Corruption and Companies Obligations
What is Corruption
While there is no universally accepted definition of corruption, in general and in the context of South Africa, a person (including a corporate entity) will be guilty of the offence of corruption if they, directly or indirectly, accept or offer to accept gratification (as defined) from another person, or gives or agrees to give gratification to any other person for their own benefit, or the benefit of another and so as to induce the other party to act in an illegal or improper manner, in the performance of that individual’s duties.
Not only can individuals be held liable for corruption - section 332(1) of the Criminal Procedure Act 51 of 1977 provides that corporate entities, such as companies, may be held vicariously liable for crimes committed by Directors or agents, acting within the scope of their employment or authority, or while furthering the interests of the corporate entity. Accordingly, in certain instances, companies may be found guilty and held liable for acts of corruption committed by their Directors/agents.
While corruption is a crime governed by numerous pieces of legislation that comprise the “anti-corruption” legislative framework, this article seeks to provide insight on the anti-corruption obligations placed on Companies in terms of the Companies Act 71 of 2008 (“the Companies Act”) and the consequences for failing to abide by same as contemplated in Prevention and Combatting of Corrupt Activities Act 12 of 2004 (“PRECCA”).
The Companies Act: Compliance Measures
At the outset, the Companies Act requires that all companies must maintain systems and procedures that encourage and facilitate whistleblowing. In this regard, section 159 of the Companies Act provides that persons who disclose information to certain persons and/or entities listed in the Act, which relates to, inter alia, corruption or acts that constitute corruption, are given immunity from civil, criminal and administrative liability that could result from such disclosure.
State-owed, listed public and Public interest Companies:
In terms of the Companies Act and Regulation 43 thereto, certain companies, such as: state-owned companies, listed public companies and any other company that has, in any two of the previous five years, had a public interest score of at least 500 points, are required to, inter alia, establish a Social and Ethics Committee (“the SEC”).
The SEC must be constituted and appointed in accordance with the provisions of the Companies Act and plays a pivotal role in a company’s compliance with the anti-corruption legislative framework. To this end, the SEC is responsible for, inter alia, monitoring the company’s activities and standing in relation to, amongst other things:
the company’s measures to address corruption;
the company's standing in terms of the goals and purposes of the 10 principles set out in the United Nations Global Compact Principle and the OECD recommendations regarding corruption; and
good corporate governance (including an obligation to maintain a record of sponsorship, donations and the like)
While companies, other than those set out above, are not legally required to establish a SEC, in order to mitigate the potential for liability it is advisable that each company, including private companies, have measures in place that demonstrate and ensure compliance with anti-corruption legislative framework.
Moreover, while the implementation of a compliance program may not necessarily absolve a legal entity of vicarious liability in the case of corruption, it may be considered mitigating if the company is able to show that it has taken all reasonable steps to prevent the commission of corruption. Not only do they play a mitigating factor in the case of corruption, these measures go far in implementing a system of checks and balances, due diligence and prudent consideration of transactions within companies more generally.
To this end, companies are encouraged to adopt, measures to demonstrate compliance, which include but are not limited to:
establishment of a committee akin to that of a SEC to initiate, monitor and implement compliance programmes so as to mitigate liability for crimes of corruption;
creation and implementation of an anti-corruption policy which, inter alia, sets out the responsibilities in observing and upholding the policy on bribery and corruption;
provide information and guidance to employees, partners and clients on how to recognise and deal with corruption issues and the procedures and process to be followed with regards to same; and
adoption and implementation of all the principles provided in the King Code on Corporate Governance (current version King IV, 2016) which is pivotal in ensuring, inter alia, sound corporate governance, ethical business practice and the prevention of corruption within a company.
Why Compliance is important For Companies?
Given the nature of the penalties that may be imposed for corruption, as will be dealt with more fully below, it is imperative that companies comply with their obligations under the Companies Act and take all reasonable steps to demonstrate compliance in order to mitigate potential liability in relation to acts of corruption committed by its members, in terms of both the Companies Act and PRECCA.
Consequences and Penalties
Depending on the nature of the corruption or act constituting corruption, such acts may be classified as a crime wherein, upon conviction, a Court will be entitled to impose a fine and/or imprisonment.
Moreover, in terms of PRECCA, the following penalties may follow for acts of corruption:
a monetary fine (there is no maximum value of the fine that may be imposed and accordingly same is unlimited);
prison sentence (the maximum sentence in this regard is life imprisonment);
an additional fine equal to 5x the value of the gratification involved in the specific offence in relation to the provisions of the Act; or
upon conviction, a person or corporate entity as the case may be, will be endorsed on a list of individuals/corporate entity which the government and public sector are prohibited from doing business with (ie essentially blacklisting them).
Additionally, it is a criminal offence for an individual or corporate entity applying for a tender not to disclose their involvement in a company that has been blacklisted as aforesaid.
Moreover, given the nature of corruption, the following further consequences may follow to individuals guilty of corruption in terms of the Companies Act:
A Director may be declared a delinquent director, by a Court, in terms of which they will not be able to act as Director, either forever or subject to conditions and timeframes imposed by the Court;
A Director may be disqualified as acting as a Director; and
Directors may be found in breach of their fiduciary duties and obligations in terms of the Companies Act which could render them personally liable to people or entities that suffered damage or loss as a result of their acts of corruption.
Additionally, a company and all its Directors may be subjected to a penalty for failure to comply with the provisions relating to the establishment of a SEC, as provided at section 84(6) of the Companies Act, if they are required to do so by law.
Accordingly, it is imperative that corporate entities comply with their obligations in terms of anti-corruption legislative framework and take all reasonable steps to demonstrate compliance in order to mitigate potential liability, be it civil or criminal, and weather to the company itself and/or the individual/s in question. The legislative framework is vast and complex and requires an understanding and analysis of various pieces of legislation and regulations thereto.
At Kern, Armstrong and Associates, we can assist you in ensuring that you and your company comply with the necessary obligations and guide you accordingly. To this end, we can assist with, inter alia:
The correct establishment, operations and obligations of the SEC and/or similar Committee;
Application for exemptions on the establishment of a SEC
Interpreting and implementing the King Code to ensure best practice with regards to corporate governance;
Drafting anti-corruption and bribery and related policies; and
Drafting policies and procedures that encourage and facilitate “whistleblowing”.