Brokers Required to Sign Legislation Bites

Wednesday, November 10, 2010

International Transport Intermediaries Club (ITIC) said that shipbrokers are being required to sign formal agreements with their principals in the light of a worldwide trend towards stricter anti-corruption legislation, and ahead of the implementation of the new UK Bribery Act in April 2011.

The typical document presented to brokers will set out the principal’s prohibition of the payment of bribes and/or the provision of other inducements. There will often be a general ban on ‘inappropriate entertainment’ without defining exactly what that might be. Brokers will be required to confirm their adherence to the principal’s policies, and will often be required to agree to allow their records to be audited. And it is some of the ‘additional’ provisions that can cause the most difficulties.

In the U.S., the Foreign Corrupt Practices Act 1977 (as amended) has been around for a number of years. It has not been unusual for a provision to be inserted into contracts saying that the other (non-US) party would not do anything in breach of the Act. When the UK statute comes into force, if someone acting for a company (not just an employee but also a third party agent or broker) gives or receives a bribe, the company will need to demonstrate that it has adequate procedures in place to prevent such corruption. If the company cannot do so then it may face a criminal prosecution and be liable to a substantial fine. This requirement to demonstrate procedures has led to the appearance of written documents on shipbrokers’ desks. 

ITIC Claims Director Andrew Jamieson said, “Over more recent times, a tendency has developed for companies to issue formal agreements setting out their ‘ethical trade policies’. ITIC has seen agreements from principals based in many different countries. These documents are often in the form of separate agreements sent to brokers to sign, although sometimes the provisions are included as part of commission agreements. Whatever the format, it is important to make sure that these agreements are not used as an excuse to insert other rights, obligations or responsibilities.

“Brokers reviewing these agreements should ensure that the text does not make them responsible for the acts of others in the chain. It is one thing to confirm you have not paid or received a bribe, but it is quite another to provide an undertaking that no-one else has.

“The next consideration is the scope of the agreement. Anti-corruption measures should not cause any difficulty, but some agreements contain general unqualified statements that the broker must comply with all laws, whether relevant or not. A recent example included an undertaking that a broker would make all appropriate declarations, filings and disclosures to the tax authorities and that these would be open to inspection by the principals. Most brokers would regard that as overly intrusive.

“The inclusion of wide-reaching ‘audit clauses’ can also be a cause of concern to brokers. In one recent case, a broker agreed that ‘its books and records (and those of related parties) shall be subject to audit…’ and that, ‘the auditors shall have full and unrestricted access’. If you objected, then presumably the principal would point out the next provision that the ‘broker forfeits, waives and agrees to forgo any rights to compensation…’

“It is unlikely that brokers will be able to avoid signing these types of agreements, and the greater emphasis on regulatory compliance will make them more common. Brokers should ensure that the provisions are limited to their own actions and that any rights granted to the principal are reasonable and directly relevant to the transaction in question.”

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