This offence has extra territorial scope and therefore an associated person can be located anywhere in the World.
Under the Act, a coverholder, as a contractual counterparty, is seen as an associated person of a managing agent, which means that in the event of an act of bribery or corruption, it could create criminal liability for its principal. Therefore managing agents will require coverholders to ensure that they conduct business in compliance with the requirements of the Act. In addition, coverholders may be subject to their own local anti-bribery legislation, with which they should also comply.
This guidance is therefore aimed at raising awareness of the Act and discusses the expectations of managing agents to ensure their coverholders’ actions do not attach criminal liability for them under the Act.
The background to the Act and its offences are detailed in Appendix 1.
Coverholders as associated persons
The Act broadly defines an associated person as a person who “performs services” for or on behalf of an organisation and can be an individual or a company referencing that agents (amongst others) are examples of associated persons. It also makes clear however that whether a person is performing services for or on behalf of a commercial organisation is established by taking into account all relevant circumstances not just the nature of the relationship.
In determining their associated persons, managing agents have regard to guidance that has been issued by the UK’s Ministry of Justice (“The MOJ Guidance” - see Appendix1). The MOJ Guidance states that a commercial organisation is likely only to exercise control over its immediate contractual counterparty in a supply chain and will be regarded as performing services for or on behalf of only those organisations with which it has a direct contractual relationship.
Coverholders fall within the category of associated persons and consequently managing agents need to ensure that its coverholders are not making improper payments to win/retain business for their benefit and have effective systems and controls in place to counter this potential risk.
How does the Act impact on coverholders’ relationships?
Under the Act, liability for the corporate offence under Section 7 (see Appendix 1) is incurred if a commercial organisation (eg a managing agent) fails to prevent bribery by associated persons. The only defence a commercial organisation can use to defend a failure, is to demonstrate that it has “adequate procedures” in place designed to prevent bribery.
To assist commercial organisations implement risk based measures to counter bribery, six principles have been set out in the MOJ Guidance.
Some of the principles may impact upon the managing agent/coverholder relationship more than others, due to the risk profile of the business and coverholder. For example the MOJ Guidance states that commercial organisations should carry out risk based due diligence on counterparties (eg coverholders) and if appropriate they should request that their counterparties do the same. Therefore based on the risk assessment of a coverholder, a managing agent may require that the coverholder undertakes risk based due diligence on their producing brokers.
A financial crime endorsement has been developed for all model binding authority wordings, which amongst other issues, addresses bribery and corruption risk. If a managing agent considers it proportionate to the risk, it may require that the coverholder replicates similar anti-financial crime terms and conditions into any applicable contracts it has with producing agents.
The risk assessment will take into consideration a number of factors, not least territorial risk (an assessment of the corruption risk within the territorial scope of the binding authority) and product risk (eg the insurance coverage being sold, the size of premium and distribution method).
Managing agents should be able to explain to coverholders the rationale (based on the risk assessment they have carried out) for requiring the use of a financial crime endorsement and any other additional measures they require.
Training is also an important recommendation set out in the MOJ guidance and coverholders will be expected to ensure that they understand the implications of the Act. Lloyd’s will be launching an on-line training module for coverholders regarding anti-financial crime compliance which will be available for all coverholders and staff with underwriting authority, who will be expected to complete the modules. It is anticipated that this training module will be launched by the end of 2011 and further information regarding its implementation will be released in due course.
Finally, monitoring anti-financial crime processes and risks is expected and coverholders should anticipate that managing agents’ audits will, if not already, focus on anti-financial crime systems and controls, including anti-bribery compliance.
Therefore in summary, coverholders can expect changes to their relationships with managing agents, such as:
• Risk based audits and assessments conducted by managing agents to ensure compliance with the UK Bribery Act;
• An expectation that coverholders carry out risk based due diligence on their counterparties, if appropriate;
• Inclusion of a financial crime endorsement in the standard binding authority wording to serve, inter alia, as an anti-bribery warranty that coverholders must comply with;
• An expectation that coveholders ensure anti-bribery terms are included in their contracts with counterparties, where appropriate;
• Extending the scope of coverholder audits to include anti-bribery compliance;
• Training for coverholders to understand their responsibilities and obligations regarding anti-bribery
Managing agents are responsible for ensuring compliance by coverholders in respect of the UK Bribery Act, as associated persons. In assessing coverholders’ compliance, managing agents will need to conduct a risk based assessment taking into account a number of risk factors, the outcome of which should be transparent to their coverholders. Coverholders, for their part, as associated persons, will be expected to adopt procedures and demonstrate controls designed to prevent bribery and corruption to ensure compliance with both UK and local legislation.