Corruption and the Cayman Islands

Read our article in the Cayman Financial Review Magazine, eversion 

On 1 July 2011 the Bribery Act 2010 came into force in the United Kingdom. The legislation has been described as the “toughest anti corruption legislation in the world”.

The introduction of an offence for commercial organisations which fail to prevent bribery, has led many businesses to take rigorous steps to put in place adequate procedures to combat bribery.  

With the spectre of an ailing Serious Fraud Office seeking high profile scalps and a new relevance, businesses are rightly concerned about the new legislation, its scope and its consequences. In stark contrast, the Cayman Islands’ Anti Corruption Law 2008 came into force on 1 January 2010 with little debate in the Legislative Assembly and little fanfare.

This is perhaps unsurprising given the Law deals mainly with offences of official corruption. However it is important to be aware that the Law also seeks to address corruption in business activity.

This article highlights how the Law may affect the business community and the pitfalls for directors and other officers of a Cayman Islands registered company.

In line with the OECD convention, the Law introduces a series of offences relating to the corruption of public officials, both domestic and foreign, and the peddling of influence. As with much legislation in the Cayman Islands, the Law is a combination of provisions from other jurisdictions and most closely mirrors the Canadian Criminal Code.

In respect of business activity, an important provision is found at section s21 of the Law which introduces an offence of “secret commissions”.

The section provides that any “person” who offers any “agent” any loan reward advantage or other benefit as consideration for doing or forbearing to do any act relating to the affairs or business of his principal commits an offence. s21(1)(b) makes it an offence for an “agent” to demand, accept or offer or agree to accept from any person such a loan, reward or advantage.

The concept of secret commissions is well known in the context of breach of fiduciary duty where an the agent is obliged to make full disclosure of all material circumstances in which his own interest may affect the performance of his duty to the principal.

The offering and accepting of bribes to an agent has long been a criminal offence in most commonwealth countries and s.21 mirrors the provisions of s.1 of the Prevention of Corruption Act 1906 in the United Kingdom1.

Pursuant to s21 a “person” is defined to include a corporation and an “agent” defined to include an employee, an officer of a corporation or other organisation, a lawyer in respect of his client or a consultant to any person.

For an offence to have been committed, the prosecution have merely to prove that the agent received a gift as an inducement to show favour; they are not required to prove that the agent did actually show favour in consequence of having received the gift2.

It follows, therefore, that where an employee of company A (a person) makes a payment to an employee of company B (the agent) as an inducement to show favour, an offence will have been committed by both employees against the employer (the principal).

Similarly, where a director of company A (a person) makes a payment to a director of company B (the agent), as an inducement to show favour, an offence will have been committed by both directors against the Company (the principal). The penalty in both cases is five years imprisonment.

One might rightly conclude that those involved in such criminal conduct deserve what penalty they get. However, it is interesting to consider how a conviction of an employee or director under s21 could soon engulf a company.

Let us assume that a director of company A bribes an employee of a bank to obtain more favourable terms on a loan. Certainly the two individuals involved will be subject to prosecution.

However, a second possibility exists, namely that a prosecutor decides, in appropriate circumstances and usually where the director in question is the controlling mind of the company, to prosecute the company as the body corporate for the commission of the offence.

Assuming such a prosecution to be successful the ramifications could be potentially extremely serious. In terms of a penalty against the company itself, the Law allows for a maximum fine of US$5,000.

However, the derisory penalty is unlikely to be of much comfort. Aside from the obvious reputational damage and regulatory issues a company may face, a conviction would almost inevitably lead to proceedings under the Proceeds of Crime Law.

The company could face the confiscation of all benefits flowing from the bribe, including returns on any investments made. Worse still, depending on the knowledge of the directors, a separate prosecution could be launched against them for substantive money laundering offences.

Even where a director had no knowledge of the bribe, he may still be at risk of prosecution if it could be shown that the offence was committed due to his neglect. s51 of the Law provides that where a body corporate is found to have committed an offence, officers of the body corporate or any person purporting to act in such capacity are liable to be prosecuted for the substantive offence if it is found that the offence was “attributable to any neglect”.

Any officer found guilty under this section would be liable to be sentenced to the penalty imposed for the substantive offence, in other words five years imprisonment.

In order to secure a conviction under s51 the prosecution must prove that:

  • (i)  the accused is the particular officer who was charged with preventing the commission of the offence by the corporation; and
  • (ii)  where the accused had no actual knowledge of the relevant state of facts he should have been put on inquiry by reason of the surrounding circumstances so as to have made inquiries     concerning whether the relevant procedures were in place3.

In respect of the first limb, the prosecution must establish that the accused is the officer charged with responsibility for preventing the commission of an offence, in other words the officer charged with policing anti corruption. It should be noted that it will be no defence for senior management to argue that no such officer was appointed.

To do so would simply be used as evidence of endemic neglect on the part of senior management and may lead to a more extensive prosecution.

In respect of the second limb it should be noted that what is required is not for the officer to prevent the actual commission of an offence, but rather to ensure that “relevant procedures” are put in place to prevent the commission of an offence. Where such procedures are in place the prosecution will fail.

Avoiding prosecution

As with most offences, it is impossible to prevent an individual from giving a bribe where he is determined to do so. However companies can and should take steps to ensure that both the body corporate and the officers of the company are protected from any subsequent prosecution.

First, each company should ensure that they have a nominated officer to implement anti -corruption procedures. In the absence of any nominated officer, the prosecution will have little difficulty proving neglect.

Second, each company must ensure that it has in place “relevant procedures” to prevent the commission of an offence and ensure that those procedures are properly implemented and observed.

It this second requirement that may cause difficulty. In the UK, for example, clear guidelines have been issued setting out what procedures should be put in place by companies to satisfy the requirements under the UK Act. In Cayman, over a year on from the introduction of the Law, no such guidance has been forthcoming.

Therefore, businesses are left in the unenviable position of having to put in place what they believe to be relevant procedures without any objective benchmark. It is understood that guidelines are forthcoming although no date has been given as to when they are to be published.

Despite the absence of clear guidance, however, the importance of introducing “relevant procedures” within individual organisations should not be underestimated.

Not only would the fact of such procedures being in place and properly policed prevent the prosecution of an individual officer for neglect, it may also prevent the commission of a substantive offence under the act.

Therefore, whatever difficulties a business may encounter due to the lack of guidance in the Cayman Islands, they would be unwise to do nothing. Instead, a business would be well advised to look to other jurisdictions where similar legislation has been introduced and guidance issued.

Those concerned should, at the very least, seek the protection of legal advice as to the adequacies of the procedures they propose to adopt.

It may be that such protections prove unnecessary and that the risk of such prosecutions remain slight. It is true that at present the focus of the Anti Corruption Commission appears to be in respect of allegations of corruption by government and statutory authorities, rather than offences in the workplace.

However, given the economic climate and the political pressure, especially in the US, to address corruption in all walks of life, it would be unwise to assume that investigations into business activity are not a real possibility.

Therefore, serious consideration should be given by all businesses to ensuring they have put in place as far as possible, the necessary safeguards to protect themselves from prosecution.

Endnotes 

  1. See for example Secret Commissions Act 1905 (Australia); Secret Commissions Act 1910 (New Zealand) and s.426 Canadian Criminal Code RSC 1985
  2.  R v Carr 40 Cr.App.R 188 Ct-MAC
  3.  R v P [2007] EWCA Crim 1937
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