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14 | 13TH - 19TH MAY 2016 | UTILITY WEEK Policy & Regulation Market view T ransformation, disruption and innova- tion – these three words are currently dominating thought and discourse in the corporate world. Innovation within any industry is crucial for growth but oen this expansion comes at the expense of compliance. A rigorous compliance programme, attuned to fraud prevention and anti-bribery and corruption (AB&C) policies is fundamen- tal to the future of any business or organi- sation. Without a functional compliance programme, a company is liable to reputa- tional damage, fines, criminal convictions, substantial legal costs and wasted resources and, critically, the possibility of complete collapse. The energy and utilities sectors are no stranger to corruption. The inherent involve- ment of government officials and low mar- gins in a growing sector is a corruption breeding ground. Ultimately, corruption dis- rupts investment. Transparency International highlighted that about 10 per cent of water sector invest- ment is lost to corruption. Only the other month, a corruption probe surrounding the head of State Grid Shanghai Electric Power Company revealed that three senior Chinese officials had taken in excess of 37 million yuan (£4 million) in bribes. In the developing world there is growing scrutiny in relation to the way governments co-ordinate utility privatisation programmes to the benefit of the higher echelons of soci- ety while the cost of these schemes is borne by the population as a whole. UK and US companies can unwittingly get caught up in such schemes. The current trends suggest that law enforcement agencies like the US Depart- ment of Justice or the UK Serious Fraud Office will be emboldened to use their pow- ers under the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act (UKBA) to punish their own companies who are com- plicit in the disruption of investment in the developing world. To that end, utility, extrac- tive and infrastructure companies must be careful how they invest and grow globally. Europe is not immune to corruption and scandal. In our own domestic market we have seen Scottish Power criticised by an all-party parliamentary group, which said a cashback guarantee scheme run by the energy supplier to 625,000 of its customers was "effectively a fraud on the public". Businesses must place fraud and cor- ruption prevention at the forefront of their considerations in order to create a culture of compliance. Hogan Lovells recently con- ducted extensive research at the highest level of the corporate world to assess how compa- nies deal with compliance. Our report, Steering the Course: Navigat- ing Bribery and Corruption Risk, describes the existence of a "profits over prevention" culture: 40 per cent of compliance officers admit that AB&C is not one of their chief executive's top priorities, with 44 per cent of boards not even having AB&C items on their board agenda. Pricing and competition With gas and wholesale power prices at near ten-year lows, the drive to increase efficien- cies in operations for energy suppliers and contractors is stark. The pressure to cut costs across the supply chain may lead to employ- ees and third parties accepting bribes to meet targets, or paying bribes to win lucra- tive contracts or open new opportunities. The numbers game is a lot easier than compliance and ultimately the temptation to boost profits comes with personal reward whereas compliance does not win prizes. In this regard, our research showed that more than half of the respondents stated that com- pliance conflicts with business expectations. Ignorance is not bliss. New competitors must develop compliance programmes early on, remembering that the FCPA and UKBA are far-reaching. Three's a crowd Working in the developing world oen requires partnering with local companies whether by joint venture or by the use of sub- contractors. Working with a range of busi- ness partners can be challenging because companies need to ensure that a consistent commitment to compliance is being repli- cated by all parties. Subcontractors, for instance, may have the authority to act on your behalf but they do not owe you the same loyalty as would be expected by your own employees and may not share the same ethical values. To this end, under the UKBA, UK compa- nies are potentially liable for the corrupt acts of their employees, subsidiaries, joint ven- ture partners and third party service provid- ers (such as subcontractors) wherever those acts take place – even if such acts were not sanctioned or even known about. The FCPA has similar provisions. Indeed, 90 per cent of all FCPA cases have involved bribes being paid through third parties. Ignoring the actions of business partners can lead to unexpected costs for the perceived (un)controllable actions of others and put off potential investors. The good news is that putting in place a robust compliance programme will give you a good chance of preventing such behaviour, and more importantly can provide a substan- tive legal defence. It does not have to be dif- ficult, particularly if put in place early. The problem we have seen is that far too many companies have failed to prioritise AB&C compliance. Establishing or cementing a market position can never justify illegal practices. Corruption prevention must be seen as an absolute necessity. Liam Naidoo, counsel in Hogan Lovells' Investigations practice Getting a grip of corruption It is essential that utilities have anti-bribery policies in place because the financial and reputational damage of getting involved in corruption scandals can be immense, says Liam Naidoo. Key points Corruption is widespread on many devel- oping countries. Utilities in most countries are government- run industries. Companies can be held responsible for the corrupt practices of JV partners or subcontractors.