May 21,2013 / News / Legal Brief

Lack of compliance and corporate governance – provoking the revolving prison door

In today’s business world, companies are expected to invest in meeting regulatory demands to avoid investigations by regulatory bodies as well as the payment of penalties and damages to corporate reputation. But there are new developments that companies should be mindful of.

Until recently, non-compliance with the Competition Act only exposed companies to enormous fines with potential harm to their corporate reputation. Now, for the first time since the inception of the Competition Act, there is a real and definite focus on criminal investigations linked to contraventions of the Competition Act.

Since the inception of the Act, public awareness around cartel and collusion activities started peaking, with the authorities having made high-profile inroads in breaking up cartels in a diversity of sectors, from bakeries and medical devices through to chemicals and fertiliser production.

Recent allegations made against construction companies and the Competition Commission subsequent investigation into collusion and price fixing, have however created confusion and debate about the extent to which directors of companies are liable for the actions of the companies that employ them, following a guilty finding by the Commission.

The confusion was primarily caused by the fact that it was always assumed that the Competition Act will not give rise to criminal prosecution for anti competitive behaviour, and that compliance with the Competition Act was the end of the inquiry insofar as regulatory compliance was concerned. This however, cannot be further removed from the truth as executives now bear personal responsibility for their company’s participation in a bid-rigging cartel.

The local construction industry was an early target, as bid-rigging and other cartel-like practices have been in the regulatory limelight.

Following the investigation into the construction industry, the Commission stated that it not only succeeded in breaking up the cartel, but according to a statement by the Competition Commissioner, Mr Shan Ramburuth, it has eroded the trust amongst cartel members to a significant extent. During the investigation process, cartel members not only implicated each other but also provided the Commission with previously undisclosed projects that require further investigation. This clearly signals the success of the investigation by the Commission.

It is expected that the majority of the construction industry cartel matters will be finalised within the next month, but unfortunately this may not be the end of this chapter. There are other legislative considerations which have not received much attention. These are contained in the Prevention and Combating of Corrupt Activities Act, 12 of 2004 (the “Corruption Act”), and the Companies Act, 71 of 2008 (the “Companies Act”) and the consequences these two Acts may have when companies are found to have transgressed certain sections of the Competition Act.

In addition to the investigation by the Commission, the South African Police Services’ Special Investigations Directorate (the “Hawks”) is conducting a separate investigation into allegations that the directors of the scrutinised construction firms were also involved in corruption.

The outcome of this investigation by the Hawks should be an enormous cause for concern for company directors. Not only is it alleged that in the construction industry collusion was acceptable, but also that that the directors of the construction companies were expected to be involved in the collusion that took place.

The directors of these companies could potentially be charged for corruption in their personal capacity under the Corruption Act if the state succeeds to prove that they are guilty of corruption beyond reasonable doubt.

The Corruption Act provides that:

“ Any person who, directly or indirectly, accepts or agrees or offers to accept any gratification from any other person, whether for the benefit of himself or herself or for the benefit of another person, as an inducement to, personally or by influencing any other person so to act upon an invitation to tender for such contract, make a tender for that contract which has as its aim to cause the tenderee to accept a particular tender or withdraw a tender made by him or her for such contract is guilty of corrupt activities relating to procuring and withdrawal of tenders.”

It is evident that inducement to withdraw a tender or a reward for withdrawing (or for having withdrawn a tender), is an offence in terms of the Corruption Act. Furthermore, directors of companies can no longer ignore their fiduciary and reporting duties in terms of the Companies Act.

In terms of the Companies Act, a person is disqualified to be a director of a company if he or she has been convicted, in the Republic or elsewhere, and imprisoned without the option of a fine, or fined more that the prescribed amount, for theft, fraud, forgery, perjury or an offence under the Corruption Act or Competition Act.

The question is where does this leave the directors of the scrutinised construction companies?

Going forward, a clear shift in focus is required when directors of companies consider compliance with the Competition Act. The reputational damage following the outcome and conclusion of the investigation by the Commission into the construction industry cartel could be irreparable, but the potential personal consequences for directors of those companies can even be worse.

Directors should ask themselves to what extent they are prepared to bear the negative consequences of non-compliance and which early warning systems and processes have been put in place to ensure that employees do not expose them to unwarranted risks.

Companies are eager to make declarations of their vision, their mission and their core corporate objectives. But the impact, both in terms of reputation and bottom line, can be extremely damaging when companies fail to live up to their regulatory compliance duty.

The term compliance has moved beyond its traditional narrow meaning. A modern, best practice definition describes compliance as ensuring that the requirements of laws, regulations, industry codes and organisational standards are met.

This requires management to establish a solid foundation of compliance, which includes not only competition law compliance but also compliance with the Corruption Act and Companies Act. This will address potential risk issues with a view to the future by mapping a way forward that will build sustainable growth and value for all shareholders.

Taking all of the above into consideration and the personal consequences a company director might face due to a lack of compliance within an organisation, we firmly suggest that directors ask themselves the following two questions “Am I sure that my company complies with the Competition Act” and “How do I ensure that I will not be held criminally liable for my companies’ actions?”