Archive for the ‘Serious Fraud Office’ Category

An Odd Speech By The SFO Director

Monday, March 17th, 2014

U.K. Serious Fraud Office Director David Green recently delivered this speech titled “Ethical Business Conduct:  An Enforcement Perspective” at an event sponsored by PwC.

It is an odd speech.

Contrary to the “active engagement” position of his predecessor Richard Alderman, Green stated as follows.

“The role of the SFO is to investigate and to prosecute the topmost tier of serious and complex fraud and bribery. As part of that process, we are engaging and will continue to engage in a straight-forward way, by a process which is now underpinned by statute and a Code of Practice, with companies which self-report misconduct to us. We totally get the importance of generating trust and, in the right circumstances, legitimate expectation based on a track record of our dealings with companies who self-report. But the SFO is not a regulator, an educator, an advisor, a confessor, or an apologist. I am not funded for any of those activities. The SFO is a law enforcement agency dealing with top end, well-heeled, well-lawyered crime. We enforce the law in our specialist field. It follows that I am not here to preach. The SFO does not do lectures on ethics. We do not issue guidance on how not to rob banks. I would not dream of telling you how I think you should behave. It is for business and senior managers to decide appropriate standards of ethics and integrity in their commercial activities. They have access to the best expertise and advice available from the law and accountancy sectors of the Bribery Act industry. That advice would doubtless take account of the legitimate profit motive, and the interests of employees, shareholders, investors and pensioners. So I cannot help you on ethics. But the SFO will continue to engage with companies who want to do the right thing, and we are very interested in building trust.”

However, after stating that he would not “preach,” that “the SFO does not do lectures on ethics,” and that he “would not dream of telling you how I think you should behave,” Mr. Green proceeds to do the things he said he would not do.

For instance, “why should a company self-report suspected criminal misconduct to the SFO.”

In the words of Green, because “there is a moral and reputational imperative to self-report:  it is the right thing to do and demonstrates that the corporate is serious about behaving ethically.”

Mr. Green’s speech was not entirely an air ball.

He did state as follows regarding the difference between U.K. style deferred prosecution agreements and U.S. deferred prosecution agreements.

“The US model for DPAs has no statutory foundation; it has developed through practice. The downsides are that some judges feel they are used as rubber stamps for deals agreed between prosecutor and corporate and that the public may perceive a DPA as a “sweet-heart deal” which lacks transparency.

The British model for DPAs is adapted to the British context.

It is a creature of statute, explained by a published Code of Conduct.It is available only in relation to corporates, not individuals.

It is designed to take account of the frustration expressed by very senior judges in the Innospec and BAE hearings that they had been presented with fait accompli as to penalty agreed between prosecution and defence. [See prior posts here and here]

The whole process, from preliminary hearing to application for approval to pronouncement of approval, takes place under judicial supervision.

The judge has to be persuaded that the DPA is in the interests of justice, reasonable, fair and proportionate.

The final hearing (the pronouncement of approval of the DPA, with reasons) will almost always be in open court.

It is by invitation only.

It is not a panacea.

Prosecution remains an option and the prosecution of individuals remains likely.As experience is built up by all parties, this will generate consistency and therefore predictability around the likelihood of achieving a DPA.”

Even so, it remains troubling that Mr. Green defends the new DPA model by calling it “cheaper” and “quicker.”  As noted in this prior post, ease and efficiency are not concepts normally associated with the rule of law and justice.

*****

What is the DOJ’s primary role when it comes to the Foreign Corrupt Practices Act?  As highlighted in this previous post, in  Lamb v. Phillip Morris Inc., 915 F.2d 1024 (6th Cir. 1990) the court, after reviewing the FCPA’s legislative history, concluded that the “legislative action clearly evinces a preference for compliance in lieu of prosecution …”.

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.

The U.K. Enters The Facade Era

Monday, February 24th, 2014

In my 2010 article “The Facade of FCPA Enforcement,” I warned that this was going to happen.

Under the heading “why the facade of FCPA enforcement matters,” I noted, among other things, the “increasing frequency by which other nations are modeling enforcement of their own bribery laws on U.S. enforcement methods and theories” and stated that ”these methods and theories, unless addressed and corrected here in this country, will continue to be replicated elsewhere, perhaps leading to a global facade of enforcement.”

Today, the U.K. formally enters the facade era as deferred prosecution agreements become available to U.K. prosecutors.  (See here and here for relevant documents recently released by the Serious Fraud Office (SFO) and Crown Prosecution Service (CPS)).

To anyone who values the rule of law, reading these documents is truly distressing and I imagine Sir William Blackstone (the famed English jurist best known for his Commentaries on the Laws of England) has flipped in his grave.

Why did the U.K. adopt DPAs?

In short, the SFO and CPS tell us that doing things the old-fashioned way (i.e. proving a criminal violation in an adversarial system) is too difficult and takes too long.  The SFO Director’s language on this issue is blunt as he states that “one of the principal purposes of DPAs is to bring resolution to cases of corporate criminality more quickly.”

The U.K.’s justification for DPAs is really quite sad as ease and efficiency are not concepts normally associated with the rule of law and justice.  Yet, when politicians and civil society groups are clamoring for more prosecutions this is the end result.

Before highlighting certain troublesome features of the U.K.’s new system, it is important nevertheless to recognize the following.

When the U.K. was considering its approach, it rejected U.S. style non-prosecution agreements and stated that such agreement

 ”[Are] unsuitable for the constitutional arrangements and legal traditions in England and Wales.  We have concluded that [NPAs] are not suitable for this jurisdiction due to their markedly lesser degree of transparency, including the absence of judicial oversight.”  (See here for the prior post).

Moreover, even though the U.K. is adopting DPAs, the DPA regime is most certainly different from the U.S. regime in that the U.K. regime contemplates active and early involvement by the judiciary.

U.K. DPAs will be used to resolve a variety of corporate criminal actions, not just actions under the Bribery Act.  My opposition to the U.K. adopting DPAs has been limited to application to Bribery Act offenses (see here for my prior submission to the U.K. Ministry of Justice as well as prior posts here, here and here).  The questions I posed have never been answered.

“Why does a law with an adequate procedures defense require the third option of a deferred prosecution agreement (the first two options being prosecute vs. not prosecute)? If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act. This seems like a just and reasonable result and there is no need for a third option in such a case. On the other hand, if a corporate does not have adequate procedures (thus demonstrating a lack of commitment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act. This seems like a just and reasonable result. Does a third option really need to be created for corporates who do not implement adequate procedures? I submit the answer is no and urge the MoJ to reject use of DPAs in the Bribery Act context.”

For years, I have been highlighting how the DOJ picks and chooses which aspects of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions it chooses to follow.  When the DOJ wants to justify a position it is taking and feels like the OECD Convention supports this position, the DOJ cites to the OECD Convention.  However, when the DOJ is acting inconsistent with the OECD Convention, it simply ignores the Convention.

For instance, OECD Convention Article 5, under the heading “Enforcement,” states that investigation and prosecution of bribery offenses “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”  Every time the DOJ enters into an NPA or DPA and justifies its decision through reference to potential collateral consequences that may result to a particular company, the DOJ is considering the “identity” of the “legal persons involved” in violation of Article 5.

The U.K.’s Code of Practice for DPAs does the same thing.

Section 2.7 of the Code of Practice states:

“Prosecutors should have regard when considering the public interest stage to the U.K.’s commitment to abide by the OECD Convention on ‘Combating Bribery of Foreign Public Officials in International Business Transactions’ in particular Article 5.  Investigation and prosecution of the bribery of a foreign public official should not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”

Yet a page later, at Section 2.8 under the heading ”additional public interest factors against prosecution,” the Code of Practice sets forth the following:

“[whether] a conviction is likely to have disproportionate consequences for [an organization], under domestic law, the law of another jurisdiction including but not limited to that of the European Union …”

“[whether] a conviction is likely to have collateral effects on the public, [an organization's] employees and shareholders of [an organization] and/or institutional pension holders.”

In other words and contrary to Article 5, the U.K., like the U.S., will take into account the identity of the legal person involved.

Notwithstanding the above, the most troubling feature of the Code of Practice concerns the evidence sufficient for U.K. prosecutors to resolve an action via a DPA.  In defending adoption of the “lower evidential test” in the Code of Practice and addressing concerns that this standard “was so easily satisfied as to have very little substance,” the SFO’s response is, in pertinent part, as follows.

“One of the principal purposes of DPAs is to bring a resolution to cases of corporate criminality more quickly.  [...] If a prosecutor had to be satisfied that the evidence against an organization was sufficient to meet the Full Code Test (“Prosecutors must be satisfied that there is sufficient evidence to provide a realistic prospect of conviction against each suspect on each charge”) without the alternative of the ‘lower’ evidential test before considering whether a DPA was in the public interest, a key purpose of DPAs, as was the express intention of parliament, would become redundant.  In order to achieve one of parliament’s key intentions in legislating for the introduction of DPAs a ‘lower’ evidential test is necessary.”

“Satisfaction of the Full Code Test, particularly in view of the well documented difficulties in proving corporate liability, would in most circumstances require a complete an full scale investigation, sometimes spanning many jurisdictions, which inevitably is time consuming and expensive.  It is not intended for there to be such an investigation before a DPA is entered into.”

This response is nothing short of laughable and truly distressing to anyone who values the rule of law.  The SFO is defending the DPA regime by saying that the old regime of proving corporate criminal liability required a complete and full scale investigation that took too long.

At the end of the day, the U.K.’s adoption of DPAs is a political response to show results.  Because this new system expands the market for legal services, you will find few opposing it.

What a sad state of affairs the U.S. has started and is now spreading across the world.

Across The Pond

Tuesday, December 24th, 2013

This post highlights recent developments from the United Kingdom.

Enforcement Action

In an enforcement action similar to the 2009 action against Aon Limited (see here) and the 2011 action against Willis Limited (see here), the U.K. Financial Conduct Authority (a regulator of the financial services industry) recently announced that JLT Specialty Limited (JLTSL – a company that provides insurance broking and risk management services) was fined “over £1.8million for failing to have in place appropriate checks and controls to guard against the risk of bribery or corruption when making payments to overseas third parties.”

According to the FCA release:

“JLTSL was found to have failed to conduct proper due diligence before entering into a relationship with partners in other countries who helped JLTSL secure new business, known as overseas introducers. JLTSL also did not adequately assess the potential risk of new insurance business secured through its existing overseas introducers.

[...]

JLTSL’s failure to manage the risks created by overseas payments, which occurred between 19th February 2009 and 9th May 2012, breached the FCA’s principle on management and control. During this period, JLTSL received almost £20.7 million in gross commission from business provided by overseas introducers, and paid them over £11.7 million in return. Inadequate systems around these payments created an unacceptable risk that overseas introducers could use the payments made by JLTSL for corrupt purposes, including paying bribes to people connected with the insured clients and/or public officials.”

The FCA’s director of enforcement and financial crime stated:

“These failings are unacceptable given JLTSL actually had the checks in place to manage risk, but didn’t use them effectively, despite being warned by the FCA that they needed to up their game.  Businesses can be profitable but firms must ensure that they take the necessary steps to control the risks in that business.  Bribery 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.”

The FCA release notes that “JLTSL’s penalty was increased because of its failure to respond adequately either to the numerous warnings the FCA had given to the industry generally or to JLTSL specifically.”

Add Another to the Compliance Defense List

What is most striking about many of the opposition pieces written about FCPA reform is that while opponents of FCPA reform warn of a U.S. retreat on bribery and corruption issues should the FCPA be amended, opponents fail to address the fact that an amended FCPA, or revisions to FCPA enforcement policy, would actually align the FCPA with many FCPA-like laws or enforcement policies of peer nations.

For instance, and as discussed in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” many countries have compliance-like defenses in their FCPA-like law.

Add the Isle of Man, a self-governing British Crown Dependency, to the list.  Its recent Bribery Act 2013, largely modeled on the U.K. 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.”

Scrutiny Alerts and Updates

As noted in this previous post, Rolls-Royce Holdings has long been under scrutiny concerning its business conduct in China, Indonesia, and other markets.   The Wall Street Journal reports:

“U.K.’s Serious Fraud Office has opened a formal investigation into concerns that employees of the U.K.-based engineering group may have been involved in bribery and corruption. The maker of engines for aerospace, defense and marine customers said a year ago that it had handed over material to the SFO having previously initiated its own independent review into allegations of malpractice in overseas countries, including China and Indonesia. “We have been informed by the Serious Fraud Office that it has now commenced a formal investigation into these matters,” Rolls-Royce said. Rolls-Royce declined to provide further details on the progress of the investigation. An SFO official confirmed that “a criminal investigation into allegations of bribery at Rolls-Royce” is under way but declined to comment further.”

See here for the related U.K. Serious Fraud Office statement.

As noted in this previous post, in June, Data Systems & Solutions, LLC, a wholly-owned subsidiary of  Rolls-Royce Holdings, resolved an FCPA enforcement action.

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Interesting snippets from a recent Financial Times article – “GSK China Probe Flags Up Wider Concerns” – concerning GSK in China.

“[A]cross the healthcare spectrum, from doctors to hospital officials to sales representatives for rival local companies, there is agreement that foreign pharmaceutical groups are not the main culprits of corruption in the Chinese healthcare industry. Local companies are far more profligate with so-called “commissions” to doctors because they are not subject to the kind of scrutiny that foreign companies face under global anti-bribery laws. A medical student in a leading Shanghai hospital says: “The supervising doctor in my department sees as many as 80 patients in a morning, and prescribes as much as Rmb100,000 worth of drugs. She definitely takes commissions from drug companies, but that only affects what she prescribes when there are two similar drugs.” That situation normally arises when both are local generic businesses, industry analysts say. “In China, foreign drug companies are the best boys, but the parents beat them first,” says one industry insider, echoing a sentiment heard frequently from Chinese doctors who say foreign drug companies pay for educational activities that no one else will pay for in China.  “Financial flows – both legal and illegal – tied to drug and device sales are funding perhaps 60-80 per cent of total hospital costs,” says George Baeder, an independent drug industry adviser. “Without this funding, the current system would collapse.” Many drug analysts see kickbacks as structural, and therefore hard to eradicate: central and provincial Chinese governments cannot afford to pay doctors a living wage, and many patients cannot afford to pay the true cost of care. Up to now, Beijing has turned a blind eye as pharma companies find ways to subsidise doctor salaries and underwrite their medical education.”

Speaking of GSK, as noted in this New York Times article, the company recently announced that it ”will no longer pay doctors to promote its products and will stop tying compensation of sales representatives to the number of prescriptions doctors write.”

Great Speech, But a Major Contradiction

Ben Morgan (SFO – Joint Head of Bribery and Corruption) recently delivered this speech titled “Striking Tigers As Well As Flies:  Non-Selective Anti-Corruption Law Enforcement.”

Morgan talked about “the widely accepted premise that the law should apply to everyone, equally, regardless of any external factors such as the identity of an alleged offender, their background, their status, who they know or, if they are a commercial organisation, their size, their share price, their line of business or their financial resources.”

Morgan stated as follows:

“So if we’re being asked to discuss the need to be non-selective in the way we enforce anti-corruption legislation – to treat all potential defendants equally regardless of the external factors I have mentioned – that implies, does it not, that we have a problem in the way we currently enforce anti-corruption law.  The implicit accusation we are answering in this session is “you don’t strike Tigers; you only strike flies”.  So let’s test that.

First, let’s look at why it might be tempting not to prosecute certain offenders.  Well, on the one hand, it might be for practical reasons.  Many of our countries have endured difficult financial times recently.  In times of austerity and ever decreasing resources, there might be a temptation to avoid prosecuting the really difficult, complex cases that are likely to consume resources.  Those kinds of cases where the evidence is scattered all over the globe, where there are lots of witnesses and perhaps where specialist skills are needed.  Far easier, surely, to deploy what resources one has into the easier targets, the “low hanging fruit”.

Another reason not to prosecute certain offenders might be for political reasons.  Does a situation appear to involve state officials of one’s own country, or of an important ally?  Does it concern an issue that those with power would prefer not to be investigated?  Or perhaps, in the corporate world, does it involve a company that is of real national significance – a major employer and tax payer?

These are the sorts of situations where it seems to me there is a risk that the Tigers might be treated differently to the Flies.  And while they are not to be underestimated, I hope that one thing we can all agree on here is that as a statement of principle, we cannot accept that for any reason the rule of law should be applied differently to some groups than others.”

Morgan’s points are spot-on of course.

However, the irony is that the U.K. government – in the minds of many – contradicted all of these points in its handling of BAE over the past several years. (See here).  (So too did the U.S. government – see here and here).

Friday Roundup

Friday, December 13th, 2013

Ask yourself, the true measure of success is, statute of limitations decision of note, and more on JPMorgan.  It’s all here in the Friday roundup.

Ask Yourself

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The True Measure of Success Is …

As numerous sources have reported (for instance see here from Reuters and here from the Telegraph), the U.K. Serious Fraud Office’s prosecution of Victor Dahdaleh for allegedly paying millions in bribes to former managers of Aluminium Bahrain has collapsed.

The SFO provided the following statement to the court.

“At the commencement of this trial, the Serious Fraud Office was of the view that there was a realistic prospect of conviction in this case and that furthermore, the evidence in this case was strong.  Two things, in particular, have happened which have led to the prospect of conviction deteriorating in this case.  The first of those is that Bruce Hall, a conspirator and significant witness for the SFO significantly changed his evidence from that contained in his witness statement. Secondly, we have the unwillingness of two witnesses to face cross-examination. That impacts both on the fairness of the trial as well as the prospects of conviction.  Since last Thursday, yet further contact has taken place with Akin Gump, the lawyers for Aluminium Bahrain, or “Alba”, to secure the attendance of these two American witnesses, Mark MacDougall and Randy Teslik who are both partners in that firm. As you will see from the correspondence, they have attempted to place limits on the extent to which they can be cross-examined.  The Serious Fraud Office does not believe it would be appropriate to attempt to persuade the court to agree to such limits nor, given your comments last week, that they should appear via video-link.  The Defence have raised issues questioning Akins Gump’s role in the provision of assistance to the Serious Fraud Office both as to what their motives may have been in the dissemination of material and assistance as to witnesses who could provide relevant information, this in the context, as accepted by the defence, of the Serious Fraud Office acting in good faith. The attendance of the two American witnesses would have allowed this aspect of the case to be ventilated before the jury. Their refusal to attend creates a situation where it is clear that the trial process cannot remedy the position and we accept unfairness now exists for the Defence.  In seeking to secure the attendance of these two witnesses – who have previously attended court on every other occasion when their attendance has been required – the Serious Fraud Office has taken every available step, including a direct telephone conversation between the Director of the Serious Fraud Office and the chair of Akin Gump.  Not every unfairness necessarily leads to trials being discontinued, particularly where there is other evidence and taking into account the public interest in pursuing serious crime. After careful consideration of all of the circumstances of the case the Serious Fraud Office has concluded that there is no longer a realistic prospect of conviction in this case and accordingly we offer no evidence.”

For an additional SFO statement, see here.

While I have no unique insight into the facts and circumstances relevant to the Dahdaleh case and the SFO’s decision to abandon it, this much I know.

Success in enforcing a law, whether in the corporate context or individual context, is best measured – not by instances in which an enforcement agency in position of various “carrots” and “sticks” is able to procure a settlement – but by instances in which an enforcement agency is actually put to its burden of proof in an adversarial proceeding.

Statute of Limitations Decision of Note

Speaking of that measure of success, earlier this week the Second Circuit Court of Appeals rejected the DOJ’s statute of limitations theory in U.S. v. Grimm.

The case – outside the FCPA context – involved employees of General Electric Company who allegedly engaged in a multi-year scheme to fix below-market rates on interest paid by GE to municipalities.  The defendants were tried and convicted of violating the general federal conspiracy statute (18 USC 371).  The defendants appealed their convictions on the ground that the indictment was barred by the statute of limitations.  The trial court held that the statute of limitations continued to run during the period when GE paid the (depressed) interest to municipalities, and that the interest payments could constitute overt acts.

On appeal, the defendants argued that such interest payments cannot serve as overt acts because the routine payments were scheduled to continue for years (if not decades) after the contract was awarded and after all concerted conduct had ended.

The Second Circuit concluded that those payments do not constitute overt acts in furtherance of the conspiracy.  In so holding, the court rejected the DOJ’s position that a conspiracy continues so long as a stream of anticipated payments contains an element of profit.  The court stated, “but that proves too much” – “a conspiracy to corrupt the rent payable on a 99-year ground lease would, under the government’s theory, prolong the overt acts until long after any conspirator or co-conspirator was left to profit, or to plot.”

Not that statute of limitations have much practical impact on corporate FCPA enforcement actions given the “carrots” and “sticks” relevant to resolving an action, but if they did, it is easy to see relevance to the FCPA context as certain alleged bribe payments could be made to secure a contract – such as a production sharing agreement or similar – that has a revenue stream of serial payments over a number of years.

More on JPMorgan

The NY Times returned (here) to the JPMorgan story it first reported in August (see here and here for prior posts) regarding the company’s hiring practices in China.  The article states:

“Federal authorities have obtained confidential documents that shed new light on JPMorgan Chase’s decision to hire the children of China’s ruling elite, securing emails that show how the bank linked one prominent hire to “existing and potential business opportunities” from a Chinese government-run company.  The documents, which also include spreadsheets that list the bank’s “track record” for converting hires into business deals, offer the most detailed account yet of JPMorgan’s “Sons and Daughters” hiring program, which has been at the center of a federal bribery investigation for months. The spreadsheets and emails — recently submitted by JPMorgan to authorities — illuminate how the bank created the program to prevent questionable hiring practices but ultimately viewed it as a gateway to doing business with state-owned companies in China, which commonly issue stock with the help of Wall Street banks.

[...]

“There is no indication that executives at JPMorgan’s headquarters in New York were aware of the hiring practices described in the documents. And authorities might ultimately conclude that the bank’s hiring, while aggressive, did not cross a legal line.”

Once again (see here and here for prior posts), the latest JPMorgan article spawned much commentary touching upon double standard issues.  For multimedia content, see here from the Daily Ticker.

In this Huffington Post column, former Labor Secretary Robert Reich states:

“But let’s get real. How different is bribing China’s “princelings,” as they’re called there, from Wall Street’s ongoing program of hiring departing U.S. Treasury officials, presumably in order to grease the wheels of official Washington?

[...]

Or, for that matter, how different is what JP Morgan did in China from Wall Street’s habit of hiring the children of powerful American politicians?

[...]

And how much worse is JP Morgan’s putative offense in China than the torrent of money JP Morgan and every other major Wall Street bank is pouring into the campaign coffers of American politicians — making the Street one of the major backers of Democrats as well as Republicans?”

Reich concludes by asking:

“The Foreign Corrupt Practices Act is important, and JP Morgan should be nailed for bribing Chinese officials. But, if you’ll pardon me for asking, why isn’t there a Domestic Corrupt Practices Act?”

Well, Mr. Reich, there is a domestic corrupt practices act – it is called 18 U.S.C. 201, but as I’ve highlighted for years there is a double standard (see the 25 separate posts under the subject matter heading double standard).

But why should corporate interaction with a “foreign official” be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official? After all, 18 U.S.C. 201 has elements very similar to the FCPA.  Why do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet generally turn a blind eye when it happens here at home?

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A good weekend to all.