Smith & Nephew, the global medical technology company, is again in the spotlight following allegations that its distributors breached anti-corruption laws in India. This article considers why suppliers and principals need to ensure that their distributors and agents comply with the UK’s Bribery Act as well as being aware of similar legislation in other countries, such as the US Foreign Corrupt Practices Act (FCPA).
Smith & Nephew
Smith & Nephew was reported earlier this month in The Times, to once again be under scrutiny for possible violation of anti-bribery laws. [1] The company uses a significant number of distributors in various overseas countries for the sale of its products.
The US Securities and Exchange Commission (SEC) is investigating Smith & Nephew on the basis that its distributors, this time in India, have breached anti-bribery and anti-corruption laws, although the exact details of what they are said to have done are not yet clear.
This follows a statement in Smith & Nephew’s 2020 Annual Report stating that while the SEC has asked it for information relating to the alleged breaches, it was not possible to “predict the nature, scope or outcome of the investigations, including the extent to which, if at all, this could result in any liability to the group”. [2]
This latest problem for Smith & Nephew follows on from the company being charged and fined $22 million by the SEC in 2012 for violating the FCPA. The charges related to US and German subsidiaries of Smith & Nephew bribing Greek doctors in return for business between 1998 and 2008, with sums of almost $10 million paid to an offshore company belonging to a Greek distributor.
If the 2012 decision is anything to go by, the consequences of this latest SEC investigation could be very serious for the company.
Smith & Nephew is not the first supplier to fall foul of anti-corruption / anti-bribery laws in respect of actions taken by its distributors and agents and it certainly will not be the last.
Nor does the size of company matter either – big (such as Smith & Nephew) or small, they will face the same legal scrutiny. But what measures can be taken by companies to protect themselves from potential violations?
The law
The UK Bribery Act 2010 (Bribery Act) and the FCPA both have wide-reaching extraterritorial effect. This means that they apply to UK / US companies that operate abroad and also to foreign suppliers and principals that operate in the UK / US. Third parties, such as agents and distributors, may also be captured by these two key examples of global anti-corruption legislation, even if the principal or supplier in question was unaware that such activity was taking place.
This latest SEC investigation is a stark reminder that suppliers and principals may face increased liabilities due to their distributors or agents’ non-compliance with anti-corruption laws. Furthermore, the Bribery Act and FCPA aside, companies must also ensure that they do not breach other local or extraterritorial anti-corruption laws in place in the areas in which they or their associated third parties are operating, nor any contractual provisions relating to anti-corruption. Punishment for breaking such laws or contractual terms will vary, but as is clear from the $22 million fine levied on Smith & Nephew by the SEC in 2012, the financial penalties may be severe. In addition reputational damage is highly likely.
How to comply with the law?
This may seem a gargantuan task, particularly for those companies which operate in many different countries and which have complex distribution networks. If a distributor or agent commits an offence under the Bribery Act, a supplier or principal will have a full defence if it is able to show that it had imposed “adequate procedures” to prevent bribery from taking place – even if it was not possible to prevent this bribery from occurring at all. [3] A Guide to the Bribery Act [4] sets out what might constitute such “adequate procedures”, listing proportionality, top level commitment, risk assessment, due diligence, communication and monitoring and review as the 6 principles which may help to mitigate risk.
Whilst the existence of “adequate procedures” would necessarily be assessed on a case-by-case basis, it is unlikely that one-off anti-corruption training within the immediate business would be sufficient. Instead, as a standard, management should insist that distributors and agents ensure that they receive regular anti-corruption training and that there are clear and accessible policies in place to reduce bribery risk.
Additionally, in theory, if it can be successfully argued that an agent was not acting expressly or impliedly on behalf of the principal, there may also be a further defence available to the latter where an agent has engaged in bribery or another corrupt behaviour. Ultimately, however, it will be up to the courts to decide, although principals – and indeed suppliers – will certainly benefit from ensuring that their contracts with agents or distributors include a clause under which the parties agree to comply with anti-bribery and anti-corruption legislation.
Outside the UK
It is important that suppliers and principals understand that such defences may not be available to offences under foreign anti-bribery or anti-corruption laws, and management should ensure that they have done adequate due diligence into which rules may be triggered based on the company’s network and global reach. Certainly, since the 2012 SEC decision against it, Smith & Nephew appears to have imposed an anti-corruption regime. [5] Companies using overseas distributors will look with interest as to whether this is enough to mitigate the SEC’s latest concerns about its distributorship. However, it may be that the existence of such procedures will still be insufficient for Smith & Nephew to escape a second penalty under the FCPA.
[1] https://www.thetimes.co.uk/article/smith-nephew-corruption-inquiry-asked-for-documents-f3f6d8qrw
[3] Section 7(2) Bribery Act 2010.
[4] https://www.justice.gov.uk/downloads/legislation/bribery-act-2010-guidance.pdf
[5] https://www.smith-nephew.com/compliance/third-party-seller-compliance-programme/easy-steps-to-manage-compliance/
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