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Fatally flawed? TRACE International due diligence in question again in Rolls-Royce’s Nigeria case

Due diligence provider TRACE International certified a Nigerian company that, according to court documents, paid bribes on behalf of Rolls-Royce. The revelation comes less than a year after allegations that TRACE certificates helped Unaoil do corrupt business around the world on behalf of multinationals. The failure to detect possible wrongdoing by Unaoil and Rolls-Royce’s Nigerian agent, which has family connections to a key government department, raises serious concerns about the robustness of TRACE’s due diligence process.

 

Unaoil, a Monaco based intermediary for large multinationals in the oil industry, was described by the US Department of Justice in its Deferred Prosecution Agreement with Rolls-Royce as having “regularly bribed foreign officials and others in order to secure work for Rolls-Royce” while the UK’s Serious Fraud Office said in a 2016 submission to the High Court in London that Unaoil conducts “no lawful business.

 

The Nigerian agent in the Rolls-Royce case, meanwhile, was named by the FT as PSL Engineering and Control, a Lagos-based company which claims on its website to provide “engineering solutions to clients.  According to court filings accompanying Rolls-Royce’s £671 million corruption settlement in January, PSL, which is not identified by name in the documents, corrupted government officials in an attempt to secure business for Rolls-Royce. Specifically, PSL is accused of making improper payments to officials in National Petroleum Investment Management Services (NAPIMS), a Nigerian government body that supervises bids for contracts, including ones that Rolls-Royce vied for.

 

In one incident in 2010, PSL paid £5,000 into a private bank account in London linked to officials at NAPIMS, according to court documents. Three directors of PSL were also related to a key NAPIMS official.  In return for PSL’s links to NAPIMS, Rolls-Royce received confidential information about the bidding process for two energy projects.

 

The court documents show that a number of Rolls-Royce employees were suspicious about PSL’s work for Rolls-Royce which started in 2009. In December 2010, one Rolls-Royce employee raised concerns that PSL would not pass TRACE International’s due diligence process and also flagged suspicions about the agent’s family connections to the Nigerian government.

 

In March 2011, Rolls-Royce employees became aware of press reports about alleged corruption affecting the construction of the Oghareki power plant, a project that both the UK manufacturer and PSL were involved in. During 2010, Nigerian media widely covered two petitions to the country’s Economic and Financial Crimes Commission calling for an investigation into the Oghareki power plant project in Nigeria’s Delta State.

 

One petition, written in April 2010 by Intelligence Watch UK, said the project had been fraudulently awarded in June 2009 to DavNotch, a company allegedly linked to Victor Ochei, a senior Delta State politician. In particular, the Delta State government awarded DavNotch a multi-billion Naira contract to purchase and install two Trent gas turbines from Rolls-Royce. PSL provided technical assistance to the project. Nigerian government officials reportedly questioned at the time why Rolls-Royce had been selected to be the supplier, as the company’s turbines were possibly not as well suited to Nigeria’s tropical climate as other alternatives.

 

In May 2016, the Financial Times reported that the SFO was investigating Rolls-Royce’s and PSL’s involvement in the Oghareki project. However, the gas turbine contract was not covered by the SFO’s Deferred Prosecution Agreement, and the SFO made no allegation of wrongdoing against Rolls-Royce in relation to the Oghareki project.

 

Davnotch denies any allegations of impropriety, and Ochei says he divested from the company in 2011. According to local media reports, the Oghareki power plant project has been abandoned.

 

As part of its due diligence process TRACE says it reviews local media reports. However, a certificate posted on PSL’s website shows that TRACE, following due diligence checks, certified the company as “of good standing on 1 April 2011.

 

The question is how did TRACE certify a company which was not only linked in the media to a corruption-tainted project, but which was also the subject of substantial concerns by one its own clients (Rolls-Royce)? Staff at Rolls-Royce continued to raise concerns about bribery by PSL in July 2011 several months after the company had been certified.

 

TRACE was not the only organisation to carry out due diligence on PSL. The same month that TRACE certified PSL, another due diligence provider, Altegrity Kroll, produced a report highlighting the corruption risks relating to PSL, which included allegations of corruption, use of political connections and family connections to government employees. A month later, Rolls-Royce commissioned another due diligence exercise, this time from Stirling Assynt, who while questioning how the company had managed to get contracts before even being incorporated, concluded that PSL was “more acceptable as agents of foreign companies than others” and was “a suitable partner” for Rolls-Royce.

 

The Statement of Facts asserts that Rolls-Royce’s compliance in relation to PSL was “ineffective and failed to detect the corrupt nature of the relationship” between PSL and NAPIMS. Interestingly when Rolls-Royce’s Higher Risk Committee met in January 2012 to consider PSL’s approval, employees’ concerns about corruption were not discussed and only two due diligence reports were put before it, neither of which made mention of the family connection between PSL and NAPIMS. Given that the Altegrity Kroll report did mention the family connection, it is not clear which reports were put before the committee and whether TRACE due diligence reports were one of the two. The Committee approved PSL as an agent in March 2012.

 

Virna Di Palma, a spokesperson for TRACE, was unable to comment on the specifics of the due diligence carried out on PSL in 2011 as her organisation discards documents after three years.  Di Palma also said while TRACE issued PSL a certificate certifying the company as a “member of good standing” in 2011, TRACE only began its official certification programme after 2012.

 

Di Palma added: “As every compliance professional knows, due diligence is not a guarantee against wrongdoing… If a company withholds information or knowingly permits or directs a vetted agent to pay bribes, then the due diligence process is entirely undermined.”

 

However, TRACE’s due diligence process was clearly important to Rolls-Royce. For example, in 2007 Rolls-Royce issued a company-wide business ethics code that made TRACE due diligence mandatory for external advisers hired by the manufacturer. Oil services company Unaoil was also approved by TRACE due diligence for a decade, helping it win business from Rolls-Royce. Unaoil is now under investigation by authorities in the US, UK and Australia over allegations that it paid bribes on behalf of numerous multinationals, including Rolls-Royce.

 

According to Fairfax Media, Unaoil gamed the TRACE due diligence process by getting company executives to submit false references attesting to the highly ethical operations of the Monaco-based business. Cyrus Ahsani, the chief executive of Unaoil, called TRACE “wankers” and “box tickers”, but realised the importance of passing the organisation’s due diligence process. He urged his sons to hang TRACE’s certificates on the walls of the Unaoil head office.

 

Neither Unaoil or PSL are currently listed on TRACE’s database of certified companies.

 

A box ticking exercise?

 

In the wake of the Unaoil scandal, the president of TRACE, Alexandra Wrage said: “We knew that the sheer volume of due diligence we handle meant we would eventually have a Unaoil in our midst. That is, a TRACE certified entity under criminal investigation.”

 

Now another company implicated in criminal proceedings has managed to slip through TRACE’s due diligence process. It seems that the organisation’s due diligence methods are fatally flawed.

 

In order to get TRACE certification an intermediary must consent to a 2-3 week due diligence screening. TRACE will then compile a report based on: a questionnaire filled out by the intermediary; references from multinationals that have used the agent; media searches; court case searches and screening of sanctions lists. Companies can still get certification despite having multiple red flags in their report.

 

A significant flaw in the TRACE due diligence process is that the organisation assumes that both the intermediary and the multinational will be forthcoming and honest in their questionnaires and references. The slew of ongoing corruption, money laundering and tax fraud investigations into some of the world’s largest companies, suggests that a resolute belief in the honesty of multinationals may be misled.

 

As TRACE does not carry out full-blown investigative research into intermediaries, it will be unable to discern if an agent or multinational is lying unless there are public court documents or media reports to suggest so.

 

Part of the problem is the terminology that TRACE uses, which creates the misleading impression that companies have been fully vetted, their business ethics guaranteed, rather than the truth, which is that they have passed a due diligence process costing a few thousand US dollars. In an interview with Global Investigations Review following the Unaoil scandal, Wrage recognised that the word “certify” (which appears on PSL’s certificate), is problematic.

 

She said: “The terminology – and I’m obviously not delighted with it in the wake of this – is that they are TRACE certified… “Can Unaoil stand up to the world and say, ‘Yes we’re TRACE certified’? Yes… Should we change the name of it? It’s possible. We can certainly consider it. It’s due diligence; it’s certainly not a guarantee.”

 

As TRACE readily admits receiving certification or passing background tests does not actually guarantee an agent is corruption-free.  But it does provide a crucial stamp of credibility that multinationals can hide behind when trying to show that they took proper measures to vet agents and prevent corruption. The Rolls-Royce scandal has shown yet again that the TRACE certification process is flawed. It begs the question, are TRACE certificates worth the paper that they are printed on?

Still underwriting corruption: UKEF needs new bout of public scrutiny

On 5th February, the Guardian revealed that UK Export Finance (UKEF) – a government body which provides exporters with government backed insurance products – is conducting an internal review into whether Rolls-Royce complied with its anti-corruption policies. This follows Rolls-Royce’s admission in two Deferred Prosecution Agreements in the UK and the US to having paid bribes in 12 countries over nearly two decades.

Taxpayers appear to have underwritten at least some of the corrupt activity that Rolls-Royce admitted to. Last week, Private Eye revealed that UKEF had given support to Rolls-Royce on three contracts in Thailand, Indonesia and Russia totalling over £700 million, on which it had admitted corrupt activity. UKEF also supported a fourth contract in Brazil relating to the P-52 offshore oil platform with Petrobras worth £32 million. The full amount of UKEF support may be significantly higher given that some support isn’t made public due to commercial sensitivity, some support will have been given as re-insurance for products provided by other export credit agencies, and a significant amount of support is given to Rolls-Royce as a subcontractor to Airbus.

Rolls-Royce has long been a major customer of the UK’s export credit agency. In March 2016, UKEF’s CEO, Louis Taylor, described UKEF as having “a phenomenal relationship with Rolls-Royce.

As the Guardian reminded people in January this year, back in 2004 Rolls-Royce lobbied the export credit agency (then known as the ECGD) alongside BAE Systems and Airbus to weaken new anti-corruption procedures. In particular, the companies objected to requirements to reveal information about agents used on contracts. The companies lost that battle and new rules were clarified in 2006 which meant that all companies applying for support had to reveal the name of the agent, amount and purpose of commission payments, and place of payment. They also have to sign a warranty that they had not engaged in corrupt activity.

Disclosing the middlemen

The requirement on companies to disclose the use of an agent is crucial to the ability of UKEF to do due diligence on corruption risks in the contracts it underwrites. The use of agents to distance a company from bribe payments has long been the pattern in corporate bribery. According to the OECD Foreign Bribery Report, 71% of all bribery cases on which enforcement action was taken between 1999 and 2014 involved an intermediary or agent.

UKEF is unique among government departments in being able to scrutinise companies’ use of such agents. The number of companies disclosing the use of agents to UKEF has averaged around 20% since 2008 according to annual statistics provided to the Export Credit Advisory Group. A snap shot of the kind of disclosures made on agents during 2014-15 was given to Private Eye in late 2016 under Freedom of Information. While the names of agents and some other details were blacked out, some of the disclosures would appear to raise serious red flags. In one instance, commission was 20% for “introduction and contract negotiation”, despite the fact that for a good number of export credit agencies, 5% is the ceiling for commission payments above which they will not give support. In another, $6.5 million was paid in commission for “political and business intelligence… and relationship building.” In another, the purpose of the commission was cited simply as ‘facilitation’.

The main way that UKEF conducts due diligence is to ask the diplomatic mission in the relevant country about the agent. However, since 2008, UKEF has never turned down an application from an exporter following due diligence on its agents and commission and has only ever twice referred a suspicion of corruption to the law enforcement authorities. This raises questions about how robust its due diligence procedures are in practice.

UKEF is already in the firing line on this. In April 2016, Airbus announced that it had informed UK authorities of “its findings concerning certain inaccuracies relating to applications for export credit financing.” UKEF stated that the inaccuracies, which were picked up by Airbus and not UKEF, related to the “historical use of overseas agents” and referred the findings to the Serious Fraud Office (SFO). In August 2016, the SFO announced a criminal investigation into allegations of fraud, bribery and corruption relating to ‘irregularities’ involving third party consultants by Airbus.

UKEF’s response to the Airbus findings was to freeze temporarily all Airbus applications pending a review. In November 2016, however, it said that it was open to Airbus applications subject to “conducting appropriate due diligence on compliance issues.” UKEF also launched ‘Project Trident’ in which it (jointly with German and French export credit agencies) commissioned legal advice from Slaughter and May for £30,000 and a review by PWC “to understand and seek assurances about compliance issues” worth £614,460 (to be reimbursed by Airbus).

Until 2012, Airbus accounted for around 80% of all UKEF support given and still receives roughly a quarter of its support. Given that it is such a major customer of UKEF, the implications for UKEF of any potential criminal action against Airbus are huge.

Other corruption cases where UKEF has provided support have also started to emerge. In 2013, UKEF gave £12.2 million of support to Smith and Ouzman for exporting ballot papers to Kenya despite the fact that the company was under investigation by the SFO at the time for potential bribes on other electoral contracts in Kenya via a middleman. UKEF has confirmed that an agent was involved in the Smith and Ouzman contract. Smith and Ouzman was convicted in December 2014 of paying bribes via a middleman in Kenya.

The key question facing UKEF now in the Rolls-Royce case is whether the company gave accurate information to UKEF about its intermediaries and the commission payments made.

But UKEF must also look at the appropriateness of its Special Handling Arrangements (SHA) for agents, which companies can request where they want to keep the identity of an agent confidential. These arrangements were a compromise reached between UKEF’s predecessor, ECGD, and Rolls-Royce, Airbus and BAE back in 2006 to get around the reluctance of the big defence companies to reveal their agents at all. Under these arrangements only a senior UKEF manager is allowed to know the identity of the agent and must keep it confidential. They have been used on six occasions by Rolls-Royce.

UKEF is adamant that these arrangements do not compromise their ability to do due diligence, but if senior members of staff at UKEF must keep the identity of the agent confidential, it is not clear how UKEF conducts due diligence on the agent. Furthermore, industry insiders say that the desire to keep an agents’ identity confidential raises red flags in itself about whether the agent is appropriate. In light of the admissions of Rolls-Royce and the Airbus investigation, UKEF must seriously reconsider the Special Handling Arrangement regime.

Broken promises? UKEF anti-corruption warranties and consequences

Companies must sign anti-corruption warranties when applying for UKEF support stating that:

1. they have neither engage nor acquiesced in ‘corrupt activity’ in relation to the contract for which they are seeking support; and

2. they will “promptly notify” UKEF if they become aware of any such activity with full details.

Rolls-Royce told the Guardian that it had made such anti-corruption declarations to UKEF in three of the contracts on which it admitted bribery. Additionally, it emerged from Rolls-Royce’s DPA with the SFO that senior management at the company had known about corrupt conduct since 2010 but decided not to notify authorities. That means that Rolls-Royce may have breached both parts of the warranty by engaging in corrupt activity and failing to notify UKEF when it became aware of such activity.

But what isn’t clear is what consequences Rolls-Royce faces for such breaches. Most of the support that Rolls received was not direct from UKEF but involved UKEF guaranteeing a loan made by a bank. UKEF states that it cannot cancel the policies on the contracts where Rolls admitted bribery despite ongoing liabilities as this would ‘unfairly penalise the banks involved in the financing’. Unless UKEF faces direct losses on any of these contracts – in which case it could refuse to indemnify Rolls – there is no immediate financial or other impact on the company.

So are UKEF’s anti-corruption warranties worth the paper they are written on?

If UKEF can’t cancel the policies it has with Rolls, what action can it take to ensure that there is some real consequence to the company for breaching its warranty?

The options are as follows:

1. Seek law enforcement action against Rolls for fraudulently obtaining government support. This would require the SFO to press charges on these grounds against Rolls. Given that the SFO has made a final settlement with Rolls through a Deferred Prosecution Agreement it is unlikely to have the appetite for doing this, but it could and should at the very least ensure that this is one of the range of charges that can be made against the senior Rolls executives it is now investigating.

2. Withdrawing cover from Rolls for a set preiod of time. UKEF says that a conviction for corruption is ‘prima facie’ grounds for refusing cover to a company. However, Rolls has not been convited, but only admitted corrupt acts under a DPA. It is likely that UKEF, which tends to take a narrow interpretation of these things, will argue that it can’t refuse cover in these circumstances. However, UKEF could use its ‘discretionary’ decision-making power to withdraw cover for a three-year period as a response to its warranties being breached. This would send a srong message to exporters about the serious consequences they can face for breaching the warranties.

3. Improse increased premiums on Rolls. Rolls-Royce has clearly shown that it is at a higher risk than other companies because it has lied to UKEF and breached its warranties. One option would e for UKEF to increase Rolls-Royce’s premiums for a set period of time as a consequence which is how a commercial insurer would eal with such risk.

4. Impose increased due diligence procedures on Rolls-Royce. Rolls could and should be subject to increased due diligence on any contracts it seeks UKEF support for with any costs for this borne by Rolls.

What is clear is that unless there are some real consequences for Rolls’ breaches of its anti-corruption warranties, UKEF risks undermining its anti-corruption procedures. It will create a real moral hazard that other companies, knowing there is no penalty for lying to UKEF about corrupt activity, may also be economical with the truth. Taking no action is not an option.

Scrutiny of whether UKEF’s anti-corruption procedures are up to scratch is desperately needed at a time that the government has announced that it will double the risk appetite of UKEF from £2 billion to £5 billion. This is in a context when UKEF has reduced anti-corruption burdens (particularly in respect of disclosure of agents) on companies in relation to its new general working capital facility. If UKEF is going to manage the real risk of corruption that exporting to risky markets brings, it needs to get serious about its due diligence, controls and sanctions for corrupt activity. It cannot wait for more scandals to emerge.

Chadian oil corruption case: SFO Court of Appeal victory sets reassuring standard for asset recovery cases

You may have missed it, because it garnered little in the way of press coverage, but the Court of Appeal in London made an important and welcome decision in an international corruption case last week. The decision, which upheld a freezing order for corrupt assets, suggests that UK courts will take a dim view of overseas orders that are designed to preclude asset recovery in the UK.

 

The Serious Fraud Office (SFO) secured an order in 2014 freezing £4.4 million belonging to Ikram Mahamat Saleh, the wife of a senior diplomat from Chad. Prosecutors allege that the money is a corrupt payment by oil company Griffiths Energy, now named Caracal Energy, which in 2013 pleaded guilty to bribery charges in Canada.

 

Saleh has repeatedly challenged the freezing order on the grounds that a Canadian court has already declared the £4.4 million, which is deposited in a Royal Bank of Scotland (RBS) account, lawful and not the proceeds of corruption. However, in a sign that UK courts will not let hasty and ill-thought-out overseas court proceedings scupper asset recovery cases in this country, the Court of Appeal dismissed Saleh’s challenge on 23 January, pointing out that the Canadian order was not based on close consideration of facts or evidence.

 

The backstory: how the £4.4 million found its way to the UK

 

Evidence of corruption against Griffiths first surfaced at the end of 2011 when the company was preparing to float on the London Stock Exchange.

 

Due diligence carried out in preparation for the flotation unearthed evidence that Griffiths had paid bribes to officials in the government of Chad to gain access rights to two oil blocks in the country.

 

A subsequent internal investigation by Gowling Lafleur Henderson (a Canadian law firm which, following a merger, is now known as Gowlings WLG) revealed the full extent of the corrupt scheme: Griffiths entered into a “consultancy agreement” in 2009 with a company named Chad Oil whose sole shareholder and director was Nouracham Bechir Niam, the wife of Chad’s then-ambassador to the US and Canada. The agreement included a US$2 million payment to Chad Oil.

 

What’s more, on the same day that the consultancy deal was agreed, Niam and Saleh, wife of Chad’s then-deputy chief of mission to the US, acquired a large amount of shares in Griffiths for a nominal amount. Saleh bought 800,000 shares for just US$745.

 

In the words of a judge who later reviewed the case, there is no logical reason why Niam and Saleh would have bought shares in a small, private and recently formed Canadian petroleum company unless they were privy to information about Griffiths’s impending oil-block-access deal with Chad’s government.

 

After Griffiths pleaded guilty to violating Canada’s Corruption of Foreign Public Officials Act in 2013, Canadian prosecutors launched forfeiture proceedings against Niam and Saleh seeking the stock that they acquired.

 

However, the proceedings took an odd turn of events – Canadian authorities obtained an order to freeze the shares, but then in April 2014 abruptly dropped their forfeiture application without publicly explaining why.

 

Saleh’s lawyer was then allowed to draft a court document declaring his client’s innocence, and stating that her shares were lawfully acquired. Judge Brooker, the Canadian judge overseeing the case, signed the order as drafted by Saleh’s lawyer.

 

The judge approved the order without being presented with evidence by the defence or prosecution, and without close examination of the document presented to him. Judge Brooker also signed a separate, more simply worded order releasing Niam’s shares.

 

Enter the SFO and DOJ.

 

Not to be deterred by the worrying turn of events in the Canadian proceeding, the US Department of Justice (DOJ) launched its own civil forfeiture case for the value of shares belonging to Niam, whose husband Mahamoud Adam Bechir now serves as Chad’s ambassador to South Africa. This is unsurprising considering the corruption scheme involved Chadian officials living in the DOJ’s own backyard in Washington, DC.

 

The SFO sought to freeze the value of Niam’s assets following a mutual legal assistance request by the DOJ. However, US prosecutors did not initially seek the value of the shares belonging to Saleh as they feared claims of diplomatic immunity – Saleh’s husband, Youssouf Hamid Takane, remained at Chad’s embassy in Washington, DC until recently.

The SFO acted on its own initiative obtained a freezing order in July 2014 for £4.4 million of Saleh’s money deposited in a RBS account in the UK. Saleh had made £4.4 million after selling her stock in Griffiths to Glencore which acquired the Canadian company in mid-2014, paying £5.50 per share. Griffiths’s lucrative oil assets in Chad were at the forefront of Glencore’s decision to purchase the company.

 

Saleh challenged the freezing order, first in the High Court in London before Mrs Justice Andrews and afterwards in the Court of Appeal.

 

Counsel to Saleh argued in both cases that the Canadian order, which declared the shares were not the proceeds of crime, was binding the world over, and the SFO should refrain from contending otherwise.

 

Unsurprisingly, the Court of Appeal, like the High Court before it, took a dim view of Saleh’s argument. The appeal court said while Saleh’s Canadian lawyers had drafted the order to make it seem conclusive and final the world over, this did not make it so.

 

Rather, the Canadian order “was plainly not the product of a decision-making process, in which the relevant facts were considered and weighed, in which the relevant principles of law were set out and applied”, the court said. The court also made the point that the judge signed the order without considering or understanding that it was drafted by Saleh’s counsel to bar overseas enforcement authorities from pursuing her assets.

It is reassuring to see that UK courts will not let poorly worded or ill-considered overseas orders hamper attempts by the SFO to pursue the proceeds of corruption.

 

In the Canadian case there is no evidence to suggest that the judge had any intention to unlawfully protect Saleh’s assets from recovery. However, it is not difficult to imagine proceedings in other jurisdictions with compromised and corrupted court systems where sham orders are passed with the sole intent of preventing asset recovery by overseas authorities. The approach taken by the Court of Appeal – which subjected the Canadian order to minute paragraph-by-paragraph analysis – should be the standard in such cases to prevent ill-considered or even illegal overseas decisions hampering asset recovery in the UK.

 

But will the facilitators be held to account?

 

While the approach taken by the Court of Appeal is heartening, the Saleh case also raises significant concerns about the role of UK banks and financial institutions in the laundering of corrupt assets, particularly when the asset in question is stock.

 

At least two UK companies handled the £4.4 million Saleh received and the £17.6 million Niam received after selling their shares in Griffiths to Glencore: RBS, and stock transfer agent, Computershare Investor Services.

 

Computershare Investor Services, which is an FCA-regulated UK subsidiary of its Australian parent Computershare Ltd, deposited £22 million belonging to Niam and Saleh in its account at RBS. It seems likely that Computershare had a duty to report suspicious activities.

A Failure of Nerve: The SFO’s Settlement with Rolls Royce

So Rolls Royce has been fined £671 million under a global settlement for a bribery scheme that ranged from the 1980 right up until 2013 and spanned 13 countries. The Deferred Prosecution Agreement (DPA) with the UK’s SFO resulted in a fine of £497.2 million for payment of bribes concealed in well over $56 million of commission payments paid mainly via intermediaries in Nigeria, Indonesia, Malaysia, Thailand, India, China and Russia. The DPA with the US Department of Justice (DOJ) resulted in a fine of $170 million for payment of $35 million in bribes through intermediaries in Angola, Azerbaijan, Kazakhstan, Iraq, Thailand, and Brazil. The Brazilian prosecutors’ office has also reached a leniency agreement with Rolls Royce under which the company will pay $25 million for bribery in the Petrobras scandal.

The DPAs were rushed through so that the US agreement could be finalised before the Trump administration takes office – Trump has described the US’s Foreign Corrupt Practices Act as a ‘horrible law’ and said he will repeal it.

In his judgement, Sir Brian Leveson remarked that his first reaction was that if Rolls Royce’s “egregious criminality over decades” was not to be prosecuted “it was difficult to see when any company would be prosecuted.” However, he ultimately decided that because of Rolls Royce’s extensive cooperation during the investigation and because Rolls-Royce now has an entirely new Board and executive team, and has made considerable changes to its policies, the DPA was in the interests of justice.

The UK’s third DPA with one of the UK’s most politically and strategically important companies raises some serious questions about the DPA regime and the willingness and ability of the prosecuting authorities to prosecute what was clearly an egregious, sustained, and global pattern of wrongdoing ingrained in the very culture of the company and involving senior former executives.

In particular, the DPA raises the following key issues:

  • The UK’s DPA regime has been significantly weakened by the Rolls Royce precedent:

Previously the SFO has emphasised that companies should self-report information about wrongdoing that the SFO could not otherwise have known about. Both the previous two DPAs were based on this type of self-report. This did not happen with Rolls Royce: two whistleblowers posted allegations online and the SFO approached Rolls to ask them about the allegations. The SFO argued in this case that because Rolls Royce’s cooperation was so extensive and resulted in Rolls providing the SFO with further information of wrongdoing which the SFO was not aware of, it should be treated as having self-reported. The Rolls Royce DPA, therefore, sets a precedent that a company can fail to disclose – in fact deliberately decide not to disclose information about wrongdoing (the judgement says that Rolls Royce knew about conduct since 2010 and decided not to notify authorities), but if it then cooperates with the SFO it will still be eligible for a DPA. Companies will heave a sigh of relief that they can now safely take the risk of not disclosing wrongdoing to the SFO, but still receive all the advantages of a DPA if they do get caught as long as they then play ball. This DPA therefore potentially undermines incentives for companies to self-report – a key plank of why DPAs were introduced.

  •  The terms of the UK DPA which include a 50% discount in fine, a five year payment plan and a lack of transparency about how the full benefit received by Rolls from the contracts was calculated, are overly generous and unmerited:

Despite the fact that Rolls Royce did not self-disclose, Sir Brian Leveson still decided that it was eligible for a 50% reduction in fines under the DPA. The Department of Justice was not so generous. It gave Rolls a 25% discount in acknowledgement that it had not self-disclosed the wrongdoing. Leveson’s decision to start allowing 50% reductions in fine under DPAs is a deliberate shift away from the 30% reduction stipulated by the Crime and Courts Act 2013, and raises questions about who Leveson is accountable to when changing DPA policy on such a fundamental basis.

It is worth noting that while the US DOJ has demanded the fine upfront, the SFO has given Rolls Royce 5 years to pay the fine in instalments. This overly generous treatment raises serious questions about how much of a deterrent the DPA provides and whether fines of this type are likely to become regarded by companies as a potential cost of doing business.

  • The SFO has given an inappropriate assurance to Rolls Royce about not investigating and prosecuting additional criminality should it emerge alongside the DPA:

The SFO has assured Rolls-Royce (para 134) that “it would not consider it to be in the interests of justice to investigate or prosecute it for additional conduct” that pre-dates the DPA but which might arise from the SFO’s ongoing investigations into Airbus and Unaoil. But if those investigations, which the judgement reveals are currently “insufficiently advanced” to provide evidence on potential wrongdoing by Rolls Royce, reveals criminality by the company, it would be wholly inappropriate for the SFO not to penalise the company for that criminality. Additionally, it would raise questions as to why Rolls Royce had either not uncovered such criminality itself in the course of its internal investigations, or if it had, why it had not disclosed it to the SFO. That is to say, the very basis of Rolls Royce’s DPA might be called into question by information that arises from these other SFO investigations. The assurance has worrying overtones of the immunity clause that the SFO gave to BAE Systems in its 2010 settlement, which was roundly criticised by the Judge who oversaw that settlement and by the OECD.

It is notable that the DOJ’s DPA specifically requires the company to continue to cooperate with it “in any and all matters relating to the conduct [subject to the DPA] … and other conduct” under investigation by the DOJ until the term of the DPA ends, and to inform it of any further evidence or allegations of bribery. The SFO’s DPA only commits the company to cooperate if the SFO launches a prosecution.

  • The ‘adverse consequences’ that Rolls Royce might suffer if it were prosecuted, in particular being debarred from public contracts, were vastly overplayed and their consideration as a public interest factor against prosecution undermines government commitments to ensure corrupt bidders are excluded from public contracts:

At the UK Anti-Corruption Summit in May 2016, the UK committed, along with other countries at the Summit, to exclude corrupt bidders from public contracts. However, one of the key public interest arguments given for not prosecuting Rolls Royce was that it would face exclusion from public procurement. As the judgement itself acknowledges, only 15% of Rolls Royce’s contracts would have been affected by mandatory exclusion from public contracting – a fact that suggests that claims made by the SFO and accepted by Sir Brian that a prosecution might lead to Rolls Royce’s demise were vastly over-stated. Given that EU exclusion regimes now specifically allow for companies to argue that they have effectively reformed or ‘self-cleaned’ in such a way as to avoid mandatory debarment, the likelihood of Rolls Royce being excluded at all was in any event very low.

  • The impact of Rolls Royce’s corruption on the countries in which it paid bribes was given no weight in the proceedings:

While the innocent employees and shareholders who could potentially be affected if Rolls Royce were prosecuted were given specific mention, no reference was made to the victims of the corruption that Rolls Royce committed. None of the prosecuting authorities from the countries where bribes were paid appear to have been given a right to make representations to the court. And no real assessment of the potential harm caused by Rolls Royce’s corruption appears to have been made by the SFO. Such corruption undermines democracy, the rule of law and socio-economic development, disadvantaging citizens in victim countries.

  • Finally, the DPA raises questions about accountability for judicial scrutiny of DPAs itself and lack of third party representation:

Only one senior UK judge currently hears DPAs: Sir Brian Leveson. Given that DPAs cannot be judicially reviewed or challenged, it is questionable whether the process should be left in the hands of only one judge who gets to set case law on DPAs. There is no route for third parties to make representations to the court who might have evidence or reasons for questioning why a DPA might not be in the public interest. Sir Brian therefore only ever hears arguments from two parties, the SFO and the company, who are in agreement about the DPA being a good thing. The danger is that Sir Brian Leveson is not only reformulating DPA policy on the job with no oversight, but may get so familiar with the arguments in favour of DPAs, that his critical oversight is dimmed. 

What the SFO needs to do now

If the SFO’s DPA with Rolls Royce represents a failure of nerve, there are a few key things the SFO must do now to show that it is serious about ensuring that the vast wrongdoing exposed in its investigation of Rolls Royce does not go completely unpunished:

 

  1. Individual prosecutions against the executives involved will be a key test of the SFO’s commitment to dealing with the alleged corruption effectively:

    The SFO has said that it is pursuing investigations against individuals. Bringing those individuals, particularly senior level executives, who were responsible for the wrongdoing alleged in both the SFO and DOJ DPAs is essential.

  1. The SFO must bring prosecutions against the intermediaries involved where possible:

    In particular, it should continue its investigation into Unaoil vigorously (the danger is that it could lose appetite for such an investigation now the Rolls Royce allegations have been resolved), the Choudhries who acted as an intermediary for Rolls Royce in India, and the UK based intermediary cited in relation to corruption allegations in Kazakhstan in the DOJ’s DPA.

  1. The SFO must look at whether there are assets belonging to corrupt officials linked to the bribes paid by Rolls Royce and to intermediaries based in the UK and whether there are grounds for confiscating them:

    At least one of the intermediaries involved in the alleged wrongdoing is known to have property in the UK, and it is possible that some of the officials involved, who are known to the SFO from its investigation, may also.

 

Failure to continue to act with determination on these matters will undermine the UK’s stated commitment to fighting corruption by British companies and will strongly suggest that the introduction of the DPA regime still results in too-cosy settlements that effectively allow big and powerful companies off the hook.

Rolls Royce Bribery Allegations – Why A Prosecution Is Essential

The allegations of widespread bribery by aerospace and defence giant, Rolls Royce, raised both by Panorama and the Guardian are a fundamental test of the UK’s political will and ability to prosecute such crime. A successful prosecution of Rolls Royce would be hugely symbolic and help lay to rest the demons of the UK’sdisastrous handling of allegations of extensive bribery by BAE Systems. It would also help address the following issues:

 

  1. Whether big companies in the UK are beyond the law

 

The SFO has been successful in getting various small companies into court since David Green became Director. But it has yet to nail a large British company. And Rolls Royce is very big. With a revenue of £13.8 billion and nearly 50,000 employees globally (around half in the UK), it is the second largest provider of defence aero-engine products in the world.

 

The UK has always struggled to prosecute large companies successfully partly due to weak corporate liability laws and partly due to lack of political will. Rolls Royce’s alleged wrongdoing spans both the old corruption laws in the UK (under which prosecuting a large company is nearly impossible) and the new Bribery Act, under which it is fairly easy – the SFO just needs to prove that Rolls Royce failed to prevent an offence. Whether the SFO can bring a prosecution against Rolls Royce is a key test of whether it can prosecute large multinational companies in general and whether UK corporate liability laws are up to the job.

 

  1. Whether some companies are too important to prosecute

 

The real question is whether the SFO is going to be able to prosecute a company that is politically so powerful, where it failed to do so with BAE. Rolls Royce is the only other UK company, apart from BAE, where the government holds a ‘golden share’ which means that those companies cannot sell more than 25% of their assets without government permission. At the end of 2015, the Financial Times reported that the governmenthad drawn up plans for nationalising Rolls Royce’s nuclear business to prevent hostile takeover bids after a series of profit warnings. Rolls Royce is supplying the nuclear propulsion systems for the next generation of nuclear submarines under Trident. It is also said to be presenting itself as a ‘White Knight’ to rescue the UK’s nuclear power strategy with a programme of work around mini nuclear reactors.

 

Rolls Royce is additionally a major partner in the government’s Industrial Strategy, under which it receives significant government support for research and development. Between 2005 and 2014, Rolls Royce received around £335 million in research and development grants from the UK government . As Matt Hancock, both a former business minister and current culture minister told Parliament in 2014: “Of course the relationship between the Government and Rolls-Royce is a very close one, not least because of the support we give it for research and development, but also because of the defence relationship, which is vital to our national security.

 

Cases against a company like this will really test a prosecutor’s resolve. On top of which, if the SFO wants to prosecute Rolls for any of the wrongdoing alleged to have occurred prior to 2011 under the UK’s old anti-corruption laws, it’s going to need to get the Attorney General’s consent to do so. David Green, the SFO’s Director, is a tough operator – but just how tough is he going have to be?

 

  1. Whether big powerful companies can get special treatment through an out of court settlement

 

Rolls Royce is said to be keen on settling with the SFO and talk is in the air for it to receive a Deferred Prosecution Agreement. There is a little sticking point: while getting one of these in the US is fairly routine, to get one of these agreements in the UK you have to have self-reported (and that means giving information that the SFO would not otherwise have known about). While Green’s predecessor Richard Alderman was very relaxed about the definition of a self-report, the SFO under Green is fairly strict.

 

The allegations, according to press reports, emerged after a whistleblower, Dick Taylor, made comments in online posts which resulted in the SFO asking Rolls in early 2012 for further information. The very fact that the SFO asked the company for information should preclude Rolls from claiming credit for a self-report.

 

The original allegations involved China and Indonesia. Rolls Royce’s internal investigation in December 2012 found matters of concern in both China and Indonesia but also in other markets. The key question is whether Rolls already passed informationto the SFO about allegations that have subsequently emerged related to Petrobras in Brazil; to Unaoil, the Monaco company alleged to have acted as a corrupt middleman for various Western companies in the Middle East and for Rolls Royce in Iraq, Kazakhstan, Azerbaijan and Angola;and to Nigeria; or whether these emerged as new allegations during the course of the SFO’s investigation.

 

Rolls Royce will be hoping to get credits against aprosecution by having appointed a senior legal figure, Lord Gold, to review its anti-bribery compliance procedures – just as BAE appointed Lord Woolf to do so. Gold’s review has led to a considerable reduction in the number of intermediaries used by Rolls, and a new code of conduct and other new compliance measures. But some have criticised the lack of transparency in the Gold review which has yet to be published, unlike the Woolf review and other reviews of its type into Barclays and the Bank of England. How can the public know how much a company has actually changed if it isn’t transparent about what its problem was?

 

One of the key arguments Rolls may use to push for a settlement is to help it avoid exclusion from public procurement if convicted. In BAE’s case, it was specifically charged with non-corruption related offences both in the UK and the US specifically to avoid exclusion from public procurement. The reality is that few companies have faced this consequence for corruption, and if Rolls Royce is convicted under Section 7 of the Bribery Act, it is purely discretionary whether it would be excluded. In fact, under new procurement forms drawn up by the UK, it isn’t clear whether Rolls would even have to declare such a conviction. This is despite the fact that the Declaration from the UK’s Anti-Corruption Summit specifically signed countries up to excluding corrupt companies from bidding for public contracts.

 

However cooperative Rolls Royce has been with the SFO, the sheer scale of Rolls’ alleged offending would suggest that some kind of settlement would be wholly inappropriate. The UK needs to walk the talk on corruption. Anything less than a full airing of Rolls Royce’s wrongdoing in a court room is going to look like a cop out.

The Soma Oil and Gas judgement: is the SFO going to have to get a move on with its investigations?

On 12th October the full High Court ruling refusing Soma Oil and Gas’s judicial review challenge to an SFO investigation was published. The hearing was held back in August.

The SFO launched an investigation in July 2015 into allegations of corruption and bribery surrounding ‘capacity building payments’ by Soma in Somalia. This was prompted by a report by the UN’s Somalia and Eritrea Monitoring Group which was leaked alleging that payments made by Soma to the Somali government were used to make “systematic payments to senior ministerial officials” within the Somali Ministry of Petroleum and Mineral Resources. The report also raised serious conflict of interest issues outlining how Soma had paid the Somali government’s independent legal advisor nearly $500,000, while the legal advisor was giving advice on the contract with Soma.

Soma’s background

 Soma was established in early 2013 specifically to pursue oil and gas exploration opportunities in Somalia and is chaired by former Home Secretary and Conservative Peer, Michael Howard.It is 50% owned by a British Virgin Islands based company, Winter Sky. One of Soma’s board members is Russian oligarch, Georgy Djaparidze, whose family own Winter Sky. Another non-executive director is Mohamed Ajami, a London-based Lebanese businessman who has been under investigation by the US Department of Justice for placement fees to the Libyan Investment Authority (LIA) on behalf of hedge fund manager Och-Ziff. In late September 2016, Och-Ziff admitted engaging a third party agent in relation to securing investment from the LIA knowing that the agent “would need to pay bribes

In August 2013 Soma was awarded a lucrative contract with the Federal Government of Somalia to conduct seismic surveying and a subsequent right to exploit 12 offshore blocks of its choosing. Soma contested the UN group’s findings stating that its payments were all related to building much needed technical capacity.

Soma’s challenge

 In August 2016, Soma launched the judicial review against the SFO claiming that the investigation was casting a shadow over Soma’s business and gave rise to a risk of insolvency. In particular it claimed that the investigation would prevent it from concluding a Production Sharing Agreement (PSA) with Somalia and raising finance in order to be able to meet its obligations under a PSA.

In its challenge Soma claimed that the SFO’s investigation was irrational, a breach of its Article 8 rights under the ECHR (right to private life) and that the SFO’s failure to disclose information on its other strands of inquiry was contrary to minimum standards of disclosure under EU law on the rights of accused or suspected persons.

The outcome

 The SFO will be relieved that the Court took a dim view of the Soma challenge and restated the wide discretion available to investigators and prosecutors. Lord Justice Gross and Mrs Justice Andrews wrote: “it is not for this Court to blur the roles of Court and investigator by compelling the SFO, by way of a remarkable, unwarranted and mandatory order, to terminate its investigation”. The Judges awarded 80% costs against Soma. It is yet another of a string of victories the SFO has been having in challenges brought by companies to its investigations or procedures.

But it is not all good news for the SFO. The judicial review of the SFO by Soma was a particularly aggressive strategy for a company,that according to the judgement,“cooperated extensively with the investigation.” But it is also a strategy that partially worked. Five days after launching the challenge, on August 15th, the SFO issued as a “unique exception” a letter to Soma providing an update on its investigation which stated that there was “insufficient evidence of criminality” in relation to the ‘capacity building payments’ but that ‘other strands of the investigation’ were continuing.

The Judges found that it was “fair, responsible and most welcome” for the SFO to do this and concluded that “it would plainly be desirable if the other strands investigation was concluded as expeditiously as possible – hence the Court’s exhortation at the conclusion of the hearing.”

In other words, where commercial deals are at stake, the SFO needs to get a move on.

Getting a move on with Airbus – another unique exception in the making?

On the same daythat the Soma judgement was published, SFO Director David Green was quoted by Reuters as saying that the SFO would “proceed fairly quickly” with its investigation into Airbus.

In August 2016, the SFO announced that it had started an investigation in July into “allegations of irregularities concerning third party consultants” . This followed an announcement by Airbus in April 2016 that it had passed to the UK authorities “its findings concerning certain inaccuracies relating to applications for export credit financing.”These inaccuracies are thought to concern discrepancies over the amount of agent’s commission disclosed and missing names of third parties which could represent a potential fraud on the UK tax payer.

A few days later Reuters reported that UK Export Credit Finance (UKEF), the UK government export credit agency had referred information to the Serious Fraud Office and temporarily frozen all Airbus cover pending a review. The French and German export credit agencies followed suit a few days later. That raises the question whether the SFO will be under pressure to conclude its investigation quickly so that uncertainty over Airbus’ export credit cover can be resolved.Commercial deals will be at stake though Airbus is unlikely to face bankruptcy as a result of the delays.

It is worth remembering that Airbus is facing investigation in both the UK and Germany for a string of corruption allegations. The SFO’s investigation into allegations that Airbus’ UK subsidiary, GPT, paid bribes via a Cayman Islands based subcontractor on a government to government contract with Saudi Arabia, was opened in August 2012. The German public prosecutor announced an investigation in March 2012 into allegations of bribery and corruption among other offences in relation to the use of third parties by Airbus in a contract to supply the Austrian government Eurofighters. German prosecutors are also looking at irregularities in contracts to provide border surveillance to Romania and Saudi Arabia; and at alleged bribery by a company owned jointly by Airbus and ThyssenKrupp, Atlas Elektronik, on contracts in both Greece and Turkey. Greek and Romanian authorities are also investigating allegations.

David Green told Reuters it was too early to say whether Airbus would qualify for a Deferred Prosecution Agreement – one potential way of getting a quick result. Given the scale of the wrongdoing alleged against Airbus around the world, even if Airbus did self-report its export credit misdemeanours, anything short of a full investigation into wrongdoing by Airbus would be a serious travesty. On the other hand, the fact that the GPT investigation has been drifting on for over four years now makes people nervous that nothing is actually happening. The SFO badly needs to see some results particularly on its investigations into big players, but the pressure on the SFO to do deals and enter into Deferred Prosecution Agreements to avoid upsetting commercial deals and get quick results needs to be resisted.

The OECD Comes to Town…

This week the OECD Working Group on Bribery (WGB) review team have been in London reviewing the UK’s implementation with the OECD Anti-Bribery Convention. This is the sixth time the UK has been reviewed. The UK has been reviewedby the WGB three more times than any of the other major OECD countries such as Germany, France and the US, mainly because of the very long time (a decade) the UK took to enact fit-for-purpose anti-bribery legislation.

OECD Working Group on Bribery reviews have generally been meticulous, detailed and robust in their analysis of failings. The UK is one of the first countries, along with Finland, to be reviewed under its fourth round of monitoring, Phase 4, in which the OECD is focusing on detection, corporate liability and enforcement. The review team looking at the UK is made up of government officials and law enforcement experts from Norway and South Africa and members of the OECD WGB Secretariat (UK government and law enforcement officials get to monitor the US and Canada).

UK’s previous pariah status

The UK achieved the closest to pariah status a country can get at the OECD Working Group on Bribery in 2008. In an unprecedented move, the group placed a quarterly reporting requirement on the UK and warned that UK companies may need heightened due diligence placed on them because of the weakness of UK anticorruption laws.

This followed the 2006 dropping of the SFO’s investigation into corruption allegations involving BAE on the Al Yamamah project in Saudi Arabia following a personal intervention from Tony Blair. The UK drove a coach and horses through the OECD Convention by citing ‘national security’ as a reason for dropping a bribery investigation – despite Tony Blair citing jobs and damage to relations with Saudi Arabia as the real reasons. Both of these reasons are prohibited under Article 5 of the OECD Convention but national security is not explicitly so.

Is the UK out of the hot seat yet?

The sustained pressure from the OECD WGB was one of the reasons behind the Bribery Act which finally brought the UK into compliance with the OECD Convention. The UK was reviewed again as part of Phase 3 focusing on implementation and enforcement in 2012. That review welcomed the Bribery Act but highlighted serious concerns with the use of civil recovery orders to deal with foreign bribery – the favourite strategy of Richard Alderman, former SFO Director, who reportedly overrode his prosecutors to enter into fireside-chat deals with companies.

The OECD noted that these deals were private and lacked transparency. It also criticised the use of confidentiality agreements with companies by the SFO, the provision of advice by the SFO to companies, and the loose definition that the SFO used of self-reporting (famously Mabey and Johnson were credited with having self-reported their wrongdoing despite the fact that allegations of corruption had appeared in the Guardian and that the UN Volcker Commission Inquiry into the Oil for Food programme in Iraq had found wrongdoing by the company. It specifically criticised the use of a blanket immunity clause in the plea agreement that the SFO entered into with BAE for minor accounting charges in relation to Tanzania.

All these criticisms helped shaped the new Deferred Prosecution Agreement regime that was introduced in the Crime and Courts Act 2013 and have framed the SFO’s strategy to fighting bribery since 2012 when David Green took over as Director. Green ended the SFO policy of civil recovery orders for self-reporting companies and the role of the SFO in giving advice to the companies on whether specific acts could constitute breaches of law. While these have not made him popular with companies and defence lawyers, he has re-established the SFO’s credibility and legitimacy in the eyes of many as a result.

So what can the UK expect this time?

The Phase 4 monitoring process is focusing on:

  • How countries detect corruption including:whether tax authorities, embassies, and export credit agencies are passing information onto enforcement bodies; whether information is coming through from Financial Intelligence Units and money laundering investigations; whether and how countries are encouraging self-reporting by the private sector (including auditors); and whether countries are investigating media reports and encouraging whistleblowers.
  • How countries enforce their laws including: resources for anti-corruption authorities, cooperation with overseas authorities through Mutual Legal Assistance (MLA), measures to ensure that authorities aren’t taking into account prohibited Article 5 considerations such as relations with other states or national economic interest, and results from enforcement actions.
  • How countries deal with corporate liability; and
  • Engagement with the private sector.

The UK’s British Overseas Network on Development (BOND) Anti-Corruption Group made a written submission to the OECD as well as meeting with the Review team. The full submission can be viewed here. It highlighted the following issues:

  • The UK needs to make a strong commitment to the Bribery Act in the post-Brexit world and do more to raise awareness among SMEs particularly of what steps they should be taking to be in compliance;
  • The UK needs to ensure that corporate liability laws in the UK don’t disadvantage SMEs and give serious consideration to Director’s Disqualification for Bribery Act convictions as a way of holding Directors to account for failures to prevent Bribery.
  • The UK should make a final decision about law enforcement structures for fighting corruption, including improving funding for the SFO, changing the funding model of the SFO away from blockbuster funding, and giving the SFO the remit and powers to investigate all foreign corruption cases.
  • The UK should ensure that there is a specialist economic crime court to hearing foreign bribery cases to get around the long delays in getting foreign bribery cases into court.
  • The UK should introduce Corporate Probation Orders so that companies that do not cooperate with the SFO and face prosecution face greater scrutiny of their compliance procedures – at the moment they face none.
  • In its use of Deferred Prosecution Agreements, the SFO should ensure it is not overly reliant on company internal investigations, that it has a consistent definition of self-reporting and cooperation, and that individuals are properly held to account for wrongdoing. It should ensure that any changes to the DPA regime are made through an accountable policy making process not through DPAs themselves which cannot be challenged or reviewed.
  • Scotland should not continue to use discredited civil recovery orders as a means of dealing with foreign bribery cases.
  • The SFO should be more transparent about enforcement statistics, more ready to use civil recovery orders where prosecutions are not an option and should ensure it provides detailed analysis of the full benefit and harm of corruption to the courts.
  • There iscontinued systemic risk that prohibited Article 5 considerations could play a part in investigations: the need for Attorney General’s consent for Prevention of Corruption Act offences which still make up a significant portion of the SFO’s workload; the ability of the Attorney General to appoint and sack the Director of the Serious Fraud Office; and the use of ‘Shawcross’ exercises, which were very controversial in the BAE/Al Yamamah case and have been used more recently in 2014.
  • The lack of implementation of exclusion from public procurement of companies convicted of corruption.
  • Serious concerns about the adequacy of anti-corruption and bribery procedures at the UK export credit agency (UKEF), and the need for an independent review of its handling of corruption risks in the Petrobras/Brazil scandal.
  • The need for the Ministry of Defence to set up an independent transparency and ethics review of its handling of corruption risks, particularly in light of corruption allegations involving another government to government deal with Saudi Arabia, and Airbus subsidiary, GPT.
  • The need to ensure the independence of the Financial Conduct Authority.
  • Ongoing weaknesses in the UK’s whistleblowing laws particularly as they apply to expatriate workers and the need for the UK to conduct a public awareness campaign around whistleblower protection laws, and to produce through consultation a Whistleblowing Code of Practice to establish best practice standards.

 

There’s no doubt that there is room for improvement in the UK’s enforcement of the Convention and hopefully the OECD’s review will act as a prompt for that to happen.

And a word on process…

 Back in the heady days of the London Anti-Corruption Summit, the UK government announced that it intended to be the most transparent government in history when it announced its Open Government Action Plan.

In that spirit, the BOND Anti-Corruption Group wrote to the government in the run up to the OECD review (see the full letter here), asking the government:

To make invitations to the non-governmental meetings open, transparent and public;

  • To make public the agenda for the meetings;
  • To commit to open meetings during the review process (except where sensitive case material is being discussed);
  • To provide a copy of its written response to the OECD questionnaire to non-governmental actors, including the law profession, the private sector and civil society;
  • To provide a draft of the final report for comment prior to publication to non-governmental actors; and
  • To invite governmental and non-governmental actors from victim countries (those affected by bribery by UK companies) to provide an input into how UK enforcement could be improved.

 

Unfortunately, the government responded that most of these things were not in its power and were the decisions of the OECD WGB. It’s worth noting that the US in its Phase 3 review published its response to the written questionnaire online. The Phase 4 resource guide specifically says that a country can take “whatever steps it felt appropriate to release information concerning its report.”

While it is entirely legitimate that governments don’t release case sensitive material, making as much of their written response to the OECD as public as possible can only help make the OECD WGB’s reviews more robust and credible. How else can the OECD ensure it is receiving accurate information about governments’ enforcement efforts?

Brexit: What Next for the Anti-Corruption Movement in the UK?

The fight against corruption has just become a whole lot harder. Brexit and its political and economic fallout risks pulling the rug from under many of the gains made in fighting corruption in the UK over the past few years. This is for the following reasons:

1. David Cameron had a personal interest in tackling corruption that was unusual for a Conservative politician. This created considerable policy space for anti-corruption work, culminating in the Anti-Corruption Summit in May this year. This interest is unlikely to be shared by any successor who will, additionally, have so many things on their plate that fighting corruption will be way down the agenda.

2. Business is likely to hold an unprecedented sway in politics as politicians negotiate Brexit, with politicians guided by the fear of businesses relocating abroad. The government will want to protect both UK exports and inward foreign investment at all costs. Brexit is likely to become the pretext for a heightened deregulation agenda to enable UK business to gain as much competitive advantage as possible. This process has started already with Osborne’s announcement on Monday 4th July that he would lower corporate taxation by 5%, in pursuit of creating what he called a “super-competitive economy.” In the coming years, business is likely to have unparalleled access to government, increasing the risk of regulatory capture.

3. As UK exports to the EU face uncertainty and difficulties, there will be pressure on business to increase exports to other areas of the world including those with high risk of corruption. At the same time, the UK will want to encourage inward investment from non-EU countries (Johnson said in his post Brexit speech that he had already had offers of interest in investment from countries such as Malaysia) and is unlikely to want to ask too many questions. The potential result is that UK companies are likely to engage in higher levels of bribery to get business, while more corrupt money is likely to come into the UK.

4. At the same time, a serious economic downturn is likely to result in resource pressure on enforcement and regulatory bodies. If UK GDP drops by 2% – as some economists predict – that will seriously eat into the Department for International Development’s (DFID) budget. DFID’s budget is locked as 0.7% of Gross National Income (GNI), the absolute value of which would decline if the GNI dropped. In a period of economic difficulties and in a political context of austerity, it may be that the 0.7% figure could come under challenge. DFID is a significant source of funding for enforcement in the UK and of enforcement initiatives globally. It has also traditionally been one of the key promoters of the anti-corruption agenda in central government.

5. The ability of the Serious Fraud Office (SFO) to bring cases against large corporations may be undermined by the risk and/or threat of companies relocating, with an increased likelihood of political pressure to go easy on companies to avoid that outcome. Meanwhile, the SFO’s very existence might be under threat in a new political landscape. If Theresa May becomes leader of the Conservatives and therefore Prime Minister, she may try to finish her agenda of amalgamating the Serious Fraud Office (SFO) with the National Crime Agency (NCA). The Telegraph reported on Friday 30th June in a profile on May that if she wins, May “will be resolute in pursuing her agenda for the Home Office to take control of the SFO.” This would be disastrous for the fight against corruption and put at risk the SFO’s currently heavy and increasing work load of corporate bribery and embezzled public funds

6. The considerable effort that civil servants have put in to delivering a cross-Whitehall anti-corruption agenda are at risk of being dissipated as government departments refocus their energies on what Brexit will mean for their work (As one US diplomat put it before the referendum result: “just think of the stationary costs”!). Resource pressure meanwhile may well affect whether some of the commitments made by the UK at the UK Anti-Corruption Summit can be delivered. In particular, less resources and the UK’s new isolationist position may make it difficult for it to establish the new international anti-corruption coordination centre which was proposed at the Summit.

7. Several EU instruments that have helped frame the UK’s response to corruption will have to be renegotiated, including the EU Procurement Directive, the EU Anti-Corruption Conventions and the EU Money Laundering Directives. For the most part these commitments are covered by other international instruments, so the UK will need to fulfil these obligations anyway. The exceptions are the EU Procurement and EU Money Laundering Directives which both created mandatory obligations on the UK, whereas the broader international framework is based only on recommendations. The EU Procurement Directive sets out clear requirements for companies convicted of corruption and money laundering to be excluded from public procurement. Although these provisions  have largely gone unimplemented across the EU, they have generated the potential for serious consequences of engaging in corruption for companies and are widely feared in the business sector. These provisions have been written into domestic law already but a renegotiation of the UK’s relationship to the EU might put this legislation in doubt.

If the UK opts out of the EU Money Laundering Directives meanwhile, the UK could create a race to the bottom on anti-money laundering compliance, and become an ever more attractive no questions asked location for corrupt capital.

The next few years are likely to see anti-corruption campaigners having to fight tooth and nail to maintain some of the advances we have seen in fighting corruption in the UK and indeed to stop the UK enforcement of its international anti-corruption obligations collapsing altogether. A Donald Trump victory in the US, and any further disintegration of the EU, is likely to shake the international framework for corruption in such a way that could knock the anti-corruption agenda back by decades. The task ahead is to keep corruption doggedly on the agenda and ensure that Brexit does not become an excuse for turning Britain into the very godfather of offshore territories, where business interests reign supreme.

Cash For Cash Notes: Former Business Manager at Securency International PTY Ltd. Convicted of Corruption

Against the backdrop of the UK’s Anti-Corruption Summit in mid -May 2016, a jury at the Southwark Crown Court retired to consider six counts of corruption brought against Peter Chapman, the former business manager for Africa for Securency International PTY Ltd., after a six-week long trial. The allegations brought by the UK Serious Fraud Office against Chapman were that he bribed a foreign official for the purpose of securing orders for the supply of polymer substrate by his company, Securency to the Nigerian Security Printing and Minting PLC. Polymer substrate is used in the printing of bank notes and Securency was said to be monopoly supplier of this substrate in Nigeria. Peter Chapman had spent 162 days in custody in Brazil before being extradited to the UK.

 

Securency was a joint venture, set up in 1996 between the Reserve Bank of Australia (RBA) and Innovia Films, a British international manufacturer and supplier of speciality packaging.[1] In late 2010, both organizations, who each had a 50% stake in Securency, announced their intention to sell the business following allegations that staff had bribed foreign officials to secure contracts. But a lack of suitable offers led Innovia Films to change its mind on the sale, and it paid AUD $65m (£43.4m) for RBA’s shares.[2] Innovia Films, based in Cumbria had a net worth of £158.4 million in 2014.[3] It produces high-tech film products for industrial applications and banknotes, and in 2014 it won a contract to provide polymer for the Bank of England’s new £5 and £10 banknotes.[4]

 

The Serious Fraud Office and the Australian Federal Police have been investigating the activities of Securency employees and its bribery since May 2009  in a burgeoning bribery investigation involving allegations, arrests and raids across three continents.[5] Business executives in Securency were previously alleged to have conspired to win lucrative contracts to print plastic notes in several south-east Asian countries by paying bribes to high-ranking politicians and officials between 1999 and 2005 including Vietnam, Malaysia and India.
The trial was an important one particularly because of the astonishing secrecy surrounding bribery allegations involving the company. In July 2014, an extraordinary gagging order was issued by an Australian court to block the reporting of the bribery  allegations surrounding Securency  and  several international political leaders.[6] The judge who issued the ruling, Justice Elizabeth Hollingworth, said the order was necessary “to prevent damage to Australia’s international relations”.[7] The gagging order prohibited reporting about any person involved in the case who “received or attempted to receive a bribe or improper payment” [8] The order was a “super injunction” – even publishing its existence was itself suppressed, however it was published by Wikileaks in what Justice Hollingworth, called a “a clear and deliberate breach of law”.[9] The last known blanket suppression order of this nature had been granted in 1995 and concerned the joint U.S.-Australian intelligence spying operation against the Chinese Embassy in Canberra .[10]

 

The Charges

 

The jury convicted the former Securency official, Peter Chapman on four counts of corruption for giving the foreign official bribes worth £103,000. The corruption occurred between January- March 2009. He was acquitted on two counts of alleged bribery to the same official on earlier occasions. This is good news for the UK Serious Fraud Office which has successfully prosecuted a key individual in a global bribery case. Last year, three employees of Swift Technical Solutions Ltd were found not guilty at Southwark Crown Court of corruption offences in relation to the tax affairs of a Nigerian subsidiary.[11]

 

Peter Chapman was sentenced to a 30-month custodial sentence, half of which has already been served in Brazil and then Wandsworth Prison in the UK. For the remaining half he was immediately released on license, which generally means he is released under conditions such as he must be of good behavior, not commit any offence, be in touch with the supervising officer in accordance with the instructions of this officer and reside permanently at an address approved by the supervising officer.

 

He will return to a confiscation hearing on 19th January 2017.[12] In sentencing Peter Chapman, Judge Michael Grieve said a significant factor in mitigating Chapman’s sentence was the role of Securency management. Chapman was seen to have been under considerable pressure by the management to move towards “polymeriz[ing] the world” and accordingly, the UK Judge said Chapman acted with his manager’s “connivance” or at least “encouragement”.  The management based in Australia named during the trial included Hugh Brown, then Director of Sales, Miles Curtis, then Managing Director of Securency and David John Ellery, then Director of Financial Operations who was also the main prosecution witness against Peter Chapman.

 

More information on Securency and the trial monitoring notes can be accessed here

[1] Innovia Security official website at https://www.innoviasecurity.com/history/ accessed on 26th May 2016.

[2] 14th January 2013, Print Week, “Innovia to buy out Securency partner” at http://www.printweek.com/print-week/news/1136015/innovia-securency-partner

[3] See https://companycheck.co.uk/company/00271998/INNOVIA-FILMS-LIMITED/group-structure accessed on 23rd May 2016

[4] Bank of England official website at http://www.bankofengland.co.uk/publications/Pages/news/2014/050.aspx

[5] January 10, 2011, Sydney Morning Herald, Business Day, “RBA firm rehired suspect agents via tax haven company” at  http://www.smh.com.au/business/rba-firm-rehired-suspect-agents-via-tax-haven-company-20110109-19juo.html accessed on 4/01/2016; July 30th, 2014, Guardian at “ Australian court’s gagging order condemned as ‘abuse of legal process’”

[6]July 30th, 2014, Guardian “Australian court’s gagging order condemned as ‘abuse of legal process’” at http://www.theguardian.com/world/2014/jul/30/australian-court-gagging-order-abuse-legal-process

[7] July 30th, 2014, Guardian “Australian court’s gagging order condemned as ‘abuse of legal process’” at http://www.theguardian.com/world/2014/jul/30/australian-court-gagging-order-abuse-legal-process

[8] July 30th 2014, FCPA, “Australia clamps embarrassing gag order on global bank note bribery case” at http://www.fcpablog.com/blog/2014/7/30/australia-clamps-embarrassing-gag-order-on-global-banknote-b.html#sthash.63KWvTiL.dpuf

[9] 15th July 2014, blog Crikey, “Finally court lifts absurd Securency injunction” at http://www.crikey.com.au/2015/07/15/finally-court-lifts-absurd-securency-injunction accessed on http://www.crikey.com.au/2015/07/15/finally-court-lifts-absurd-securency-injunction/

[10] 29th July 2014, WikiLeaks release at  https://wikileaks.org/aus-suppression-order/press.html

[11] SFO official public website at https://www.sfo.gov.uk/2015/06/02/defendants-acquitted-in-nigerian-corruption/

[12] January 10, 2011, Sydney Morning Herald, Business Day, “RBA firm rehired suspect agents via tax haven company” at  http://www.smh.com.au/business/rba-firm-rehired-suspect-agents-via-tax-haven-company-20110109-19juo.html accessed on 4/01/2016; July 30th, 2014, Guardian, “Australian court’s gagging order condemned as ‘abuse of legal process’” at http://www.theguardian.com/world/2014/jul/30/australian-court-gagging-order-abuse-legal-process

The UK’s Anti-Corruption Summit: Not a Complete Waste of Time?

There was a considerable amount of scepticism in some quarters when British Prime Minister David Cameron announced his international anti-corruption summit. The UK is not renowned for its vigorous fight against corruption – few of its companies have been prosecuted for bribes, London and the UK’s overseas territories are a hub for laundering corrupt capital, and no executives have ever been prosecuted for laundering. Was the summit just a PR exercise by the UK government, or was it, as some were saying, a once-in-a-generation opportunity for a significant leap in the fight against corruption?

There was certainly a lot of PR going on. Cameron touted the Summit as “the biggest demonstration of political will to address corruption for many, many years.” Given that only 11 heads of state turned up and that the G20 has been making annual high level statements on fighting corruption for the last 6 years, it seems a little over-egging of the pudding. The Global Declaration Against Corruption that came out of the Summit is described on the government’s website as ‘the first ever global declaration against corruption’. This would seem to ignore the UN Convention Against Corruption which is surely the only truly global declaration against corruption with 140 signatories (compared to the Anti-Corruption Summit’s 40).

PR aside, was the Summit worth it? The Economist noted that where most international summits are a flop, this one “was certainly not a complete waste of time.” The UN Secretary General described it as “a timely effort to reinvigorate the international response to corruption.”  Getting countries to commit to doing specific things to fight corruption publically is always useful as long countries put their money where their mouth is and follow through. Quite how anyone is going to hold countries to account for what they committed to at the Summit is another matter.

So what were the bad bits?

For an anti-corruption summit, this one was shockingly untransparent. The government would not reveal who was coming to the summit or what was on the agenda beforehand. A couple of ‘stakeholder meetings’ and regular briefings for a small group of NGOs couldn’t compensate for that fundamental lack of openness, nor could live-streaming the summit (obviously most of the interesting discussions occurred previously behind closed doors).

The failure of the UK to either persuade or issue an Order In Council to force its Overseas Territories and Crown Dependencies to set up public registers of beneficial ownership may well be the defining failure of the summit for many. Such an order was used to force the territories to abolish the death penalty and decriminalise homosexuality in the past. As the Panama papers revealed, over half of the offshore companies set up by Mossack Fonseca were registered in the British Virgin Islands.

Only 6 countries agreed at the Summit to have fully public registers on beneficial ownership (with another 6 agreeing to consider it) – the other 38 signed up to meet a standard that was already set by the Financial Action Task Force in 2014, and agreed by the G20 in the same year: ie sharing beneficial ownership information with ‘competent authorities.’ It is worth remembering that the key reason why civil society wants public registers is that law enforcement bodies haven’t exactly covered themselves in glory fighting corruption. It has often (one might say usually) been investigative journalists and civil society groups that have uncovered wrongdoing while law enforcement have lagged massively behind. Unless civil society groups can get access to registers of public beneficial ownership, who will make sure law enforcement is actually doing its job?

And then there were some glaring omissions. It would have been good to see some much stronger commitments on whistleblower protection. Just before the summit, the whistleblower in the Panama Papers case said that he would provide the papers to law enforcement if he is given immunity from prosecution. Too many whistleblowers in the recent leaks have faced prosecution. Some really clear commitments by countries to review their whistleblowers procedures and develop best practice national frameworks would have gone a lot further than a generalised commitment to protect whistleblowers.

Meanwhile, commitments to transparency in commodity trading and ensuring victims of corruption are represented in court proceedings and settlements dropped off the agenda pretty much altogether during horse-trading over the Summit communiqué (though transparency in commodity trading made it into a couple of country commitment statements).

The good bits …

The announcement of a global asset recovery forum in 2017 will keep the issue of asset recovery on the agenda, but will need to be thought through carefully with some clear and early input from civil society. The creation of a new International Anti-Corruption Enforcement centre might be useful, though only 8 countries signed up to be involved, which is a little worrying – how much buy in will it really have? Would having one of the existing bodies actually monitor whether countries are responding to Mutual Legal Assistance requests (over 50% go unanswered currently) and naming and shaming those that don’t have been more effective? The commitment to open procurement and open contracting is good (it would be useful to know how much further it goes beyond commitments already made to this through the Open Government Partnership but reaffirming these  commitments is no bad thing). And it was important that a commitment to exclude corrupt companies from procurement made it into the final communiqué.

The UK meanwhile has had to think carefully about how to get its own house in order. The possible introduction of Unexplained Wealth Orders and a requirement for companies buying property or participating in public procurement to reveal their beneficial owners are things that were simply not on the agenda even two years ago. Whether keeping corrupt money out of the UK will just entrench the trend of pushing such money to other less scrupulous jurisdictions is an interesting and under-discussed issue. Corporate liability reform, meanwhile, which was dropped last autumn is now back on the agenda (though in a very narrow form).  And the UK has finally decided to set up a central register of convicted companies to be excluded from procurement (something that campaigners have been arguing for for over a decade).

There is a lot more the UK could do however. Key among these would be showing long term commitment to the Serious Fraud Office and committing resources to it; ensuring that the Courts are set up and resourced to deal with economic crime; providing public information about allegations received and what action has been taken by law enforcement on them (including public explanations for why investigations have been dropped – too many allegations disappear into the black hole of enforcement at the moment never to emerge); and committing to ensuring that the bank accounts and assets of bribe takers are frozen in any bribery investigations (as the US Department of Justice has started doing).

To sum up:

From close up, the Summit was probably a small step rather than a leap in the right direction – though only time will really tell. There is no doubt that corruption has been on the agenda in the UK as it never has been before. Civil servants have been working flat out to really work out how the UK can deliver an anti-corruption agenda. But a vote to leave the EU in June could easily pull the rug out from under this agenda. If Cameron loses the EU Referendum his political life will be on the line, and there is no guarantee that a post-Cameron Conservative government, desperate to keep capital and investment coming into the UK and for UK companies to keep exporting, is going to care quite so much about corruption. If Donald Trump were to win in the US elections and repeal or weaken the Foreign Corrupt Practices Act, which he calls ‘a horrible law’, the prospects for fighting corruption might go very quickly from fairly rosy to looking very bleak indeed.

Out of Court, Out of Mind – do Deferred Prosecution Agreements and Corporate Settlements deter overseas corruption?

Corporate settlements to deal with foreign bribery are becoming all the rage. It is hardly surprising. The US has racked up an apparently impressive enforcement record on foreign bribery that far outstrips any other country, while raking in billions of dollars in the process. What’s not to like?

Corruption Watch has produced a substantive report on the use and impact of corporate settlements around the world. It can be viewed here.

Other countries are taking note. The UK introduced Deferred Prosecution Agreements in 2014 and agreed its first one in late 2015. France has just introduced a bill to introduce settlements into the French criminal context for corporate corruption offences. The Irish Law Commission and an Australian Senate Committee are both looking at whether to introduce Deferred Prosecution Agreements into their respective countries. One Canadian company charged with corruption in Canada is claiming the country’s lack of such settlements is putting it at a competitive disadvantage globally. The use of settlements to incentivise companies to ‘self-report’ their wrongdoing is one of the main themes of the OECD Ministerial meeting on the Anti-Bribery Convention on 16th March this year.

But just as corporate settlements look set for a global roll-out, the US may be starting to row back on their use. Deferred Prosecution Agreements have become increasingly controversial in the US with critics claiming that these agreements allow culpable individuals off the hook, fail to deter economic crime or prevent recidivism, undermine the deterrent effect of the law by shielding companies from debarment from public contracting, lack regulation or oversight, and undermine the very justice system and rule of law itself.

One of the main arguments given for these settlements is that corruption cases are incredibly difficult to investigate and prosecute. Unless enforcement authorities encourage companies to come forward with evidence of their wrongdoing, the argument goes, enforcement rates will remain low. The problem with this argument is that unless enforcement bodies beef up their ability to detect corruption (it is worth noting that in the US less than 50% of cases are self-reported) and are willing to prosecute, there is little incentive for companies to report wrongdoing that they could otherwise get away with. This is the chicken and egg of the current enforcement dilemma.

The other main argument for the use of such settlements is that they protect companies from going bust, with the loss of jobs of innocent employees, and financial damage to innocent shareholders. Empirical evidence in the US where corporate prosecutions are common across a wide range of offences shows this argument to be hollow. No US company has failed due to a conviction in recent years. The 2002 collapse of Arthur Andersen following prosecution for destroying documents relating to the Enron scandal, cited by many as an example for why companies must not be prosecuted, is an exception rather than the rule. Giving too much credence to this argument has effectively given companies special pleading rights within the justice systems where settlements are used.

Before countries across the world try to emulate the US experience, they need to look long and hard at its lessons. The UK has sought to avoid some of the pitfalls of the US approach, by ensuring judicial scrutiny of settlements, but critically by using Deferred Prosecution Agreements as part of a wider enforcement strategy in which prosecution plays a critical role. But it is not clear that the UK’s use of Deferred Prosecution Agreements is going to avoid the other pitfalls of the US, such as allowing culpable individuals off the hook and failing to deter economic crime.

In a context where European countries are increasingly using some form of out of court settlement to deal with foreign bribery, the case for global standards on settlements is growing. The OECD Working Group on Bribery has long raised concerns as to whether the use of out of court settlements in various countries are offering ‘effective, proportionate and dissuasive’ sanctions as required under the Anti-Bribery Convention and are indeed deterring foreign bribery. It is time that the OECD Working Group on Bribery conducted a full and detailed examination of whether they do.

As NGOs writing to the OECD this week have argued, the Working Group on Bribery also needs to develop some best practice standards as use of these settlements spreads. The very purpose of the OECD Anti-Bribery Convention is at stake. Unless high standards for and judicious use of such settlements can be agreed on a global level in tandem with increased prosecutions, the public around the world will lose confidence that justice in relation to overseas corruption is really being done.

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.

Beware the Bribery Skeletons in the Closet: Court of Appeal Rules That Bribery Illegal in the UK prior to 2002

In a very significant judgement on Friday 15th January, the Court of Appeal has ruled in favour of the Serious Fraud Office, finding that bribery of foreign officials was indeed illegal prior to 2002. The SFO had appealed a ruling by Judge Pegden in an ongoing case the SFO is prosecuting (the facts of the case remain in issue, and the case is subject to reporting restrictions) that the key piece of pre-Bribery Act legislation it relies on for older corruption allegations, the 1906 Prevention of Corruption Act, did not apply to foreign officials.

 
The ruling was described by the appeal judges as settling a “critically important” question and it certainly sets a very important record straight. After signing the 1999 OECD Anti-Bribery Convention, the UK government initially argued that the 1906 Prevention of Corruption Act was sufficient for UK compliance with that Convention. That Act however only applies where significant activity took place within the UK in relation to the alleged offending. There was little case law to back the UK’s position up and even less on what ‘significant’ activity in the UK constituted. The OECD were not convinced.

 
The UK responded by introducing an amendment via the Anti-Terrorism Crime and Security Act 2001 (that became effective 14th February 2002) making it clear that the 1906 Act and the UK’s other corruption statutes from 1889 and 1916 applied even where the person receiving a bribe is outside of the UK and has no connection to it. This put it beyond doubt that bribery of foreign officials was illegal from February 2002, but did not clarify the position prior to then. Ongoing pressure on the UK to develop modern anti-bribery legislation continued, leading to the introduction of the Bribery Act 2010 which came into force 1st July 2011.

 
The Court of Appeal ruling finally clarifies that the 1906 Prevention of Corruption Act unequivocally applies to foreign officials. Interestingly, the way the 1906 Prevention for Corruption Act is portrayed in the ruling, using quotes from historical material at the time, almost makes it sound like the original Foreign Corrupt Practices Act. It was introduced in 1906, for instance, as a result of “growing public concern that bribery and corruption in the private sector was rife”. Its purpose, according to a contemporary memorandum was “to check, by making them criminal, a large number of inequitable and illegal secret payments, all of which are dishonest, and tend to stifle confidence between man and man and to discourage honest trade and enterprise.” The judges ruled that in the context of the global trade that England was engaged in at the time, if Parliament had wanted to exclude foreign agents and principals, it would have done so.

Significance of the ruling

 

The judgement is significant because it means there is no limit to what historical corruption the SFO can now investigate. Any corruption that had some connection to the UK prior to 2002 is illegal. After 2002 it is illegal whether or not it has some connection to the UK. It is likely that the courts will still need to test what the definition of ‘connection to the UK’ is, but the issue of legality is settled. The SFO has plenty of cases in its workload that relate to allegations of overseas corruption prior to July 2011, for which it will need to use the 1906 Prevention of Corruption Act. It now has a free hand to determine how far back it can go in investigating and prosecuting such corruption.

 
The ruling also flatly contradicts claims made by the former Attorney General, Lord Goldsmith, that a prosecution of BAE for bribes paid in relation to the Al Yamamah government to government contract with Saudi Arabia, which was dropped by the SFO in 2006 on ‘national security’ grounds following government intervention, was virtually impossible. Lord Goldsmith claimed in an interview with the Financial Times in 31st January 2007 that most of the allegations against BAE related to activity pre-2002, and that even the SFO “accepted they wouldn’t prosecute in relation to pre-2002 because that’s when we changed the law”. This is the second Court of Appeal judgement in the last 3 years to throw doubt on Goldsmith’s claims. Goldsmith claimed, again in the FT and elsewhere, that the other insuperable obstacle to BAE being successfully prosecuted was that the company was claiming that “the payments they were making had been authorised at the highest level”. In 2013, the Court of Appeal ruled in another case ([2013] ECWA Crim 2287) that the SFO was not required to prove that there was no knowledge or authorisation of a corrupt payment by the principal or employer of the agent receiving it. The court held this on the grounds that “a payment to an agent or employee cannot be authorised if it is made for the prohibited purpose.”

 
The ruling suggests that, as many of us suspected at the time, the issue with the UK’s old corruption legislation was not so much inadequacy of the law but a lack of real prosecutorial will to enforce it (although whether larger companies can be brought to justice under the Prevention of Corruption Act given the UK’s inadequate corporate liability laws – view Corruption Watch UK’s paper on corporate liability laws here – remains to be seen). Fifteen years on we have an SFO that is serious about prosecuting and is prepared to take test cases all the way to the Court of Appeal to lay the legal groundwork. This strategy is paying off – there is now certainty and clarity about the law. It may not be the kind of certainty that those within the private sector who have skeletons in their closet will welcome, but for those who have been urging the UK to get serious about prosecuting corruption for the last 15 years it is welcome news indeed.

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.

 

 

The UK’s First Deferred Prosecution Agreement: Good News for the SFO But Worrying News for Tanzania and the Fight Against Corruption

The UK’s first Deferred Prosecution Agreement (DPA), approved by a senior judge on 30th November and
involving Standard Bank’s alleged failure to prevent its Tanzanian subsidiary and its executives from
paying bribes, has changed the UK’s legal landscape for fighting bribery and economic crime.

Corruption Watch UK has conducted an analysis of the DPA and has flagged concerns regarding its conception, execution and potential impact.

A full report of this analysis is available here

A brief summary of this analysis is available here

Corruption Watch UK Urges Financial Conduct Authority to Investigate Employees Named in Standard Bank DPA

Corruption Watch UK has written to Mark Steward, the Director of Enforcement at the UK’s Financial Conduct Authority (FCA), urging the FCA to open an investigation into individuals currently or previously employed at Standard Bank PLC relating to activities described by the company’s Deferred Prosecution Agreement (DPA). Standard Bank PLC entered into a DPA with the Serious Fraud Office (SFO), which was approved by a senior judge on the 30th of November 2015. This is the first time the UK has made use of DPAs to resolve a corruption case after the publication of the DPA Code of Practice in 2014.

The letter can be viewed here

The UK Government’s Bribery Act Wobbles Received Slap Down From Business

In July 2015, the UK Government engaged in a secret and one-sided consultation with business on the Guidance on the UK’s Bribery Act, asking what changes business would like to see to it. Corruption Watch UK has now received, through a Freedom of Information Act request, the email chain that led to the consultation, along with the responses of business. The responses show that business was almost unanimous in saying that the Bribery Act was not an issue; some pointed out the harm that could be done to the UK’s reputation by easing up on the Act.

A full briefing, by Corruption Watch’s Sue Hawley, can be viewed here

The UK Government’s Startling About-Turn on Corporate Liability

The UK’s Independent reports today on recent news that the UK government has reneged on its plans to introduce more effective corporate liability laws that would allow for the effective prosecution of UK corporates for economic crimes such as corruption and money laundering. Answering a question in Parliament, the Justice Minister, Andrew Selous, stated that there was no imminent plan to introduce tougher laws as ‘there was little evidence of corporate crime going unpunished.’

Corruption Watch UK’s Sue Hawley, interviewed by the Independent, commented that “this decision is shockingly short-sighted. The Government has missed a major opportunity to get its house in order on holding corporations to account.

“Companies in the UK are rarely brought to justice and are often effectively above the law because of the UK’s outdated corporate liability laws. It appears that the government is allowing its pro-business deregulation agenda to derails its anti-corruption commitments.”

A new report by Corruption Watch UK, published earlier this week, shows that, in the absence of serious reform, UK anti-corruption laws are seriously flawed. The current legal regime makes it incredibly difficult to bring effective charges against large companies; indeed, the larger the company is, the less likely that it can be charged under the existing regulatory regime.

The news of the government’s U-turn is particularly disappointing given David Cameron’s recent anti-corruption message delivered during a recent trade trip to South East Asia.

 

 

Off the Hook: Corporate Impunity and Law Reform in the UK

Today, Corruption Watch UK launches a new report on Corporate Liability, the options for its reform and the necessity of doing so. The report can be viewed in full here.

Corporate liability reform in the UK is long overdue. The inadequacy of the UK’s corporate liability laws has been recognised by the government, the Law Commission and by international bodies such as the OECD. The UK’s current laws are based on an outdated model that is not fit for the purpose of holding 21st century globalised companies accountable under the law. These laws:

– seriously disadvantage smaller companies who are far easier to prosecute than larger companies;

– create perverse incentives for large companies to insulate their boards from knowledge of wrongdoing, thus weakening accountability within corporations;

– provide little real deterrent against corporate wrongdoing.

As a result, the UK lags far behind other commercial centres, such as the US, in prosecuting corporate economic crime.

In 2012, the government recognised in introducing Deferred Prosecution Agreements that “options for dealing with offending by commercial organisations are currently limited and the number of outcomes each year, through both criminal and civil proceedings, is relatively low.” The Law Commission has called UK corporate liability laws “inappropriate and ineffective.” Most recently the government recognised in its July 2015 consultation on introducing a new corporate offence of failure to prevent tax evasion that “under the existing law it can be extremely difficult to hold .. corporations to account for the criminal actions of their agents.” Introducing a new offence of failure to prevent economic crime was a key manifesto commitment of the Conservative Party in the May 2015 elections.

The decision on 28th September 2015 to drop further corporate liability law reform on the basis that “there is little evidence of corporate economic wrongdoing going unpunished” is therefore incomprehensible, misguided and a serious failure of political will. Corporate liability law reform, which has been muted for over a decade, must not shelved once again.

Corruption Watch UK’s new report looks at the background to and arguments for corporate liability reform and the options for reform. It concludes that an extension of the offence of failure to prevent under Section 7 to economic crime, and possibly more broadly to serious crime, would be a significant step in the right direction of improving UK corporate liability laws. A failure to prevent model of corporate liability would also help ensure that the UK is able to comply with EU Directives which require liability for corporations where there has been “lack of supervision or control”. It is questionable whether the UK is currently compliant with several EU Directives which require liability for corporations without such changes to its corporate liability regime. However, extending Section 7 should be done in tandem with a broader and comprehensive review of the UK’s corporate liability laws to ensure coherence and consistency in how corporations are held to account.

UK’s Deferred Prosecution Agreements Come One Step Closer

On 20th May this year, Ben Morgan, the Serious Fraud Office’s Joint Head of Bribery and Corruption, told the Global Anti-Corruption and Compliance in Mining Conference 2015 that the SFO had sent out its first letters of invitation to companies to enter into Deferred Prosecution Agreements. Shortly afterwards there was speculation that Tesco, under investigation by the Serious Fraud Office (SFO) for accounting irregularities since October 2014, was one of the companies that might be involved in negotiations for such an agreement.

Deferred Prosecution Agreements (DPAs) became available for use in February 2014. DPAs are potentially a significant improvement on the secret settlements and civil recovery orders for corruption that the SFO entered into under Richard Alderman, which amounted to little more than a light slap on the wrist and which were heavily criticised by the OECD. For a start DPAs require judicial oversight and under present SFO Director, David Green, the SFO has made clear that prosecution will remain the norm and that there are very strict criteria around how a company has self-reported and cooperated with the SFO before it will be offered a DPA. However, DPAs are controversial and the question remains as to whether justice will be done and seen to be done where they are used.

US jitters

The UK is embarking on the Deferred Prosecution Agreement process just as this instrument is becoming increasingly contentious in the US. In the US, DPAs have been used to deal with the almost all foreign bribery cases and other corporate financial wrongdoing over the past decade. US judges, who in the past have played a mainly rubber stamping role, are starting to flex their muscles. In 2013, Judge Rakoff described the use of DPAs by the US Department of Justice as ”technically and morally suspect”.

A key case is currently before an appeals panel in the US as to whether and on what grounds a judge may throw out a DPA. The case revolves around a judgement in February 2015 by Judge Leon who rejected a DPA between the Department of Justice and Dutch aerospace company Fokker, accused of making illegal shipments to countries under sanctions such as Iran and Myanmar. Judge Leon described the DPA as too lenient and “grossly disproportionate” to the gravity of the company’s conduct. That case will determine the role that judges can and should play in approving DPAs in the US.

DPAs have also been controversial in the US because individuals from the companies involved have rarely gone on to be prosecuted. On 16th September this year, the US Department of Justice issued a new memo, the Yates memo, that states that companies wishing to resolve criminal charges against them must provide all relevant facts relating to the individuals involved in the wrongdoing.

Further controversy over lack of information and transparency in the settlement process in the US led the US Senate to pass the bipartisan Truth in Settlements Act on September 22nd this year.  The aim of the act is to increase transparency in settlements reached with corporations by US enforcement agencies, particularly with regard to the terms of the settlement and the amount of fine a company would have to pay. The fine a company pays in the US is often significantly less than the headline figure because settlement fines are tax deductible.

NGO concerns

As the UK gets read to enter into its first DPAs – a radical departure for the UK justice system – UK NGOs Corruption Watch, Global Witness and Transparency International raised concerns about their use in a letter sent to David Green, Director of the SFO, in June 2015. The three anti-corruption NGOs urged the SFO to abide by key principles in applying DPAs. These include:

– that prosecution should be the norm;

– there must be no immunity clauses either for individuals or undisclosed acts;

– a full admission of wrongdoing must be made by the company;

– open justice principles must be followed with regard to court hearings;

– there must be full transparency including full details of the wrongdoing and of the public interest arguments in favour of a DPA;

– victim and community impact statements should be presented at DPA hearings;

– affected states must be informed of the DPA process and invited to participate;

– and, finally, sanctions must have significant detterent value.

In his reply to the NGOs, David Green said that the issues raised would be taken into account when considering the overall public interest.

It remains to be seen how DPAs will work out in practice as there are several weaknesses in the DPA Code of Practice. One of these is that companies are not required to admit wrongdoing in order to get a DPA. Another is that a DPA can be offered where a conviction “is likely to have disproportionate consequences” on the company and where a conviction would have “collateral effects on the public”. Article 5 of the OECD Anti-Bribery Convention requires signatories to ensure that investigation and prosecution of bribery is not influenced by ‘national economic interest’ or the identity of the natural or legal person involved. The concern is that the Code effectively allows prosecutors to take such things into account.

DPAs in the press

In July 2015, the Independent ran a front page article entitled “Justice for sale: Big companies could soon escape prosecution for corporate corruption by paying their way out” reporting again on NGO concerns that companies should not be allowed to a ‘get out of jail’ free card and that big companies may bully the SFO into DPAs. David Green has publically said these concerns are ‘misplaced and premature.

Over the summer, there was feverish ongoing speculation in the press as to who would be eligible for the first DPAs. On July 21st Sky News reported that Barclay Bank had received an offer for a DPA in relation to payments made to Qatari investors in 2008. The FCA found that Barclays had failed to reveal £322 million paid in two advisory services agreements. Barclays denied that they had been offered a DPA.

On the 23rd July the FT reported that 2 companies had started talks with the SFO with a view to entering into a DPA. One of companies according to the FT was a SME (Small and Medium Sized Enterprise), Sarclad – a Rotherham based company that provides technology products to the metal industry. The FT reported that Sarclad and one other company were well advanced in their negotiations for a DPA and that two other companies had been invited to enter into discussions for a DPA. David Green was reported as saying that he hopes that the agency will conclude 2 DPAs by the end of the year. According to the Guardian, he has also said that he hopes to conclude the Tesco investigation by the end of this year adding to speculation that Tesco is in the frame.

Public furore… private justice

An interesting point about this speculation, as the briberyact.com website pointed out is that DPA negotiations are, under the DPA Code of Practice, meant to be confidential. The question is, who is talking to the press? Is it people associated with the SFO who want to prove that the SFO is implementing a key government policy at a time when its future is still under threat? Or is it people associated with the company wanting to assure people that an end is in sight where the wrongdoing is concerned (announcement of DPAs in the US classically lead to a rise in share prices)? Or is it idle legal gossip?

This cuts to the heart of an issue that Corruption Watch has been raising with the Serious Fraud Office for some time now about how transparent DPAs are actually going to be. Under the DPA Code of Practice, hearings at which DPAs will receive final approval will for the most part be heard in private to avoid “uncertainties and destabilisation” and a DPA will only become public knowledge once it has been approved. Theoretically a DPA would remain totally secret until it is a done deal. Corruption Watch has repeatedly raised its concerns with the SFO over the past year as to whether this meets open justice principles. In effect, it allows a company that is being given the privilege of escaping criminal liability for wrongdoing, the double privilege of private justice to boot.

Corruption Watch has asked the SFO to explain whether they will list applications they make for the approval hearings to be held in private and inform the media they have done so, so that the media (and we would argue public interest organisations) can make representations as to why such hearings should be held in public. It is hard to see how DPAs can be fully transparent, if all the legal arguments and evidence as to why a DPA should be approved are heard in private. As Lord Justice Toulson said in a key open justice ruling in 2012, “transparency of the legal process” is critical to the rule of law. DPAs can be no exception. Four months on we are still awaiting the SFO’s answer.

The Companies in the Frame

Sarclad

Sarclad, which has regional offices in the US, China and India, says in its company overview that it supplies to 46 countries around the world and has an extensive network of local agents. Over the past few years, Sarclad has won orders in Saudi Arabia, Brazil, India, Turkey and China. It has a turnover of around £15 million and employs 64 people. It first reported in its 2012 accounts, signed off in September 2013, that the company was “involved in discussions with governmental authorities following report of possible irregularities in relation to the conduct of its business in a number of jurisdictions”. While involved in these discussions, which began after a new director started at the company, Sarclad has managed to almost double its turnover according to its 2013 accounts, “through winning orders in challenging environments, with a number of sales being to emerging markets overseas”. Sarclad appears to be in the frame for a DPA for offences under the Bribery Act.

Tesco

Tesco has been under investigation since October 2014 by the SFO for accounting irregularities. At the end of August 2014, Tesco is alleged to have misstated profits by £263 million, by booking payments from suppliers early. This was apparently reported to the new chief executive, Dave Lewis, who started in August 2014, who immediately called in forensic accountants from Deloitte and suspended 8 senior executives. Lewis reported the misstatement to the City in September. Tesco tried and failed to withhold payouts of £2 million to its former chief executive and finance director and has said it may try to claw them back at a later date. Both the former chief executive and finance director were reported in August 2015 to have been called in for interviews at the SFO.

On the face, of it, the fact that Tesco self-declared the wrongdoing, has removed those responsible, and would appear to be helping the SFO with a case against individuals, would make them a contender for a DPA. Tesco is also under investigation by the Financial Reporting Council and faces further facing legal action from shareholders both in the UK and the US.

Barclays

Barclays is under investigation by the Serious Fraud Office for two advisory services agreements it made with Qatar Holding LLC in June and October 2008. The Financial Conduct Authority (FCA) opened an investigation in July 2012 into whether these agreements were connected with Barclays’ capital raisings in June and November 2008. Barclays paid fees of £322 million which were not disclosed under the agreements. The FCA issued warning notices against Barclays in September 2013. The FCA Warning Notices state that the fees paid were not for advisory services but rather were payments for the Qatari participation in raising capital for Barclays. The Warning Notice conclude that Barclays was in breach of disclosure obligations but also in breach of Listing Principle 3 (the requirement to act with integrity towards shareholders), and that it had acted recklessly. The FCA were due to fine Barclays £50 million but the FCA proceedings have been stayed because of the SFO investigation which started in August 2012. Barclays was set to contest the FCA’s ruling.

Barclays reported in October 2012 that the DOJ and SEC are also investigating whether Barclays’ relationships with third parties to win business for Barclays are compliant with the US FCPA and under this are also investigating the Qatari agreements. Barclays relationship with a third party is also under investigation by another undisclosed regulator.

The SFO, DOJ and SEC are said to be investigating whether the fees paid under the advisory services agreements amounted to an attempt to ‘induce’ the Qataris to invest £4.6 billion in the bank. Barclays was able, as a result of its capital raising, to avoid being part re-nationalised by the UK government, as RBS and Lloyds were.

If Barclays has been offered to enter into talks for a DPA, this would be a very contentious choice by the SFO. The fact that Barclays did not self-report to the SFO and was due to contest the FCA ruling raises questions as to how cooperative it has really been. And the fact that it is under investigation for further corruption offences in the US would militate against it being given a DPA. Under the DPA Code of Practice a main public interest factor in favour of prosecution rather than an agreement would be a history of similar conduct. The Codes states that “failure to prosecute in circumstances where there have been repeated or serious breaches of the law may not be a proportionate response and may not provide adequate deterrent effects.”

It is possible that a DPA has been offered to Barclays as part of a global settlement involving a DPA with the US DOJ with regard to FCPA violations. However, if the UK were to give Barclays a DPA when it is either still under investigation by the DOJ for corruption and bribery allegations, or where the SFO only enters into an agreement with Barclays with regard to Qatar while the DOJ enters into an agreement with regard to broader corruption offences committed, the SFO will look extremely weak.