Corruption in the Private Sector: The Growing Importance of Legislation Designed to Combat Private Corruption

01 April 2007

by Paul Gully-Hart, Schellenberg Wittmer 

Indeed, in view of the crucial role played by the private sector in the global economy and the continuing privatisation of governmental enterprises and activities, the time has come to introduce effective measures to combat private corruption. Particular attention should be paid to the role played by the private sector, where important public functions (education, health, transport, telecommunication, energy, etc) have been deregulated and transferred to private entities. Deregulation enhances the need to protect the public from the damaging effects of corruption in private business as well. After an introduction to the notion of private bribery, this article will provide an overview of some international anticorruption rules with a focus on the private sector. As an example of implementation of these international rules into national legislations, the new piece of anti-corruption legislation that entered into force in Switzerland on 1 July 2006 will be presented.

NOTION OF PRIVATE BRIBERY

The bribery of private individuals (bribery in private sector, or private bribery), as opposed to the bribery of state officials, refers to a situation where a bribed individual acts in breach of private law duties of loyalty and trust towards a third party, in most instances his or her employer. Private bribery thus implies the involvement of three parties, with the bribed person not being a state official, but being, eg, an agent, an employee, or a member in a partnership.

An example of private bribery would be for an interior designer who has undertaken to purchase a sculpture for his client not to purchase this item at the best possible price for his principal but, instead, to ‘negotiate’ a higher price with the (consenting) seller in breach of his contractual duty of loyalty towards his principal, with the intent of sharing the profit with the seller and thus of obtaining a ‘kick-back’ payment for his own benefit.

The following legally protected interests underlie the criminalisation of private bribery: the protection of corporate assets; the duty of loyalty owed by the person accepting the bribe towards a third party (his or her principal); and the promotion of fair competition. National legislators have allocated priority differently among these competing interests. For instance, the Swiss lawmaker chose the Unfair Competition Act (UCA) to regulate the criminal offence of (active and passive) private bribery and not, as one might have expected, the Swiss Penal Code.

INTERNATIONAL ANTI-CORRUPTION LEGAL INSTRUMENTS

At the international level, some recent instruments have paved the way for the establishment of a global prohibition of all forms of corruption, including private bribery. The main initiatives in this area are the United Nations Convention against Corruption and the Criminal Law Convention on Corruption of the Council of Europe.

It is noteworthy that even though 36 states are parties to the OECD Anti-Bribery Convention (Convention on Combating Bribery of Foreign Public Officials in International Business Transactions) and have passed comprehensive legislation against bribery of officials in international business, the OECD has not yet developed a set of rules targeting bribery in the private sector as crime (ie, where no public officials are involved). Similarly, the European Union Convention on the fight against corruption involving officials of the European Communities or officials of members states of the European Union (Council Act of 26 May 1997) does not apply to private bribery; that said, none of its provisions prevents member states from adopting domestic law which goes beyond their obligations under that Convention.

THE UN Convention Against Corruption

The United Nations Convention against Corruption, adopted on 9 December 2003, marks an important step forward in the global fight against corruption, making the prohibition of corruption an integral part of international public order. This Convention follows a number of international instruments which have been developed under the auspices of different inter-governmental organisations, including the OECD, the Council of Europe, the Organization of American States and the European Union. One of the most important features of the UN Convention as compared to its predecessors is that it constitutes a truly global instrument against corruption and therefore plays a crucial role for countries not covered by regional conventions.

The UN Convention also addresses the critical matter of private bribery. However, the way the relevant provisions are drafted clearly constitutes a result of a compromise at an international level that was designed to leave sufficient leeway to national law.

Article 21 of the UN Convention requires each state party to consider adopting such legislative and other measures as may be necessary to establish as criminal offences, when committed internationally in the course of economic, financial or commercial activities: the promise, offering or giving; and the solicitation or acceptance, directly or indirectly, of an undue advantage to any person who directs or works for, in any capacity, a private sector entity, for the person himself or herself or for another person, in order that he or she, in breach of his or her duties, acts or refrain from acting. The wording of article 12 is less stringent as it only announces general principles according to which each state party shall take measures, in accordance with the fundamental principles of its domestic law, to prevent corruption involving the private sector, enhance accounting and auditing standards in the private sector and, where appropriate, provide effective, proportionate and dissuasive civil, administrative or criminal penalties for failure to comply with such measures. The drawback of these two provisions is that their language has not been made mandatory.

The ultimate beneficiary of active bribery is not, as a rule, the individual agent himself, but the corporation behind him or her. Thus, article 26 of the UN Convention requires the state parties to adopt such measures as may be necessary, consistent with their legal principles, to establish the liability of legal persons for participation in bribery. The Convention explicitly enables national legislators to choose at their discretion between criminal, civil or administrative liability, without prejudice to the criminal liability of the natural persons who have committed the offence.

In conclusion, the importance of the UN Convention is more of a political than of a legal nature. It is to be seen as the threshold against which different national legislations punishing corruption are to be evaluated. However, its effectiveness is substantially impeded by the absence of mandatory language and the lack of enforcement mechanisms.

Criminal Law Convention on Corruption of the Council of Europe

The Criminal Law Convention on Corruption of the Council of Europe (Convention no.173 of 27 January 1999) is probably the most important international instrument of regional importance in fighting corruption.

Article 7 of the Convention extends criminal responsibility for bribery to the private sector. The offence is defined as “the promising, offering or giving, directly or indirectly, of any undue advantage to any persons who direct or work for, in any capacity, private sector entities, for themselves or for anyone else, for them to act, or refrain from acting, in breach of their duties”. The offence has to be committed intentionally in the course of business activities. Article 8 of the Convention punishes passive bribery which is correspondingly defined as the request or receipt of any undue advantage or the promise thereof in the circumstances described above.

As to the scope of application of these provisions, the briber can be anyone, whatever his capacity (businessman, public official, private individual, etc). If, however, the briber acts for the account or on behalf of a company, corporate liability may also apply in respect of the company in question (article 18). Nevertheless, the liability of the company does not exclude in any manner criminal proceedings against the natural person. The offence is committed also where the briber undertakes to give an undue advantage later or where there is an agreement between the person giving the bribe and the person accepting it.

The following restrictions to the definition of the offence of private bribery are noteworthy. First, the scope of articles 7 and 8 is restricted to “business activity”, thus deliberately excluding any non-profit oriented activities carried out by persons or organisations, eg, by associations or other NGOs. National governments are free to fill this gap by extending the scope of application of the Convention when introducing it into domestic law. Second, the Convention requires the additional element of “breach of duty” in order to criminalise private sector corruption. This does not aim solely at ensuring compliance with specific contractual obligations but also at guaranteeing that there will be no breach of the general duty of loyalty in relation to the principal’s affairs or business.

In conclusion, the Convention of the European Council is more precise than the UN Convention in its definition of private bribery. It thus constitutes a useful reference for members of the European Council when enhancing their fight against corruption in the private sector. In particular, implementation of the Convention constitutes a proper means to improve transparency of the privatisation process in eastern European countries and, more generally, to increase their attractiveness for foreign investors. The enforcement of the Convention is to be ensured by reciprocal country inspections.

SWISS LAW

Recently enacted legislation criminalises bribery in the private sector. Under previous law (article 4(b) of the UCA), active private bribery, ie, the fact of offering a bribe, was only punishable upon the filing of a criminal complaint. Offenders faced (and still face under the new law) imprisonment of up to three years and a fine of up to 100,000 Swiss francs (or both) (article 23 of the UCA). By contrast, the bribed person in the past could not be held responsible in terms of criminal law – at least not under the umbrella of passive private bribery.

The new article 4a of the UCA declares both active and passive bribery in the private sector to be a criminal offence. In order to mitigate the radical nature of this change, the Swiss legislator chose not to prosecute this offence ex officio. Thus, criminal proceedings may only be initiated as a result of the filing of a complaint. In addition to the defrauded principal and the disadvantaged co-competitors (direct victims), clients and certain organisations such as consumer protection groups and business associations are also entitled to file a complaint and to request the initiation of criminal investigations.

The fact that the offence has its legal basis in the UCA has certain practical consequences. In order for specific conduct to qualify as private bribery, there needs to be an impact on a competitive relationship between two parties in terms of the UCA. It is enough that fair competition is threatened by the payment of a bribe.

The Swiss Government’s view is that the payment of bribes to non-profit organisations (such as FIFA, IOC, etc) in the context of a public tender process for the allocation of sports events to countries or towns, cannot be criminalised as private bribery, as no competitive relationship is involved. This being said, the payment of bribes to non-profit organisations is not in principle beyond the reach of the provisions on private bribery. The requirement of a competitive relationship is certainly met if bribes are paid, for example, in connection with sponsorship agreements.

The proceeds of private bribery do not qualify as a possible object of money laundering in Switzerland (while proceeds originating from bribery in the public sector will).

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In conclusion, the current trend is clearly to criminalise private bribery. The international instruments adopted under the auspices of the United Nations and of the Council of Europe provide for member states to outlaw both public and private bribery. National legislators are then left with some discretion as to the choice of measures when implementing these Conventions at the domestic level.

The discussions about the scope of the new offence demonstrate that the line between public and private corruption is not always easy to draw. This distinction continues to have more than just a theoretical meaning, as the two offences are not identical. Public and private corruption do not threaten the same legal interests and do not carry the same sanctions.

The ongoing trend of deregulation and of outsourcing public tasks to private entities has provided an incentive to criminalise private bribery. Nevertheless, there remain substantial differences from one jurisdiction to another in the enforcement of provisions outlawing private corruption. The non-stringent language used at the international level and a number of restrictions in prosecuting private bribery at the national level (eg, in Switzerland) appear to indicate the lack of clear political will to deal effectively with corruption in the private sector.

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