Legal experts advise companies to bolster internal anti-corruption measures

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Legal experts are advising private sector and state-owned companies to strengthen their internal anti-corruption measures in response to a new law that could hold them liable for failing to prevent corruption, even if carried out by a third party.

The Judicial Matters Amendment Act (JMAA) came into operation on 3 April. Among other things, it inserted section 34A into South Africa’s primary anti-corruption legislation, the Prevention and Combating of Corrupt Activities Act (PRECCA).

Section 34 of PRECCA obliges anyone in a public or private company who learns of corruption or fraud to report it to the police if the value of the incident loss exceeds R100 000.

With section 34A now in place, any member of a private or public companies who fail to stop “associates” from engaging in corruption will themselves be liable.

In an article published by Herbert Smith Freehills (HSF), the law firm explains that “the newly inserted section 34A provides that any member of a private sector or an incorporated state-owned entity is guilty of an offence if an associated person commits a corruption offence to obtain or retain business or a business advantage for that private or state-owned entity”.

Edwards James, an expert in global investigations at Pinsent Masons, further clarifies that under the new offence, any member of a private sector or incorporated state-owned entity is guilty of an offence if a person associated with them gives or agrees, or offers to give, any “gratification” prohibited under Chapter 2 of PRECCA to another person, intending to obtain or retain business or an advantage for the company concerned.

Chapter 2 of PRECCA sets out a series of offences that involve inappropriate giving, offering, accepting, or receiving of gratification. Examples of gratification are money, gifts, property, jobs, or the forgiveness of debts.

What constitutes an ‘associated person’

HSF warns that the broad definition of “associated person” will increase pressure on companies that control multiple layers of parties that could be categorised as associated persons.

According to ENS Africa, the concept of “association” for purposes of the offence refers to persons who perform services for or on behalf of that member irrespective of the capacity in which such person performs services for or on behalf of that member.

“Section 34A casts the net of association broadly and would include not only employees but also independent contractors and other third parties providing services to the entity. It will, therefore, be important to ensure anti-corruption risk mitigation controls are sufficient to cover such third parties,” the firm states.

Webber Wentzel notes that the inclusion of third-party contractors in the widened definition of the PRECCA is “informative”. According to the law firm, third parties have been at the heart of corruption in South Africa before, during, and after the state capture era “due to their ability to abuse public and private procurement processes”.

“Instead of corrupt parties dealing directly with their facilities, third parties are regularly used to create a layer of bureaucracy between the parties committing the fraud, so it’s harder to identify, with third parties compensated for their efforts,” the firm states.

Affirmative defence

According to HFS, a key characteristic of the new “failure to prevent” offence is that it is a strict liability offence. In other words, the act itself is considered illegal regardless of the individual’s intentions or state of mind at the time of committing the offence.

“The prosecution will not be required to prove that a company participated in or knew that corruption took place for its benefit or under its watch,” states HFS.

Included with the new offence is the introduction of a clear defence that does not exist under the current corporate criminal liability laws in the Criminal Procedure Act.

No offence will be committed in terms of section 34A if the member had in place “adequate procedures” designed to prevent associated persons from committing corrupt activities.

James says: “In this regard, companies that can show they implemented ‘adequate procedures’ to prevent people from bribing or other forms of corruption can raise this as an absolute defence against liability under the new law.”

Six principles

The section does not prescribe or define what will constitute “adequate procedures”.

So, what can reporting organisations do to show they have done all they can to prevent corruption by a member of staff or an associated third party?

Webber Wentzel says that a good place to start is to consider the United Kingdom’s Bribery Act because section 34A of PRECCA is based on this Act.

The UK Bribery Act refers to six principles that are used to judge whether an organisation has “done enough” to stop corruption from within and by parties they work with externally. These principles are proportionality, top-level commitment, risk assessment, due diligence, communication, monitoring, and review.

On “proportionality”, ENS Africa, explains that the six principles require “procedures that are proportionate to the extent of the corruption risks facing the organisation”.

“Therefore, an important first step will be to conduct a risk assessment to assess the extent of the corruption risks so that procedures can be tailored accordingly,” the firm advises.

Until local authorities release their own guidelines, these principles will most likely be used as a reference point for determining what constitutes “enough” in a South African context.

Webber Wentzel says: “Over time, the courts will provide clarity on the minimum requirements as matters enter litigation. Until that happens, organisations and their leaders must proactively act to set up and leverage systems that can identify problematic employees, patterns, and third-party contractors in advance.”

HSF states that unlike the penalty for failing to comply with a reporting obligation under section 34, no specific penalty for contravening section 34A is referenced; “although the penalty provisions in section 26 of PRECCA would likely serve as a catch-all”.

“Although largely untested, the penalties for a conviction of corruption under PRECCA provide for a fine of an unlimited amount and a period of up to life imprisonment,” the firm adds.

According to James, the new law will only apply to current, ongoing, and future acts of corruption.

“Historical corruption can, however, still be prosecuted under the Criminal Procedure Act,” he says.

Enforcement is key

The introduction of a failure to prevent corruption offence is in line with recommendations made by the Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector, including Organs of State (Zondo Commission).

James says that while he is delighted that the recommendation of the Zondo Commission finally made its way into the law, for the change to be meaningful the state will need to overcome an acute credibility gap.

“There has not been a single high-profile corruption conviction of the key actors implicated in state capture. If the state does not change this and show it is willing and able to hold people accountable, it runs the risk of the new law being ignored by companies that may see it as a paper law with no real teeth,” he says.

HSF agrees in that while the new offence may have noble intentions of bolstering the country’s anti-corruption framework, its effectiveness hinges on enforcement.

“In the interim, both private and state-owned entities would be well advised to develop their internal anti-corruption procedures to stand the test of judicial scrutiny to be ready and protected when enforcement increases,” the firm says.