption. Companies that bid on and receive MDB-financed contracts are often required to acquiesce to MDB jurisdiction in investigating and sanctioning a broad range of private corruption activity. Companies found to violate these MDB rules governing private corruption face stiff, potentially operation-ending penalties.

MDBs have developed robust sanctions systems to punish and deter a broad range of practices encompassing private corruption. For example, the World Bank Group’s sanctions system, one of the most sophisticated MDB anti-corruption regimes, has used its enforcement authority in the global fight against corruption for over 20 years.^[70] To support these efforts, the World Bank’s sanctioning system consists of highly capable anti-corruption units that investigate and address at least five types of illicit conduct (Sanctionable Practices), all of which may be used as tools to punish and deter private corruption activity:

• coercive practices: ‘impairing or harming, or threatening to impair or harm, directly or indirectly, any party or the property of the party to influence improperly the actions of a party’;
• collusive practices: ‘an arrangement between two or more parties designed to achieve an improper purpose, including to influence improperly the actions of another party’;
• corrupt practices: ‘the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party’;
• fraudulent practices: ‘any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation’; and
• obstructive practices: ‘(i) deliberately destroying, falsifying, altering or concealing of evidence material to the investigation or making false statements to investigators in order to materially impede a Bank investigation into allegations of a corrupt, fraudulent, coercive or collusive practice; and/or threatening, harassing or intimidating any party to prevent it from disclosing its knowledge of matters relevant to the investigation or from pursuing the investigation, or (ii) acts intended to materially impede the exercise of the Bank’s contractual rights of audit or access to information.’^[71]

Sanctions under the World Bank’s sanction system can range from a letter of reprimand to permanent debarment, as well as payment of restitution to a party harmed by a party’s misconduct. Furthermore, in 2010, several of the most prominent MDBs entered into the Agreement for Mutual Enforcement of Debarment Decisions, which provides for mutual and reciprocal enforcement of debarment decisions made by any one of the MDBs against entities that are found to have engaged in sanctionable practices (the Cross-Debarment Agreement). Accordingly, a company sanctioned by the any MDB for private corruption may find itself automatically cross-debarred from obtain financing from other MDBs based on the same sanctionable practices. For repeat players in the MDB-financed project space, crippling sanctions and the Cross-Debarment Agreement can have devastating and operation-ending effects on even the most prominent providers and institutions.

How to identify kickbacks within private companies

Kickbacks involve the negotiated remuneration of an individual for facilitating a trans­action and are generally considered a higher risk in free market countries.^[72] Kickback schemes almost always occur during the purchase or bidding phase of a transaction between two companies, and are often disguised as management or consultancy fees. However, kickback schemes do not always involve the payment of cash, but can rather involve hidden interests in other companies, employment opportunities or tangible gifts.^[73]

While the line between sales processes and kickbacks is difficult to draw, companies can implement robust monitoring policies to help prevent and identify kickbacks in the corporate setting. While companies should implement whistle-blower mechanisms sufficient to encourage the reporting of kickback schemes, whistle-blowers usually report wrongdoing after it has already occurred.^[74] For this reason, it is important for companies to take steps to prevent and detect kickback schemes before they come to fruition. This can be done through the creation of internal investigative units and software aimed at spotting indicators of kickbacks.^[75]

Indicators of kickback schemes vary according to the type of industry and transaction. For example, the involvement of middlemen or third parties in brokering a transaction where none is needed is a potential indicator that kickbacks may be present.^[76]

In the purchase context, high prices, high-volume purchases or unusual approval patterns may indicate the existence of a kickback scheme. In the bidding context, unexplained delays, bidding irregularities in favour of a small group of contractors, or unjustified sole-source awards are often signs that bribes and kickbacks are being offered and accepted.^[77] In the sales context, experts suggest comparing prices paid for goods or services with market rates to identify continued purchases of high-priced, low-quality goods or unexplained favourable treatment of certain vendors.^[78]

Corporate bribes and kickbacks often produce a paper trail that can successfully be detected and followed with the aid of robust accounting procedures, including internal investigative units using software to spot indicators of kickbacks. Increased oversight of operations with a high risk of corrupt practices not only aids in the detection of kickbacks but has also been shown to prevent them.^[79]

Ultimately, companies can take steps to prevent kickback schemes by designing policies that clearly define prohibited conduct and conflicts of interest.^[80] Clear policies and training of employees can help create business environments that value ethical behaviour as the best way to serve a company’s interests.^[81] In addition, the inclusion of anti-corruption clauses in contracts, which allow contracts to be terminated if any party has engaged in any form of corruption, can help prevent kickbacks and signal to potential business partners a company’s disapproval of the practice.^[82]

Conclusion

As awareness of the prevalence and nefariousness of private corruption grows, more countries have decided to take steps to combat private corruption aggressively within and beyond national borders. The United States and United Kingdom have differing but equally forceful means of combating private corruption. In Latin America, certain countries have been taking up the mantle of passing legislation that criminalises private corruption, though the success of implementing these reforms has been varied across jurisdictions. With growing international interest in preventing and penalising private corruption, companies should meticulously design policies and procedures to detect and eliminate corrupt practices.

Footnotes