Securency Corruption Conviction: 11 May 2016
7 January 2015
A small family printing company in Eastbourne, Smith and Ouzman, was found guilty on the 22nd December 2014 of overseas corruption in the first successful prosecution of a company in a contested overseas corruption case. It is a significant victory for the Serious Fraud Office (SFO). It shows that the SFO is serious about prosecuting overseas corruption rather than resorting to settlements, and that it will use the old, pre-Bribery Act, corruption laws to do so.
Smith and Ouzman (S&O) and its Directors, father Christopher Smith and son Nicholas Smith were found guilty of corruptly agreeing to make payments to public officials in the Interim Independent Electoral Commission (IIEC) of Kenya, the Kenyan National Examinations Council (KNEC), and the Ministry of the Interior in Mauritania (MIDEC). The company, its Directors, its international sales manager, Timothy Forrester and its agent in Somaliland, Abdirahman Mohamed Omar, were found not guilty of corruptly agreeing to make payments to officials in Ghana and Somaliland.
On February 12th 2015, the two Directors of Smith and Ouzman were sentenced. The Chair, Christopher Smith received an 18 months suspended sentence suspended for 2 years, 250 hours of community work and a 3 month curfew. His son, Nicholas Smith, was sentenced to 3 years, half of which will be served in custody. Both were disqualified from acting as a director for 6 years. Judge Higgins commented that their behaviour was “cynical, deplorable and deeply antisocial, suggesting moral turpitude“. He also acknowledged that “ultimately it is the people of the country who are effected, beyond the financial cost, but also to the extent that the integrity of, and confidence in, the electoral and examination systems were undermined.” The company will be sentenced at a later date following a confiscation hearing which will be held in October 2015.
The date for the confiscation hearing is yet to be set, but will likely be done so during the sentencing hearing on the 12th.. Recent comments by judges in the Innospec case suggest that courts should apply fines comparable to those used in the US, and which reflect the fact that corruption of public officials is at the top end of culpability and harm. Since this is the first conviction of a company that has contested the charges against it, this is new territory for the UK. According to the model of “gross contract value”, used in several bribery cases in the UK, the company can expect to face a fine in the region of £1.9 million. It remains to be seen however, what submissions the SFO will make, and what orders the court will grant as to the level of harm caused by S&O’s corruption in Kenya and Mauritania and the way in which fines and compensation should be assessed.
The company describes itself as “one of the world’s leading security and financial printers”. It recently provided the certificates of authenticity for the Tower of London Remembers ceramic poppies to commemorate the First World War, which was visited by millions including the prime minister and royal family. The company has substantial business interests in Africa specifically with regards to the printing of election documents and ballot papers. The company made a pre-tax profit of £4 million on sales of £24 million in 2013.
The company and its Directors were found guilty of making corrupt payments of £395,074 through agents. The prosecution’s case rested largely on substantial email evidence in which the directors discussed giving “chicken” to public officials with their agent in Kenya, which the prosecution argued was a codename for bribes. The case has been dubbed “Chicken-gate” in the Kenyan press.
The company’s directors and staff argued that the payments were legitimate business payments, such as for hospitality, gifts, and facilitation payments. Their defence said they were just doing things “the African way”, and that they are guilty only of “being generous”. Christopher Smith was given a good character direction by the Judge for his involvement in local charity work through the Rotary club. The Judge specifically directed the jury to have regard to the “high integrity” and the good moral character of the defendants when considering their verdict. It was said, in their defence, that the Directors saw themselves as safeguarding the integrity of electoral systems in Africa.
The most serious allegations relate to 7 contracts with the IIEC in Kenya between 2009-2010, worth £1.37 million, where S&O made unusually high commission payments of between 27% and 37% of the contract price. Part of prosecution’s case was that the commission of £380,859 over 18 months paid to the agent, Trevy James Oyombra, was exorbitant, and clearly designed to include payments for officials.
The contracts in Kenya included ballot papers and voter ID cards for By-Elections, 18 million voter registration cards, Referendum ballot papers, and other products relating to elections, such as card pouches, OMR forms, ultraviolet lights. It was a feature of several of these contracts that the S&O subcontracted out the printing work to other companies, in one case to a Chinese company that delivered the goods for less than half the cost of the contract price. This raises questions about whether S&O were compliant with procurement rules and whether it compromised the security and integrity of the electoral process by subcontracting.
Additionally, on several contracts, S&O delivered significantly less papers than they were contracted to do raising the question of whether the integrity of the electoral process was compromised. It was also a feature of some of these contracts that prices were inflated significantly after award of contract. In all the contracts, the alleged bribes were paid for by the Kenyan tax payers, as the cost of commission was reflected in the contract price.
The specific contracts were as follows:
June 2009 – Shinyalu and Bomachoge By-Election. S&O were to provide voter ID cards, and ballot papers – although in the end they provided only 142,000 papers against the 200,000 ordered.
January 2010 – 18 million voter registration cards. Once S&O had been awarded the contract they subcontracted the production of half the forms to another company.
March 2010 – contract for electors’ card pouches which S&O subcontracted to a Chinese company who delivered them for less than half of the contract price.
May-July 2010 – three different By-Election ballot paper contracts (South Mugirango, Matuga and Civil By-Elections) – where the contract price in each case was increased substantially (sometimes by 50%) after award of contract to permit bribes to be paid. The agent advised S&O against providing “chicken” to visitors to their factory in 2010 as there were other officials not from the IIEC who he said they shouldn’t give “the wrong picture” – undermining the defence’s argument that the company was just doing things the “African way”. Significantly the company again delivered less quantities of ballot papers than were required in each of these three contracts – in the case of the Civic By-Elections some 40,000 less than ordered.
July 2010 – a contract to provide 14.6 million Referendum Ballot Papers in which S&O worked out an uplift per ballot paper to factor in the bribery.
July 2010 – 1.5 million OMR correction forms and 1000 nomination forms in May.
July-December 2010 – ultra violet lights and other Parliamentary and Civil Ballot Papers.
Electoral officials at the IIEC were on several occasions described by the agent, Trevy, as trying to make money before they left the IIEC and went back into government. The agent described the officials at on stage as anxious and “broke”, and “they are desperate for the chicken”. The agent also said that officials told him that S&O needed to “be discrete since all peoples eyes and the government intelligence are watching their every move even on the phone to ensure transparency”.
The Kenyan officials named in court as recipients of payments were as follows:
IIEC: Kenneth Karani (chief procurement officer); David Chirchir (IIEC Commissioner); James Oswago (IIEC Chief Electoral Officer); Dena; Kennedy Nyaundi (Commissioner); Gladys Boss Shollei (Deputy CEO); Issack Hassan; Hamida, Tororey and Sang.
Several of these officials are still in government: David Chirchir is current Energy Minister in government, and Issack Hassan is the current Chairman of the Independent Electoral and Boundaries Commission (IEBC) which took over from the IIEC.
KNEC: Paul Wasanga (executive secretary), Ephraim Wanderi (computer manager), Gitogo (ICT Manager), Ndua (principal supplies officer), Wanyanga (deputy CEO)
In addition, the prosecution claimed that officials from the Kenyan Bureau of Standards were paid bribes, as was Dixon Lugonzo, procurement officer at the National Registration Bureau of Kenya.
In Mauritania, through its agent Karim Reaich, S&O and its Directors were found guilty of having corruptly agreed to make payments to officials in 2009 at the Ministry of the Interior and of Decentralisation in Mauritania (MIDEC) for printing ballot papers for a Presidential election that was not held, and for a postponed election. The contract for these papers was to the value of £560,924. The secretary general of MIDEC, Mohamed El Hadi Macina, was paid 15% of the sale price, with five direct payments totalling £45,220 being paid to French bank accounts in his daughters’ names. Additional commission of 30% was paid to their agent on the contract.
The company, its Directors, international sales manager and agent were acquitted of charges of corruption in relation to Ghana and Somaliland.
In Ghana, the prosecution alleged that S&O were not satisfied with their existing agent, Ebenezer William Amarteifo, because he was not bribing the right people, and so had been losing contracts for them. In 2009 they employed a new agent, Elliot Agyare. The international sales manager said in an email that the old agent had “not made any expression of appreciation to anyone” at the right level at the West African Examination Council, and talked about the new agent being given some money to “do the needful” with the head of procurement at the Council, AR Abdul Razak. There was further talk of “looking after” officials and creating a pot in order to make “a suitable disbursement” to relevant officials. The new agent had also been asked to ensure that as many of their competitor’s samples were disqualified as possible.
In Somaliland, S&O through their agent, Abdiraham Omar, was alleged to have paid bribes to officials of the National Election Commission in 2009 for contracts to supply ballot papers and indelible ink in presidential elections which were then cancelled and again in 2010, when the process was restarted, for contracts to print voter identification cards and election materials. Commission on the 2009 contract was set at 37.9%. The International Sales Manager had tasked the agent with finding out which companies they were bidding against and details for their bids. The agent had also said that he would find companies to bid for the contract who were prepared to pay less commission than S&O were offering, to ensure they won the contract. Emails presented to court suggested that the company had offered payments to officials including Jama Omer, Chairman of the National Election Commission in 2009 and Ali Khadar Osman, Deputy Head of the Tender Committee at the Commission in 2010.
The case is interesting because of the role of Interpeace, a UN affiliated body which had a place on the NEC tender board, and was meant to be overseeing tenders to ensure the integrity of the electoral process.
Issues raised by the case
1. The importance of prosecution
The case is not a classic SFO case as the sums involved are relatively small but it sends a strong message to the business community that the SFO is willing to prosecute overseas corruption. Under its previous Director, the SFO had entered into a series of settlements with companies rather than prosecuting them. This prosecution shows that the SFO is finally putting prosecution at the heart of its enforcement strategy and means business. This is crucial because case law will finally emerge on overseas corruption. The fact that the company’s defence of hospitality and facilitation payments did not work, for instance, sets an important legal precedent. It is also crucial because names of those bribed and details of the corruption are all now in the public domain and this will enable those in the countries concerned to hold their governments to account for bringing those officials to justice.
Smith and Ouzman is however a small family firm and therefore a relatively easy target. It remains to be seen whether the SFO will be able to bring such prosecutions against large firms where proving corporate liability will be significantly harder.
2. The impact of corruption
Little evidence was put to the court of the impact that Smith and Ouzman’s corruption had in the countries concerned. S&O’s payments seriously compromised the integrity of the electoral processes they were involved in, undermining trust in the electoral officials of those countries, and raising questions over whether due process was followed in the elections. Far from safeguarding the integrity of elections, the company was seeking to put its own profit above the democratic process.
It is not clear what victim strategy the SFO had in place in this case. This issue will become important when the issue of compensation by the company is considered as part of the penalty it will face. It is a concern that the court might be tempted towards a more lenient sentence for the Directors and a lesser fine for the company, because it was presented with more evidence about the good character of the Directors than the impact of their corrupt acts.
3. Company reports and audits
The company was seriously coy to the point of misleading about the case against it in its 2013 accounts. Under contingent liabilities it made provisions for just £825,000 for legal fees defending a “historic legal matter” relating to the period 2006 to 2010. If the company is convicted, this would appear to be a wholly inadequate provision, considering that the company may face a significant fine, a compensation order, and will also face procurement exclusions which will impact on its business. It is surprising that the auditors, Price and Company, signed off on these accounts.
4. Anti-bribery compliance certification
Smith and Ouzman gained a BS10500 certificate of anti-bribery compliance from a CQS, in September 2014. This was despite the fact that the current directors were going on trial in November 2014. As the SFO made clear in the prosecution, the company did not cooperate with the SFO, nor did it admit guilt or appoint new management, all of which are clear prerequisites for showing a company has adequately dealt with corruption. The award of the certificate seriously undermines the credibility of the BS10500.
Click here to view the SFO’s indictment of Smith and Ouzman
Click here to view the SFO’s opening note in the prosecution, detailing the charges and allegations against the accused
Regina v Nicholas Smith, Christopher Smith and Smith & Ouzman has been a significant case given that it was the first one in which a jury has convicted a company for overseas corruption in a contested case. On 22nd December 2014, Smith and Ouzman, a small family printing company in Eastbourne, was convicted of paying bribes totalling £395,074 public officials for business contracts in Kenya and Mauritania which involved the printing of ballot papers and exam certificates. The case heard by Judge Higgens, now retired, involved the application of the old, pre-Bribery Act; the Prevention of Corruption Act 1906.
The matters of confiscation and the setting of relevant fines in this case was new territory for the UK. At the confiscation hearing, on 7 and 8th January 2016, the court heard submissions from the SFO and the defence as to the way in which these fines and compensation should be assessed.
The hearing was spread over two days and held in Court room Number 8 of Crown Court, Southwark presided over by Recorder Andrew Mitchell QC. The Crown was represented by Mark Bryant Heron QC and Trevor Archer. Nicholas Smith, the sales and marketing director of the company, who had earlier been sentenced to three years imprisonment, was represented by Mr. Peter Doyle QC and Christopher Smith, the chairman of Smith & Ouzman, who has earlier been sentenced to 18 months’ imprisonment, suspended for two years, and ordered to carry out 250 hours of unpaid work, was represented by Mr. Duncan Penny QC.
Smith & Ouzman, the company was represented by Miranda Hill and Mr. Hayes.
The prosecution had made applications to the Court regarding compensation, confiscation and the recovery of prosecution costs regarding the trial while the defense had presented mitigating factors to be taken into account by His Honour while setting up the fine and confiscation amounts.
The following are issues that came up during trial and decided by His Honour.
Very early on in the hearing, the Judge questioned why an application on “compensation” had been made by the prosecution and not followed by any formal evidence in this regard. Mark Bryant Heron QC stated that while Section 13 of Proceeds Of Crimes Act 2002 directs that the court must take into account the confiscation order before making a compensation order, or an order involving payment by the defendant other than an order under section 130 of the Sentencing Act, the case of Davenport has given some useful guidance regarding this and directed the court to view where compensation should be paid.
The Judge stated in response, that he was not concerned with going into details regarding legal principles on compensation stemming from the mentioned statute or case law but rather how they applied in this particular case. He asked the prosecution whether they wanted to, in fact, even pursue an application for compensation given certain issues. Firstly, that the Judge was “not happy” about there being made an application for compensation without there being any information surrounding it. Secondly, the application was not a formalized one. If he did not know what was being asked for and by whom exactly, he could not make an award of compensation part of the process. Thirdly, the prosecution’s reply to his query was that there had been nothing in writing from the Kenyan authorities on this subject matter and no corresponding claim for civil recovery being made in Kenya regarding the company’s wrongful conduct. The UK Government could agree to give victims in Kenya and Mauritania funds from the consolidated fund arising from any confiscation order. The Judge asked the prosecution to either further instruct him on these points or to reconsider if they wanted to pursue the application. On the second day of the trial, the prosecution stated that in light of the Judge’s observations, they wished to withdraw their application for compensation.
Admissibility of Witness Statements on Behalf of the Crown
The prosecution had wanted to bring to the record two witness statements in the confiscation hearing. There were from Professor Nic Cheeseman and John Githongo and would highlight the impact of the misconduct of the defendants on the socio-economic environment in Keyna. The defense had objected to these statements saying they had not been used in the main trial. On this particular hearing, the Judge questioned whether the prosecution really wanted him to spend time resolving this issue as it was now clear that the company was convicted of corruption and that the company had given bribes to Kenyan officials, and given that Judge Higgens had been clear in his remarks on how pernicious bribery is for under developed jurisdictions. The Judge stated it was unclear how much the witness statement would add to this. On the prosecution’s reply that the statements speak to the consequential undermining of public confidence in Kenyan institutions, the Judge replied that this was available to one given the simple fact that officials were corrupt and there was already material available on this from the OECD Convention on Combating Bribery of Foreign Public Officials.
On the defense side, material from two reports by Julian Glass, who was also present at the hearing to answer any of the Judge’s questions, was considered in determining how to arrive at a confiscation amount which corresponded with the company’s means to pay and did not put it out of business.
On the first day of the hearing, 7th January 2016, His Honour stated that he will deduct the confiscation amount from the fine imposed on the company for their wrongdoing as it was not about “numbers but principals”. When asked their opinion, the prosecution stated it was the duty of the court to consider the confiscation amount when imposing the fine, but it is within its discretion to decide whether to deduct it from the fine amount itself. The court must look at seriousness of the misconduct, totality and means to pay. On the second day of the hearing, 8thJanuary 2016, the Judge stated “I think I was overgenerous yesterday in saying that the confiscation amount will be deducted from the fine. I have decided that this was not principled or the right thing for me to do.” Thus on determination of both the amounts, the confiscation orders made would not be deducted from any fine imposed on the company. The Judge also stated at one point that the objective of the fine is deterrence and thus, the “penalty has to hurt.”
What index should be used?
Confiscation legislation in the Proceeds of Crime Act 2002 requires the Crown Court when making a confiscation order to take account of changes in the value of money where appropriate. It is unclear which UK inflation index is to be used. The Judge asked both parties to instruct him on what index to use in calculating the benefit accrued to the defendants as a result on their wrong doing. He said that while the Retail Price Index with arithmetic formula or Retail Prices Index using geometric (Jevons) formula may be okay to use for human defendants, a company might need to be subjected to another formula which needs to brought to his attention.
Should income taxes be counted in assessing the total benefit to be confiscated from the company as a result of its alleged wrongdoing?
There was a significant amount of discussion over the course of the second day of the hearing on whether taxes should be taken into account while calculating the total benefit accrued to the company as their result of securing business contracts through fraudulent means.
Protocol 1 Art.1 of the European Convention on Human Rights provides:
(1) Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
(2) The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.
The question which arose is whether the income tax, paid for the defendant is to deducted from the “benefit” they owe to the court in terms of confiscation.
It was argued by Mr. Peter Doyle on behalf of Mr. Nicholas Smith, that given that the judical direction in this area points towards the importance of repatriation of assets of crime over the imposition of a financial penalty, it would be disproportionate, and therefore an infringement on the defendant’s rights, to include the taxed amount in respect to determining the salary and bonuses acquired by Mr. Smith. The co-defendant company accounted for tax paid to revenue and customs and Mr. Nicholas Smith did not receive any benefit of that money. The defense recognized that in assessing the value of benefit, one cannot say that what was obtained as a result of the criminal activity, be deducted taking into account other liabilitites. But in POCA 2002, it is said that it is disproportionate to ask to pay an amount twice, which is not the purpose of the legislation.
In the interests of minimizing the risk of uncertainty, one should look at the provision which says that double recovery from the individual, while not absolutely forbidden, might lead to disproportionality. The fine should be a deterrent and not punitive. Para 32 of Harvey [Harvey 2015 (UKSC) 73] stated this principle and although that case concerned VAT, it should apply to income tax as well. Tax accounted for and paid by the defendant should be taken into account and subtracted from the benefit seen to be obtained by him while setting the confiscation amount.
If individuals are taxed in arrears at the end of a financial year, in the case of the self-employed as the Judge pointed out, they enjoy the money at that time. Where as PAYE employees have their tax deducted from their salary before they enjoy it.
The Judge however also pointed out to Mr. Doyle that sometimes bonuses are paid around Christmas time but tax is not deducted untill later and secondly, dividends are only taxed, according to the specific tax rate on dividends which may result in different tax calculations at a time. Thus, the issue about when the tax is paid may not be so clear cut.
Mark Bryant Heron QC argued on behalf of the prosecution that Lord Hughes in Harvey reminded us that it is not about government recovery but restitution- returning benefits to the loser. It was a dissenting judgment but point made in para 58 was that there should be no uncertainty in the law. Money paid to the state should not be treated any differently than the bigger benefit received as a result of the criminal operation. It highlights the difficulty in this area. It would be bad luck simply then if the individual was self-employed and not taxed at source while PAYE did not run that risk. This creates inconsistency. Therefore the benefit including the amount income tax should always be taken into account in the confiscation amount from the defendants which would, in fact, not be a disproportionality, as the defense says.
Mr. Doyle however continued to argue that notwithstanding the draconian nature of POCA, the traditional route should be that POCA be interpreted to the letter. The Crown omitted to mention that POCA strictly warned against disproportionality. Tax is a burden and a liability and not an expense. It is different from the situation in which a getaway driver stops to pay fuel in his stolen car and then seeks to recover tax. It would be disproportionate to claim income tax from the defendant and then include this amount in the benefits being confiscated from him as a result of any wrongdoing.
Miranda Hill on behalf of the company argued that given the small and specialized nature of Smith & Ouzman, its ability to pay must be taken into account while determining this as well as all other issues.
Amount of confiscation set
The Judge commented on how this case brought up an “ unusual territory.” This was a case where the bribes amounts were written into the contract itself. The gross profit from the contracts obtained was £ 438,933. Whereas the Judge would take up the point by the defense of subtracting distribution costs from the benefits obtained by Smith & Ouzman from the result of their wrong doing whereby they acquired contracts in Kenya worth £ 2 million, he would add the value of the bribes of £395,074 to the gross figure. He would also, for “consistency and certainty” only use the relevant index which reflects the nature of the business which the entity was involved in, which was in this case the printing index to reflect the value of prices. The law, through Harvey, is clear that corporate tax was not to be deducted from the amount confiscated. This brought the total confiscation amount sought from Smith & Ouzman set by the Judge to be £881158 payable within 28 days.
The Judge maintained that the prosecution had proved that the defendants had benefitted from the result of the unlawful conduct and obtained a pecuniary advantage. In his judgment, the offences were not committed for "altruistic purposes."
According to the figures presented by both parties, the benefit accrued to Mr. Nicholas Smith of £18, 693 including RPIJ and to Mr. Christopher Smith of £4500, including the change in the value of money, would be confiscated.
The Judge also ruled that while the case of Harvey concerned VAT when it established that including the amount of corporation tax, paid for and accounted by the defendant, into the overall sum demanded by confiscation order would amount to a disproportionality, the same principle did not apply in case of income tax and national insurance as the latter was “an expense of earning the benefit of the criminal conduct” and because “it is the value of what it is received that determines the benefit.”
Further, this confiscation amount set on Smith n Ouzman, Mr. Nicholas Smith and Mr. Christropher Smith would not be deducted from the fine set on them.
Should the sentencing guidelines that came into force on 1 October 2014 be taken into account by the Judge in setting the amount of the fine?
Given that the sentencing guidelines came into force on 1 October 2014 and refer to the Bribery Act 2010 instead of the legislation used in this case which was the Prevention of Corruption Act 1906, the Judge asked for instructions on whether he should use these in this particular case. The defence stated they were not “strictly applicable” whereas the prosecution maintained this was within the Court’s discretion. The Judge stated his preliminary ruling was that they should apply as the conduct is the same, if not the legislation.
At what value should the multiplier be set on the fine?
A basic “multiplier” is to be set on a fine based on the level of harm causes. The Judge expressed his preliminary view that the multiplier should be set at a high culpability level, known as “Category A”, given the financial gain obtained as a result of the misconduct by the Company and the co-defendants and the nature of the contracts which concerned the Kenyan National Examinations Council and the Independent Interim Electoral Commission in Kenya. These were two, “responsible” and “serious” contracts which concerned an impact on democracy.
The amount of bribes would not be added as that was taken into account when setting the confiscation amount.
Given all these factors, His Honour said at the outset that the multiplier should be set at 350% notwithstanding the submissions made by the defense at the time that this would result in a figure which the company would have no means to pay.
What are mitigating circumstances to be taken into account?
Miranda Hill, on behalf of the company went over her principle submissions about the nature of the company, which she said was important to take into account while setting the fine. In May 1946, the Smith and Ouzmanfamilies merged and the company was formed. It is the leading security business. Though convicted under three counts of corruption, it has still been held in highest regard as per Judge Higgens’ words with regard to work in security printing. It provides specialist security features which ensures integrity of product. Care Smith & Ouzman gives to its employees must also be taken into account. 13 of its employees are part of the 25 years club which is 15% of its workforce. Staff retention is more than the national average. There is already reputational damage to the company. Apart from this, customers are refusing to settle debts, suppliers are wanting payments upfront, etc. One financial year was particularly difficult. There have been remedial measures put in place now as well to tackle bribery such as the hiring of a full time compliance officer and use of other audit mechanisms. There is a schedule kept by the company regarding correspondence with customers, suppliers etc. and includes telephone calls. This provides evidence that the sales went down as a result of the conviction. Also from the date of conviction uptill 5 years, there is also a debarrment to be imposed from the EU although different rules apply in different countries.
Ability to pay must also be looked at. The bonuses to the directors in the company have decreased and will keep on decreasing. The company may have to sell properties, and hire or lease machinery as they cannot afford to buy them.
There was also some discussion about whether the wrongful conduct was a “father son” team effort only or the company had a “culture of corruption.” On the first day of the hearing, Ms. Hill argued that there was no complicity in the company regarding the payment of bribes by the Smiths, whereas the prosecution, once questioned by the Judge, said while they were not in a position to answer, it could be said there is simply lack of evidence to suggest a culture of corruption within the company. On the second day of the hearing, Ms. Hill withdrew any of her earlier submissions to the contrary and stated for the record that she would no longer pursue the argument that there was no oversight of the bribery incidents in the case because having taken instruction from her client, it was clear that documents relating to the bribes were circulated more widely in the company than just between the two Directors convicted.
Amount of fine set.
His Honour ruled that he will take the 2014 sentencing guidelines into account regardless of the date of the offense. In setting the fine he will look at the degree of harm and level of culpability surrounding the offence. The Judge said corruption of foreign officials is damaging to the country in which the corruption occurs, is damaging to the reputation of UK business and in the market in which a business operates as it is anti-competitive. Five factors were relevant: 1) The corporate defendant had played a leading role in organized, planned, unlawful activity 2) The corruption involved corrupting local or national government officials. 3) The company abused its dominant market position. 4) The offence was committed over a sustained period of time i.e. 15 months 5) There was a motive of substantial financial gain. The Judge stated the integrity in the Kenyan elections had been comprised which led to behaviour which was in Judge Higgens’ words, “cynical”, “deplorable”, “anti-social” and showing “moral turpitude”. In the Innospec case, the Secretary General of the UN, Kofi Annan’s words in the foreword to the 2004 UN Convention on Corruption were taken into account which said corruption was an “insidious plague that has a wide range of corrosive effects on societies” and which was most harmful in fact in developing nations because it was a widespread phenomenon undermining economic and social well-being.
However, in light of the defence’s submissions as to the high regard in which the company is held for its products in security printing and also remedial actions taken by the existing Directors in the company regarding anti-bribery, the multiplier would be set at 300% instead of 350%.
Accordingly the fine set on the company is £1,316,799.
Prosecution Costs of Trial
The company had to pay prosecution costs of £25000 whereas the co-defendants had to pay £75000 each.
The Prosecution had been encouraged to cut down its earlier global figure of £500,000 for costs of the trial , to £396,323 given that two defendants from the company were acquitted in the earlier trial and also some of the costs of the trial had already been paid for the company. The prosecution had agreed with the parties that the costs to be paid by Mr. Christopher Smith and Mr. Nicholas Smtih would be £75000 and aimed to recover £87794 from the company. The Judge refused saying the costs recovered from the company must be 1/3 of that recovered from the “human defendants” and thus set this amount at £ 25000.
How much time should be given to the defendants to pay the confiscation amount, fine and prosecution costs?
Confiscation sums are to be paid by the company within 28 days from the date of the hearing, by Mr. Christopher Smith within 7 days and by Mr. Nicholas Smith within 8 weeks. The Judge was flexible in allowing the parties’ submissions in altering the time given to the parties to pay the prosecution costs and fine. Initially he was sceptical about the defence’s claim that the company did not have the means to pay fixed monthly sums to pay the fine as he was told the company had set aside £1 million for this purpose but agreed to a payment of the amount of £65839.95 after 6 months from the ruling, then £ 131679.90, 12 months from the ruling and then the same amount every 6 months for 60 months till the total amount was paid off. Prosecution costs should be paid within 6 months.
From his handwritten additions to the judgment the Judge may also have made allowances for Mr. Nicholas Smith and Mr. Christopher Smith regarding the deadlines for paying their confiscation sums.
Given Mr. Nicholas Smith was serving time in prison and would need to get back on his feet after, he agreed to 9 months to the payment of prosecution costs whereas Mr. Penny, the lawyer for Mr. Christopher Smith agreed to pay prosecution costs within three months.
CONFISCATION, FINE AND COST FIGURES SET ON EACH DEFENDANT:
Smith & Ouzman Christopher Smith Nicholas Smith
CONFISCATION AMOUNT £881158 £4500 £18693
PAYABLE WITHIN 28 days 7 days 8 weeks
PROSECUTION COSTS £25,000 £75000 £75000
PAYABLE WITHIN 6 months 3 months 9 months
FINE AMOUNT £ 1,316,799.––
PAYABLE WITHIN 60 months with first instalment due in 6 months––
TOTAL £ 2,222,957.
Smith and Ouzman Confiscation Hearing: 7 – 8 January 2016
Chickens come home to roost: the Smith and Ouzman African bribery case
THE CARROT, THE STICK AND THE RABBIT
Amidst the UK anti-corruption summit, the former business manager of Innovia Securency PTY Ltd., previously known as Securency International PTY Ltd, was convicted on four counts of corruption for giving bribes worth £103000 to a foreign official in Nigeria to secure contracts for the supply of polymer substrate used in printing bank notes.
Peter Michael Chapman, aged 54, was convicted at Southwark Crown Court on 11th May 2016 after a six week-long trial under Section 1 of the Prevention of Corruption Act 1906. Chapman’s conviction came out of a joint investigation by the Serious Fraud Office and the Australian Federal Police into Securency International PTY Ltd, a business jointly owned by the British Innovia Films and the Australian Reserve Bank. The corruption occurred within the time period January- March 2009. He was acquitted on two counts involving alleged bribery to the same official on earlier occasions.
The trial heard that Chapman, who joined Securency in 2003 and was promoted to regional director for Africa in 2008, to borrow a phrase from one of his internal emails to the senior management of Securency, supposedly pulled a “rabbit out of a battered hat” in bribing the official for securing orders from the Nigerian Security Printing and Minting PLCfor the supply of polymer substrate by his company, Securency. This was at what was said to be a high-pressure time for the company in terms of securing sales. The leading prosecution witness against Peter Chapman was the former accounting manager at Securency who had faced a carrot and stick deal by the Australian Federal Police of either naming other corrupt officials in Securency, or going to jail.
The scandal surrounding the printing of polymer notes by the Central Bank of Nigeria was first reported by an Australian newspaper ‘The Age’.The paper reported that Securency, paid kickbacks to secure polymer note printing contracts in a few countries, Nigeria being just one of them. The scandal led to the resignation of Chapman who was in September 2009, to the firing of the firm’s South African “middleman,” Donald McArthur.
The Serious Fraud Office and the Australian Federal Police have been investigating the activities of employees and agents of Securency inan ever-growing bribery investigation that has seen a string of prosecutions, arrests and raids across three continents. Business executives in Securency are 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.
In September 2011 the UK Serious Fraud Office charged former Securency director, a 71-year-old Cumbrian businessman, Bill Lowther, for taking part in a conspiracy to help secure a university place for the son of the then governor of Vietnam’s state-owned bank, and paying his fees and accommodation costs. The move came after seven senior executives from the banknote printing firm were charged in the summer of 2011 by Australian police for allegedly funneling bribes to officials in Vietnam, Malaysia and Indonesia.] Bill Lowther had reportedly been awarded a OBE and CBE during his business career as well as an honorary knighthood from the king of Belgium. 
According to a press release by the SFO in 2010, Securency made improper payments to Vietnamese government officials in order to secure a contract in 2002 to supply polymer banknotes to the Vietnamese Government. It allegedly hired Hanoi-based Company for Technology and Development (CFTD) as its local agent because it employed the son of the State Bank of Vietnam’s governor.According to press reports, the company’s affairs in India were also under investigation.There have even been allegations in the press that in 2003 Securency engaged an arms dealer linked to gangs, the Paraguay company, Perfecta SAMI to help it win a bank-note printing deal in Paraguay.The regional director for south-east Asia, David Twine, had earlier supposedly met Indian arms dealer Vipin Khanna in May 2007 to discuss work for Securency. 
In July 2014,there was an extraordinary gagging order issued by an Australian court to block reporting of the bribery allegations surrounding Securency and several international political leaders. Journalists and lawyers looked upon the gagging orderunfavorably. It was said to be unacceptable and unjustifiableaccording to Benjamin Ismail, head of the Asia-Pacific desk for Reporters Without Borders,and an attempt to “silence the world on a matter of enormous public importance” according to Mark Stephens, a media lawyer in London.
Chapman’s trial was briefly affected by the flurry of publicity around the UK Anti-Corruption Summit held in London on May 12th 2016, when it was widely reported that Prime Minister Cameron had made offhand remarks to the Queen that Nigeria was one of the fantastically corrupt countries coming to the summit. In an extraordinarily opportunistic move, the defence made an application that since the PM’s statement got widespread coverage the jury might be prejudiced on the basis of this and therefore it must be discharged no matter how unfortunate this would be. The Judge however ruled that while he acknowledged the risk of prejudice to the jury, he did not accept the comments made by the Prime minister went to the central issue of this particular trial and the unfortunate matter could be resolved by judicial assistance to the jury. He then called the jury out and reminded them to try the case on the basis of the evidence and only the evidence, and to specifically, utterly disregard the Prime Minister’s comments in the media.
On 12th May 2016 Peter Chapman was sentenced to a 30-month custodial sentence, half of which has already been served in Brazil and Wandsworth Prison in the UK. For the remaining half he has been released on license i.e. with conditions, which is in accordance with the law. He will return to a hearing to consider confiscation in the case on 19th January 2017.
The charges brought forward against Mr. Chapman involved six counts of corruption in the pre-Bribery Act 2010 era, falling under the Prevention of Corruption Act 1906.
All counts alleged that Peter Chapman corruptly gave a foreign official, who cannot be publicly named and thus referred to as Mr. X here, a sum of money via Chapman’s own offshore company, incorporated in the Seychelles, Swingaxle Ltd. The money was to induce or reward Mr. X to ensure that Nigerian Security Printing and Minting PLC placed orders for reams of polymer substrate with Securency Pty Limited. The case concerned Nigerian bank notes made out of polymer instead of paper.
The table below illustrates the payments in each count.
COUNT SUM OF MONEY FUNDS SENT TO DATE
1 US $27,000 Karehose and Company, a general partnership registered in Ontario, Canada with a connection with Mr. X9th July 2007
Count 2£5,479.63To a UK NatWest bank account in the name of Mr.14th February 2008
Count 3£40,000To a UK NatWest bank account in the name of Mr.8th January 2009
Count 4US $34,927.50Karehose and Company Limited, a company registered in Nigeria with a connection with Mr. X9th January 2009
Count 5US $54,915.Karehose and Company Limited, a company registered in Nigeria with a connection with Mr. X12th March 2009
Count 6US $54,915Karehose and Company Limited, a company registered in Nigeria with a connection with Mr. X18th March 2009
The total value of the bribes, he was convicted of paying to the official in Count 3-6 was UK £138,442.35.
In the case against Peter Chapman, the trial heard, the senior management at Securency had requested their employees to “focus on all essential markets”, Nigeria being one of them, and promised rewards for “creative thinking”. Responding to an update sent by Mr. Chapman about new orders and resolving issues on past orders, which Chapman described as the “rabbit” having been pulled out from the battered hat, the management replied enthusiastically calling it “a huge order”.
The SFO was represented by John McGuinness QC and Natasha Barnes; Mr. Chapman was represented by David Spens QC and Raj Chada. The judge presiding over the case was His Honorable Justice, Michael Greeve.
In his opening speech to the jury Mr. McGuiness highlighted some of the following facts:
Peter Chapman was essentially responsible for Africa and his remuneration package included commissions from the sales of polymer substrate. Prosecution had alleged that between time of Count 1 and 6, Peter Chapman corruptly gave the foreign official, Mr. X, a sum of money via Chapman’s own offshore company, incorporated in the Seychelles, Swingaxle Ltd. The money was to induce or reward Mr. X to ensure that Nigerian Security Printing and Minting PLC placed orders for reams of polymer substrate with Securency Pty Limited. Payments to the Nigerian official, Mr. X went to Karehose, Canada or Karehose Nigeria, – both controlled, either directly or indirectly by Mr. X.
Peter Chapman was also connected to other entities involved in the money trail in these payments which included SPT Limited and St Christopher’s Trust. Chapman facilitated the setting up of SPT, was the protector of St Christopher Trust and was also related to the Martindale Trust. SPT was owned by the two trusts on a 50% basis each.
Chapman did not dispute he did make payments to Mr. X or that he was owner of Swingaxle. He did not dispute that it was Mr. X who received all 6 payments. He disputed however any link between the payments made to Mr. X and the business of Securency at the time that it was providing polymer substrate for NSPM to print polymer notes.
Chapman contended that he had in fact, borrowed money from Mr. X and that he was repaying Mr. X. for the money borrowed to cover various expenses he incurred in Nigeria.
Chapman was said to have had a strong personal as well as working relationship with Mr. X. This included acting as a referee on an application by Mr. X for naturalization as a British citizen in 2006, in which Mr X gave various false details.
Chapman claimed that he had tried to reclaim the money incurred on expenses from Securency, but via unorthodox means such as agreeing to a false consultancy contract with Securency after he resigned and pretending to claim back unpaid holiday leave from them.
The Prosecution brought forward two witnesses in the course of this trial. The first was the former principle accounting manager of Securency, David, John Ellery who testified that Peter Chapman had told him at one point that there was an unreasonable amount of pressure being put on him by the Securency senior management to achieve sales and that in fact payment had been made to bring forward a letter of intent from NSPM to facilitate an order for the purchase of substrate at a time which formed the basis of Count 3.
The second witness from the prosecution was the principal investigator at the SFO who had been connected to the investigation of the case since April 2010.
In the absence of direct evidence, the prosecution invited the jury to look at circumstantial evidence in this case. Peter Chapman was working for Securency, he was doing business in Nigeria with NSPM, Mr. X was an agent of NSPM, Peter Chapman had paid significant payments to him. “That looks odd”, said Mr. McGuiness. Why when Chapman’s company and Mr. X’s employer are transacting business, was one making a payment to the other?
The strength of circumstantial evidence came from the “cumulative effect” of certain factors which were stated to be as follows:
The importance of Nigeria to Securency. By looking at internal emails, one could see that Nigeria was an important market.
The relationship between Securency and NSPM
The importance of Mr. X to Securency in doing business in Nigeria and NSPM (disputed by Chapman)
The relationship between Chapman and Mr. X
The close relationship between Chapman and the senior management back in Australia
Chapman’s relationship with SPT, one of the entities featuring in the money trail
The key role played in these payments by Swingaxle, a company owned by Chapman whose existence had not been immediately disclosed to his managers at Securency.
The circumstances in which the payments were made and money trails.
In addition to that one of the themes was the absence of any contemporaneous records which supported Chapman’s case that the payments in question were innocent payments to Mr. X.
The Prosecution invited the jury not to be confined to documents just before or after the time each of the payments were made, but to look at the wholeperiod which would provide “a cohesive and comprehensive picture”. The payments against the background told a “compelling case”.
Chapman claimed that each payment to Mr. X was in fact a repayment for a loan given to him by Mr. X in Nigeria which is largely a cash-based society, for various expenses he had to incur in the course of his business in Nigeria.
In its cross examination of the other former Securency employee brought by the Prosecution, the defence pointed out that since Securency was actually a monopoly supplier of polymer substrate at the time they were concerned with, they had no reason to bribe an official to get these orders. It accused the employee, who was facing a potential sentence of bribery himself and had a dubious track record for lying, of falsely inculcating Mr. Chapman to the Australian Federal Police to save his “own skin”. In the cross examination of the Serious Fraud Office Investigator, the defence established that Securency did have a large number of expenses in Nigeria since they were also giving technical assistance to the printers in NSPM.It also pointed out that Chapman, had no prior convictions in his past.
The Defence submitted that the Governor of the Central Bank of Nigeria had already made the decision of switching from paper to polymer on a number of bank notes. In respect of 5 other smaller denominations the decision wasn’t made until very much later way after July 2007 and not before 2009. The Governor of the Central Bank of Nigeria was continuously airing his desire to convert other denominations into polymer which would give business to Securency. Mr. X had no real importance in this regard. What was also striking that no evidence demonstrated that Mr. X was in a position to persuade or influence the Governor of the Central Bank of Nigeria.
The defence claimed that there was no need for Peter Chapman to hide Swingaxle his offshore trust, and that there was nothing unlawful about owning one. The jury was urged not to be prejudiced by the media reports following the release of the Panama Papers about illegal offshore trusts.
The defence argued that the burden of the prosecution was a heavy one and mere suspicion did not suffice.
THE JURY IN RETIREMENT
In his legal directions to the jury, His Honor made the following points: They must decide the case solely on basis of the evidence; they do not have to resolve every issue of fact, only that they need to reach a verdict. There had been a lot of media coverage about offshore companies, but there was no suggestion of Mr. Chapman was using illegal offshore trusts and they should not let that prejudice them. They must be sure beyond reasonable doubt. While they should consider each count separately,they could take the overall trading relationship demonstrated in the period covering all counts as evidence in their consideration for each count- what lawyers refer to as cross-admissibility of evidence. “Corrupt” for the jury must meant purposely doing an act that the law labels corrupt.
The jury spent a total of 17 hours considering the verdict during which they asked the Judge a number of clarifying questions. It was unable to reach a unanimous verdict.
On 11th May 2016 they returned a NOT GUILTY verdict on Count 1 and 2, GUILTY verdict on Count 3 by a majority of ten to 2, GUILTY verdict for Count 4 by majority of ten to 2, GUILTY verdict on Count 5 by majority of 11 to 1 and GUILTY verdict on Count 6 by majority of 11 to 1. The table below shows the verdict on each of the counts.
COUNTSUM OF MONEYFUNDS SENT TODATEVERDICT
1US $27,000Karehose and Company, a general partnership registered in Ontario, Canada with a connection with Mr. X9th July 2007Not guilty
Count 2£5,479.63To a UK NatWest bank account in the name of Mr.14th February 2008Not guilty
Count 3£40,000To a UK NatWest bank account in the name of Mr.8th January 2009Guilty by majority of ten to two
Count 4US $34,927.50Karehose and Company Limited, a company registered in Nigeria with a connection with Mr. X9th January 2009Guilty by majority ten to two
Count 5US $54,915.Karehose and Company Limited, a company registered in Nigeria with a connection with Mr. X12th March 2009Guilty by majority eleven to one
Count 6US $54,915Karehose and Company Limited, a company registered in Nigeria with a connection with Mr. X18th March 2009Guilty by majority eleven to one
Following the conviction, today on 12th May 2016 the Judge sentenced Mr. Chapman to a custodial sentence of 30 months.
Judge Greeve stated that corruption is a very serious global problem as this week’s anti-corruption summit highlighted. Shortly after Mr. Chapman committed the offences LJ Thomas on an appeal by this court in the case of Innospec had said corruption is an insidious plague, it is found in all countries rich or poor big or small but it hurts the poor more by diverting funds and undermining the government’s ability to provide resources. It was a major obstacle to poverty alleviation and development. In an offence so serious a custodial sentence was fully justified. It was against this background the Judge said he had considered the appropriate sentence in this case.
In mitigation, the defence had highlighted that the time period within which the bribery in Counts 3-6 occurred was only 3 months or slightly more, in the period of Peter Chapman’s employment in Securency in 2005-2008, during which time orders were obtained in which there was no corruption and business was gained legitimately. The total value (of bribes) was £103000 which was substantial but less than that in the cited case of Innospec. The argument by the defence that Securency would have gotten the orders in any case in the Judge’s view was not justified. Finally, he accepted Peter Chapman was under considerable pressure to secure the orders from the higher management. As to personal mitigation he had also from suffered acute and chronic health conditions before and at the time of the commission of these offences and had in fact resigned from Securency soon after. The precise nature of his health conditions were unclear but the Judge accepted they made life for Mr. Chapman “painful”.
In addition to this, Mr. Chapman’s time already spent in a jail in Brazil was accepted to be “to put it mildly, extremely uncomfortable” and Wandsworth prison had not been an ideal environment either. In fact, it was because of this that Judge Greeve had granted Mr. Chapman bail in the middle of this trial on 22nd April 2016. He had served a total of 1 year 5 months 3 days on prison, 162 days of which were spent in Brazil. The starting point of the custodial sentence given overall circumstances was 3 years’ imprisonment. In light of mitigation available, the sentence however passed on Counts 3-6 was 30 months. Since according to the law he was only required to spend half of the sentence in custody and for the remaining period he could be released on license with conditions, given the time already spent in jail, he could be released now.
The hearing on confiscation and costs to be recovered from him will be on 19th January 2017.
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