British business under American rules

The story of the Bermingham Three has finally made it from the business news to the front pages of the papers.  The alleged fraudsters have been fighting extradition for over two years but now that their last appeal has failed, they will be put on a plane for Houston on Thursday and will probably be held on remand in a US federal penitentiary for over a year before they come to trail.

The case is controversial because the former Nat West employees have been extradited under the 2003 Extradition Treaty which the UK incorporated into law but which the US Senate has not ratified. However, today’s Financial Times argues that they could have been extradited under the previous 1972 treaty and that, by neglecting to ratify the treaty, “the senate has provided a perfect smokescreen for three men who have a real case to answer.”

The extradition of the Bermingham Three will send a shiver through the management teams in many British companies. Many UK companies are already subject to American legislation and regulation, even if they do very little business in the USA. America’s willingness to seek the extradition of foreign executives gives these regulations real teeth.

After the collapse of Enron, the US government brought in a number of measures to try to prevent anything similar from happening again.  One of these was the Sarbanes-Oxley Act.  There is fierce debate over whether this measure will be effective. Many commentators see it as a tick-box exercise which enables the US government to be seen to be doing something but which will not stop further corporate abuses.  What is beyond doubt, though, is that it is proving a major headache for British businesses.

The Sarbanes-Oxley Act applies to any company that is registered with the Securities and Exchange Commission. This includes all British companies that are listed in the USA or that wish to raise significant capital there. Even companies that are not SEC registered may also be covered. Last year, Alun Jones QC warned that the directors of British companies with just one US shareholder could risk prosecution if their reports are not compliant: 

“A director of a publicly listed UK company could be extradited to the US to be tried for fraud if his company’s allegedly inaccurate reports are published in a US newspaper to a solitary US shareholder.”

“Many UK companies still believe that they need a US listing or a large US shareholder base before they are subject to US laws such as Sarbanes-Oxley but this is not the case.”

Non-compliance with Sarbanes-Oxley carries stiff penalties. Chief Executives and Chief Financial Officers are personally liable under criminal law for any breach. Failure to comply carries a potential £3million fine and twenty years in prison.  For this reason, although most of the compliance work is routine, many CEOs and CFOs are doing a lot of the work themselves. Usually, they would delegate such activities to more junior staff but when there is even a small risk that they might have to spend two years on remand in a US jail, most executives want to make absolutely sure that that their companies are compliant.

This is having a detrimental impact on their performance.  One CFO that I worked with said that she spends most of her time on Sarbanes-Oxley compliance. Another reckons that worrying about SOX, as it is often known, keeps him awake at night.

In a recent FT article, Eric Hutchinson, chief financial officer of Spirent Communications, described the burden of SOX compliance: 

“Think about your morning routine. We all get up, clean our teeth and have a cup of tea. Well, imagine you have to document all that, explain any deviation from the normal routine and get your partner to certify it, and every now and again an auditor will come round and check you’ve done it. That’s what it feels like complying with Sarbanes-Oxley.
 

“People are spending so much time thinking about controls on the business that they are not thinking about the business itself. It’s getting in the way. There’s a danger you can be taken over by Sarbox.” 

Last year BOC estimated that the cost of complying with SOX would cost the company £20million. It’s not just UK companies that are worried.  German chemical producer BASF estimates that it may cost $30m a year to comply with the US regulations. 

The combined effect of the Sarbanes-Oxley Act, the 2003 Extradition Act and America’s financial dominance has been the imposition of tough new regulations on  British business, yet there has been almost no outcry from the ‘sovereignty’ brigade. Those who usually complain about over-regulation, red-tape and foreign interference have barely mentioned Sarbanes-Oxley.  I doubt if anyone in UKIP has even heard of it.

Here we have a law which is tying British business in knots, enacted by a legislature in which Britain is not represented, yet our politicians and our press are silent.

Imagine if regulations with even half the impact of SOX had been enacted by the European Commission. Most of the British press, the Conservative Party and all the assorted Euro-haters would have protested to such an extent that the UK would have demanded an opt-out clause by now. With US legislation, though, such an opt-out is not negotiable. Perhaps that is why those who bang on about sovereignty have kept quiet. Sarbanes-Oxley Act clearly demonstrates the limits of British sovereignty. The US can demand that its business regulations are adhered to by foreign companies because of its economic and political clout. That gives it much greater power over what our companies do than anything the EU could dream up.

Two of the main criticisms of the EU from the anti-Europe lobby are its imposition of red-tape and its threat to British sovereignty. But if the UK withdrew from the EU tomorrow, British firms would still have to comply with Sarbanes-Oxley and British executives would still be threatened with extradition to the US to stand trail. 

For the larger British companies, the deadline for complying with Sarbanes-Oxley is this Friday.  The Bermingham Three may not be the last British executives to find themselves flying to America to stand trial for a breach of US financial regulations.