UK High Court strikes a blow for compliance officers

Compliance professionals facing push back from deal makers ought to take heart from a recent English High Court decision involving UBS (AG) London UBS and Leipzig’s water utility KWL.

The decision (available here) is long and complex and arises from the sale and enforcement of collaterised debt obligations with potentially huge liabilities. Investment agents, who initially acted for KWL and as it transpired also became agents for UBS, bribed KWL’s leading director with $3 million to ensure the deals, which provided them with commission, went through without proper scrutiny.

UBS, which had not authorized this conduct, was nonetheless treated as having knowledge of it through one of its employees. Senior executives, entranced by the potential profits eventually overruled UBS’s compliance department, which throughout had resolutely sought to oppose the deals. 

The bribery aspects of the case are of some importance on a number of issues:

Whether a contract procured by a bribe is voidable where a counterparty does not know or authorize the payment. On this there are two conflicting decisions but the judge, without having to reach a decision, considered that a contract tainted by bribery would remain enforceable provided the counterparty was completely ignorant of or was not responsible for the bribing.

The existence of agency: this turned not on how the parties themselves regarded the relationship but how it was treated as a matter of law. The Judge considered, amongst other reasons, that an arrangement of delivering captive clients to UBS went well beyond an understandable desire to do business if suitable opportunities arose.

In determining whether bribing falls within the scope of agency, the judge considered it necessary to ask whether the agent was acting within the scope of its agency as the agent of the party seeking to enforce the contract. If so, the enforcing party must accept the legal consequences of the bribe even if the agent was also the agent of the other party and even if the payment of the bribe was also within the scope of that other agency. As a result, UBS was held liable for the bribe, the contract was rescinded and an indemnity was ordered.

The case and the judge’s concluding remarks should resonate with compliance professionals and those deal makers with short memories:   

“As I observed at the outset, neither UBS nor KWL emerges with credit from this saga. For UBS it has been a case study in how not to conduct investment banking in an honest and fair way. It is to be hoped that the events described belong to a bygone era. As most of the main participants have moved on, and many of them are no longer employed in the banking industry, there is room to believe that to be so.”

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Alistair Craig, a commercial barrister practicing in London, is a frequent contributor to the FCPA Blog.