In the UK, the Economic Crime and Corporate Transparency Act 2023 (the Act) has expanded the general longstanding rule that the conduct of "directing minds and wills" could create criminal liability for a corporate. It now includes liability based on the actions of senior managers. Senior management is undefined by the Act, but it is designed to encompass a wider group of people within an organisation than was captured under the common law. The expectation is that prosecutors will make use of the statutory mechanism to hold more organisations to account in a wider variety of circumstances than before, including for substantive bribery offences.
The UK Bribery Act 2010 (the UKBA) criminalises organisations if they have failed to prevent bribery by an associated person that is intended to benefit that organisation. This is a strict liability offence for corporates and there have been a number of actions and deferred prosecutions concluded in relation to it. UKBA can also be used to criminalise organisations for substantive bribery offences providing that the mental state of a natural person committing these offences can be attributed to the company.
It has historically been more difficult for prosecutors to attribute substantive active or passive bribery by an individual to a corporate, in part due to challenges with identifying a directing mind and will. A very few deferred indictments have contained charges of conspiracy to corrupt (under the pre-UKBA law) or active bribery contrary to s.1 UKBA. No company has ever been convicted of (or had an indictment deferred containing) a passive bribery offence under s.2 UKBA. The Act makes it easier to prosecute organisations for substantive bribery offences – both active and passive bribery (and as opposed to failure to prevent bribery) – because of the expanded group of individuals whose actions and mindsets can be attributed to the business.
There is, in theory, a tension whereby a relevant organisation could have adequate anti-bribery and corruption procedures that form a proper defence to a failure to prevent bribery offence, but could nevertheless face an action for a substantive bribery offence carried out by people within its business. How a senior manager will be defined is yet to be tested by the courts, but we may well see prosecutors using the expansion of the law to prosecute corporates in cases where they might otherwise have encountered difficulties showing the lack of procedures necessary to succeed on the strict liability offence.
Partner, Addleshaw Goddard LLP
Sometimes I feel like combatting debarment misinformation is a part-time job. Anytime misconduct involving a government contractor becomes public, criticism from the media, watchdog groups, and Congress often negatively influences a public that is largely uninformed about the debarment process, creating public pressure to rid the government of “bad” contractors.
Many of these calls for “more debarment” not only lack a basic understanding of U.S. debarment laws, they fail to acknowledge the extreme negative consequences of overly rigid or punitive debarment systems. I have spent the past 15 years publishing countless articles and essays in an attempt to counter the loud and, frankly, ignorant voices spreading misinformation about this critical risk management tool. Given recent attention to this issue, I have provided a brief explainer of U.S. debarment law and policy below.
.1. Is discretionary debarment in the United States used to punish “bad” contractors?
No. Federal Acquisition Regulation (FAR) 9.4 provides the framework for discretionary suspension and debarment in the U.S. procurement system and is grounded in the concept of “protection” rather than “punishment.” As noted in FAR 9.402: “The serious nature of debarment and suspension requires that these sanctions be imposed only in the public interest for the Government’s protection and not for the purposes of punishment.”
The punishment/protection distinction is one of the most frequently misunderstood aspects of the U.S. debarment regime – often leading to confusion and misunderstanding about how or why certain exclusion decisions are made when a contractor’s misconduct is discovered. The confusion likely stems from the mistaken belief that debarment is an extension of the government’s criminal justice system, designed to punish bad actors. Although this is certainly the case in some countries, in the United States, debarment is a “business decision,” designed to protect taxpayer dollars, not punish misconduct.
Even if there is cause to consider a contractor’s debarment, agency suspension & debarment officials (SDOs) must also assess whether exclusion is still necessary to protect the government’s interest by considering “mitigating factors” such as cooperation, disciplinary action against responsible employees, and compliance enhancements.
Because the United States attempts to balance its interest in promoting competition with its need to maintain the integrity of the system, it reserves debarment only for those contractors who continue to pose a threat to the government’s interests. The United States views the exclusion of contractors that, despite past misconduct, are otherwise responsible due to their significant mitigation efforts, as undermining its goal of competition by unnecessarily excluding contractors that are responsible enough to continue receiving taxpayer dollars.
2. But Contractor X did something bad. And fines and penalties don’t do enough to punish wrongdoers. Shouldn’t we use debarment as a form of punishment to more effectively deter misconduct?
No. Debarment is not an effective “sanction.” Systems that wield debarment as a form of punishment disincentivize disclosures and cooperation, deter compliance enhancements, and undermine government procurement competition. Don’t believe me? Just look at Canada.
3. Are some contractors too big to debar?
No. Although large contractors are less likely to be debarred than their small to mid-sized counterparts, the reason is not because of a “too big to debar” problem. As I explained in my article, A House of Cards Falls: Why Too Big to Debar is All Slogan and Little Substance:
[W]hen misconduct occurs in huge multinational corporations, the improper activity often involves a specific division or subset of employees, rather than the entire company. Thus, in responding to the misconduct, large companies are better positioned to sever the diseased sector, remediate, implement robust compliance programs, and move forward. In other words, these companies are often far better equipped to demonstrate their present responsibility. Small companies, however, often lack the resources to respond to and remediate harm and install new and sophisticated compliance programs. More importantly, because misconduct often permeates the entire firm, small companies are often unable to terminate the employees responsible for the misconduct, making full remediation impossible.
In addition, most of the largest U.S. contractors have the most sophisticated and well-resourced ethics and compliance programs in the world. With organizations such as DII and IFBEC continuing to support these efforts, many large contractors have become leaders in the ethics and compliance space. Consequently, when large contractors have compliance failures, they have the resources to remediate the problem, enhance their pre-existing compliance programs, and demonstrate that they are still responsible enough to receive government contracts.
4. But contractor misconduct makes me mad. Punishing them by taking away their government contracts would make me feel a lot better.
First, as a general rule, it’s not a great idea to allow “feelings” to drive the development of administrative policies. To the individuals calling for “more debarment,” I ask: Do you like paying more for things than you should? Do you prefer to buy lower quality goods and services? Do you want your taxpayer dollars to be wasted? No? Then STOP advocating for policies that undermine competition. I am not suggesting that we continue working with companies that are irredeemable or pose ongoing threats to the government. But if a company can demonstrate that they have fully addressed misconduct, engaged in remediation, enhanced their compliance programs, and no longer pose a threat to taxpayer dollars, they shouldn’t be debarred.
Second, this is a friendly reminder that bad stuff happens. No entity is immune from employee misconduct and compliance failures. The best any company can do is prevent as much misconduct as possible, detect misconduct that has already occurred, and mitigate the wrongdoing. Promoting policies that incentivize compliance investments rather than those driven by a visceral desire for retribution is the best way to protect government procurement systems.
Associate Dean, Government Procurement Law at The George Washington University Law School
This post is a follow-up to our four-part series, Hook, Line, and Sinker, about Mozambique’s ill-fated attempt to launch a commercial tuna fishing industry, and the corrupt firms that pushed the effort and helped cause the country to lose more than $2 billion.
Recently, Mozambique largely prevailed in its claims against the Privinvest Group, the shipbuilder at the center of the doomed transactions known as the Tuna Bonds. A UK court concluded that Privinvest paid bribes to win related contracts, and awarded a net amount of roughly $1.9 billion to the country.
Privinvest has said it will appeal the ruling.
Up until the decision, Mozambique had been reaching out-of-court settlements with relevant parties, including Credit Suisse and VTB Capital Plc. – both of which provided or arranged billions in loans to build and support a commercial tuna fishing industry in the country.
While the settlements allowed the banks to keep many details out of public view, the court judgement offers a much deeper look at relevant facts. In doing so, the case provides some practical lessons for compliance professionals.
Don’t cut corners
The court decision reveals why the July 2013 Mozambique Fishing Feasibility Study, which was used to justify the projects that the loans would back, was so rife with problems – it was completely made up. Indeed, a Credit Suisse banker created the document, while fully aware of its unrealistic assumptions (quipping, for instance, that they “will only catch yellow fin and sell to Nobu!”).
Even if compliance officers felt that they lacked the technical knowledge to question the substance of the feasibility study, answers to more general questions – Who wrote the study? What are their qualifications? What other work have they done? – might have prompted further skepticism.
It’s not all bad
When U.S. and U.K. regulators resolved their enforcement actions against Credit Suisse in 2021, they (and media reports about the cases) pounced on a due diligence report that called the head of Privinvest a “master of kickbacks.”
Viewed in isolation, the description can appear damning. But due diligence reports often include varying degrees of negative findings, and a company that shies away from any hint of dirt may soon find itself short of options.
The judge in this case provides some reassurance for companies that come across similar red flags: “There was reference at trial to his having a poor reputation for business methods and integrity. I did not find that persuasive where it was based on unattributed rumour rather than evidence.”
In other words, while such warnings are certainly meaningful, companies are not expected to pull the plug whenever they appear. Rather, they should assess that red flag against other factors – in this case, it was those other factors that were too easily disregarded.
FCPA Compliance Consultant, TRACE