SFO Plays Hardball: Sweett Case Sets New Standards for Cooperation in Corruption Cases

SFO Plays Hardball: Sweett Case Sets New Standards for Cooperation in Corruption Cases

The SFO under David Green has repeatedly made clear that companies that don’t cooperate will not be eligible for a Deferred Prosecution Agreement. It has used the Sweett case to drive that message home.

Sweett, the UK’s only listed quantity surveyor, pleaded guilty on 18th December 2015 to failure to prevent bribery under Section 7 of the Bribery Act in relation to a consultancy agreement entered into by its wholly owned subsidiary, Cyril Sweett International Ltd, for construction of a £63 million luxury hotel in Dubai.

Sweett’s sentencing hearing was heard on 12th February 2016 before Judge Beddoe. Confiscation of £851,152.23 was agreed between the parties at the hearing. The final sentence will be handed down on 19th February. Sweett’s defence has said that the company, which posted a pre-tax loss of £1.1 million last year, cannot afford a higher penalty in the range of £2 million. Sweett says it has already spent £2-3 million investigating the allegations against it.

This is the first time since 2010, in the Innospec case, that a company has pleaded guilty to an overseas corruption offence. However the negotiations over Sweett’s guilty plea between the company and the SFO were, the court heard, ‘protracted’ and controversial, and were not conducted under the Attorney General’s guidelines for acceptance of pleas.

The SFO has said it will be bringing action against individuals involved and expects to charge at least one individual in the next three months.

The Charges

Sweett admitted that it failed to prevent bribes worth £680,000 made between December 2012 and December 2015 by way of a sham subcontract to a company, North Property Management (NPM) owned by Khaled Al Badie. Khaled Al Badie is the son of Mohammed Al Badie who owns and controls Al Ain Ahlia Insurance (AAAI), a Dubai based insurance company with which Sweett won a £1.6 million contract in 2013 for project management and cost consultancy services in relation to the building of the Dubai hotel. AAAI is 19.7% owned by the Abu Dhabi Investment Council, the Abu Dhabi government’s investment body.

The subcontract with NPM was for ‘hospitality development services’, which were described briefly and vaguely in the contract, the court heard. There is no evidence, the SFO stated, that any services were provided. Payments were made on a regular basis, with invoices being sent from the personal email on the personal computer of Simon Higgins, Executive Director of Cyril Sweet International. The court heard that as Higgins is an Australian national and all his activities took place outside of the UK, the SFO has no jurisdiction to bring action against him. From January 2013 to July 2014 the payments were authorised by a director within the Middle East and North Africa office of Sweett. From July 2014 to October 2014, they were authorised by the new and current Chief Financial Officer of Sweett.

The SFO argued that Cyril Sweet was effectively controlled by Sweett such that it was run more like a division of the parent company than a subsidiary.

How NOT to “Cooperate”

The allegations against Sweett first came to light in June 2013, when the Wall Street Journal published an article about allegations of bribery by Sweett in relation to a hospital in Morocco. Seven days before it published the article, Sweett reported the allegations to the SFO. The SFO’s counsel made clear at the sentencing hearing that the SFO considered that report to be in ‘anticipation’ of the news report. By implication it did not qualify as a ‘self-report’.

Sweett was then allowed time to investigate the allegations. It appointed Pinsent Masons to do so. Six months later, in January 2014, Sweett replaced Pinsent Masons with US firm, Mayer Brown. In March 2014, KPMG produced a report repeating findings it had made, three years earlier in 2011, that Cyril Sweett International, Sweett’s subsidiary, had “significant control weaknesses requiring urgent attention from management,” particularly with regard to its checks on subcontractors. KPMG specifically identified the North Property Management subcontract in its 2014 report, and noted that the subcontract had not been approved by the main customer, AAAI.

In June 2014, the SFO commenced its own investigation into corrupt business practices by Sweett. During this period, there appears to have been some conflict between the SFO and Sweett who were unwilling to provide evidence from first witness accounts. The SFO issued a demand to Sweett that it not trample on evidence. In November 2014, Sweett issued a regulatory notice to the market that it was cooperating with the SFO. The SFO asked Sweett to remove the notice and made clear that it did not consider that Sweett was cooperating. In December 2014, Meyer Brown made a disclosure to the SFO of the North Property Management Contract which had resulted from its investigation (it is not clear whether the SFO had had sight of the KPMG report at this stage).

Then things took a curious turn. In December 2014, Sweett ordered Mayer Brown to cease work on the allegations and elected to “self-investigate” (to the disapproval of the SFO). Sweett’s defence counsel stated that it was clear that Mayer Brown and the SFO “did not get on”. From December 2014 to July 2015, Sweett appears to have taken the position that the payments to North Property Management were in fact legitimate under United Arab Emirates law. In March 2015, the Sweett management asked Cyril Sweett International to try to obtain a letter from the board of AAAI, its main customer, to the effect that North Property Management was a legitimate subcontractor and that it knew about the fee to NPM. Cyril Sweett International staff asked Khaled Al Badie if they would be able to obtain such a letter, and were told they would not and not to mention the issue again. Sweett’s defence claimed that the Sweett management were trying to get to the bottom of things by asking for the letter from AAAI’s board but that it was individuals on the ground in the Middle East who were going “their own sweet way.”

Despite having stopped direct payments to Khaled Al Badie and NPM in October 2014, Cyril Sweett International agreed with Al Badie in March of 2015 to set up an escrow account into which the fee he was due under the subcontract would be paid to show good faith in its intention to pay. Justice Beddoe was clearly surprised by the fact that the company carried on making financial arrangements in relation to a contract that the company had self-reported and that was under investigation, asking at one stage, “what on earth was the company doing?”

Sweett asked Pinsent Masons, who it had brought back in as an advisor in April 2015, about the propriety of such an arrangement and received a clear response that the arrangement should be terminated. Khaled Al Badie took steps in the meantime to offset outstanding payments to him in such a way that, as the SFO counsel put it, the parties were “in the same position as if the bribe had continued to be paid.”

In July 2015, it appears that the SFO held out to Sweett the possibility of a Deferred Prosecution Agreement. After this Sweett cooperated fully with the SFO and took a series of steps to remedy the issue. It acknowledged that the NPM contract was invalid, that the company did not have adequate procedures and made limited admissions about the allegations made in the Wall Street Journal in relation to Morocco. It contracted KPMG to do a total review of all its contracts to check there were no more problems lurking. In July 2015 it closed down its Middle East business (on the grounds that it was “too challenging and commercially unviable”) and in September 2015, it terminated the employment of three members of staff for ‘breach of contract’ in relation to the NPM contract. In November 2015, Sweett finally informed AAAI of the existence of the NPM contract and apologised. Sweett also took steps to sell Cyril Sweett International to a third party. When the letter of invite for a DPA didn’t come, Sweett indicated in November 2015 that it was prepared to plead guilty.

Clearly Sweett were trying to jump through all the hoops from July 2015 onwards to get a Deferred Prosecution Agreement, but the SFO decided that a DPA was not an option. It seems somewhat surprising that the SFO even contemplated a DPA with Sweett, given the way the company had behaved up to that point, and the obvious conflict that there had been between Sweett and the SFO, particularly over what constituted privileged material. The decision not to offer a DPA with Sweett sends a strong signal that when the SFO says cooperation it means cooperation from the start and not just when the going gets tough.

The effect of Sweett’s lack of cooperation is not just, as Sweett’s defence counsel put it “the ignominy of coming before the crown court.” A guilty plea exposes the company to potential debarment from public procurement contracts. Although a Section 7 offence does not, according to the government, incur mandatory debarment, it can incur discretionary debarment (whether the government is right, is a question for another day). Given that 74% of Sweett’s income comes directly or indirectly from public sector clients, this is a potentially significant risk. In this context, the SFO’s decision not to offer Sweett a DPA sends a particularly important message: that it will not rescue companies from the consequences of their own decisions not to come clean and cooperate at the earliest possible opportunity.

Sweett did not face charges over the allegations made in the Wall Street Journal with regard to the building of a hospital in Morocco despite making “limited admissions” with regard them. This could be because the SFO could not find enough evidence to charge Sweett under the relevant legislation, but the fact that Sweett made such admissions suggest that the Dubai subcontract was not the one-off that Sweett’s defence claimed, but potentially part of a broader pattern of behaviour resulting from a lack of controls that Sweett’s management knew about but failed to act on.

It is also not clear whether Sweett were also required to provide the SFO with all evidence of wrongdoing uncovered by either Pinsent Masons, Mayer Brown or KPMG, or whether it only provided evidence in relation to the particular contracts under investigation by the SFO. Whether the SFO can get companies to disclose the full range of their wrongdoing in negotiations for either a DPA or a plea, is crucial to how aggressive an enforcer the SFO can actually be.

Is It Time For Corporate Probation Orders?

Under a DPA, the SFO could have ordered Sweett to commission an independent review of its anti-bribery procedures. At one point during the sentencing hearing Judge Beddoe asked whether he could presume that Sweett had now done the right thing with regard to its procedures. He was assured it had, particularly given KPMG’s 2015 review of all contracts. But is that enough?

Given Sweett’s track record of ignoring clear recommendations from an external consultant (KPMG) about supervision of subsidiaries and of effectively advice shopping in relation to wrongdoing, is it really appropriate that all scrutiny of its procedures stops once it is sentenced? Courts ought to have the power to order probation conditions, or supervision orders for companies – requiring a company to get an independent review of its anti-bribery procedures and report to the court about its implementation of any such review. Such orders should also require companies to report any wrongdoing it discovers while the order is in place.

Without corporate probation orders, the UK will remain in the strange position of having less rigorous scrutiny of the corporate governance of companies that do not cooperate with law enforcement bodies than of those that do cooperate and are offered a DPA.