Archive for the ‘Guest Posts’ Category

Checking In Down Under

Wednesday, April 23rd, 2014

Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery).  Wyld is the Australia Expert for FCPA Professor.

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This update covers a range of important developments in Australia and overseas in the area of foreign bribery policy, investigations and regulation in the first quarter of 2014.

The key issues that are covered in this Update include:

  • Australia’s address to the G20 Anti-Corruption Roundtable
  • The Australian Securities and Investment Commission (ASIC) and whistleblower protections
  • ASIC and civil penalties
  • Australian foreign bribery investigations and prosecutions – media updates
  • Asia Pacific developments

Australia and the G20 Anti-Corruption Roundtable

The Australian Government has been remarkably quiet in the foreign bribery space. A Consultation Paper into whether facilitation payments should be abolished (published in November 2011) appears to have died an unfortunate death by inertia.

It was refreshing to read that the Attorney General, George Brandis QC, in delivering his opening address to the G20 Anti-Corruption Roundtable, made it clear that corruption is and remains one of the greatest barriers to global growth and that all governments must address the systemic problems flowing from corruption.

The Attorney General highlighted three specific issues that warranted close attention by the Roundtable group – judicial integrity, foreign bribery and the transparency of legal structures, and the identity of beneficial owners. While little was said on the detail, it is encouraging to see the topic of foreign bribery (whatever that entails) is firmly on the agenda while Australia chairs the G20 in 2014.

ASIC and Whistleblower Protections

On 18 February 2014, ASIC published its Information Sheet No. 52 entitled ‘Whistleblowers and whistleblower protection’. ASIC’s responsibilities are to regulate companies acting in contravention of the Corporations Act 2001 (Cth) (Act). ASIC’s focus is on conduct which is disclosed to it which involves a potential contravention of the Act. The Act provides a statutory framework to protect whistleblowers (see Pt9.4AAA, sections 1317AA to 1317AE).

The key elements under the statutory whistleblower protection regime that must be satisfied are:

  • the whistleblower must be an officer or an employee of the company or a contractor or employee of a contractor which has a current contract to supply goods or services to the company the disclosure is about;
  • the disclosure must be to the company’s auditor, a director, secretary or senior manager within the company, a person authorised by the company to receive whistleblower disclosures or ASIC;
  • the whistleblower must identify himself when making the disclosure;
  • the whistleblower must have reasonable grounds to suspect that the information disclosed indicates the company or company officers may have breached the Act (or ASIC’s Act); and
  • the whistleblower must make the disclosure in good faith.

The tenor of ASIC’s approach is that it still has limited resources, it prefers to focus on the disclosed conduct and it keeps emphasising that a whistleblower should seek independent legal advice. ASIC has been criticised in the past for responding very slowly at times to significant complaints. ASIC will now appoint a dedicated Liaison Officer to be in regular contact with the whistleblower. While a whistleblower may have protection from victimisation, any complaint about how a whistleblower is treated is a private matter between the whistleblower and the company.

In an Ethics Conversation hosted by the St James Ethics Centre in Sydney on 8 April 2014, the ASIC Chairman, Greg Medcraft indicated that while the protection of whistleblowers was important, he appeared less enamoured of the US whistleblower bounty scheme established under the US Securities Exchange Act. Mr Medcraft felt that such a scheme sat uncomfortably with the Australian culture of “not dobbing in a mate”. At the same event, Rod Sims, the Chairman of the Australian Competition & Consumer Commission, was concerned about how Australian courts might treat an individual who had a financial interest in a prosecution and the impact that might have on a whistleblower’s overall credibility. Perhaps the pioneering research work of Prof AJ Brown at Griffith University might help to debunk the myth of not dobbing in a mate – and encourage regulators to realise that the vast majority of Australians consider that whistleblowers who report serious misconduct should be both praised and protected. It remains to be seen how ASIC will act in the future towards whistleblowers.

ASIC and Civil Penalties

In March 2014, ASIC published its Report No. 387 entitled ‘Penalties for corporate wrongdoing’ which considered the penalties available to ASIC and whether they were proportionate and consistent with those for comparable wrongdoing in selected overseas jurisdictions. The key findings of the Report were as follows:

  • ASIC rated effective enforcement as critical to achieving its strategic priorities of fair and efficient financial markets with a range of penalties designed to deter contravention and promote greater compliance;
  • in relation to imprisonment and fines open to ASIC to seek through litigation: the maximum fines are broadly consistent with other comparable jurisdictions save for the US; other jurisdictions have greater flexibility to impose higher non-criminal fines; other jurisdictions can seek the disgorgement of profit generated by the wrongdoing,
  • within Australian legislation, there are examples where non-criminal fines can be imposed at a much higher amount than those available to ASIC.

ASIC has called for greater penalties to be available to it for corporate wrongdoing. While ASIC made it clear that it will pursue the sanctions and remedies best suited to each case on its merits, Mr Medcraft made it clear at the St James Ethic Centre Conversation that he wanted to target individuals as it was only through “scaring the hell out of people” faced with imprisonment, that he believed commercial behaviour might, in fact, change.

Australian Foreign Bribery Investigations and Prosecutions – Media Updates

The Securency banknote printing corruption prosecution continues to roll on slowly in Victoria. While the whole process is subject to suppression orders in Victoria, it is hoped significant public progress in the case occurs during 2014.

The Australian media has continued to follow the saga of an AFP investigation into the Middle East business activities of Leighton Holdings, its various entities and senior officers. While no criminal prosecution has occurred, the opening salvos in a securities class action in Victoria concerning non-disclosure to the market between aggrieved Leighton shareholders and the company suggests the case will continue to affect the company, currently under new Spanish management.

Asia Pacific Developments

The Asia Pacific region is home to both many of the world’s most active economies and to those where the perception of systemic corruption is the greatest.

Developments in China, as one of Australia’s most significant trading partners, must be followed. From mid-2013, the Chinese Government started to target multinational companies in the pharmaceutical sector, in the “supply side” of corruption rather than its traditional focus on the “demand side” of corruption, being the local Chinese public official. This must ring warnings to all Australian business that they are not immune from Chinese Government investigation.

In addition, the role of the US – China Joint Liaison Group on Law Enforcement, may yet see an increase in parallel US and China investigations, although human rights issues may see such investigations undertaken only in limited cases.

In the Asia-Pacific Economic Cooperation (APEC) Bali Declaration in late 2013, APEC called for greater regional cooperation on corruption and collaboration between regulators. A new regional authority is to be established, called the APEC Network of Anti-Corruption Authorities & Law Enforcement Agencies (ACT-NET). The goal of this agency is to, in part, “encouraging private sector stakeholders to implement APEC’s high standard principles for codes of business ethics”.

At the meeting of the APEC Anti-Corruption and Transparency Working Group held in Ningbo in China in February 2014, members agreed to further discuss ACT-NET’s development and implementation during 2014. The goal of the ACT-NET was said to advance greater collaboration among law enforcement authorities in combating corruption, bribery, money laundering, and illicit trade.. Future meetings of ACT-NET will take place during 2014.

Richard Bistrong … In His Own Words

Monday, April 14th, 2014

Richard Bistrong.

Most people likely associate his name with the manufactured Africa Sting FCPA enforcement action. The Africa Sting action involved a purported deal to purchase equipment for the presidential guard of an African Government with FBI agents posing as African Government officials and Bistrong working as an undercover informant.

The Africa Sting enforcement action resulted in criminal charges against 22 individuals.  After extensive motions practice and two trials, all charges against all defendants were ultimately dismissed by the DOJ and the action ended with Judge Richard Leon (D.D.C.) calling the entire case a “long and sad chapter in the annals of white collar criminal enforcement.” (See here).

Bistrong was not charged in the Africa Sting case, but previously pleaded guilty to “real-world” Foreign Corrupt Practices Act conduct, including conspiring with others to bribe United Nations officials, Dutch officials, and Nigeria officials.  (See here and here). This charge stemmed from Bistrong’s work as the international sales vice president for a large, successful and publicly traded multi-national corporation.  Bistrong started to cooperate with the DOJ in June 2007 and Judge Leon ultimately credited Bistrong’s extensive cooperation at sentencing.  (See here).

FCPA Professor seeks to highlight a wide range of voices on FCPA issues.  With this goal in mind, I requested to communicate with Bistrong with the permission of his attorney.  Bistrong’s attorney, Brady Toensing (diGenova & Toensing) would not allow his client to discuss questions about the Africa Sting case.

At present, Bistrong is out of prison but still serving the supervised release portion of his sentence.

In this detailed Q&A, Bistrong describes: the circumstances that put him in a position to violate the FCPA; what made him think he could get away with it; his thought process when he realized he was caught; and how he spent his time in federal prison. In the Q&A Bistrong not only looks back, but forward as well and shares what he learned from his experience and what he hopes to accomplish in the future, including through his recently launched blog.

U.K. Sentencing Guidelines For Organizations: Implications For Violators Of The U.K. Anti-Bribery Regime

Tuesday, February 25th, 2014

Today’s post is from Karlos Seeger, Matthew Getz and Robin Lööf (all from the London office of Debevoise & Plimpton).

As regular readers of FCPA Professor will no doubt be aware, the UK legislative regime in relation to bribery and corruption, foreign as well as domestic, has changed dramatically in recent years, both in terms of substance and procedure.  These changes are particularly important for commercial organisations and, what is more, are all linked.  To re-cap:

  • The Bribery Act 2010 (“the Bribery Act”) did away with the patch-work of late 19th and early 20th century statutes which until recently, with some amendments and complemented by the common law, constituted the UK’s substantive anti-bribery laws.  It criminalises active and passive bribery both in the private and public sectors, and also creates a new, specific “FCPA offence” of bribing a foreign public official.  The most revolutionary aspect of the Bribery Act, however, is that in relation to activities on or after 1 July 2011, organisations will be held criminally liable for failing to prevent bribery by their employees, or other persons associated with them, unless they can prove that they had an effective compliance programme in place (the so-called “corporate offence”).
  • The Crime and Courts Act 2013 introduced Deferred Prosecution Agreements (“DPAs”) into UK law.  Previously, although plea agreements were possible and covered by specific guidance, attempts by prosecutors and defendants to present courts with agreed sentences had been deprecated by the judiciary on the basis that for an English prosecutor to agree on a sentence with a defendant would be contrary to “the constitutional principle that … the imposition of a sentence is a matter for the judiciary.” (Lord Justice Thomas [since appointed Lord Chief Justice] in R v Innospec Limited; see below)  DPAs will make this possible and will be available to organisations suspected of, inter alia, offences under the Bribery Act.  DPAs come into force on 24 February 2014.
  • On 31 January 2014, the Sentencing Council, the independent body responsible for developing guidelines for courts in England & Wales to use when passing sentence, issued a definitive guideline for sentencing organisations convicted of, inter alia, offences under the Bribery Act (“the Guideline”).  The Guideline will also constitute the basis for calculating the financial penalties levied under a DPA.

In this post, we look first at previous English practice in relation to sentencing for organisations convicted of bribery offences.  We then describe the new Guideline, draw comparisons with US practice, and attempt to assess what changes, if any, it will bring for organisations convicted of bribery.  Finally, we seek to predict how the Guideline will be used to calculate the financial penalties due under a DPA, with particular focus on the corporate offence.

Analysis of the Current State of the Law

Unlike in the US where the application of the principle of respondeat superior makes organisations vicariously liable for many criminal acts of their employees, English prosecutors seeking to hold organisations responsible for most criminal offences, including bribery, have had to prove that some part of the organisation’s “directing mind” – a director or senior executive, was involved in the wrongdoing.  As a result, few prosecutions have been brought and there are, consequently, very few examples of criminal fines imposed on organisations guilty of foreign corruption.  In addition, as a likely consequence of the uncertainty surrounding agreements between prosecutors and offending organisations, particularly as regards sentencing, a number of instances of corporate foreign corruption were dealt with civilly with Civil Recovery Orders which can be agreed between the investigating body and the corporate concerned.  With the introduction of DPAs, however, similar certainty of outcome can now be achieved through the criminal process which should reduce the need to resort to civil procedures to deal with criminal behaviour.

The Existing Case Law

In September 2009, engineering company Mabey & Johnson Ltd was sentenced for having sought to influence decision makers in relation to the award of public contracts in Ghana, Jamaica, and Iraq.  The company had paid some £832,000 in bribes in return for contracts worth approximately £44 million.  It was agreed between the Serious Fraud Office (“SFO”) and the company that there was a maximum of £4.65 million (ca. $7.4 million) available for confiscation and/or fines.  On its guilty pleas, the company was sentenced to pay confiscation of £1.1 million, and fines of £3.5 million.  The company also committed to paying reparations to the three countries concerned of, in total, £1,415,000.  There was a joint submission by the SFO and the company that the £4.65 million maximum was the most the company could afford to pay and still stay in business.  His Honour Judge Rivlin QC endorsed this sum, stating that he found it “realistic and just”.

In March 2010, Innospec Ltd was sentenced by Lord Justice Thomas (since appointed Lord Chief Justice) in respect of “systematic and large-scale corruption of senior Government officials” in Indonesia.  Innospec manufactured a fuel additive (TEL) which had been banned in most countries on environmental grounds and in order to preserve one of the few remaining markets for TEL, it had paid an estimated $8 million in bribes in order, as Thomas LJ found, to “block legislative moves to ban or enforce the ban of TEL on environmental grounds in Indonesia.”  As part of a global settlement between the company, on the one hand, and the SFO, as well as the US DoJ, SEC, and OFAC, on the other, a figured had been arrived at which represented the maximum the company could afford to pay and stay in business.  Before Thomas LJ, it was submitted that there was only $12.7 million available for confiscation and/or fines in the UK if the company was to survive.  This represented roughly one third of the global settlement sum.  Thomas LJ noted that the benefit from this campaign may have been as high as $160 million and that the US Federal Sentencing Guidelines indicated a sentencing range in respect of the company’s offending in Iraq (“no more serious than the Indonesian corruption”) would have been between $101.5 and $203 million.  In terms of what the appropriate UK fine would have been, Thomas LJ confined himself to indicating that it “would have been measured in the tens of millions.”  However, “with considerable reluctance”, Thomas LJ ordered that the sterling equivalent of $12.7 million be paid as a fine.  His Lordship explained his decision: “in all the circumstances and given the protracted period of time in which the agreement had been hammered out, I do not think it would have been fair to impose a penalty greater than that.”  Importantly, Thomas LJ made it clear that “the circumstances of this case are unique.  There will be no reason for any such limitation in any other case and the court will not consider itself in any way restricted in its powers by any such agreement.”  In fact, in His Lordship’s view, the division of the global sum between the UK and the US was not “one which on the facts of the case accorded with principle.” 

Finally, in December 2010, as part of a global settlement with the SFO and the US DoJ, BAE Systems plc pleaded guilty to a failure to keep adequate accounting records in relation to a contract worth $39.97 million for the provision of a radar system to Tanzania.  BAE accepted that there was a high probability that part of $12.4 million paid to a local adviser, Mr. Vithlani, had been used to favour BAE in the contract negotiations.

An agreement between the SFO and BAE was presented to the court under which BAE undertook to pay £30m to Tanzania, less any financial orders imposed by the court.  In his sentencing remarks, Mr. Justice Bean made no reference to this agreement.  His Lordship did however state that he was “astonished” at the SFO’s approach to the evidence and, in particular, branded the SFO’s preparedness to accept that Mr. Vithlani was simply a well-paid lobbyist as “naïve in the extreme”.  Whilst refusing to accept this interpretation of the evidence, Mr. Justice Bean pointed out that “I … cannot sentence for an offence which the prosecution has chosen not to charge.  There is no charge of conspiracy to corrupt …”  Noting that there were no relevant sentencing precedents for the offence charged, Mr. Justice Bean fined BAE £500,000.

Assessment of the Existing Case Law

Two things are noteworthy from the above sentences:

First, the recognised lack of precedent for UK sentences in foreign bribery cases.  In only one of the cases (Mabey & Johnson) did the sentencing judge indicate that the sentence passed was appropriate.  Having no doubt carefully studied the “success” of the approach in that case, the lawyers involved in Innospec approached the sentencing exercise in a structurally very similar manner only to be faced with the ire of one of the most senior judges in the country.  Disapproving of every aspect of the situation in which the sentencing court found itself, Thomas LJ made it very clear that the result in Innospec was in no way to be seen as a precedent for the future.

Second, the comparison with the US is instructive.  In Innospec, US prosecutors obtained $26.7 million compared to the SFO’s $12.7 million.  As far as BAE is concerned, however, in March 2010, prior to being fined £500,000 in the UK, BAE had agreed a settlement with the US DoJ including a $400 million criminal fine in respect of virtually identical conduct as that charged in the UK, albeit in a different jurisdiction.

This disparity in relation to BAE led to criticisms of the UK sentencing regime for organisations.  Notably, the UK Labour party included it in its Policy Review on Serious Fraud and White Collar Crime as an example of the apparent comparative laxity of the UK regime.  However, in the most authoritative ruling on these matters we have, Lord Justice Thomas’s sentencing of Innospec Ltd, there is the following statement of principle: “there is every reason for states to adopt a uniform approach to financial penalties for corruption of foreign government officials so that the penalties in each country do not discriminate either favourably or unfavourably against a company in a particular state.

In any event, whatever the theoretical position might be under existing English case law, from 1 October 2014, courts will sentence organisations convicted of bribery offences under the Guideline which puts in place a sentencing system which should feel familiar to US lawyers.

The New Guideline:  Background and Context

Offences under the Bribery Act are covered by the new DPA regime.  This is seen as particularly significant in relation to the corporate offence which, with its lower evidential threshold for conviction, is expected to make prosecutions of organisations for bribery offences easier and therefore, potentially, more common.  The Act introducing DPAs provides that the financial penalty agreed under a DPA “must be broadly comparable to” the fine the organisation would have received had it pleaded guilty and been convicted.  However, as is apparent from the review of the authorities above, there is not much by way of guidance in this regard, in case law or otherwise.

Recognising this lack of guidance which risked introducing unnecessary but critical additional uncertainty into initial DPA negotiations, the Sentencing Council, which had been working on it for years, expedited its work on sentencing guidelines for corporates convicted of fraud, bribery, and money laundering.

The Basic Fine Calculation

The basic principle of the Guideline for calculating the fine is that the “[a]mount obtained or intended to be obtained (or loss avoided or intended to be avoided)” from the offence (the “harm figure”) is multiplied by a figure based on the corporate offender’s culpability (the “harm figure multiplier”).

For bribery offences, the harm figure “will normally be the gross profit from the contract obtained, retained or sought as a result of the offending.”  For the corporate offence, an alternative measure is suggested, namely “the likely cost avoided by failing to put in place appropriate measures to prevent bribery.

Culpability is assessed with reference to the offender’s “role and motivation” in the offence(s) and categorised as “high”, “medium”, or “lesser”, depending on the characteristics and circumstances of the offending.  Characteristics indicating high culpability include the corruption of governmental or law enforcement officials, and factors indicating lesser culpability include the existence of some, but insufficient, bribery prevention measures.

Each culpability level has both a starting point for the harm figure multiplier (100% for lesser, 200% for medium, and 300% for high culpability) and a range: 20-150% for lesser, 100-300% for medium, and 250-400% for high.  The presence of aggravating and mitigating factors (of which the Guideline provides non-exhaustive lists) will determine where within the relevant range a defendant organisation falls.  Listed factors increasing seriousness, and thus raising the harm figure multiplier, include corporate structures set up to commit offences and cross-border offending.  Mitigating factors that lower the harm figure multiplier include co-operation with the investigation, self-reporting and early admissions.

Having applied the relevant multiplier to the harm figure, a sentencing court would have to take into account further factors such as discounts due on account of guilty pleas (up to one third, according to the current guidance), particularly valuable co-operation, and the consequences on third parties of the proposed totality of the financial orders.  The court could then adjust as appropriate.

In setting out this basis for the calculation of fines, the Sentencing Council acknowledged having considered Chapter 8 of the US Federal Sentencing Guidelines.  US lawyers will recognise in the harm figure the UK equivalent of the “base fine” in §8C2.4, and in the harm figure multiplier the equivalent of the “culpability score” multipliers pursuant to §§8C2.5 to 8C2.8.

The Guideline – What Likely Changes in Practice?

Although a highly hypothetical exercise, it may be illustrative to seek to predict what fines would be imposed under the Guideline on the facts of some of the cases discussed above.

On the facts of Mabey & Johnson, the following can be deduced:

  • The contracts obtained as a result of the offending were said to be worth some £44 million.  Included in that figure was the £2.56 million Iraqi contract for which the “gross margin” was said to be approximately £700,000.  If the same rate of gross profit to contract value (approximately 27%) is applied to the totality of the offending, the harm figure would be approximately £12 million.
  • In terms of culpability, the company’s accepted behaviour included the organised and planned corruption of government officials over a sustained period of time.  Therefore the culpability level under the Guideline would likely be deemed “high”, establishing the range for the harm figure multiplier of 250-400%.
  • In terms of the appropriate harm figure multiplier within that range, account would have to be taken of the many facts presented to the court and not disputed which, under the Guideline, would constitute factors increasing seriousness: The company had set up the “Ghana Development Fund” in order to make corrupt payments; fraudulent activity could be said to have been endemic within the company; the revelations caused considerable political fall-out in both Ghana and Jamaica; the offences were committed across borders in that many of the payments were made to officials while they were in the UK.  In terms of factors reducing seriousness, the main one would be that the offending was committed under the previous management.  Taken together, a harm figure towards the top end of the range would be likely.

If the harm figure multiplier chosen had been, say, 350%, the starting point for the appropriate fine for offending like that in Mabey & Johnson would be £42 million.  Even if a court had found that a reduction of the maximum of one third for the company’s guilty plea was due, as well as some further reduction on account of its co-operation, on the facts in Mabey & Johnson, the resulting fine of £20-25 million would be many times higher than the fine (£3.5) the court found “realistic and just”.

Taking the facts of Innospec and applying them to the Guideline the result is staggering: If it a court had found that the benefit to the company was indeed $160 million, and that the conduct was as serious as in Mabey & Johnson, the resulting fine under the Guideline could very well be upwards of £190 million; considerably more than the “tens of millions” Thomas LJ indicated would have been appropriate, and even higher than the top of the US range in that case.  Even so, however, it needs to be borne in mind that in both Mabey & Johnson and Innospec the sentencing courts took into account the fact that if higher fines had been imposed, the companies concerned would have been made bankrupt to the detriment of current employees and other third parties.  Such considerations along with the resulting adjustments remain possible under the Guideline.

Likely Approach to Financial Penalties Under a DPA – Focus on the Corporate Offence

A UK-based organisation faced with evidence of bribes paid by, for example, one of its agents after 1 July 2011 will have some difficult decisions to make.  On the assumption that it reports this evidence to the SFO, it would risk being charged with the corporate offence.  If charged the organisation could seek to rely on the defence, created by the Bribery Act, of adequate procedures to prevent bribery and even if those procedures are ultimately found insufficient to shield the organisation from liability, their presence would still be an indicator of “lesser” culpability for the purposes of the Guideline.  However, having run an unsuccessful defence on the merits, the organisation would not benefit from the substantial reduction in fines it would have been due had it pleaded guilty.

Assuming, however, that the organisation indicated a willingness to admit to not having adequate anti-bribery procedures in place, and entered into negotiations with the SFO to conclude a DPA, how would the Guideline be used to calculate the financial penalty?

The assessment of the organisation’s culpability would not be affected by being conducted in the context of the negotiation of a DPA.  However, the presence of some, albeit insufficient, anti-bribery procedures would be an indicator of “lesser” culpability.  Further, the very fact that the organisation was considered for a DPA would imply that a number of factors tending to lower the reference fine under the Guideline were present:

First, among the mitigating factors lowering the harm figure multiplier is co-operation with the investigation, the making of early admissions and/or voluntary self-reporting.  Under the DPA Code of Practice (published on 14 February 2014), pro-active and early co-operation with the authorities is one of the public interest factors weighing in favour of entering into a DPA (and against a full prosecution) in the first place.  There will therefore be a strong mitigating factor already assumed.  Consequently, absent extraordinary circumstances, the tops of the ranges for the harm figure multiplier ought not to be applied in the context of DPAs.

Second, as already mentioned, the final figure could be adjusted with reference not only to the totality of the various financial orders, but also on account of the nature and extent of the organisation’s overall assistance to the authorities and admissions of offending.  Applying the Sentencing Council overarching guideline on reductions in sentence for guilty pleas, an organisation that co-operates with the authorities and is convicted on its guilty plea can expect a reduction of a third.  In Innospec, Thomas LJ held that the company was entitled to a reduction in sentence of “well in excess of 50%” on account of its guilty plea and cooperation with the authorities.  Following this logic, organisations negotiating a DPA might be able to persuade prosecutors (and the courts) that a further “DPA discount” should apply on account of the substantial cost savings their co-operation has entailed, and the good faith they have shown.

All in all, it is not unreasonable to assume that an organisation facing charges under the corporate offence could benefit from a reduction of any financial penalties of between 50-75% under a DPA compared to the fine it would face if it lost a trial on the adequacy of its anti-bribery programme.  Add to that the legal costs avoided and the greater ability to manage the outcome and we entertain some doubt whether many conscientious organisations that discover bribery in its business would risk a trial.

Conclusion

No organisation has yet been prosecuted under the new corporate offence in the Bribery Act but the SFO has publicly indicated that several organisations are being investigated in circumstances where – the SFO hopes – such prosecutions may well result.  If that were to happen, the first applications of the Guideline may take place sooner rather than later.

The director of the SFO, David Green QC, is a vocal advocate of extending the principle of the corporate offence in the Bribery Act to other corporate offending such as fraud and market manipulation.  The government is understood to be consulting internally on such a reform.  If enacted, prosecutions and convictions of organisations can be expected to cease to be a curiosity and potentially become as common as in the US and under the Guideline, the resulting fines could well equal those in the US.

Former SEC Enforcement Official Throws The Red Challenge Flag

Monday, February 10th, 2014

Today’s post is from Russ Ryan (Partner, King & Spalding).  Prior to joining King & Spalding,  Ryan spent ten years in the SEC’s Division of Enforcement, including his last  three years as Assistant Director of the Division.

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Sometimes you see something in a Foreign Corrupt Practices Act case that’s so inexplicable you wish someone would throw the red challenge flag and have the play reviewed under the hood or up in the booth.  Unfortunately, in the largely-overlooked wind-down phase of the SEC’s FCPA case against several former Siemens executives, the last of the defendants defaulted, so nobody was around to throw the challenge flag – and as a result the SEC seems to have gotten away with a doozy of a blown call.

Recall that this is the same 7-defendant case in which only one – Herbert Steffen – actively contested the SEC’s charges.  Of the other six defendants, the SEC voluntarily dismissed one (Carlos Sergi), three others settled without admitting or denying any wrongdoing (Bernd Regendantz, Andres Truppel, and Uriel Sharef), and the last two defaulted (Ulrich Bock and Stephan Signer).  Steffen, a German citizen and the only defendant who actively contested the charges, was dismissed from the case in February 2013 in a widely-noted decision that found a lack of personal jurisdiction over him.  (See here for my prior guest post).  None of the other defendants in the case were U.S. citizens either, and few if any appear to have had any significant contacts with the United States; the SEC alleged the familiar sporadic touching of U.S. bank accounts, along with a single meeting in Miami during the decade-long alleged bribery scheme, but proffered little else to support personal jurisdiction over any of these foreign nationals.

You might think the court’s dismissal of the only defendant who actively contested personal jurisdiction might have led the SEC to tread carefully when seeking penalties and other sanctions against the defaulting defendants.  Think again.

To the contrary, the SEC took an astonishingly aggressive approach to sanctions against the defaulting defendants, and it got everything it asked for.  The overall case raises legal and policy issues too numerous to address here, but two warrant especially close scrutiny.  First, the SEC convinced the court to impose more than a half-million dollars in civil penalties against each of the two defaulting defendants, despite alleging only four alleged bribes and despite the FCPA’s statutory limit of $10,000 per violation (increased for the relevant period to $11,000 through the SEC’s periodic inflation adjustment as authorized by statute).

How did the SEC get away with a penalty demand more than ten times this apparent $44,000 statutory limit for each defendant?  First, by saying that each of the four alleged bribes should be triple-counted as three separate securities law violations – once as a bribe, again as a books-and-records violation, and yet again as an internal-controls violation – thus artificially multiplying four violations to create twelve.  And as the SEC wonks among us well know, books-and-records and internal-controls violations come with their own separate statutory penalty regime.  But even here the SEC was super aggressive, taking the position that these classically non-fraud violations involved “reckless disregard” of a regulatory requirement, thus allowing the SEC to demand the maximum $60,000  per violation in “second-tier” penalties rather than the $6,000 per violation in the “first-tier” penalties ordinarily associated with non-fraud violations.  (The statutory anomaly that permits dramatically higher civil penalties for books-and-records and internal-controls violations than for bribery violations is another topic beyond the scope of this guest post.)

By triple counting each bribe in this way, the SEC demanded $11,000 + $60,000 + $60,000 ($131,000 total) in penalties against each defaulting defendant, and then multiplied that amount yet again for each of the four alleged bribes in question, arriving at a staggering total penalty of $524,000 per defendant.  This penalty for each of the defaulting defendants was much higher than the total penalties paid by all three of the settling defendants combined (which were only $40,000, $80,000, and $275,000 respectively).

But that’s not even the most bizarre aspect of the SEC’s penalty demand.  Of the four bribes alleged by the SEC against the defaulting defendants, three unquestionably occurred – according to the SEC’s own complaint and penalty motion papers – more than five years before the lawsuit was filed in December 2011, thus raising the obvious question of how the SEC could lawfully request, and how the court could lawfully impose, any penalty at all for those bribes.  By now everyone knows that SEC penalty demands are subject to the 5-year statute of limitations codified at 28 U.S.C. § 2462.  Indeed, just last year the Supreme Court unanimously ruled against the SEC in a case that involved the same statute (Gabelli v. SEC), wherein the SEC conceded the statute’s applicability to penalty demands.  (See my prior guest posts here and here).

So how did the SEC overcome this seemingly insurmountable statute of limitations obstacle?  Essentially by ignoring the issue entirely.  Of course, it’s possible the SEC got a tolling agreement from these two foreign nationals who later decided to ignore the ensuing lawsuit altogether, but that seems improbable. In any event, neither the SEC’s complaint nor its penalty motion mentioned any tolling agreement.  Of the $524,000 in penalties demanded and imposed against each of the defaulting defendants, nearly $400,000 seems obviously barred by the statute of limitations, yet neither the SEC nor the court appears to have acknowledged this issue at all.

One final oddity in this case warrants a separate challenge flag.  On top of the $524,000 in penalties imposed against defaulting defendant Bock, the SEC was awarded another $316,000 against him in what the agency euphemistically styled as “disgorgement” of ill-gotten profits from the bribery scheme.  But as described by the SEC, this money bore no resemblance to profits derived from any of the alleged bribes.  The SEC described it as hush money allegedly paid to Bock (and his wife) to buy his silence and false testimony in two arbitration proceedings that occurred long after he had retired from the company and that, according to the SEC, helped prevent the bribery scheme from being uncovered.

In my recent article, The Equity Façade of SEC Disgorgement, I wrote at length about how disgorgement in SEC cases, as a general matter, is often stretched beyond its proper limits.  The default judgment against Bock reflects many of the concerns I raised in that article, but it also reflects an even more fundamental disconnect under settled disgorgement law.  Characterizing the kind of hush money allegedly paid to Bock as ill-gotten profits caused by his alleged securities law violations seems a stretch to say the least.  The SEC’s theory was that the money was paid to induce and reward Bock’s false testimony in two arbitration proceedings – not as his share of any alleged bribes, not as extra compensation he was paid for his securities law violations, and not as his share of profits earned by Siemens as a result of the bribes.  Here too, neither the SEC nor the court addressed the obvious causation issue, and the SEC got the full amount it demanded.

One can only hope that neither the SEC nor the courts will view these default judgments as models for similar treatment of individuals in future FCPA cases.  This case illustrates the oft-lamented perils presented by the multitude of SEC cases that are decided each year without any effective advocacy on behalf of the defendant – typically due to the defendant’s default, pro se status, lack of adequate financial resources, or counsel possessing little or no expertise in securities law.  The perils run not only to the hapless defendants who invariably get steamrolled in such cases, but sometimes also to the credibility and ultimate enforceability of the resulting judgments.

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See here for original source documents relevant to the above issues.

The U.K. Financial Conduct Authority And Its Focus On Adequate Procedures To Prevent Bribery

Monday, January 27th, 2014

Today’s post is from Robert Amaee (Covington & Burling), the United Kingdom Expert for FCPA Professor.

In the post, Amaee notes that while the U.K. Bribery Act does not have formal books and records and internal controls provisions like the FCPA, the U.K. Financial Conduct Authority (which regulates firms in the U.K. that provide financial products and services to U.K. and overseas customers and is the U.K. listing authority) has brought several recent enforcement actions against regulated entities on grounds similar to typical FCPA books and records and internal controls actions.

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The recent enforcement action taken by the U.K. Financial Conduct Authority (“FCA”) against JLT Specialty Limited (“JLTSL”) is the latest example of the regulator’s drive to penalize companies in the financial sector for failures in their anti-corruption policies and procedures, even in the absence of any evidence of bribery.  There is every indication that the FCA will continue to use its regulatory powers to bring enforcement actions against companies that it deems not to have adequate anti-corruption controls.  In the words of Tracy McDermott, the FCA’s Director of enforcement and financial crime:

“[b]ribery and corruption from overseas payments is an issue we expect all firms to do everything they can to tackle. Firms cannot be complacent about their controls – when we take enforcement action we expect the industry to sit up and take notice.”

This article outlines the FCA’s role in combating financial crime and discusses some pertinent aspects of the JLTSL case as well as previous cases against Willis Limited (“Willis”), and Aon Limited (“Aon”).

The remit and track record of the Securities and Exchange Commission (“SEC”) in enforcing the internal control and accounting provisions of the Foreign Corrupt Practices Act 1977 is well known to readers of FCPA Professor.  Companies that are US issuers have an obligation to keep accurate books, records and accounts, and to devise and maintain sufficient internal accounting controls to ensure such accuracy.  In the UK, the Bribery Act 2010, does not contain equivalent internal control or accounting provisions.

In the case of a company that is suspected of failing to prevent bribery, the Serious Fraud Office (“SFO”) — the lead agency tasked with enforcing the Bribery Act — must assess the adequacy of the company’s procedures (i.e., whether the company has a defence) before deciding to bring Bribery Act charges (see Sec. 7 of the Bribery Act).   In the absence of evidence of bribery, however, the SFO cannot simply take enforcement action under the Bribery Act against a company for failures in its anti-corruption procedures.  In respect of a suspected failure to keep adequate accounting records, UK Prosecutors have in the past resorted to bringing action under the provisions of the Companies Acts of 1985 and 2006.  In 2010, for example, the SFO relied on section 221 of the Companies Act 1985 (now replaced, in substantially the same form, by the sections 386 and 387 of the Companies Act 2006) to sanction BAE for a failure to keep adequate accounting records in relation to payments made to a third party intermediary.

The FCA

The FCA, which took over the majority of the responsibilities of the Financial Services Authority (“FSA”) in April 2013, however, has a statutory objective under the Financial Services & Markets Act 2000 (as amended by the Financial Services Act 2012) to protect and enhance the integrity of the UK financial system.  This market integrity objective includes tackling the risk that the financial sector companies that it regulates may be used for a purpose connected with financial crime, including fraud, money laundering, and bribery and corruption.  In its July 2013 publication, The FCA’s Approach to Advancing its Objectives, the FCA states: “we will take action against firms found to be using corrupt practices, or failing to prevent bribes being paid to win business.”

To achieve this objective, the FCA has imposed, via the FCA Handbook, a number of financial crime requirements on the financial sector companies that it regulates. The key requirements are set out in Principles 1 (integrity), 2 (skill, care and diligence), 3 (management and control) and 11 (relations with regulators) of the FCA’s Principles for Businesses (“PRIN”); and Chapters 3 and 6 of the FCA’s Senior Management Arrangements, Systems and Controls sourcebook (“SYSC”).

In addition, the FCA’s recently published Thematic Review TR13/9 (October 2013) (here) on Anti-Money Laundering and Anti-Bribery and Corruption Systems and Controls, based on an assessment of 22 companies, sets out a case-based analysis of good and bad practice examples for businesses dealing with the risks of bribery and corruption. The October 2013 review followed previous thematic reviews of anti-corruption controls in commercial insurance broking (2010), in investment banking (2012), and AML and sanctions controls in trade finance (2013). The foregoing, together with the FCA’s Financial Crime: A Guide for Firms (here), provide companies with a clear indication of the FCA’s expectations in relation to the implementation and monitoring of anti-corruption systems and controls.

The recent JLTSL enforcement action followed the FCA findings of a breach of Principle 3 of PRIN.  Principle 3 provides that “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.”  This includes implementing checks and controls designed to prevent bribery and corruption overseas.   For a breach of Principle 3 to be established, there is no need for the FCA to show that suspicious payments were made or that an act of bribery has taken place.  In both the Aon and Willis cases investigations did show that suspicious payments were in fact made, while in the JLTSL case there was no evidence of suspicious payments having been made.

JLT Speciality Limited

On December 19, 2013 JLTSL, a wholly owned subsidiary of JLT Group (the largest European broker quoted on the London Stock Exchange), was fined £1,876,000 in respect of breaches of Principle 3 of PRIN.  The FCA found that JLTSL had failed to carry out effective due diligence before entering into relationships with, and making payments to overseas introducers.  The FCA found that the overseas introducers had been paid in excess of £11.7 million, representing some 57% of the total amount received by JLTSL from the business that had been introduced by the overseas introducers.  There was no evidence of bribery or any improper intent on the part of JLTSL, but the FCA concluded that the failings gave rise to an unacceptable risk that the payments made to the overseas introducers could have been used to pay bribes “to persons connected with the insured clients and/or public officials.”

It is worth noting that the FCA brought this action against JLTSL in spite of the fact that it found that JLTSL had (i) implemented policies and procedures aimed at countering the risk of bribery and corruption, including an Employee handbook and a Group Anti-Bribery and Corruption Policy which prohibited JLTSL employees from engaging in any form of bribery, an Operating Procedure Manual which contained more detailed procedures that employees had to follow in order to establish relationships with overseas introducers, and a 7 Alarm Bells policy to assess the bribery and corruption risk associated with entering into a relationship with an overseas introducer; and (ii) engaged an external adviser to review its systems and controls to assess compliance with the provisions of the Bribery Act 2010, concluding that the due diligence procedures in relation to introducer/facilitator relationships appeared comprehensive and broadly in line with the Act.

The FCA took the position that there was a failure to conduct adequate due diligence, and the external advisor had not conducted aholistic” review of JLTSL’s systems and controls.  JLTSL also was found to have failed to adequately assess bribery and corruption risks, only carrying out a risk assessment at the start of each relationship not every time that overseas introducer introduced a new piece of business.  JLTSL also failed to adequately implement its own anti-bribery and corruption policies, which resulted in the risk of JLTSL entering into higher risk relationships with overseas introducers without senior management oversight and approval.

Specifically, JLTSL failed to assess whether or not there were any connections between the overseas introducers and the clients or any public officials.  Although both the OPM and the Alarm Bells highlighted the importance of carrying out due diligence, there was a lack of practical guidance “to employees in order to establish whether the Overseas Introducer was connected to the client it was introducing.”  On reviewing 17 of JLTSL’s relationships with overseas introducers, the FCA found that in the majority of cases in which the overseas introducer was a company, JLTSL had failed to screen one or more directors or beneficial owners.  In one example, a major shareholder of the overseas introducer was known to JLTSL to be a Nigerian public official. The FCA concluded that as a Nigerian public official it was entirely possible even probable that the shareholder of the overseas introducer would have connections to West African public officials.

Willis Limited

On July 21, 2011 the insurance broker Willis was fined £6,895,000 for failings in its anti-corruption systems and controls (breaches were for Principle 3 of PRIN and Rule 3.2.6 R of the SYSC) which “contributed to a weak control environment surrounding the making of payments to Overseas Third Parties.”

The FSA found that overseas third parties had received commissions of approximately £27 million, representing some 45% of the brokerage earned by Willis from the business that had been introduced by the overseas third parties.  The FSA’s findings were supported by Willis’ own internal investigation which identified a number of suspicious payments made to overseas third parties, two of which formed the subject of suspicious activity reports that Willis submitted to the Serious Organised Crime Agency (“SOCA”) (now replaced by the National Crime Agency (“NCA”)).

The FSA did not find any evidence to suggest that Willis’s conduct was either deliberate or reckless.  It acknowledged that Willis had introduced improved anti-corruption policies and guidance in 2008, reviewed how its new policies were operating in practice and further revised its guidance in 2009.  The FSA, however, formed the view that Willis had failed to ensure its policies were adequately implemented, that failures by staff to adhere to the new policies were identified in a timely manner, or that the Board was provided with sufficient relevant management information regarding the performance of the new policies.

Specifically, the FSA concluded, inter alia, that Willis had (i) failed to ensure that it had established and recorded an adequate commercial rationale for using overseas third parties; (ii) failed to provide formal training or adequate guidance for staff who only recorded brief descriptions of the reason for making commission payments; and (iii) conducted inadequate due diligence on overseas third parties to establish, for example, any connections with the insured, insurer or public officials.

Aon Limited

On January 6, 2009 Aon was fined £5,250,000 for failing to “take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems” (breach of Principle 3 of PRIN).  In particular, the FSA highlighted Aon’s failure to establish and maintain effective systems and controls for countering the risks of bribery and corruption associated with its use of overseas Third parties in high risk jurisdictions.

As in the Willis case, the FSA found that the failings led to a weak control environment that gave rise to an unacceptable risk that Aon could become involved in potentially corrupt payments to win or retain business. The FSA highlighted 66 suspicious payments totalling in excess of US$7 million that were paid to nine overseas third parties.  Aon’s own internal investigation identified a number of suspicious payments that it later reported to SOCA.

The FSA concluded, inter alia, that (i) procedures lacked adequate levels of due diligence either before commencing relationships with overseas third parties or before payments were made; (ii) Aon failed to monitor its relationships with overseas third parties in respect of specific bribery risks; (iii) Aon did not provide its staff with sufficient training and guidance on bribery and corruption matters; and (iv) Aon failed to ensure that the committees it appointed to oversee bribery and corruption risks received relevant management information or routinely assessed whether bribery and corruption risks were managed effectively.  Aon also failed to implement effective internal systems and controls to mitigate those risks.  Margaret Cole, FSA director of enforcement at the time, described the case as sending a clear message that it is completely unacceptable for firms to conduct business overseas without having in place appropriate anti-bribery and corruption systems and controls”.

Adequate Procedures

The FSA’s 2009 action against Aon marked the start of period of concerted effort by the regulator to take action against companies deemed to have inadequate policies and controls, in particular in respect of the risks associated with making payments to overseas third parties.  The Aon action was followed in 2011 by the FSA’s action against Willis for failings in its anti- corruption policies and controls.  In bringing its recent action against JLTSL, the FCA has clearly signalled its intention to continue the focus on companies’ internal anti-corruption control environment. In addition, a number of separate enforcement actions have confirmed that the FCA remains focused on ensuring companies also maintain adequate anti-money laundering policies and controls.  See here, here, here and here.

It is clear, in particular from the JLTSL case, that the FCA will not be impressed by the volume of policies and controls that have been drafted or the fact that an external vendor has given the anti-corruption program the all clear.  The FCA is focused on the effectiveness of the policies and controls and how they have been implemented, and how they are being monitored in practice.  There is little doubt that when the SFO starts to bring enforcement actions against companies under the failure to prevent bribery offence contained in section 7 of the Bribery Act, its assessment of the adequacy of a company’s policies and controls will similarly focus on their real life implementation, and not on the elegance of the prose, or the sign off of external vendors.