Maritime sanctions & corruption: You're liable for more than you think

Trade is a fundamental part of economic activity and without shipping, trade would simply not be possible. The shipping industry connects almost all industries and exerts influence across the world.

Corruption is one of the biggest threats to the shipping industry. A report by the United Nations (UN) estimates that corruption adds as much as 10% to the cost of doing business internationally.

It has a disproportionate impact on the poor and vulnerable, increasing costs and reducing access to services. In 2018, the Maritime Anti-Corruption Network (MACN), a global business network that provides a unique forum for businesses to contribute to the elimination of corrupt practices in the maritime industry, received 27,000 anonymous reports of corrupt demands.

Where does corruption thrive? "It thrives where there is a lack of transparency," says Kevin Cooper, Partner at MFB Solicitors.

According to Transparency International, "countries successful at curbing corruption have a long tradition of government openness, freedom of the press, transparency and access to information."

Ahead of the Managing Sanctions and Anti-Corruption in Shipping Seminar, we spoke with Kevin Cooper to better understand the current maritime landscape, paper tigers, and compliance challenges in the shipping industry.

Read the full interview below.

Iain Gomersall: A facilitation payment seems so minor an offence in the context of the shipping industry, yet individuals have been pursued for instances of low-level bribery. Are there greater, far-reaching consequences which we might not be thinking about?

Kevin Cooper: I think the first thing to bear in mind is what a facilitation payment is, and what it is not. It is not a traditional form of bribery.

Traditionally, bribery is where you pay (or give) something to someone to do something they shouldn't do, whereas a facilitation payment is paying, or giving something, to someone to do something they should do.

A facilitation payment is not defined under the UK’s Bribery Act 2010 - the main act that governs this area - but anyone who has an interest in the area knows what a facilitation payment is. It is typically where a low-level public official says, "there's something wrong with your papers," and there isn't, "but pay this fine and I will give you what you need" - this may be customs clearance, or a visa, for example.

A facilitation payment is usually a form of low-level bribery, and indeed the US approach is different to the UK approach. I understand that, in the US, under the Foreign Corrupt Practices Act, which covers the same general subject area, it is permissible to make a facilitation payment as long as you document it.

In short, it depends on the law of the country you are looking at. Under US law it is permissible, under UK law it is not. There is no exception at all for facilitation payments under English law, not even a de minimis one. It could be for one cent, but it is still illegal.

Now of course if it is for such a small amount, would the prosecution or authorities ever pursue it? Probably not, but that does not mean that there is no offence committed.

Q: What kind of risks could an insurer or compliance officer face in the case of a bribe, and a facilitation payment?

KC: Both are illegal under English law. A bribe under section 1 of the Bribery Act 2010 bribe is quite straight-forward - I’m going to give you some money, or pay for your holiday, or child's education, or something like that - in return for you doing something that you should not do. Then you have a facilitation payment, which is usually a foreign public official, being paid to do what they should do.

The English law does not really treat them differently in terms of the consequences for insurers or compliance officers.

With regard to a compliance officer within a shipping company, the consequences of an employee paying a section 1 bribe is that the employee and/or that company (if either is subject to the Act) will risk being be criminally prosecuted. The individual could go to prison for up to 10 years, suffer a fine, or both.

A company can't go to prison, but they can be heavily fined, and there is in principle no limit to the size of the fine that a company can suffer.

Where's the insurers risk here? The UK’s Bribery Act is quite innovative.  In the past countries would try to get rid of corruption by speaking to governments and saying, "look, your country or department is really corrupt, and you need to do something about it."

In a lot of these countries, nothing happened. They might pass new laws, but people would not take them seriously, let alone enforce them.

What the UK’s Bribery Act does is to punish not just the instigator of the crime, but the victim as well.

In short, it is an offence to make a facilitation payment or pay a bribe, unless you have adequate procedures to prevent that from happening.  No English laws have done this before, certainly not to the same extent, to create a positive obligation on individuals or companies to put in place these policies and procedures.

The risk for an insurer is that if a bribe is paid and it benefits them, even without their knowledge, they can still be guilty of a criminal offence and be prosecuted.

Their defence is that they have put procedures in place - under Section 7 of the Bribery Act - to prevent bribery. It will, however, be for the court to decide whether they have procedures in place and whether they are adequate.

So, for an insurer to be at risk, it does not require any complicity in a bribe or facilitation payment, and that's the innovative thing about the Bribery Act 2010.

The Act has been very effective in making companies put these policies and procedures in place, and the world is changing. As companies in the shipping sector have put these policies and procedures in place attitudes amongst those demanding bribes have started to change.

It is likely going to take generations to curb the issue, but it is starting to happen.

IG: Is this affecting who insurers or financial institutions are doing business with?

KC: I would say that all risk averse organisations are tightening up their contracts to make sure the people they are either insuring or financing comply with their compliance obligations.  This provides a strong basis for demonstrating adequate procedures and enforcing their contractual rights should their contractual counterparties not comply.

I think there will always be insurance and finance available if someone is willing to pay enough for it, but insurers and financial institutions must be attentive. I don't think that it has made many organisations un-insurable, but it has altered the attitude towards bribery, corruption and sanctions and meant that the industry, as a whole, is more compliant.

Q: How is the sentence or fine determined? Is it determined by a certain set of criteria?

KC: As to fines, the simple answer would be it would be for the judge to decide, but there are some sentencing precedents. In certain circumstances, such as corporate fines, there are also certain criteria that are set.

A corporate fine could be a certain percentage of the company's annual turnover - or something to that effect. The Bribery Act doesn't set that out in that degree of detail, so what the judge will be trying to do is - apologies for the cliché - make the punishment fit the crime. The fine will be enough to hurt the company, but it usually won't be enough to put it out of business.

As far as an individual is concerned, it will depend upon the nature of the offence and the offender as well.

There is potentially a difference between bribery that happens in the private sector - someone committing some form of corrupt act for a purely commercial gain (paying someone to do something they should not be doing) - and individuals who are in a position of trust and accept bribes.

People in the public services may receive a harsher sentence than a private individual. This could take the form of a custodial sentence (imprisonment). This might be suspended (a custodial sentence does not necessarily mean that an individual ends up going to prison - if it is a first offence for example). If it is suspended, it would hang over the head of the individual over a designated period of time. Should they not commit any further offences during that period, then it will be discharged.

Sometimes it will be an immediate custodial sentence, regardless of whether it is a first-time offence or not, if the crime is sufficiently serious.

Q: What kind of challenges can be expected in diffusing these intractable risks? In your experience, are there challenges that are unique to developed or emerging economies?

KC: I think there are no challenges that are unique to either developed or emerging economies, but I think it is fair to say that emerging economies are where you are more likely to see corruption risk. There is an NGO called Transparency International who do a very useful Corruption Perceptions Index, which is based on perception of public corruption in around the world.

Looking at this index, you see Russia, large parts of Africa, South America, India, China and other parts of the Far East tend to be darker on the “heat map” and therefore perceived as being riskier places. Canada, New Zealand, Australia, and the Scandinavian countries tend to be perceived as being less risky.

Q: The OECD has decried the “corrosive effect of small facilitation payments, particularly on sustainable development and the rule of law." In your opinion, what can the public and private sectors do to deter, or be more compliant, with regards to bribery and facilitation payments?

KC: Every company needs to be quite clear to their people as to what is acceptable, and what is not.

In an extreme example, if it is paying for an expensive holiday for someone to award you a contract, that is clearly a bad thing, and I think that everybody can identify that it is corruption.

Where it is often more difficult is the case of facilitation payments. They are normally small, such as paying a small amount to an immigration official to let you through, even though your visa may be in order.  Many people don’t immediately identify making such a payment as being “wrong”.

Gifts and hospitality are another area where acceptable conduct may be more difficult to identify and one in which there was a lot of concern when the Bribery Act was first came introduced. The corporate hospitality industry has certainly changed significantly in the years since the introduction of the Bribery Act in the UK.

In short, one needs to have strong, clear policies and procedures. They must also not be too long because if they are too long most people will not bother reading them.

You should also include in your contracts that counterparties need to include relevant provisions to ensure that they understand what your anti-corruption requirements are, and that they promise to apply those principles.

The same is true of many areas of compliance, including sanctions, anti-tax evasion, data protection (GDPR), ethical policies, and human slavery. These are all areas that companies are requiring other companies to comply with if they are going to do business with them.

It was interesting going to a compliance event in the shipping industry a few months ago and seeing an international home wares manufacturer there. They are concerned about their supply chain with regard to human slavery and other issues - where they may have line of sight, let alone involvement - which would get back to them.

In anti-corruption and other similar areas, we are increasingly reaching a minimum global standard because companies are trading internationally. The major players don't want to be tainted because someone else has cut corners on issues that could cause them a big PR fallout.

Another good example of such an effect is that it is not usually the oil majors that operate vessels, but it is their name that is all over them if there is a pollution event.  That’s why over, the past few decades, these companies have insisted that ships (even though they don't own them, they just charter them in and put their cargo on board) reach certain minimum standards. Of course, this meets the combined goals of less reputational risk and safer shipping.

Q: In April of this year, the IMO agreed to include maritime corruption as a regular work item. The IMO will now work on a Guidance document to address maritime corruption, which is expected to be completed by 2021. What would you expect to see in this document? What challenges are the IMO facing?

KC: I have seen that this has come up on their agenda, and I have seen some working reports on what has been happening. I think that so far, the shipping industry has had a very fragmented approach to anti-corruption.

In my opinion, it’s really a result of the Bribery Act of 2010 in the UK that we have seen significant change. We've seen the creation of the Maritime Anti-Corruption Network (which has been quite successful) as a consolidated action by ship owners to try to resist facilitation payments around the world.

I don't think you will ever be able to completely remove corruption, but there are three things (amongst a few others I am sure) that can help reduce corruption.

You need legislation, you need to have consistency through consolidated action, and you need to have a commercial driver. You need to get people to obey the law, but also make them realise that it is in their commercial interests to do so.

I think the Maritime Anti-Corruption Network has been quite successful, with a good uptake of responsible ship owners joining. For example, it used to be the case that a ship arrived at the Suez Canal and the canal pilot required a carton of cigarettes or a bottle of liquor to make sure they didn't lose their place in the queue. Masters are now saying they are not going to do that anymore, and if everybody does that then the canal pilot really cannot complain and hold them there. I understand that, traditionally, the canal pilots weren't relying on these bribes, they do it more to see how much they can get out of the ship owners.

What has been reported is that the incidence of minor facilitation payments in the Suez Canal has dropped considerably. This has been a great win for the industry, but I think it will take a lot longer to reduce facilitation payments and corruption in many areas and locations.

I welcome the fact that the IMO is going to start looking into it, and I just hope that what it comes up with will be deliverable by the industry, but we won't know that until we see what they propose.

Q: Can you describe a recent case which was of interest to you (dealing with bribery/ corruption)?

KC: There have been few cases specifically within this field in the last few years.

I have mainly been involved in designing policies and procedures for ship owners and insurance companies. On occasion, I have been dealing as an interface between the shipping industry and the financial industry - that is to say, investors.

It has been said that, if a shipping company complied completely with the Bribery Act and refused to make a facilitation payment, it would go out of business. The UK Chamber of Shipping has produced with a set of protocols for resisting facilitation payments. It's arguable that this approach better serves the interests of the Bribery Act because what you are doing is resisting and making it very difficult, but at the end of the day you are not shooting yourself in the foot by saying, "I'm not going to pay," and potentially going out of business, or ignoring your own policies, out of necessity.

This is the approach the shipping industry has generally adopted. It has not yet gone before the courts, so we don't know whether it works or not, but there have been enough people who know enough about this topic to make us confident that this is an appropriate approach.

When you come across financial institutions, such as banks and hedge funds, they often say, "We have a zero-tolerance approach to bribery and we will not allow any facilitation payments.”

But if they want to invest in the shipping industry, they must understand the particular pressures on a shipowner.

Dealing with such differences of approach have been more contentious than some of the court cases I have had.

Keen to know more about compliance with trade sanctions, anti-corruption and anti-money laundering regulations in the maritime industry?

Join us for the Managing Sanctions and Anti-Corruption in Shipping one-day seminar, which will look at the practical steps you need to take to stay compliant.