Investors could see profits disappear through corruption claims

Last week the High Court  ordered Mabey Engineering (Holdings)* Ltd. to pay £131,201 of dividends that had previously been paid out to investors from contracts gained through unlawful conduct in anIraq bridge-building project.

On conclusion of the case Richard Alderman, head of the SFO, commended the Mabey and Johnston Group for having referred itself to authorities when it realised that there were irregularities in the contracting arrangements, and for introducing new management, anti-bribery and anti-corruption procedures.

That the company acted quickly when it discovered the wrongdoing is certainly commendable, but could it have been avoided? Shareholders around the country will be asking themselves the same question, if not for altruism or ethical reasons, then certainly to protect their investments. It is the first case of its kind and although the sums are small, the Financial Press has already expressed concern over potential repercussions.

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Lesson to business and investors

On concluding the case Alderman sent a clear message to business that “shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will pursue this approach vigorously.” This is even when the shareholders are totally unaware of any corrupt practices going on.

This links with his second take-home point that “shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in.”

Strong language with practical consequences, but will this lead to increased shareholder and investor pressure for companies to show that they have dotted all the ‘i’s and crossed all the ‘t’s when it comes to issues like prevention of bribery, supply chain management and transparency in contracting processes?

It should do if they see which way the wind is blowing.

Legislation that will protect investors from risk

It is already illegal to bribe foreign officials under section 6 of the Bribery Act, which came into force on July 1st 2011. The Act also requires companies to implement due diligence so as to prevent bribery. If properly implemented, this should act as reassurance to investors and shareholders that the companies are doing all they can to prevent bribery.

However, as pointed out in a recent submission by the BOND group of development NGOS, the failure to prevent bribery doesn’t cover bodies such as trusts, charitable organisations or other third parties. Bribery could still be ‘outsourced’, which should be a concern for investors. The guidance from the Ministry of Justice needs to be clear and to close this potential loophole and strengthen the due diligence requirements.

Secondly, the EU Accounting and Transparency Directives currently being discussed in the European Parliament and Council should be a further reassurance to those investors connected with the mining, gas, oil and forestry industry.

This legislation will require all of these sectors to publish revenues paid to governments where they are operating, both at country and project level.

Transparency in revenue payments will ensure that all payments are accounted for and will further serve as protection for companies against potential involvement in corrupt practices, including by third parties. It could even serve to improve relationships with local communities as they can see how much money is being paid for their natural resources and can compare this with the benefits they receive.

However, some of the companies have been lobbying hard at the EU level to try and undermine this legislation and hide potentially corrupt practices. This could have the adverse effect of undermining investor confidence and putting their investments at greater risk.

So, while last week’s ruling should serve as a warning to shareholders and investors, forward thinking legislation is going some way to strengthen the requirements of due diligence in anti-corruption measures and should serve to assuage some fears that may have arisen.

* Mabey Engineering (Holdings) Ltd is the parent company of modular bridge manufacturers Mabey and Johnson Ltd and part of the Mabey Holdings group.

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