Israel’s Membership of the OECD - a Catalyst for Corporate Change?

On 10 June this year the OECD invited Israel, along with Estonia and Slovenia, to become members, acknowledging each country’s commitment to economic reform. For Israel, this marks the latest step in a concerted effort to improve its regulation of corporate practice, having become the 38th State Party to enter the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (“the Convention”) on 11 March 2009.

The OECD provides a platform where the governments of member countries can identify good practice and coordinate domestic and international policies. The organisation aims to improve the policies of its members in both national and international contexts.

Israel’s membership of the OECD offers the State and its businesses a range of opportunities derived from an improved economic reputation and increased international profile. OECD members benefit from an upgraded credit rating and greater ease in raising capital. The Israeli government expects to see greater external investment in the country.

In return, the OECD expects members to comply with a range of core principles tackling issues such as bribery, tax practices, environmental policy, corporate governance and the relaxation of restrictions on cross-border trade and investment. Invitations to join the OECD are based on its satisfaction that candidate countries are able to meet its key requirements.

Of particular importance to the OECD is a member’s approach to bribery and anti-corruption measures, given its potential impact on society in developing countries where bribes are often an accepted business practice. Although foreign bribery has long been illegal in Israel under Article 291A of the Israeli Penal Law 1977 (“Penal Law”), there have been concerns surrounding its implementation and the interpretation of many of its elements. The OECD Working Group noted in its ‘phase 2’ report on Israel’s application of the Convention, published in December 2009, that Israel has not conducted any investigations or prosecutions of bribery of a foreign public official despite being very active in investigating domestic bribery.

Since the early months of 2009, when it both signed the Convention in March and ratified the UN Convention against Corruption in February, there has been evidence that Israeli commitment to combating corruption is intensifying. The OECD’s phase 2 report also noted that Israeli authorities had agreed with the Attorney General’s office not to commence investigations into the alleged bribery of foreign public officials until the Attorney General had issued guidelines on the investigation and prosecution of the foreign bribery offence, suggesting an increased appetite to pursue bribery offences in future.

New sanctions for active bribery, both foreign and domestic, came into force on 4 February 2010. Those found guilty of the offence now face a maximum prison sentence of seven years, and a maximum fine of 1,010,000 ILS. Legal persons now face a maximum fine of 2,020,000 ILS or up to four times the benefit obtained by the offence or intended to be obtained by the offence. Article 15(b) of the Penal Law has been amended to ensure that nationality jurisdiction for the foreign bribery offence is applicable even in cases where the act is committed in a country where it is not considered an offence according to law.

Parties to the Convention agree to participate in a permanent cycle of peer reviews with the purpose of improving the capacity of parties to fight bribery in international business transactions. Having signed up to the Convention, Israel faces pressure to ensure that its new anti-corruption rules are enforced.

Peer reviews can be scathing in their assessment of a country’s application of the Convention. The OECD Working Group’s phase 2bis report on the UK highlights the high level of scrutiny members are subject to, and contributed to the UK’s move to introduce the draconian and far-reaching Bribery Act. As the OECD continues to review the response of member countries to its phase 2 recommendations, it is likely that more countries will introduce similar anti-corruption legislation.

Even if legislation such as the US Foreign Corrupt Practices Act and the UK Bribery Act does not directly impact on Israeli companies (notwithstanding the legislation’s broad jurisdictional reach), both statutes provide that corporations can be liable for the acts of third parties and Israeli companies dealing with parties operating in these markets are likely to face closer scrutiny in due diligence procedures. In addition, regardless of the strict legal position, the degree to which a company can demonstrate an effective anti-corruption framework is likely to influence its future success in tenders.

Companies operating in Israel must acclimatise to the government’s new focus on anti-corruption and act in a manner that does not expose them to corruption charges. Israel’s membership of the OECD presents major opportunities for ambitious and responsible Israeli companies looking to progress on the international stage. This will only be possible if they are familiar with the risks they encounter and implement effective compliance procedures.

Sam Eastwood is a litigation partner and Head of the Business Ethics and Anti-Corruption Group and Adam Smith is a researcher at Norton Rose LLP, http://www.nortonrose.com/. Sam can be contacted on +44(0)20 7283 6000 or by email: sam.eastwood@nortonrose.com.

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