For a business executive, it is the stuff of nightmares. A seemingly routine payment to a local fixer by a remote subsidiary results, years later, in an investigation by authorities in the company's home country. The company is forced to spend millions on legal fees, its reputation is tarnished and its share price plummets. Senior managers may even find themselves in court facing criminal charges.

This has long been a dilemma for companies operating in “emerging” markets; what may be accepted practice in one jurisdiction is illegal in another. But for European companies, the threat of being prosecuted is greater than ever. This month, Siemens, Europe's largest engineering company, said that it had set aside €1 billion (£843 million) to settle charges brought by American and German authorities relating to an investigation into bribes allegedly paid to officials in places such as Libya, Nigeria and Russia.

Siemens will not be the last corporate giant accused of corrupt practices. Even the UK, pilloried by the Organisation for Economic Co-operation and Development for its poor record in tackling corporate corruption, has shown signs of adopting an uncompromising new approach. Last week, the Law Commission recommended an overhaul of Britain's anti-corruption laws, paving the way for the introduction of criminal offences for bribing a foreign official and failing to prevent an employee from engaging in corrupt activity.

The Commission's recommendations followed another watershed in October, when Balfour Beatty, the engineering and construction company, agreed to pay a £2.25 million fine for accounting irregularities at an Egyptian venture in the 1990s. Unusually, Balfour Beatty blew the whistle on itself after an internal investigation. In return for avoiding criminal prosecution, the company agreed to surrender some of the profits from the venture and to implement stricter compliance measures.

The case heralded a shift in the approach of the Serious Fraud Office (SFO) to a more active, US-style regulation, in which companies are encouraged to come forward and co-operate or risk harsher punishment if illegal activity is revealed later.

Yet how well are British companies prepared for regulatory changes? “Senior management is much more sensitised to the risks than it was five years ago,” Paul Lomas, a litigation partner at Freshfields Bruckhaus Deringer, said.

In the past five years, British law firms have reported an explosion in the number of clients seeking advice on corruption and other regulatory issues. Indeed, such is the demand that Mr Lomas recently published the first textbook on the subject, Corporate Internal Investigations: An International Guide. Herbert Smith, the City litigation firm, has begun offering anti-corruption “health checks” to clients. Norton Rose, another leading firm, has established a unit dedicated to business ethics and anti-corruption, in collaboration with University College London.

Companies that once may have kept quiet about suspected corruption increasingly are calling in outside lawyers to investigate, to prove to regulators, non-executive directors, auditors, shareholders and the media that they are taking the problem seriously. For example, BAE Systems responded to the SFO's investigation of its £43 billion al-Yamamah arms deal by appointing an independent committee headed by Lord Woolf, the former Lord Chief Justice, to investigate its business ethics. In May, the committee issued a series of recommendations; the company has pledged to implement all 23 of them within the next three years.

“Most companies have codes of ethics, but they must go further,” Sam Eastwood, a litigation partner at Norton Rose, said. “They need to create and fully embed detailed policies and procedures within their everyday business culture.” That can include appointing a senior figure responsible for compliance, stricter vetting of intermediaries and agents and establishing clear guidelines for reporting and investigating suspected corruption. Most importantly, senior management should be seen to be taking the lead, not leaving junior employees to take potentially compromising decisions.

Mr Lomas goes further, suggesting that companies should not be afraid to make a show of their transparency by refusing to bid for contracts when illicit payments have been demanded. The competitive disadvantage for Western companies of refusing to pay bribes is exaggerated, he argues.

Certainly, compliance does not come cheaply — particularly with a recession looming and many companies under pressure to win new business at all costs — but prosecution could be even more expensive in the long run.

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