cross border transactions

The Implications of Israel adhering to the OECD’s Convention for the Prevention of Bribery – Recommendations for Future Steps

Posted by: Gadi Ouzan  & Dani Rinot

A few months ago it was widely reported in the press that a foreign government had frozen engagements with seven international companies, including an Israeli security company, in the wake of suspicions of bribery and corruption of a senior official in such country. It is especially interesting to follow these reports in the context of the recent legislative amendments in Israel, addressing the prohibition to bribe foreign public officials. These amendments are reviewed, for your convenience, below:

On March 11, 2009, Israel joined the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of the OECD (the Organization of Economic Cooperation and Development), and in doing so, joined 37 other countries that already signed the Convention. Israel’s accession to this Convention constitutes an important stage in the process of Israel becoming a member of the OECD, a process that began in May, 2007.

As part of Israel’s accession to the Convention and its efforts to be accepted to the OECD, the Israeli legislator initiated several legislative amendments in order for the Israeli internal legislation to conform to the Convention’s principles and the OECD’s requirements, similar to the restrictions imposed on US companies under the US Foreign Corrupt Practices Act (FCPA).

1. Bribing a Foreign Public Official – a Criminal Offense – in the framework of an  amendment to the Penal Law, the offense of bribing was expanded such that “bribing a foreign public official for an act associated with his position to ensure business activity or another benefit regarding business activity”, constitutes a criminal offense, the punishment of which can reach up to 3.5 years imprisonment, and the court is entitled to impose a fine in an amount of up to NIS 202,000 or up to four times the value of the benefit received due to the payment.The consequences  of this amendment is that Israeli citizens and Israeli companies shall now be exposed, inter alia, to criminal charges in Israel for giving benefits to foreign public officials abroad.
2. Payment of Bribery Abroad is not a Recognized Expense – A proposed legislation to amend the Income Tax Ordinance, so that deduction of payments made in violation of any law shall be prohibited for tax purposes, is currently pending. The said amendment was proposed, among other reasons, to comply with the OECD’s requirements, pursuant to which it is necessary to forbid deduction of bribery payments to foreign officials, as income-generating expenses.   

Recommendations for Future Steps
In the framework of corporations’ preparation for the new legislation and rules, it is advised, among other things, to consider taking the following measures: 

1. Review Agreements – In light of the accession to the Convention and the amendment of the Penal Law, we advise Israeli companies that engage in export activity to review their agreements with consultants, agents, distributors and business partners, and incorporate in the agreements detailed provisions addressing the prohibition to give illegal payments to foreign public entities.
2. Adopt Internal Compliance Program – although the law does not determine a special director offense, it is recommended that Israeli companies operating abroad consider adopting a voluntary compliance program addressing this matter. Such a compliance program would generally include preparing a plan determining the organization’s guidelines  and policy; internalizing such guidelines  within the organization; allocating resources for an internal training program for employees and business partners; appointing a senior compliance officer within the company to supervise  the matter; encouraging employees to freely report any suspicion of an offense to the compliance officer (a “hotline”); conducting due diligence examinations  regarding business partners’ activities, etc.

   In the United States (where similar legislation has been in effect for many years), the existence of an internal compliance program is taken as a factor by the enforcement authorities when determining whether to initiate legal proceedings against a corporation and its directors, and when considering the penalties to be applied.

   It is likely that also in Israel, adopting and implementing an internal compliance program will assist in providing a better defense for directors and officers of companies accused of such offenses.

This entry was posted on Thursday, March 25th, 2010 at 3:20 pm and is filed under Venture Capital Industry Trends. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.