ࡱ> fhgq` Z+bjbjqPqP ;R::"a 4 """8P"D"T4 ]7 "(#">#>#>#$$$6666666$}9h;t7 +$$++7 >#>#7...+ ># >#6.+6..V$2 5>#" ,H"S,l4 6-70]74 Y<-Y<5Y< 5$D]&.'LG)Z$$$77_.p$$$]7++++4 4 4 "4 4 4 "4 4 4   DRAFT REGULATIONS ON THE OPERATING AND FINANCIAL REVIEW AND DIRECTORS REPORT DTI CONSULTATION RESPONSE OF TRANSPARENCY INTERNATIONAL (UK) August 2004 DRAFT REGULATIONS ON THE OPERATING AND FINANCIAL REVIEW AND DIRECTORS REPORT DTI CONSULTATION RESPONSE OF TRANSPARENCY INTERNATIONAL (UK) 1. Transparency International (UK) 1.1 Transparency International (TI) has been at the forefront of the anti-corruption movement since it was formed in 1993. TI is a not-for-profit, independent, non-governmental organisation, dedicated to increasing accountability of government and the private sector and to curbing both international and national corruption. It seeks to work in a non-confrontational way with governments, companies, development agencies, NGOs and international organisations to build coalitions to combat corruption. 1.2 TIs international secretariat is based in Berlin and there are more than 90 national chapters around the world ( HYPERLINK "http://www.transparency.org" www.transparency.org). TI(UK) is the national chapter for the UK and was among the first to be formed, also in 1993. ( HYPERLINK "http://www.transparency.org.uk" www.transparency.org.uk) 2. TI(UK)s Response 2.1 This document contains TI(UK)s comments on the Draft Regulations on the Operating and Financial Review and Directors Report A Consultative Document issued by the DTI in May 2004 (OFR Regulations). 2.2 TI(UK)s position on the OFR Regulations is as follows: a) TI(UK) in general supports the principles and objectives of the OFR Regulations. However, TI(UK)s principal objectives are in the field of combating corruption. Given this focus, TI(UK) is only making a limited response on the OFR Regulations in order to address those matters where the OFR Regulations and anti-corruption law and practice interface. b) TI(UK) believes that corruption (including bribery, deception and fraud) is likely to be one of the principal risks and uncertainties facing the company and its subsidiary undertakings under Draft Regulation 7.2. (See paragraph 3 below for reasons why corruption is likely to be a principal risk and uncertainty.) As a result, the risk and uncertainty imposed by corruption, and the necessary steps which should be taken by the company to minimise this risk and uncertainty, should always be considered by a company as part of its OFR obligations. c) Although corruption is likely to be a principal risk and uncertainty, there is no statement in the OFR Regulations which expressly points out the need to consider corruption issues. Many companies may as a result believe that they do not need to consider this area as part of OFR. This would be an error, and would weaken the impact of the OFR Regulations. Draft Regulation 7.4 states that: The review shall include information about (a) the employees of the company and its subsidiary undertakings, (b) environmental matters, and (c) social and community issues. TI(UK) requests that, for the avoidance of doubt, corruption be added as a new sub-section (d) to Draft Regulation 7.4 in the following manner: (d) the risks and uncertainties faced by the company and its subsidiary undertakings in relation to bribery, deception and fraud, and the steps taken by the company and its subsidiary undertakings to deal with these risks and uncertainties. 3. Corruption as a Principal Risk and Uncertainty 3.1 As corruption is by nature clandestine, it is impossible to calculate its exact cost. The World Bank in December 2003 estimated the total cost of corruption at US$1.5 trillion a year (representing 5% of the world economy). 3.2 The UK has laws which criminalise bribery, deception and fraud. a) Bribery carries a maximum of seven years imprisonment. It is a crime in the UK to pay or receive a bribe wholly or partly within the UK. It is also a crime in the UK for a UK national or company to pay a bribe overseas, even if the whole of the offence takes place overseas. b) The UK has several laws which together cover the criminal offences of fraud and deception. The offences include, inter alia, conspiracy to defraud, obtaining property by deception, obtaining services by deception, evasion of liability by deception; false accounting; blackmail and perjury. These offences carry a maximum of between seven and ten years imprisonment. c) Companies can be prosecuted, as can the responsible directors and employees. d) If a contract is procured by a bribe, the contract can be terminated for illegality. This can result in enormous consequential liabilities for the parties involved. e) A company can in some circumstances be both criminally and civilly responsible for the corrupt actions of it agents, joint venture partners and sub-contractors. 3.3 International law in this area is also developing. Since 1996, several significant international anti-corruption treaties have been signed. These include the following: a) The United Nations Convention against Corruption; b) The United Nations Convention against Transnational Organised Crime; c) The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions; d) The Inter-American Convention against Corruption; e) The Council of Europe Criminal Law Convention on Corruption; f) The Council of Europe Civil Law Convention on Corruption; g) The EU Convention on the Protection of the European Communities Financial Interests (PIF-Convention), and its first and second protocols; h) The EU Convention on the Fight against Corruption involving Officials of the European Communities or Officials of the EU Member States; i) The African Union Convention on Preventing and Combating Corruption. These conventions vary in scope and effect. However, they all share common components in that they require signatories to take necessary steps to prohibit and to prosecute bribery, and to co-operate with each other in exchange of information and enforcement. As a result of these conventions, international investigation and prosecution of corruption is likely to increase. 3.4 Corruption can involve significant risk to a company. These risks can be divided into three categories: a) The risk of corrupt acts against the company by joint venture partners, sub-contractors and suppliers. For example, the company could be defrauded, or pay significantly more for products than it should have, or could be purchasing inferior or defective products: i) if a joint venture partner defrauds the company; ii) if bribes are paid to a representative of the company by a sub-contractor or supplier; or iii) if a sub-contractor or supplier falsely inflates invoices, or conceals defective work. b) The risk of corrupt acts against the company by the companys staff. For example, the companys directors or employees could: i) receive bribes in return for placing contracts or for accepting sub-standard goods; ii) overstate profitability so as to enhance their bonus payments; or iii) defraud the company. c) The risk of corrupt acts by or on behalf of the company. For example: i) a director or employee of the company could, on behalf of the company, pay a bribe in order that the company wins business, or overstate the extent of a contract claims so as to enhance the companys profitability; or ii) the companys agent, subsidiary, joint venture partner or sub-contractor may, on behalf of the company, pay a bribe which assists the company win business. 3.5 The consequences of corrupt practices are extremely serious for companies and their individual directors and employees. These could include: a) for companies: criminal prosecutions, fines, and blacklisting from accessing projects sponsored by international aid agencies, banks and export credit agencies; b) for individuals: criminal prosecutions, fines, imprisonment, disqualification from office, and disciplinary action by professional associations; c) the contract in respect of which a bribe was paid being declared void, or being terminated, for illegality, resulting in the company being required to indemnify the client, banks, export credit agencies and other relevant parties; d) vulnerability to civil claims for compensation by aggrieved parties; e) reputational risk and adverse publicity for the company and individual; f) economic damage to the company, resulting at best in downward pressure on the value or share price of the company, and at worst in total destruction of the company. 3.6 It therefore follows that corruption can constitute a principal risk and uncertainty facing the company and its subsidiary undertakings. A well-managed company will have in place effective anti-corruption management procedures. 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