Bribery Library Blog - Commentary on the UK Bribery Act and Its Impact on International Business

According to an article in the Financial Times on 14 January 2013, the number of companies voluntarily admitting wrong doing to the Serious Fraud Office, otherwise known as self-reporting, has nearly doubled in the past fiscal year.  The FT suggests that this indicates that the new anti-bribery legislation, the Bribery Act 2010, is proving to be a deterrent.

The article goes on to report that 12 companies had “confessed to the SFO that they had issues in the year ending March 31^st compared with seven during the two preceding years, according to data from a Freedom of Information request”.

The article suggests that one reason for the increase in self-reporting could be the introduction of the Bribery Act in July 2011, which enables the SFO to prosecute people for corruption no matter where in the world it takes place, as long as there is a link to the United Kingdom.

However, in our view this is only part of the story.  The stiffer penalties and more far reaching legislation, including the global extra territorial reach of the Bribery Act, are an important factor, but other factors are the increased political and prosecutorial interest in the enforcement of anti-corruption laws.  In addition, the encouragement in civil settlements by the SFO over the past three or four years, under the previous Director, Richard Alderman, and the promised introduction of Deferred Prosecution Agreements by the government in the near future, is changing the way that defendants and their lawyers behave when considering possible actions, following discovery of an offence having been committed.  The commercial desire to dispose of a problem as quickly as possible, and as cheaply as possible, where there would be less damage to a company’s brand image and products than defending the case through a trial is likely to be a very significant driver in deciding whether to report corruption issues to the Serious Fraud Office.  Coming clean about embarrassing issues does not come naturally to many corporations, nor hitherto to their defence lawyers, but the threat of unlimited fines, combined with the possibility of public procurement debarment orders, the damage to reputation, and the likelihood of the withdrawal of some of your business partners from relationships with you, are  important  factors to consider when weighing the alternatives to self reporting.

The fact that there were only twelve companies self-reporting to the SFO in the year ending 31 March 2012, however, is still in our view pitifully low and we think that this is likely to be the tip of the iceberg in terms of the number of corporations who are now under the jurisdiction of the British Courts under the Bribery Act and who have reportable issues.  We would expect this figure to grow and grow, particularly when the SFO starts to prosecute high profile corporations.  The reader may recall that the new director of the SFO, David Green QC, has indicated that whilst he will still consider settling with companies that self-report in the appropriate circumstances, there will be cases where even though a company has self-reported, due to the seriousness of the crime it may be in the public interest to prosecute in any event.  As the FT article itself states, Mr Green’s new stance “…could result in fewer companies coming forward, however”.

In the US, the SEC and the DOJ have been negotiating civil settlements with defendants for violations of the FCPA for several years, raising plenty of revenue for the US government in the process. The SFO’s last director, Richard Alderman, has followed the same path during his four year tenure at the SFO - all of the corporate defendants who were charged with corruption in recent years agreed to a civil settlement instead of defending the charges at trial. This chosen path has been repeatedly criticised by the new Director, David Green QC, who took up office in April 2012. In his public speeches since April, Mr Green has made it clear that while civil settlements remain an option for the SFO, in cases where there has been a systemic and major breach of corruption laws, it is more likely to be in the public interest to prosecute, and that is precisely what he will do. His view is that settlements are for corporates which are less culpable, either because the conduct wasn’t systemic, and/or that it was the result of the misconduct of one or two rogue employees, rather than being an institutional issue. It will be remembered that the courts, and in particular Sir John Thomas (the President of the Queen's Bench Division), was very vocal in his criticism of the SFO’s so-called "private deals" with defendants, not least because in his view the jurisdiction of the judges was being usurped.  

Nevertheless the SFO’s resources to try cases are very limited,  due to government cutbacks, so whatever the strong words of Mr Green about bringing more prosecutions, the reality is that the SFO does not have the funds or people to pursue to trial more than one or two large corruption cases in any year.

One of the more serious consequences of the many civil settlements in the US has been that there is almost no FCPA jurisprudence at all in the US, despite the Act being 35 years old. This fact is particularly surprising when you remember that due to the size of the country and its litigious culture, for most areas of law disputed before the courts there is a huge and almost overwhelming volume of case-law: so much so that one can often find lines of legal authority going in opposite directions in different courts around this huge country.

The paucity of case-law means that it is difficult for corporates, individuals, defendants and their lawyers to know or to advise with particular certainty on specific provisions of the FCPA. This was itself one of the many complaints made in the letter which was sent jointly to the SEC and the DOJ in February 2012, and on which we posted a blog here on 23^rd February 2012.  The absence of authority means that many terms of the FCPA eg the definition of “foreign official” or “instrumentality”, or the way in which successor liability would be treated in mergers and acquisitions are still, many decades after the FCPA was enacted, ambiguous.

It seems highly probable that the same thing will happen in the UK – namely, that if only 1 or 2 corruption cases are pursued to trial by the SFO per year, as seems likely, then ten years from now, there will be only 10 or 20 authorities, or maybe a lot fewer if the US experience really rings true in the UK.

One of the ways in which the US system has addressed this problem, whether intentionally or not, is by the DOJ’s opinion procedure. This is dealt with at Chapter 9 of the new FCPA Guidance, from pages 86 to 88 which can be found here.

“DOJ’s opinion procedure is a valuable mechanism for companies and individuals to determine whether proposed conduct would be prosecuted by DOJ under the FCPA.398 Generally speaking, under the opinion procedure process, parties submit information to DOJ, after which DOJ issues an opinion about whether the proposed conduct falls within its enforcement policy. All of DOJ’s prior opinions are available online.399 Parties interested in obtaining such an opinion should follow these steps....”

The Guidance then outlines the formal requirements and steps to obtain an opinion. It continues:

“DOJ will evaluate the request for an FCPA opinion.410 A party may withdraw a request for an opinion at any time prior to the release of an opinion.411 If the request is complete and all the relevant information has been submitted, DOJ will respond to the request by issuing an opinion within 30 days.412 If the request is incomplete, DOJ will identify for the requestor what additional information or documents are required for DOJ to review the request. Such information must be pro­vided to DOJ promptly. Once the additional information has been received, DOJ will issue an opinion within 30 days of receipt of that additional information.413 DOJ’s FCPA opin­ions state whether, for purposes of DOJ’s present enforcement policy, the prospective conduct would violate either the issuer or domestic concern anti-bribery provisions of the FCPA.414 DOJ also may take other positions in the opinion as it con­siders appropriate.415 To the extent that the opinion concludes that the proposed conduct would not violate the FCPA, a rebuttable presumption is created that the requestor’s con­duct that was the basis of the opinion is in compliance with the FCPA.416 In order to provide non-binding guidance to the business community, DOJ makes versions of its opinions pub­licly available on its website.”

So although the opinion is to be regarded as non-binding guidance, it is nevertheless still hugely useful to parties all across the US, to enable them to understand the US government’s position on many issues under the FCPA. Here is a link to the opinion releases on the DOJ’s website.

By way of example, here is a summary of one dated 14^th June 2004 taken from the DOJ's website here:

“2004-03

June 14, 2004

Background: Requestor, a U.S. law firm, proposed to sponsor a trip to the U.S. for twelve Chinese officials. On the trip, the officials would meet with U.S. public sector officials to discuss U.S. regulation of employment issues, labor unions, workplace safety, and legal institutions and procedures regarding workplace conflict resolution. The firm intended to pay for travel, lodging, meals, and insurance for the twelve officials and one translator during the ten-day, three-city trip.

Decision: DOJ explained that it did not intend to take enforcement action based on the disclosed facts and circumstances, including that:

(1) the firm had no business before the entities that might send officials;

(2) the firm obtained written assurance the visit would not violate any PRC laws;

(3) the foreign Ministry would select the officials participating;

(4) the firm would pay all costs directly to providers; and

(5) the firm would not pay expenses for spouses, family, or other guests.”

 

The full text of it is also available although it is still only a couple of pages.

By way of contrast, in the UK there is no such formal procedure and therefore no body of opinions available for parties or adviser to access. It may not have been widely known that the SFO did have, under Mr Alderman's directorship, an option whereby a party and/or its lawyers could approach the SFO and ask for informal guidance on a particular situation, either anonymously or otherwise, and the SFO would give its view – orally,  face to face.  This was not as useful, however, as it was not in writing and it was not published anywhere for others to see. That option was effectivley removed by Mr Green on his arrival  at the SFO, however, who has said publicly that it is not the SFO's job to advise companies on their future conduct and that there is plenty of guidance "out there already", the inference being, clearly, that a request for a face to face meeting will no longer be granted.

Our proposal at the Bribery Library is that the US DOJ opinion procedure should be adopted in a similar way in the UK. It will greatly assist companies which are still struggling with understanding and complying with the new laws, but it will also serve UK society well in that it will assist in making the Bribery Act effective by preventing bribery. Ultimately, the government’s aims are to reduce the amount of corruption both domestic and overseas, not to raise money by fining large corporations. This is unlikely to be an unduly burdensome additional task for the SFO because it could pick and choose which requests it actually answers, those which it feels will be widely read and considered. If the SFO is worried about costs, it could consider charging companies for the privilege of obtaining an opinion? If the new Director's concerns are not about costs, it would be interesting to know his views on the US opinion procedures, and why his position on opinions should differ.

A few days ago the new Director of the Serious Fraud Office, David Green QC, used his first public speech at a corporate accountability conference in London organised by the accountancy firm PwC to set out his plans to reconfigure the UK’s leading prosecution agency for serious economic crime.  The author was a guest of PwC at this conference which had many high profile speakers and great content throughout the day.

Mr Green told the audience of approximately 200 leading anti-corruption practitioners, at a session chaired by Lord Wolfe:

“I aim to recharge the SFO’s corporate self respect and lead it to the top of its game as a major crime fighting agency”

Mr Green continued to say that he would advertise for four senior roles and this is likely to lead to new officials entering the agency.  He is seeking a new chief investigator (to replace Keith McCarthy who left a few months ago to join PwC), a new general counsel (to replace Vivian Robinson QC who left 11 months ago to join the international law firm McGuireWoods), a new head of policy and external affairs and a new role focussing on managing cases between charge and trial.  Mr Green said that this latter position would also advise on the suitability of settlements and on American style deferred prosecution agreements (“DPAs”), should they be introduced into law, as is planned by the current government.  We have blogged on the subject of DPAs here previously.

Mr Green’s planned restructuring of the agency is partly as a result of a greatly reduced budget, which itself is a consequence of the government’s severe cut backs on public expenditure (the SFO’s budget has gone down from £52 million in 2008 to £32 million in 2012) and also due to the recent severe criticism by Lord Justice John Thomas of the way that the SFO had handled the investigation into and raid on the Tchenguiz brothers.  The Judge undertaking the judicial review brought by the Tchenguiz brothers was particularly critical of the outgoing director of the SFO, Richard Alderman.

Mr Green announced at the PwC conference that four teams would be created within the SFO: two teams would oversee fraud cases and two would manage bribery cases; a fifth team would include support functions such as human resources.  See the FT.com report here.

Amongst other things revealed by Mr Green at the conference were:

• The Serious Fraud Office should not necessarily be the agency to undertake the prosecution of boiler room scams and mortgage frauds (the implication being that these types of crime be dealt with by other agencies including presumably the Crown Prosecution Service).
• That the Serious Fraud Office may look at alternatives to prosecution (such as civil settlements) but if the SFO does not prosecute, it does not mean that it is a failed investigation.
• That the SFO will expand and develop their investigation capabilities including the use of open source research and SARs (Suspicious Activity Reports).
• Mr Green is keen to recruit solicitors and barristers from the private sector, including through secondments from their employers.
• There would be a renewed focus on training at the SFO.
• The SFO would be collaborative with other agencies, both domestically and internationally.
• Mr Green welcomed the current inspection being undertaken by the Crown Prosecution Service.
• That the SFO would remove income from shareholders for illegally obtained contracts under the Proceeds of Crime Act (“POCA”) (this is a continuation of the new policy brought into force by Mr Green’s predecessor, Richard Alderman, in January 2012 when the SFO made a civil recovery from the shareholders of Mabey & Johnson which itself had previously agreed to a civil settlement order in relation to allegations of corruption.
• In relation to deferred prosecution agreements, Mr Green said:
  • That this was a new and imaginative tool for economic crimes committed by commercial organisations;
  • That he was looking at how one could prevent corporate defendants from “forum shopping”;
  • That sentencing of defendants is solely for the courts to decide and not for prosecutors;
  • And that corporations must not be seen to be able to escape from punishment where they had committed a crime.
• Mr Green added that the fact of self reporting is recognised in the public interest limb of deciding whether to prosecute or not.  The introduction of DPAs in this context would be very helpful.
• However, information provided to the SFO as a result of self-reporting may be disclosable to international agencies, so corporations may want to seek global settlements of related crimes.
• Ultimately, where it is in the public interest for the SFO to prosecute, it will indeed prosecute.

We look forward to further announcements from the new Director as his reforms at the SFO are put into effect.

This was the title of a seminar at which the Director of the Serious Fraud Office, Richard Alderman, spoke at the Said Business School and Oxford University on 6 March 2012.

The full text of the speech is here.  Actually the speech contains a review of the SFO’s activities in the area of corruption, and the various criminal procedures which are (or ought to be) available to it to deal with corruption offences.  As Mr Alderman is stepping down as Director soon (in April) it is a kind of goodbye and “this is what I have achieved – this is what more needs to be done - hand-over” speech to the new Director.

The Director began by making a few general comments about the genesis of the SFO 25 years ago; pointing out that it is a small office with about 300 staff and that the current budget is approximately £38 million and is decreasing.

Mr Alderman is of the view that the SFO has an important international role and that over the last three to four years in particular law enforcement has become increasingly internationalised.

He continues that the SFO’s view is that law enforcement in the modern environment is about far more than just prosecution

 “…it also involves education, prevention and disruption.  What this means is that the SFO places great emphasis on helping individuals and corporations get it right in the first place…of course, helping people get it right is of limited benefit if we don’t also tackle very vigorously those who have no intention of getting it right.  This is why I want to focus SFO resources as much as possible on the individuals and corporations who continue to act criminally rather than on those who are trying to get it right but have come unstuck in some way or another.”

Mr Alderman believes that although the SFO’s new policy which is to engage with corporations was initially regarded with suspicion by corporations, the SFO is now regarded as being sensible and constructive.

Our view, at the BriberyLibrary, is that for many people and corporations this new policy must be regarded as a sea change in attitude.  Hitherto, prosecutors have been regarded with great fear and suspicion.  In other countries, such as the United States, the various prosecuting bodies across the US are still, with considerable justification, regarded as very aggressive and uncooperative.  It is interesting, therefore, that British and American prosecutors are now working together much more closely despite the “cultural” differences.  Presumably the SFO’s cooperative approach, as outlined by the Director in this speech, may come as a surprise to many American prosecutors many of whom may formulate their own career paths and personal public profiles from aggressive and high profile prosecution strategies.  Whether the new Director, David Green QC, will adopt the same apparently cooperative approach remains to be seen.  Our sources, who know him, suggest he may be a lot more aggressive prosecutor than Mr Alderman.

Corruption

Back to Mr Alderman’s speech: he then turned to the subject of corruption, stating that this area of work had been one of the major changes in the United Kingdom over the last four years.  Prior to then “for one reason or another” there were no prosecutions relating to overseas corruption in the UK and the previous law was widely regarded as being wholly inadequate for modern purposes.  Mr Alderman publicly recognises that the UK’s reputation had also suffered great and lasting damage as a result of the decisions involving BAE Systems and Saudi Arabia (as reported in my blog post of 13 March 2012 and other earlier posts).

Mr Alderman takes the view that:

1. The UK’s new Bribery Act 2010 has made a very great difference to the UK’s shattered (our word) reputation as it has replaced the previously unsatisfactory law with a range of new offences including one aimed specifically at corporations.
2. Secondly, another feature of the new Bribery Act is the extraterritorial jurisdiction of the Bribery Act and it will include the activities of many companies around the world.
3. Companies internationally are now regarding the Bribery Act as the global gold standard for anti-corruption legislation and as a part of the rules that corporations internationally have to meet.
4. Anti-corruption should just be one part of a company’s overall ethical approach, and that the tone should be set from the top of the organisation.
5. That the SFO expects corporate boards to conduct risk assessments on themselves in order to identify what measures that need to take to mitigate the risks, and to look at agents in high risk countries in great detail.
6. The SFO expects corporates to make sure that their processes are actually implemented in practice and that this should be done on a proportionate and commercial basis using sensible judgment.
7. A number of corporations both British, American and indeed others are increasingly coming to visit the SFO to talk to them about what they are doing in terms of compliance.  It appears that corporations around the world are starting to wake up to the fact that the Bribery Act potentially has global application.

Self-Reporting

The Director stated that self-reporting was something that the SFO introduced in 2009 and reflects existing US practice.  In his view, the process has been a success in the UK and the SFO has had over twenty corporations come in to the SFO to self-report (he does not say over what period these twenty self-reports took place so it is unclear to us whether it is twenty since 2009 or twenty in the last twelve months).

Mr Alderman recognises that a corporation, when discovering that corruption has taken place within the organisation, is faced with a choice of whether to self-report or not to self-report, and hope that no one finds out.  He then outlined a number of reasons why a corporation may want to self report, as follows:

1. The SFO will work with the corporation on managing the reputational risk, pointing out that reputational damage can happen almost instantaneously and can be long lasting in its effect;=

2. The SFO can work with the corporation towards a civil law resolution of the problems which, if it happens, means that there is no criminal conviction for corruption, remembering that a conviction can lead to public procurement debarment in the EU and elsewhere which he claims: “this is a very powerful deterrent.  Indeed some companies could go out of business, faced with debarment”.

As an aside, we at the BriberyLibrary are not aware of many instances either in the UK or the US where public procurement debarment has been exercised or anywhere it has led to a company going out of business (if we are wrong, please tell us!).  This is perhaps because judges would regard this as an excessive and disproportionate punishment with unfathomable and unjustifiable consequences on shareholders, employees and others who supplied to the company and are reliant on the supply-chain for business.

3. Another advantage is the opportunity to work towards a relatively speedy outcome.  The damage to reputation will be much less if the result takes months to achieve, rather than several years, which can occur through the normal criminal processes.

How Self-Reporting actually works

The Director then explains how this all works.  Usually it starts with an allegation of bribery internally at the company, possibly through a whistleblower line.  The corporation does some preliminary work and then may bring in their professional advisers to investigate further.

It is only at this point that corporations tend to contact the SFO (presumably on advice) and they are required to involve the SFO in the processes of investigation.  Naturally they also want “full credit from us” for self reporting.  The Director states that that credit can come in the form of recognition that this process should have a civil and not a criminal outcome.

The Director explains that the case is discussed with the corporation at senior levels and that the SFO will normally agree that the investigation should be carried out by the corporation’s own professional advisers but that the SFO expects to negotiate the terms of reference and the work plan for the investigation.  The SFO also expects regular updates from the corporation so that there are no “surprises” when the eventual report comes to the SFO.

The SFO does not necessarily take the report completely at face value: they will probe it in order to find out whether the company has genuinely uncovered what has happened and has now faced up to the consequences.  Apparently, there can sometimes be a lengthy process of discussion with the company.

Civil Recovery

Mr Alderman reports that the SFO has been using its powers under the Proceeds of Crime Act 2002 (“POCA”) to obtain recovery of the proceeds of criminal conduct.  Vivian Robinson QC has blogged on this subject previously here on 19 January 2012, in the context of the Mabey & Johnson case.

The Director reports (as he did in his speech, on which we blogged on 13 March 2012) that in cases where the choice is between a civil recovery order and no action at all, a civil recovery order is a good result.  However he reports that there are critics of the CRO procedure and that although these cases have to be approved by a High Court judge, less is published about the illegal conduct than would otherwise happen in a criminal case.  Another criticism apparently is that the SFO is only able to recover the proceeds of the unlawful conduct and cannot impose a fine on top of the civil recovery.

Because of these criticisms of the civil recovery process, the Director has been pushing for a more powerful system of settlement that would involve a “deferred prosecution”.

Deferred Prosecutions

The Director then outlined the way in which deferred prosecutions work and that this idea has been taken from the US where they have worked very powerfully within the criminal justice system.  In short, however, he says that in the US the Department of Justice and the corporation reach agreement about the criminal conduct that has taken place; there is agreement on the amount of the fine and other penalties; there is also agreement about monitoring and other measures, and a term for which the Department of Justice agrees to defer the prosecution for a set number of years.  That prosecution is then cancelled if the corporation complies with all the terms of the agreement and there would be no conviction in respect of corruption.

The agreement is then taken to a judge who is able to express his or her own views.

Mr Alderman very much wants to see deferred prosecutions in the UK and reports that the Solicitor General, Edward Garnier QC MP has been pushing this idea very hard in seminars and the media (including one seminar at QEB Hollis Whiteman this week which we attended and on which we may blog soon).  If it does become law in the UK then, when faced with a new case, the SFO will have a choice of either:

1. No action at all;
2. Making a civil recovery order;
3. Entering into a deferred prosecution agreement; or
4. Pursuing a full criminal prosecution.

He says that if it becomes law, “transparent guidelines” will need to be agreed and published.

He is adamant that a significant difference about the way in which things will have to work in the UK, as opposed to the way they work in the US, is that in the US, the Department of Justice and the corporation themselves reach agreement on the amount of the fine and other issues.  The courts in the UK have made it very clear in recent cases (in belligerent judgments in both Dougall and Innospec) that the SFO has no role to play in discussing questions of penalty or sentence.  Therefore Mr Alderman concludes that the only way to deal with this is to involve a judge at a much earlier stage, which itself will be a significant change.

A further change is that the SFO will still have to talk figures with the corporation which can then be brought to the judge so that the judge can express a view, otherwise he says this isn’t going to work (so in our view the SFO will have to tread carefully here, given Lord Justice Thomas' previous outburst on the subject).

Finally, the Director says that there must be much more transparency about the process so that when an agreement is reached, the facts can be explained in open court and documents placed on websites so that the public can see what has happened and that a judge has agreed to the proposals.

Plea Bargaining

The Director then turned to plea bargaining.  In the US, where plea bargaining is very common, he points out that there is a very striking difference between the sentence on pleadings guilty and the sentence after conviction following a contested trial.

In the UK the difference to the US approach is that plea negotiations tend to be engaged at a much later stage of the criminal process.  He repeats that British judges are not happy with the role of the SFO in these plea negotiations and certainly do not want the SFO to suggest a sentence to the judge.

He doesn’t say as much, but reading between the lines it looks like the Director thinks that this is something else that needs to be addressed by the legislature, as the plea negotiation process currently takes far too long.

Companies that do not self report

Mr Alderman concludes by warning that neither the Department of Justice nor the SFO will be sympathetic to a company which has failed to come forward with information.

Further, if the corporation (aware of the criminal activity) allows the corruption to go unpunished, then the profits of that crime may well form a separate offence under the UK’s anti money laundering legislation.

Furthermore, since the establishment of the new whistleblower line called “SFO Confidential”, they received in the first month 2000 reports.  In the US, by contrast, they have set up a whistleblower program with very large rewards for whistleblowers, so there is a very high incentive for someone else to report the corporation even if the corporation decides not to report itself.

If senior executives turn a blind eye to corruption, they themselves risk committing an offence personally under the new Bribery Act (section 14) as well as committing personal money laundering offences, concealing criminal conduct and perverting the course of justice.

In short, his message seems to be: whether or not a corporation self reports should not be regarded as an option for an ethical well run corporation.  It should do so automatically.

Finally, and with no real connection to the themes in his speech on self-reporting, the Director talked about the possibility of creating a new offence of recklessly running a financial institution.

He believes that a new offence needs to be created as there is not one specifically dealing with the conduct of senior executives whose reckless conduct led to the (2008) financial crisis (that we are currently still experiencing).  He reports that

 “there has been considerable interest in this from Parliamentarians and others.  I notice as well that the FSA has put forward proposals about changes to the criminal law in its report on RBS, although it has suggested a rather different solution to mine.  All of these issues will be for Parliament to consider.  I would like to see change”. 

Something for the new Director to pursue, perhaps, when he takes office in April?