Archive for the ‘Serious Fraud Office’ Category

Friday Roundup

Friday, January 15th, 2016

Roundup2Scrutiny alert, on cue, across the pond, survey says, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alert

According to various Nigerian media reports (here and here):

“A group which goes by the name: Concerned Itsekiri Coastal Dwellers Association, CICDA, has petitioned the United States, US Department of Justice, Criminal Division over alleged fraudulent and corrupt practices by some Delta state government officials with Chevron Nigeria Limited, CNL.”

In 2007 ,Chevron agreed to pay $30 million to resolve an FCPA enforcement action in connection with the Iraq Oil for Food program (see here).

On Cue

This prior post analyzed the recent U.K. deferred prosecution agreement against Standard Bank (SB)  - specifically “what” the DPA resolved – and stated:
“Given the allegations and findings, it is curious why SB even voluntarily disclosed the conduct at issue to the SFO, particularly in light of Sec. 7′s adequate procedures defense.
But then again, counsel to SB (like counsel in other FCPA or related internal investigations) no doubt secured substantially more in legal fees by making the disclosure (compared to the other reasonable alternative of not disclosing and remedying any internal control deficiencies) plus the deferred prosecution agreement comes with post-enforcement action compliance obligation. Moreover, counsel achieved name recognition by being the first law firm to represent a Sec. 7 corporate defendant and secure a DPA on behalf of its client. (One can only imagine the speaking opportunities in the future for “how they did it”).”

As if on cue, the law firm that represented SB is currently marketing a seminar about the enforcement action.  The teaser e-mail states:

“Join the legal team who acted on the UK’s first ever Deferred Prosecution Agreement for a breakfast seminar about the process. [...] We hope you will join us to hear how this ground-breaking and highly anticipated agreement was arrived at, the pivotal legal points which were discussed, and the key lessons for senior in-house counsel from the process.”

Across the Pond

The U.K. Serious Fraud office recently announced:

“UK printing company Smith and Ouzman Ltd, [previously] convicted of making corrupt payments, was … ordered to pay a total of £2.2 million in a sentencing hearing at Southwark Crown Court. The conviction and sentence follows a four-year investigation by the Serious Fraud Office.

The … company, which specialises in security documents such as ballot papers and exam certificates, was convicted in December 2014 under the Prevention of Corruption Act 1906. The corrupt payments totalling £395,074 were made to public officials for business contracts in Kenya and Mauritania.

The sum broken down included a fine of £1,316,799 as well as £881,158 to satisfy a confiscation order applied for by the SFO and £25,000 in costs. The fine is payable in instalments every six months until the full amount is paid, while the confiscation order must be satisfied within 28 days and the costs paid within six months.

In passing sentence, Recorder Andrew Mitchell QC said:

“Corruption of foreign officials is damaging to the country in which the corruption occurs, is damaging to the reputation of UK business and of course, in the market in which a business operates, it is anti-competitive.”

Director of the SFO, David Green CB QC commented:

“The bribery of foreign officials by UK companies damages this country’s reputation, commercially, politically and ethically. The SFO will pursue such criminal behaviour at both the corporate and individual level.”

Survey Says

According to this recent survey of South Africans conducted by the Ethics Institute of South Africa and sponsored by Massmart, only 22% of respondents believe that it is possible to successfully navigate daily life in the country without paying a bribe.

For the Reading Stack

In a recent article “Four Ways to Improve SEC Enforcement,” Professor Andrew Vollmer (a former Deputy General Counsel of the SEC and former partner in the securities enforcement practice of Wilmer Cutler) touches on some basic rule of law principles that sometimes bear repeating

“The first way to improve SEC enforcement is for the Commission to assert violations of law based only on well established and widely accepted legal principles and not to base claims on new, untested, and extreme legal theories.

[...]

Regulating and enforcing by unelaborated and expanding legal rules raise serious issues for both the private party and the system as a whole. Once the government charges a private party, the person is labeled publicly as a law breaker, even if a small group of knowledgeable practitioners appreciates that the legal theory is new and untested, and faces severe and frequently career or business ending sanctions. The private party must incur the costs, distress, and adverse publicity associated with a defense or succumb and settle, and the pressure to settle is over-powering even when the SEC case lacks merit.

The threats to the overall system are equally grave, and here they come in two forms. First, a federal agency breaks fundamental bonds of trust and accountability in our system of democratic governance when it exceeds its governing law. An Executive Branch agency must take care to stay well within the legal boundaries set by Congress or it acts as lawlessly as those who really violated the securities laws.

Second, enforcement agencies must exercise their power within established rules and precedent so regulated persons know what is required of them and may act accordingly and “so that those enforcing the law do not act in an arbitrary or discriminatory way.” “A fundamental principle in our legal system is that laws which regulate persons or entities must give fair notice of conduct that is forbidden or required.” A charge based on a new agency legal interpretation is essentially a claim against an innocent person. “It is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference.” An SEC enforcement case based on an interpretation that has not been properly communicated to the public is not valid.

Thus, when the Chair said SEC enforcement should be “aggressive and creative,” she sent the wrong message to her staff. Expansive, untested theories of law to impose liability weaken the SEC’s enforcement efforts, short-change investigations of core misconduct, mistreat the private parties who must respond, and breach a trust between the agency and the country. One way to improve the SEC enforcement process therefore is to reward the staff for recommending cases based on established and accepted legal doctrines and to eschew over-reaching legal positions.

[...]

Another area worth attention is the time SEC investigations take. Potential wrongdoing must be investigated promptly and charges, when justified, must be brought promptly to serve a range of important interests. Avoiding delay during investigations helps deter, uses SEC resources efficiently, reduces uncertainty and costs for private parties, keeps evidence fresh, and promotes finality.

Unfortunately, investigations lasting for many years are the norm.

[...]

Extended investigations disserve the enforcement process and the persons being investigated. The delays increase the costs of defense and the burdens on private parties. Lengthy investigations create uncertainty for both companies and individuals, and uncertainty about the SEC’s plans can harm reputations, stall careers, and postpone financings and investments, research, and product development.

The delays also seriously harm the quality of justice and the SEC’s cases.”

*****

A good weekend to all.

Potpourri

Tuesday, December 22nd, 2015

PotpourriIndividual FCPA Charges

Reuters reports:

“Two men including an oil equipment supply firm executive have been arrested on charges related to an alleged scheme to corruptly secure energy contracts from Venezuela’s state-owned energy company, the U.S. Justice Department said Sunday. Roberto Rincon, the president of Texas-based Tradequip Services & Marine, was arrested on Wednesday in Houston on charges including that he violated the Foreign Corrupt Practices Act and engaged in money laundering, a Justice Department spokesman said. A second defendant, Abraham Jose Shiera Bastidas of Coral Gables, Florida, was arrested on Wednesday in Miami on the same charges plus one count, said the Justice Department spokesman, Peter Carr. The charges relate to what the Justice Department called a fraudulent and corrupt scheme to secure energy contracts from Petroleos de Venezuela S.A. (PDVSA), Venezuela’s state-owned energy company. Lawyers for Rincon, 55, and Shiera, 52, could not be identified on Sunday. Further details on the case were not immediately available. No charging documents have been made public yet. It was also not clear if case related to Tradequip, which describes itself as an oil field supply company. The firm on its website lists PDVSA as a client, and it is registered on Venezuela’s national contractors registry. Tradequip did not respond to a call and email seeking comment. PDVSA did not respond to a request for comment.”

See here for the criminal indictment.

Sweet Group

A follow-up to a U.K. SFO enforcement action previously announced in early December (see here).

Last Friday, the SFO announced:

“Sweett Group PLC has … pleaded guilty at Southwark Crown Court to an offence under Section 7 of the Bribery Act 2010 regarding conduct in the Middle East. The Serious Fraud Office charged Sweett Group PLC earlier this month, having opened an investigation on 14th July 2014 into the company in relation to its activities in the UAE and elsewhere. Sweett Group PLC will be sentenced on 12th February 2016 at Southwark Crown Court.”

The only publicly available document at this point states:

“Between 1 December 2012 and 1 December 2015 Sweet Group PLC, being a relevant commercial organisation, failed to prevent the bribing of Khaled Al Badie by an associated person, namely Cyril Sweet International Limited, their servants and agents, which said bribing was intended to obtain or retain business, and/or an advantage in the conduct of business, for Sweet Group PLC, namely securing and retaining a contract with Al Ain Ahia Insurance Company for project management and cost consulting services in relation to the building of a hotel in Dubai, contrary to Section 7(1) of the Bribery Act 2010.”

The Sweet Group action closely follows the Standard Bank failure to prevent bribery enforcement action (see here for prior posts) and represents the second instance under the Bribery Act of a business organization being held accountable for “failure to prevent”foreign bribery.

Global Fraud Survey

According to Kroll’s annual Global Fraud survey (a survey of 768 senior executives worldwide from a broad range of industries and functions from January through March 2015):

11% of companies have been affected by corruption and bribery during the past 12 months (the 6th highest type of fraud on the list) and 40% of companies describe themselves as highly or moderately vulnerable to this type of fraud (the 5th highest on the list).

Corruption and bribery were the highest among companies in India, Russia and China.

A Closer Look At The U.K.’s First Sec. 7 “Failure To Prevent Bribery” Action

Monday, December 7th, 2015

Closer LookAs highlighted in this post, there were two firsts in last week’s U.K. Serious Fraud Office enforcement action against Standard Bank Plc (currently known as ICBC Standard Bank Plc): (i) the first use of Section 7 of the Bribery Act (the so-called failure to prevent bribery offense) in a foreign bribery action; and (ii) the first use of a deferred prosecution agreement in the U.K.

A post later this week will turn to the later, but before dissecting “how” the enforcement action was resolved, it is important to understand “what” was resolved.

This post takes a closer look at the Section 7 allegations and findings in the Standard Bank (SB) enforcement action. In short, the SFO’s first Sec. 7 “failure to prevent bribery” in a foreign bribery action was aggressive –  indeed some might say dubious.

The key points – all based on the SFO’s charging document and/or the court’s judgement – are as follows.

  • The enforcement action against SB was based on the conduct of its former “sister company” (Stanbic Bank Tanzania Limited (ST)) and two former employees at ST in regards to just one transaction.
  • The transaction was a private placement offering for the Government of Tanzania (GOT).
  • In connection with the transaction, SB connected due diligence on GOT and the enforcement action finds no fault in this regard.
  • However, the enforcement action faults SB for not conducting effective diligence on a local partner inserted into the transaction by ST.
  • SB’s oversight in this regard was the result of an apparent misunderstanding at SB based on – in the words of the SFO -  ”a reasonable interpretation” of SB’s own written guidelines.
  • The end result was that SB relied on ST to conduct due diligence and to raise any concerns regarding the local partner. Indeed, the SFO alleges that SB  was provided a “two page checklist from ST of the steps it had taken” in regards to due diligence of the local partner.
  • SB’s alleged failure though was in allowing – and trusting – that its sister company would conduct effective due diligence of a local partner in one transaction.
  • As stated by the Judge “the SFO has reached the conclusion that there is insufficient evidence to suggest that any of Standard Bank’s employees committed a [bribery] offence: whilst a payment of US $6 million was made available to EGMA (the local partner), the evidence does not demonstrate with the appropriate cogency that anyone within Standard Bank knew that two senior executives of Stanbic intended the payment to constitute a bribe, or so intended it themselves.”
  • Elsewhere, the Judge repeated: “the evidence does not reveal that executives or employees of Standard Bank intended or knew of an intention to bribe.”
  • All of the above took place against the backdrop of SB having – as highlighted in the resolution documents – various policies and procedures designed to the same conduct giving rising to the enforcement action.
  • Indeed, the SFO’s statement of facts contain an appendix titled “Training Schedule and Interview Excerpts re Training & Awareness of Policies” and identifies – for three SB employees – extensive training including “course name” and training dates.
  • SB’s alleged failure also took place against the backdrop of – in the words of the Judge – “Standard Bank [having] no previous convictions for bribery and corruption nor has it been the subject of any other criminal investigations by the SFO.”
  • Moreover, the Judge stated: ”[T]here is no evidence that the failure to raise concerns about anti-bribery and corruption risks … was more widespread within the organization.

Given the above allegations and findings, it is curious why SB even voluntarily disclosed the conduct at issue to the SFO, particularly in light of Sec. 7′s adequate procedures defense (highlighted below).

But then again, counsel to SB (like counsel in other FCPA or related internal investigations) no doubt secured substantially more in legal fees by making the disclosure (compared to the other reasonable alternative of not disclosing and remedying any internal control deficiencies) plus the deferred prosecution agreement comes with post-enforcement action compliance obligation. Moreover, counsel achieved name recognition by being the first law firm to represent a Sec. 7 corporate defendant and secure a DPA on behalf of its client. (One can only imagine the speaking opportunities in the future for “how they did it”).

Relevant to the disclosure issue, the resolution documents state: “[t]he disclosure was within days of the suspicions coming to the Bank’s attention, and before its solicitors had commenced (let alone completed) its own investigation.”

Against this backdrop, my own two cents is that if SB’s disclosure was premature, careless and indeed reckless.

Given Sec. 7′s adequate procedures defense, and based on allegations and findings in the enforcement action, the first use of Sec. 7 by the SFO seems dubious (albeit with judicial blessing).

But then again, so too is certain use of the FCPA’s internal controls provisions by U.S. enforcement authorities (in situations that originated with voluntary disclosures). With increasing frequency, U.S. enforcement authorities have seemingly ignored the qualifying language in the statutory provision and also seemingly ignored its own sensible guidance relevant to the provisions.

The same came be said of the SFO’s first use of Sec. 7 of the Bribery Act.

Sec. 7 has qualifying language and the U.K. Ministry of Justice’s Sec. 7 guidance (highlighted below) is sensible and seemingly speaks to the nature of the conduct actually alleged in the SB enforcement action.

In short, the U.K.’s first use of Sec. 7 of the Bribery Act is similar to several FCPA enforcement actions where the enforcement theory seems to be, with the benefit of perfect hindsight, to zero in on one transaction (against the universe of thousands of similar transactions) and say shoulda, coulda, woulda.

With this commentary out of the way, the remainder of this post first provides relevant background on Sec. 7 of the Bribery Act and Ministry of Justice guidance on Sec. 7. It then excerpts the SFO’s resolution documents and the court judgement relevant to the Sec. 7 offense against SB that was deferred.

*****

Section 7 of the Bribery Act states:

(1) A relevant commercial organisation (“C”) is guilty of an offence under this section if a person (“A”) associated with C bribes another person intending—

(a) to obtain or retain business for C, or

(b) to obtain or retain an advantage in the conduct of business for C.

(2)But it is a defence for C to prove that C had in place adequate procedures designed to prevent persons associated with C from undertaking such conduct

Section 8 of the Bribery Act defines associated person in Sec. 7 as follows.

(1) For the purposes of section 7, a person (“A”) is associated with C if (disregarding any bribe under consideration) A is a person who performs services for or on behalf of C.

(2) The capacity in which A performs services for or on behalf of C does not matter.

(3) Accordingly A may (for example) be C’s employee, agent or subsidiary.

(4) Whether or not A is a person who performs services for or on behalf of C is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between A and C.

(5) But if A is an employee of C, it is to be presumed unless the contrary is shown that A is a person who performs services for or on behalf of C.

In Bribery Act Guidance, the U.K. Ministry of Justice stated, in pertinent part, as follows regarding Sec. 7: “[n]o policies or procedures are capable of detecting and preventing all bribery” and “no bribery prevention regime will be capable of preventing bribery at all times.”

According to the Ministry of Justice, “[t]he objective of the [Bribery] Act is not to bring the full force of the criminal law to bear upon well run commercial organisations that experience an isolated incident of bribery on their behalf.”

As relevant to the adequate procedures defense, in the Guidance the Ministry of Justice detailed six bribery-prevention procedures (proportionality, top level commitment, risk assessment, due diligence, communication and training, and monitoring and review) that “are intended to be flexible and outcome focused, allowing for the huge variety of circumstances that commercial organisations find themselves in.”

Against this backdrop, the SB enforcement action focused on allegations that a former affiliate company of Standard Bank made an improper payment to a local partner in Tanzania intending to induce members of the Government of Tanzania to show favor to the affiliate’s and SB’s proposal for a US$600 million private placement offering to be carried out on behalf of the Government of Tanzania.

Specifically, the conduct at issue focused on a “former sister company” Stanbic Bank Tanzania Limited (ST) and two individuals ST’s former Chief Executive Officer (Bashir Awale) (BA) and former Head of Corporate and Investment Banking (Shose Sinare) (SS).

According to the Statement of Facts, the case concerned a financing transaction undertaken on behalf of the Government of Tanzania (GOT) by SB and ST by way of a sovereign note private placement. According to the Statement of Facts, SB and ST “acted jointly” on the proposal and “their initial proposal” quoted a combined fee of 1.4% of the gross proceeds raised.”

According to the Statement of Facts, “the proposed fee to be paid by the GOT had increased to 2.4% on the basis that an additional 1% (ultimately US $6 million) would now be paid to a local partner, a Tanzanian company called Enterprise Growth Markets Advisors Limited (EGMA).” The Statement of Facts alleges that EGMA’s chairman and one of its three shareholders and directors, Mr. Harry Kitilya, was at all relevant times Commissioner of the Tanzania Revenue Authority and as such a serving member of the GOT.”

According to the Statement of Facts, “the proposed involvement of a local partner and the increased fee were disclosed to SB by ST sometime after they had been included in a proposal given by ST to the GOT.”

The Statement of Facts next allege that BA and and SS “intended this 1% fee promised to EGMA to induce a senior representative or senior representatives of the GOT to perform a relevant function improperly, namely by that representatives showing favor to SB and ST in their bid to secure their joint role and fees in the financing transaction.”

According to the Statement of Facts:

“by agreement between GOT, SB and ST, ST alone contracted with EGMA and ST alone made the payment to EGMA”

“No contemporaneous document has been located which indicates that the GOT, SB or ST queried why EGMA’s services were needed. No document has been located which suggests that any of EGMA, the GOT, SB or ST sought to negotiate or ask questions about EGMA’s fee.”

The Statement of Facts next allege:

“There were bribery risks inherent in the arrival of a third party in a transaction with a government department. No document has been located which indicates that SB or ST raised concerns or questions about EGMA or those behind the company. There were bribery risks given that EGMA’s directors included a serving member of the GOT and the former head of a GOT agency. ST did not make SB aware of these connections and there is no evidence that SB asked any questions about who was behind EGMA.”

[...]

Despite the payment of the US $6 million being made as part and parcel of a deal in which SB and ST acted jointly, SB’s policies did not clearly require it to conduct any enquiry into EGMA. Despite a number of indicators of significant bribery risk nor did anyone within SB raise any questions or concerns about EGMA, its role or fees. The SB deal team relied on ST to conduct Know Your Customer [KYC] and to raise any concerns as regards EGMA.

SB’s Head of Global Debt Capital Markets, Florian von Hartig [FVH], led the SB deal team that participated in the mandate. At some point after ST had already included such in a proposal to the GOT, he was made aware by ST of a proposal to involve a local partner and the related fee increase of 1%. In interview he stated that although SB had been willing to perform Know Your Customer checks on the third party, in the end he believed they were not obliged to do so, but that ST were so obliged and did carry out the KYC. He said that he had relied upon the checks of SB’s sister company, ST, to alert him to any concerns, that it was proper to do so and that he did not suspect anything untoward. He stated that SB had no contact with EGMA and accepted that SB had not made any enquiries about EGMA or its role. The available evidence does not prove that FVH or any other member of the SB team was complicit in any section 1 or section 6 Bribery Act 2010 offence.”

According to the Statement of Facts, “SB and ST were acting jointly and on behalf of one another in respect of arranging this transaction.” The Statement of Facts next state:

“In light of all the circumstance of this transaction, the SFO alleges that:

a. BA /SS promised or gave a financial advantage to EGMA intending that advantage to induce a representative or representatives of the GOT improperly to show favour to SB and ST in appointing or retaining them for the purposes of the transaction. BA/SS permitted US $6 million to be paid to EGMA in order to reward those public officials they believed had been induced to act improperly. In acting as they did BA and SS were or would be (ignoring jurisdictional restraints) guilty of bribery contrary to section 1 of the Bribery Act 2010.

b. Given the positions of BA and SS within ST, their conduct as individuals can properly prove a section 1 offence against ST as a corporate individual. Hence ST was or would also be guilty of the section 1 Bribery Act offence.

c. In the circumstances of this case, BA, SS and ST were all performing services on behalf of SB and hence are all associated persons for the purpose of section 7 of the Bribery Act 2010. As the facts demonstrate, they were all persons connected to SB who might be capable of committing bribery on SB’s behalf.

The position of ST, BA and SS as associated persons is illustrated by the following factors:

a. SB and ST were together the “lead manager” under the Mandate Letter.

b. The fee was due to SB and ST directly and jointly as lead manager and was split 50/50 between them.

c. SB and ST carried out different but complementary roles within the transaction i.e. SB provided the technical expertise and ST managed the client relationship. SB could not complete the transaction without ST and vice versa.

d. Members of both deal teams liaised closely with one another about the transaction.

e. SB was responsible for much of the contractual drafting and had a significant level of control over the overall structure of the deal and the terms of the Mandate Letter, Fee Letter and Collaboration Agreement.

f. The Fee Letter signed by both SB and ST stated that both SB and ST were acting in collaboration with the local partner.

The SFO alleges that, in committing what would have been but for jurisdictional reasons a section 1 Bribery Act 2010 offence, BA and SS and ST (through BA and SS) were intending thereby to obtain or retain business for SB (or an advantage therein), as well as ST.”

Under the heading “Checks and Approvals,” the Statement of Facts alleges:

“FVH and his team were aware that, if SB was a direct contractual counterparty to EGMA, SB would have to conduct KYC and due diligence on EGMA as required by SB’s Introducers and Consultants policy. However, FVH and his team were of the view that because of the way EGMA’s involvement in the deal was structured (EGMA was not a signatory to the Mandate Letter, there was no separate agreement between SB and EGMA, ST would KYC EGMA and no direct payment would be made by SB to EGMA), SB’s only obligation was to KYC its client, the GOT.”

FVH had made plain in his email to the SB team on 20th September 2012 that the KYC of EGMA would fall to ST and that no shortcuts would ever be acceptable as far as the KYC of EGMA was concerned. The SB deal team was satisfied with confirmation from ST that its KYC on EGMA had been completed and having been provided with a two page checklist from ST of the steps it had taken to KYC EGMA.

[...]

“SB [was] told … by SS that KYC had been completed on EGMA.”

Under the heading “Applicable Policies,” the Statement of Facts alleges:

“Throughout the life of this transaction, both SBG and SB had in place a number of committees, policies and procedures designed to address bribery and corruption.

In particular, the SB had an Introducers and Consultants policy in respect of Introducer and Consultant agreements and relationships relating to business transacted in the name of or on behalf of SB. This reflects the language in section 7 of the Bribery Act 2010.

A central tool in any system of anti-bribery and corruption is the KYC and due diligence process. This process should provide adequate information by which to identify any obvious warning signs associated with bribery and corruption (often referred to as red flags). The obligation to conduct KYC and due diligence was a focal point in the Standard Bank approach to anti-bribery and corruption.

The strength of any KYC and due diligence process lies not only in the quality of checks which are undertaken but also in the understanding of staff as to the extent of the obligation to conduct them. In this transaction, the final formal structure of the deal was in part dictated by SB’s wish not to trigger an obligation on their part to KYC EGMA (because this would be time consuming and might jeopardise the deal, according to FVH).

In circumstances in which EGMA was being engaged and paid by another SBG entity (in this case ST) which was performing KYC on EGMA, the SB team believed that there was no requirement for SB to conduct its own KYC and/or due diligence on EGMA.

SB conducted KYC and due diligence checks on its client, the GOT, but only ST performed KYC checks on EGMA. [...] The KYC checks on EGMA performed by ST do not appear to have been conducted in the same level of detail as would have been the case had SB conducted its own KYC and/or due diligence on EGMA.

The quality of the SBG response to bribery and corruption was also influenced by broader policies designed to mitigate the risks in this area. In addition to the relevant compliance functions and high level structures (e.g. Board of Directors, Audit Committee) the most relevant committees and policies were as follows.”

The Statement of Facts then lists several relevant committees and policies at both Standard Bank Group and SB.

The Statement of Facts then states:

“None of the SB deal team thought that the Introducers and Consultants policy applied. The policy was not clear. If the policy did apply, it was inadequately communicated to the SB deal team and/or that they were not properly trained to apply the policy in circumstances where a third party was being engaged by its sister company.

In summary:

a. The applicability of the Introducers and Consultants policy was unclear on the face of the policy. Moreover, it was not reinforced effectively to the SB deal team through communication and/or training

b. SB’s Introducers and Consultants policy and/or SB’s training did not provide sufficient specific guidance about relevant obligations/procedures where two entities within the Standard Bank Group were involved in a transaction and the other Standard Bank Group entity engaged an introducer or a consultant

c. The SB deal team relied on its sister company, ST, to flag any anti-bribery and corruption risks relating to EGMA through ST’s own KYC

d. As a consequence of their reliance on ST to flag any anti-bribery and corruption risks relating to EGMA (and the fact that ST did not identify such risks), the SB deal team did not identify the bribery and corruption risks relating to EGMA’s involvement in this transaction

The result of this was that:

a. overall, SB was engaged as joint lead manager with ST in a transaction with the government of what a number of international bodies consider to be a high risk country in which a third party received US $6 million with the protection of only a bank account opening KYC check on that third party conducted by ST, a sister company in respect of which SB had no interest, oversight, control or involvement.

b. SB undertook no enhanced due diligence process to deal with the presence of any red flags regarding the involvement of a third party in a government transaction, relating to what a number of international bodies consider to be a high risk country

c. SB failed to identify and therefore deal adequately with the presence in this transaction of a politically exposed person.

d. No one within SB identified, documented or considered corruption red flags in this case.

e. SB permitted the formal structures of a transaction or relationship (i.e. contractual relationship, the identification of the client, the making of a payment) rather than the broader risks to dictate the existence of any obligation to conduct KYC/due diligence checks.

f. SB failed to address the risk of the arrival of a third party charging a substantial fee

g. SB did not provide clear guidance about relevant obligations/procedures where two parts of the SB Group (or other parties) are involved in a transaction

h. the SB compliance team did not have the opportunity to assess the role of EGMA on this transaction (because it was reliant on the SB business unit identifying and raising any substantive concerns about EGMA or its role and the SB business unit relied on the findings of the KYC conducted by ST which did not identify such risks)

i. the SB staff within that business unit were not adequately alive to bribery and corruptions risks. Some of them were not aware of relevant SB and Group policies.

j. an anti-corruption culture was not effectively demonstrated within SB on this transaction.”

In conclusion, according to the Statement of Facts:

“ST and/or its senior employees BA and SS would be guilty of bribery contrary to section 1 of the BA 2010 … They would be guilty in that they promised or gave a financial advantage to EGMA intending that advance to induce a representative of GOT improperly to show favour to SB and ST in appointing or retaining them for the purposes of this transaction. ST/BA/SS permitted US $6 million to be paid to EGMA from the raised on behalf of the GOT intending it to be used to reward those public officials they believed had been induced to act improperly. They committed that offense intending to obtain or retain business for SB (or advantage in the same).

ST, BA, and SS were persons associated with SB.

SB failed to prevent the commission of that bribery offence.

The SB procedures designed to prevent the commission of bribery offences were inadequate.”

The Statement of Facts then contains a nearly ten page appendix that details “Applicable Policies, Training & Awareness.”

As to the internal “Introducers & Consultants Policy” that the SFO alleged was executed in a deficient matter by SB, the appendix states: “none of the SB deal team though that this policy applied to EGMA. Given the terms in which it was written, that was a reasonable interpretation. If the policy was designed to have SB to perform checks on EGMA its terms failed to make that clear.”

Under the heading “Training & Culture,” the appendix states:

“Although SB did have a relevant training system in place for its employees, the effectiveness of the training provided must be in doubt given that no SB deal team member raised any concern about this transaction or sought to ask any substantive question about EGMA, its role or its fee but instead relied on SB’s sister company, ST, to flag any concerns arising from its KYC of EGMA.”

[...]

On the 9th January 2013 FVH attended an SB training course entitled “Standard Bank AntiBribery and Corruption (Associated Persons) Risk Training”. The course materials made reference to the risks of third parties being used as conduits for bribes by being paid for nonexistent services. However the training stated that where a consultant is not acting in relation to business transacted on the Bank’s balance sheet or in the name of the Bank, they would not be covered by the Introducers and Consultants policy but would instead be reviewed via the Bank’s procurement process on a contract by contract basis. Whether the training correctly reflected the policy on that point or not, given the subject matter of the training, it is difficult to understand why it did not prompt FVH to at least ask further questions about EGMA. There is no document in the possession of the SFO which records FVH doing so.

None of the SB deal team appears to have identified or considered the risks of bribery and corruption in this transaction. Given that SB placed reliance upon the relevant business unit to identify whether the relevant policies applied and to identify bribery and corruption, any effective system requires a proactive approach by such individuals.

[...]

In respect of this transaction there was an absence of appreciation by the SB deal team that there was an obligation on SB to conduct KYC and/or due diligence on EGMA and its role. Between them, they made the following points:

i. Given the lack of contractual relationship with or direct payment to EGMA, SB had no obligation to KYC EGMA.

ii. SB’s only KYC obligation was in respect of its customer, the GOT

iii. ST was obliged to KYC EGMA

iv. Had there been. any problem with EGMA, they believed this would have been brought to their attention by ST

v. SB did not need any more than a tick box form from ST that KYC had been completed

vi. They had not asked any questions themselves about EGMA or its role and did not consider they were under any obligation to do so.”

The Statement of Facts next contain an appendix titled “Training Schedule and Interview Excerpts re Training & Awareness of Policies” and identifies – for three SB employees – extensive training including “course name” and training dates.

As to the specifics of the Sec. 7 offense, in his Approved Judgment, the Judge, Sir Brian Leveson, stated:

“Turning to the position of Standard Bank, despite the fact that it acted jointly with Stanbic on the transaction, the team at the Bank (led by its then Head of Global Debt Capital Markets, Florian Von Hartig), did not believe Standard Bank was required to conduct KYC and due diligence. In that regard, it is common ground that the applicable policies at Standard Bank were unclear and did not provide sufficient specific guidance. In this uncertainty, Florian Von Hartig interpreted them as not requiring Standard Bank to conduct any enquiry at all into EGMA. Further, despite the obvious red flags for bribery risk being present, Standard Bank’s deal team do not appear to have raised any questions or concerns about the arrangement being corrupt and did not make any enquiry about EGMA or its role. Instead, it relied entirely on Stanbic to conduct KYC checks and raise any concerns as regards EGMA.”

[...]

Section 7(2) of the 2010 Act provides that it is a defence for a commercial organisation to have had in place adequate procedures designed to prevent persons associated with the commercial organisation from undertaking the bribery. On the basis of the material disclosed, the Director of the SFO has concluded that Standard Bank did not have a realistic prospect of raising this defence. The applicable policy was unclear and was not reinforced effectively to the Standard Bank deal team through communication and/or training. In particular, Standard Bank’s training did not provide sufficient guidance about relevant obligations and procedures where two entities within the Standard Bank Group were involved in a transaction and the other Standard Bank entity engaged an introducer or a consultant.

In the event, Standard Bank engaged as joint lead manager with Stanbic in a transaction with the government of a high risk country in which a third party received US $6 million with the protection of only KYC checks relevant to opening a bank account. The checks in relation to that third party were conducted by Stanbic, a sister company in respect of which Standard Bank had no interest, oversight, control or involvement. It did not undertake enhanced due diligence processes to deal with the presence of any corruption red flags regarding the involvement of a third party in a government transaction, relating to a high risk country. There were also failings in terms in not identifying the presence of politically exposed persons and not addressing the arrival of a third party charging a substantial fee. In essence, an anti-corruption culture was not effectively demonstrated within Standard Bank as regards the transaction at issue.”

In analyzing the “seriousness of the conduct,” Sir Leveson stated:

“[A]lthough the predicate bribery offence was allegedly committed by two senior executives of Stanbic, and involved the intention to bribe a foreign public official, using public funds such as to make the intended bribe payment, such as could have compromised the integrity of a financial market, that is not the conduct in respect of which Standard Bank falls to be judged.

The criminality which Standard Bank potentially faces is the failure to prevent the intended bribery committed by senior officials of Stanbic (a sister company the management of which is unconnected to the Bank) arising out of the inadequacy of its own compliance procedures and its own failure to recognise the risks inherent in the proposal. The SFO has reached the conclusion that there is insufficient evidence to suggest that any of Standard Bank’s employees committed an offence: whilst a payment of US $6 million was made available to EGMA, the evidence does not demonstrate with the appropriate cogency that anyone within Standard Bank knew that two senior executives of Stanbic intended the payment to constitute a bribe, or so intended it themselves.”

In analyzing the “extent of any history of similar conduct involving prior criminal, civil and regulatory enforcement against the organization,” Sir Leveson stated:

“Standard Bank has no previous convictions for bribery and corruption nor has it been the subject of any other criminal investigations by the SFO. It has, however, been subject to regulatory enforcement action by the Financial Conduct Authority (“FCA”) in respect of its failing in its anti-money laundering procedures. In the instant case failings arose in policy, procedure and training, specifically in respect of anti-bribery and corruption. Although there are features of similarity relating to compliance, they related to different processes and are not connected.”

In analyzing the amount of compensation to be paid, Sir Leveson stated:

“Although the facts in this case involve corruption, the specific allegation concerns a breach of s. 7 of the Bribery Act 2010 and is the failure to put in place appropriate mechanisms to prevent bribery of local or national government officials or ministers, namely member(s) of the Government of Tanzania. The Joint Prosecution Guidance in relation to the Bribery Act makes it clear (at page 11) that the s. 7 offence “is not a substantive bribery offence”. Further, I repeat: the evidence does not reveal that executives or employees of Standard Bank intended or knew of an intention to bribe.

Having said that, the significant albeit not intentional role that Standard Bank played in the bribery suggests at least medium culpability within the Sentencing Council Guideline. Standard Bank was the joint lead manager in a transaction in respect of which US $6 million was paid by the associated (sister) entity (Stanbic) to a local partner from the sum raised on behalf of the Government of Tanzania. The inference is that it was well understood (at least by two senior executives of Stanbic and, thus, Stanbic) that it would induce public officials to act improperly. Further, the deal team at Standard Bank was fully aware that a significant payment was to be made to a local third party in circumstances where there were different understandings amongst the team as to what the precise role in the transaction of that third party was.

Although there were bribery prevention measures in place, these measures did not prevent the suggested predicate offence. Standard Bank’s employees involved in the transaction did not express adequate awareness about the bribery risks in the transaction. Further, given that Standard Bank and its former sister company, Stanbic, were advising on a transaction involving the government of a country which international bodies have identified as having a high bribery risk, and given Standard Bank’s experience in emerging markets, the risk of corruption of local and national government officials or ministers should have been anticipated in this transaction, including through Standard Bank’s bribery prevention measures.”

[...]

“[T]here is no evidence that the failure to raise concerns about anti-bribery and corruption risks … was more widespread within the organization.”

Two Firsts In The U.K. – First Use Of Sec. 7 Of The Bribery Act In A Foreign Bribery Action And First Use Of A DPA

Wednesday, December 2nd, 2015

Across the PondEarlier this week, the U.K. Serious Fraud Office announced two firsts in connection with an enforcement action against Standard Bank Plc (currently known as ICBC Standard Bank Plc):

(i) the first use of Section 7 of the Bribery Act (the so-called failure to prevent bribery offense) in a foreign bribery action; and

(ii) the first use of a deferred prosecution agreement in the U.K..

The conduct at issue focused on allegations that a former affiliate company of Standard Bank made an improper payment to a partner in Tanzania intended to induce members of the Government of Tanzania to show favor to the affiliate’s and Standard Bank’s proposal for a US$600 million private placement offering to be carried out on behalf of the Government of Tanzania.

The underlying source documents are linked below and future posts will further explore the DPA, the Sec. 7 “failure to prevent” bribery offense, and the related U.S. enforcement action against Standard Bank.

(Speaking of Sec. 7 of the Bribery Act, the SFO announced today the following: “The Serious Fraud Office can confirm that Sweett Group plc has admitted an offence under Section 7 of the Bribery Act 2010 regarding conduct in the Middle East. [...] Further details will be made available when the matter comes before court, at a date still to be determined.).

Deferred Prosecution Agreement

Statement of Facts

Preliminary Judgement

Full Judgement

In this release, the SFO stated:

“The Serious Fraud Office’s first application for a Deferred Prosecution Agreement was … approved by Lord Justice Leveson at Southwark Crown Court, sitting at the Royal Courts of Justice.

The counterparty to the DPA, Standard Bank Plc (now  known as ICBC Standard Bank Plc) (“Standard Bank”), was the subject of an indictment alleging failure to prevent bribery contrary to section 7 of the Bribery Act 2010. This indictment, pursuant to DPA proceedings, was immediately suspended. This was also the first use of section 7 of the Bribery Act 2010 by any prosecutor.

As a result of the DPA, Standard Bank will pay financial orders of US$25.2 million and will be required to pay the Government of Tanzania a further US$7 million in compensation. The bank has also agreed to pay the SFO’s reasonable costs of £330,000 in relation to the investigation and subsequent resolution of the DPA.

In addition to the financial penalty that has been imposed, Standard Bank has agreed to continue to cooperate fully with the SFO and to be subject to an independent review of its existing anti-bribery and corruption controls, policies and procedures regarding compliance with the Bribery Act 2010 and other applicable anti-corruption laws. It is required to implement recommendations of the independent reviewer (Price Waterhouse Coopers LLP).

Commenting on the DPA, Director of the SFO David Green CB QC said:

“This landmark DPA will serve as a template for future agreements. The judgment from Lord Justice Leveson provides very helpful guidance to those advising corporates. It also endorses the SFO’s contention that the DPA in this case was in the interests of justice and its terms fair, reasonable and proportionate. I applaud Standard Bank for their frankness with the SFO and their prompt and early engagement with us.”

The suspended charge related to a US$6 million payment by a former sister company of Standard Bank, Stanbic Bank Tanzania, in March 2013 to a local partner in Tanzania, Enterprise Growth Market Advisors (EGMA). The SFO alleges that the payment was intended to induce members of the Government of Tanzania, to show favour to Stanbic Tanzania and Standard Bank’s proposal for a US$600 million private placement to be carried out on behalf of the Government of Tanzania. The placement generated transaction fees of US$8.4 million, shared by Stanbic Tanzania and Standard Bank.

On 18 April 2013, Standard Bank’s solicitors Jones Day reported the matter to the Serious and Organised Crime Agency and on 24 April to the SFO. It also instructed Jones Day to begin an investigation and to disclose its findings to the SFO. The resulting report was sent to the SFO on 21 July 2014.

The SFO reviewed the material obtained and conducted its own interviews. Subsequently, the Director of the SFO considered that the public interest would likely be met by a DPA with Standard Bank and negotiations were commenced accordingly.

The SFO has worked with the US Department of Justice (DoJ) and Securities and Exchange Commission (SEC) throughout this process. A penalty of $4.2m has been agreed between Standard Bank and the SEC in respect of separate related conduct.

We are very grateful to the DoJ, the SEC, the Foreign and Commonwealth Office, the Financial Conduct Authority for their assistance in resolving this investigation and deferred prosecution.”

The SFO release also provided the following information.

  • The charge against Standard Bank has been suspended for three years, after which, subject to the bank’s compliance with the terms of the DPA, the SFO will discontinue the proceedings.
  • Standard Bank’s US$25.2 million total financial penalty, which is payable to HM Treasury, consists of a US$16.8 million financial penalty and a US$8.4 million disgorgement of profits. The compensation due to the Government of Tanzania consists of US$6 million, plus interest of US$1,046,196.58.

Developments From Across The Pond

Tuesday, October 13th, 2015

Across the PondA few developments from the United Kingdom worth highlighting.

SFO Speech

In this recent speech, David Green (Director of the SFO) stated:

Deferred Prosecution Agreements (DPAs)

I anticipate that at least 2 DPAs will be completed this calendar year.

Concern has been expressed by some in the NGOs and the media that DPAs will be merely a mechanism whereby companies can buy themselves out of trouble, and that prosecutors will be brow-beaten by lawyered-up corporates. These concerns are misplaced and premature.

DPA’s are intended as a mechanism whereby the collateral damage to innocent parties occasioned by the prosecution of a company can be avoided in an appropriate case. On the English and Welsh model, the prosecutor must identify the full extent of the offending. Judicial approval is required at a preliminary hearing which will take place in private and at the final application for approval which will always be in public. Crucially, the judge must be satisfied that the DPA is in the interests of justice, and is fair, reasonable and proportionate. Rubber stamps have no part in the process.

The bar is a high one. This does not mean that corporates lose their right to contest a genuine question of law or that they have to waive privilege. But cooperation is vital, and for this simple reason: how can the prosecutor convince the judge that a DPA rather than a prosecution is in the interests of justice?

I anticipate that once the offer, the bar and the process are demonstrated and understood in action, we will see many more DPA’s.

Corporate criminal liability

There is, I suggest, one more step necessary to make DPAs mainstream. That involves moving away from the identification principle of corporate criminal liability in English law and embracing something closer to vicarious liability, as in the USA.

Until that is done, a corporate might conclude that if the prosecution of a company is so difficult under our law, why should they agree to a DPA?

On a broader front, if the public interest, in terms of public confidence, demands more prosecutions of corporates, then such change is surely necessary.

Despite the advent of DPAs, prosecution is and remains the default preferred option.”

Bribery Act First

Thebriberyact.com reports:

“Drum roll.  We now have the first corporate disposal for a violation of the new offence of failure to prevent bribery.

…in Scotland.

Last Friday the Scottish authorities announced a civil settlement with Brand-Rex Limited. The settlement is of note for two reasons.

Firstly, it is the first concluded settlement for a contravention of the Bribery Act 2010, s.7 – corporate failure to prevent bribery by a third party.

It is a classic case on the thorny question of corporate hospitality and that hospitality being misused.

Secondly, it is the third concluded corporate self-report and civil settlement in Scotland. The Scottish system is akin to that operated by the SFO before deferred prosecutions agreement were introduced. It is clear that Scottish system is encouraging self-reports and that the settlements are being progressed in a reasonable timescale.”

Reform Ditched

Speaking of the above mentioned Section 7 of the Bribery Act, for some time there has been a debate in the U.K. whether to widen such an offense to include economic crimes other than bribery.

Bloomberg reports:

“The U.K. abandoned a much campaigned-for change to legislation that would have made it easier to prosecute corrupt companies in the latest nod to a new era of deregulation for business under the re-elected Conservatives.

In a written answer to a lawmaker’s question posted Monday, junior Justice Minister Andrew Selous said the “ministers have decided not to carry out further work” on an expansion of corporate criminal liability laws as there is “little evidence of corporate economic wrongdoing going unpunished.”

Prosecutors, academics and lawyers have petitioned the government for years to widen the Bribery Act, a 2011 law that allowed companies to be prosecuted for failing to prevent economic crimes such as fraud and money laundering as well as bribery. The decision marks a u-turn by the government, which said in 2012 that the options for dealing with corporate offending were “limited” and the number of convictions each year was “too low” as public displeasure about the Libor and other banking scandals grew.”