ScherzerBlog | Scherzer International

The new law, called the Bribery Act, takes effect in April 2011. It resembles the U.S. Foreign Corrupt Practices Act (FCPA) which bars companies that trade on U.S. exchanges from bribing foreign government officials to gain a business advantage, but the Bribery Act goes beyond the FCPA by not just prohibiting illicit payments to foreign officials, but also bribes between private business people. It holds even if the individual who makes the payment does not realize that the transaction was a bribe.

And the Act’s impact extends beyond U.K.-based companies. It applies to entities with any “business presence” in the U.K., regardless of where the act of briberyoccurs. It also covers bribery by any person with “close connections” to the U.K., including both British citizens and citizens of others countries “ordinarily residing” in the U.K.

According to the Ministry of Justice, the law basically creates three criminal offenses: 1) giving or accepting a bribe designed to induce someone to perform a function improperly; 2) bribing a foreign public official with the intention of obtaining a business advantage, and 3) failing to prevent bribery.

Legal experts say that the most significant development in the law is a company’s strict liability for failing to prevent bribery (by an employee, a joint-venture partner or a subsidiary.) Under the Act, the company can be penalized with an unlimited fine for such actions, and further can be held liable for the acts of bribery by a person “associated” with the company who is trying to obtain a business advantage for the company. And unlike the FCPA, the Act does not exempt from prosecution what are commonly known as “facilitation payments.” (In some parts of the world, it is common practice to pay a small amount of money to ensure that an otherwise legitimate permit is approved in a timely manner.)

While the British government released some draft guidance on the Act in late 2010 and more definitive text is expected in 2011, it is unclear how vigorously the law will be enforced or what resources will be committed to investigating and prosecuting the suspected violations. Ultimately, it will be up to the courts to determine the true impact of the new law.

Just as global investors are turning to Hong Kong for stakes in China’s growth, they will no longer be able to rely on the comfort of a Hong Kong auditor signing off on financial statements—or more importantly, a local regulator to hold the auditors accountable. A recent change in rules for accounting standards on the Hong Kong’s stock exchange is
raising concerns that fraud will slip through the regulatory cracks. The new rules will cut costs for mainland companies seeking to list in Hong Kong if they choose to prepare one set of financial statements instead of two, but now the companies will have to rely on mainland Chinese authorities to root out fraud.

The rules also go against the trend in other jurisdictions, where regulators are pushing for more due diligence. In the U.S., where 21 of the 27 foreign offerings this year were Chinese, the Public Company Accounting Oversight Board warned auditors not to rely on financials prepared by mainland Chinese accountants and urged them to visit China to check out the companies.