Smith and Ouzman: Small Case, Big Implications

Smith and Ouzman: Small Case, Big Implications

On Friday 8th January 2016, Smith and Ouzman, the small printing company at the heart of the Chickengate scandal in Kenya (see blog on Chickens come home to roost http://www.cw-uk.org/trial-monitoring/) was given a financial penalty of £2.2 million – £1.3 million as a fine, and £881,000 in confiscation. The company was convicted in December 2014 of paying bribes of £395,074 to public officials in Kenya and Mauritania. The company has been given 5 years in which to pay the penalty, in 6 monthly instalments of £131,679, with the first payment due in July 2016, of £65,839.95.

The case was heard by Recorder Andrew Mitchell QC, who is recognised as one of the UK’s pre-eminent legal experts on confiscation. That makes this case particularly important in terms of setting a precedent for future sentencing and confiscation against companies convicted of overseas corruption.

The judgment can be viewed here

The judgement raises some key questions:

Did the company get off lightly?

Smith and Ouzman presented expert evidence to the court that it could only afford to pay £1 million if it was not to go out of business. It had set aside this amount in an account to pay the fine. During the proceedings, Mitchell expressed his scepticism at claims by companies about their ability to pay and warned the company’s counsel that the fine would be far higher than that.

So a final fine of £1.3 million appears relatively low both in terms of the Recorder’s comments, but more crucially in terms of the fact that the company’s shareholder funds (ie assets minus liabilities) stood at £7.3 million at the end of 2014, and in terms of the very generous payback terms that the Recorder gave the company.

The company is required to pay the £881,000 confiscation order on top of the fine, which is significant as the Recorder at one stage said he would deduct it from the fine. He then told the court that this would be overly generous and not principled.

Factors that appear to have influenced the court to order a less draconian fine appear to have been that:

– the company delivered high quality products at competitive prices (no mention was made however that significantly less products were delivered than were ordered in several of the contracts or that printing was subcontracted out to third parties on some contracts – potentially in breach of security requirements for electoral products);

– the company was renowned for care of its staff and contribution to the local community;

– the company had taken steps at remedial action;

– although not mentioned by Mitchell in his judgement, the company’s defence pleaded that it would face debarment under EU procurement rules for up to five years. (It is worth noting that many of Smith and Ouzman’s contracts would fall under the £170,000 threshold at which the debarment rules kick in and they rarely contract in Europe).

This is the first case of a company contesting corruption charges against it rather than “coming clean.” It would have been good if the courts could have sent a very strong message that contesting corruption charges doesn’t pay in any way. The fine as it stands, though significant, arguably lacks real deterrent force to prevent small companies choosing to operate unethically in high risk environments.

Additionally, the court (and the prosecution) appear to have accepted quite a lot of what the company claimed at face value, including its claims to be a leading security printer business (a claim insiders in the printing industry contest). But most importantly, the court did not question or look in-depth at the company’s claims to have taken remedial action. Under a Deferred Prosecution Agreement, or a plea agreement such as in the Mabey case, companies are generally required to submit their anti-corruption compliance programmes to an independent monitor. It is therefore deeply troubling that a company that has contested the allegations against it in a full court proceeding in effect has less scrutiny of its anti-corruption procedures than a company that seeks to cooperate with the SFO.

As Corruption Watch has pointed out, there are serious questions about the depth of the company’s remedial measures (see Corruption Watch’s blog on the matter), given the company’s choice not to employ a reputable and accredited certification company for its anti-corruption compliance certificate. These questions remain given that to this day one of the former Directors convicted of the corruption owns one third of the shares in the company and his family together own 50%. That gives them equal voting rights in the company. A company that genuinely wants to start over would, you would think, want to require a Director convicted of corruption to divest his or her shares. Certainly in some jurisdictions, companies lose their licence if they do not require convicted shareholders to do so.

For the sake of consistency and fairness, it is essential that in future courts order independent assessment and monitoring of companies’ compliance processes rather than relying on the company’s word and that imposition of an independent monitor should be part of the arsenal a court has at its disposal in imposing sanctions against companies. Furthermore, unless the courts can show that companies that chose not to come clean and who chose to contest allegations against them will face very stiff penalties, they will undermine other measures that seek to incentivise companies to come forward with their wrongdoing, and they will ultimately fail to deter corruption.

Will Kenya see any of the money?

 

The SFO applied for a compensation order Kenya in the case, which they did according to a matter of policy. Mitchell refused the compensation order on the following grounds:

– there had been no formal request for compensation from a victim in Kenya, nor evidence of the Kenyan government pursuing a civil recovery claim;

– there was no evidence that the respective governments had sought to recover sums from their own officials;

– tt was uncertain which institution the compensation should be given to and whether the compensation would reach the right entity.

This is significant, because he did not reject the notion of compensation on the grounds that it would lead to complex proceedings (see R v Berwick 2008, 2 Cr. App. R. (S) 31). Instead, Mitchell has effectively laid some ground rules for when compensation in corruption cases can be given. I.e:

– the government or body that would be owed compensation must have made a formal request (or have instituted a separate civil claim);

– the government or body concerned must have sought to retrieve the bribe money from officials implicated;

– and there must be certainty about where the money should go and that it would get there.

While making compensation orders possible in corruption cases, the judgement sets a very high bar for them. It also creates a real anomaly that countries will get compensation where a company enters into a Deferred Prosecution Agreement, which requires compensation whether a country asks for it or not, and potentially where a company enters a plea agreement (Mabey and Johnson were ordered to pay compensation when they were sentenced to overseas corruption in 2009 to affected countries ) but not where there is a full court conviction.

Governments are often unwilling to pursue compensation because it implies an acceptance of guilt on behalf of the officials involved who might be sitting politicians, and who might not yet have been convicted in their jurisdiction. They might also be unwilling due to lack of expertise or legal resource. In very corrupt or very poor environments, the requirement that the government will make a formal request for compensation or will have taken action against the officials is unlikely ever to be met. Furthermore, as UK courts only appear to recognise the amount of bribes paid as the compensation level, and the full social harm that corruption has caused is not taken into account, the amounts that a victim government could seek are likely to be relatively small. It is possible that the legal costs of pursuing a formal claim for compensation, particularly if contested, could make such an exercise almost pointless.

It is now up to the discretion of the UK government as to whether and how it returns the money from fines in such cases which are sent to the Consolidated Fund – the UK Government’s central bank account. Considerable thought needs to be put into how to establish an effective and fair mechanism to do this and how to ensure greater consistency across the different legal processes in how compensation is paid.

 

Were the victims of corruption properly represented at the hearing?

 

The SFO put before the court two expert witness statements as to the harm caused by the company’s corruption in Kenya. The first, available to view here, was provided by Nicholas Cheeseman, Associate Professor of African Studies at Oxford University who has particular expertise on Kenya. The second  Kenyan was provided by the anti-corruption activist John Githongo; his statement can be viewed here.  However, the defence objected (partly on the grounds that it would put the company at a disadvantage to the individual defendants) and the court upheld their objection on the grounds that the original trial judge and the UK judiciary recognise the damaging impact of corruption, and that there is OECD material to that effect. Mitchell questioned whether the statements would add anything to that knowledge and would therefore be of any relevance in assessing harm and culpability.

Given that the original trial judge recognised that the real victims of the company’s corruption were the people of those countries, it remains to be seen how these victims can be properly represented in UK corruption trials such as this. Accepting expert testimony from within the country about the impact of a specific corruption crime would be one way of ensuring this. Another way would be to see if Community Impact Statements could be adapted for overseas corruption trials.

The assumption that the UK judiciary and courts somehow know how bad corruption is and therefore do not need to hear evidence of the impact and social harm of specific corrupt acts is frankly rather arrogant. It is hard to imagine another area of crime in which the judiciary would take such a position. The result of that position is that courts can be presented with as much evidence as to the good character of a defendant or the standing of a company – including in this case a letter from a local MP – as the defence cares to submit, but no evidence of the impact that the corruption they engaged in had on the local communities where it took place. This is surely not a sustainable position.