Encouraged by the current anticorruption drive in Europe and the United States and indeed in other countries around the world, which in the West is predominantly due to new laws and/or increased enforcement of the laws, China’s new prime minister is himself now on a major anticorruption drive domestically within China.   By contrast, the West is concerned principally with stamping out anticorruption abroad, and seeks to punish their own domestic corporations and any foreign corporations which indulge in bribery and corruption to win new business while abroad. Often that has involved using illegal means to win business in China.

China’s Transparency International ranking is 80 in 2012.  This is only a few places behind Italy, which has a shockingly poor ranking at 72.  The UK by comparison has slipped a few places in recent years to 17^th place, due mostly to the parliament expenses scandal and also to the phone hacking and media scandal where, over a number of years, journalists are said to have been hacking the phones of celebrities as well as paying police officers for information.  In the course of this on-going investigation over 100 people have been arrested.  Many have been charged with a variety of corruption and other related offences. A series of trials has already started and are likely to last for several years due to the scale of the problem.

China on the other hand has a very poor image internationally and domestically when it comes to transparency and fairness in doing business.  It appears to affect all areas of life in China.  It is widely believed that many of those who hold political power are “on the take”.  Further, the perception has long been that if you want to get business from a state owned company, you need to wine and dine the relevant officials in a lavish way.  Others with more perceived power do even better than this and have, until recently at least, been proud to show off their luxury cars and watches (mostly western brands), items which no Chinese official could afford on an official’s salary. See the Financial Times article of 2nd June 2013.

Since the new  Chinese leader, Xi Jinping, came into power he quickly made it clear that anticorruption was an important part of his agenda.  As the Financial Times article asserts, anticorruption campaigns in China are nothing new, and they usually run out of steam quickly (one wonders whether this is because the leader of the time subsequently found out that those closest and dearest to them are themselves beneficiaries of corruption).  However, as the article notes, it appears that on this occasion the new initiative may last longer than previous initiatives.  

Today, 10^th June,  it is reported in the BBC that the former Minister for railways in China was tried for corruption on 9^th June.  He was accused of receiving over £6m in bribes over 25 years. The verdict has not yet been delivered. The railway itself has undergone a huge expansion and renovation programme in the last 10 years although a series of fatal accidents have demonstrated that health and safety standards have not been properly applied. One might infer (not unusually) that corruption in the rebuilding programme has led to poorer standards, and the cutting of corners along the way and may have been responsible for the fatal accidents.

The local high end restaurants in Beijing are reporting a dramatic fall off in trade in the last few months, as those government officials who might habitually be invited to lavish meals in order to win new business from state owned companies no longer wish to be seen enjoying these “privileges”.  It is reported in many places including here that they are now either going to cheaper restaurants in Beijing, or that they are enjoying those meals in private rooms where they can’t be spotted.  The luxury restaurants might not all survive with dramatically lower turnover.

At an international level, it is reported that sales of luxury Western goods have fallen off, or that the rate of increase is far less than less than one might expect when considering the growth of GDP as a whole.  This is reportedly because officials are trying to draw less attention to themselves, and therefore avoiding obviously expensive brands. On the other hand it may instead be a cynical tactic by officials to persuade Chinese people to buy locally produced goods, and to support the domestic consumer economy.  

The same FT article suggests that the public (there are no voters) overwhelmingly support the Prime Minister’s initiative, presumably because they are mostly the victims of corruption and not the beneficiaries of this illegal practice.  

In any event it does appear that China is starting off on the road to clean up its act. This is likely to be a  very long road because corruption is endemic, but also due to China’s sheer size.  Overall, China as a country will benefit from the clean-up, but there may be companies such as German luxury car makers who do less well in the future than they may have previously hoped.

Finally, as a further omen that the anticorruption drive might last, it is reported here that this year Jia Zhanke’s Chinese language film “ A Touch of Sin” won this year’s award for best screenplay at the Cannes Film Festival.  The plot of the film follows the lives of four individuals whose lives are adversely affected by corruption and exploitative practices in China.  It is reported that the film has been approved for release in China in its uncut form.

In the long run, of course, not paying bribes will mean that competition flourishes and China becomes  more open and a fairer place to do business both for domestic and foreign companies.

Whilst attention continues to focus on the on-going absence of a corporate prosecution for bribery by the SFO, it is worth reflecting on the circumstances of the three individuals who have been convicted of offences under the Bribery Act 2010 in England:

1.    Mr Patel (the court clerk)

As we have previously discussed at the Bribery Library, the first successful prosecution under the Act was far removed from the high value corporate bribery targeted by the Act.  Mr Munir Patel was a court clerk at Redbridge Magistrate’s Court.  He accepted the sum of £500 in exchange for not adding the details of a traffic summons to the court’s database.  It turned out that Mr Patel was not only corrupt, but had fallen victim to a sting; the Sun had set up and filmed the whole incident having been tipped off by a member of the public about Mr Patel’s willingness to abuse his position.  A prosecution ensued.  Mr Patel asked for a number of similar previous incidents to be taken into account in sentencing.

Mr Patel was sentenced to 6 years imprisonment in November 2011 (reduced to 4 years on appeal).

2.   Mr Mushtaq (the driving examinee)

Second on the list is Mr Mawia Mushtaq, who became the first person to be successfully prosecuted under the Act for offering (as opposed to receiving a bribe).  Having failed a driving test before an Oldham Council licensing officer necessary to secure a taxi licence, Mr Mushtaq offered the sum of £200 (later increased to £300) if the result of the test were changed to a pass.  The officer was not so easily corrupted as Mr Patel.  He refused the bribe and reported the matter to his manager.  The incident was referred to the police.

Mr Mushtaq was sentenced to 2 months imprisonment, suspended for 12 months but subject to a curfew order, in December 2012.  

3.   Mr Li (the university student)

The third individual to join this exclusive set was a Mr Yang Li.  Mr Li, a masters student at the University of Bath, was unsatisfied with  the 37% mark he was awarded for a 12,000 word essay; the pass mark was 40%.  He was given three options by his professor: appeal the mark; resubmit the essay; or withdraw from the course.   Mr Li proposed a fourth option.  He placed £5,000 on the table, stated that he was a “businessman” and told the professor he could keep the money if the mark was raised.  The professor refused.  As Mr Li replaced the money in this pocket, he dropped an imitation firearm on the floor, which had presumably been brought as a back-up in case his first attempt at coercion was unsuccessful.  The police were called in and Mr Li was prosecuted. 

In April 2013, Mr Li was jailed for 12 months (both for the attempted bribery and for possession of an imitation firearm) and ordered to pay £4,800 in costs.

It would also appear that, following a successful prosecution under the Act, a custodial sentence is pretty much inevitable.  At best, a plea in mitigation is likely to focus on obtaining a suspended sentence.

These cases go to reinforce the point that there is no de minimis requirement applicable to prosecutions under the Act; the Director of Public Prosecutions would have authorised all three prosecutions.  Whilst the Serious Fraud Office may not be interested in such low value bribery incidents, it is clear that police will investigate and obtain consent to prosecute such matters.  The SFO does not have a monopoly on prosecutions for bribery.

The question remains as to whether the police and DPP will turn their attentions to the commercial sphere.  The first three prosecutions all involve some element of bribery of a public (or at least quasi-public) official.  In their sentencing remarks, all three judges stressed the importance of court systems, vehicle licensing tests and university examinations respectively being administered fairly; the risk of undermining public confidence in such institutions clearly weighed heavily.  So whilst it remains to be seen whether the police would venture into a purely commercial bribery scenario, it would be unwise to think that only the SFO is interested in corporate corruption.  If the case against a Defendant is well established by the police, the DPP may we be willing to approve prosecutions in a commercial context that are below the financial threshold that would pique the interest of the SFO.

So far, since the Bribery Act came into force on 1^st July 2011, the largest fines for activities relating to anticorruption controls have been dished out by the FSA, which regulates the financial services sector in the UK, rather than by the courts. There has, so far, only been one case tried under the new laws (the case of Munir Patel, on which we blogged here, here and here) although the courts are, of course,  continuing to hear cases under the old corruption laws (for acts or omissions taking place before 1st July 2011).

When we at the BriberyLibrary give presentations on anticorruption, we often tell the audience that companies which are regulated by the FSA may, if they get their compliance systems wrong, suffer a "double whammy" because firstly the FSA can raise an administrative fine if it finds that a company has not put in place adequate systems and controls but, further, if it finds evidence of an actual offence having taken place, it can then refer the company to the Serious Fraud office ("SFO"), which may decide to investigate and prosecute, leading to a fine being imposed on it by the court. Often a double/triple whammy may occur anyway when the company is sued by competitors or others who claim to have been damaged by it's illegal actions. When bad news is discovered in the form of a bribe being paid to win business, it can really be long-lasting bad news for the company, and in our experience, it can take 5 to 10 years to sort it all out, remembering that in addition to the fines (and prison sentences for individuals), courts in the US and the UK are becoming more willing to impose lengthy court monitorships, but that's the subject of another blog topic for the future.

In May 2010 the FSA published the first of its thematic review reports into anticorruption, following a detailed review of a sample of firms in the insurance broking industry.  We blogged on it here.  The report, which is lengthy and quite scathing of this industry, was startling reading, not least because in truth the complaints which the FSA made of this industry were mostly very obvious ones, and were criticisms which could almost certainly be made of almost any other industry (whether in the regulated sector or not). They mostly concerned the absence of adequate systems and controls. The evidence collected by the FSA demonstrated clearly that many companies had not taken the risk of anticorruption seriously and had not attempted to deal with the risks adequately. The inference to be made is that firms were not investing enough of their resources in their risk and compliance departments, and/or that those departments were not up to the job. Two large broker firms received very large fines from the FSA. 

In March 2012, the FSA published a  further report following its second thematic review of anticorruption, this time of the investment banking sector. The report looked remarkably similar to the insurance broking sector report, underlining our view that the mistakes being made when it comes to establishing systems and controls are common to other industries in the UK (whether in the regulated sector or not).  A copy of the FSA’s press release is here.  They visited a sample 15 firms including 8 major banks.  A summary of their findings, in the FSA’s own words:- 

“In particular, we found the following common weaknesses:

• most firms had not properly taken account of our rules covering bribery and corruption, either before the implementation of the Bribery Act 2010 or after;
• nearly half the firms in our sample did not have an adequate ABC risk assessment;
• management information on ABC was poor, making it difficult for us to see how firms’ senior management could provide effective oversight;
• only two firms had either started or carried out specific ABC internal audits;
• there were significant issues in firms’ dealings with third parties used to win or retain business
• though many firms had recently tightened up their gifts, hospitality and expenses policies, few had processes to ensure gifts and expenses in relation to particular clients/projects were reasonable on a cumulative basis.”

In November 2012, Tracey McDermott, the FSA’s Director of enforcement and financial crime made a key note address at the Association of Private Client Investment Managers and Stockbrokers’ (“APCIMS”)conference in which she explained why the FSA is currently focusing so much on anti money laundering (apart from anything else, because London financial  institutions are being used to launder illegal drug money). Ms McDermott also talked about the imminent split of the FSA into two new organisations in April 2013, when the Prudential Regulation Authority (“PRA”) will take over prudential regulation of much of the regulated sector (although in fact the Financial Conduct Authority ("FCA") will be the prudential regulator for most of APCIMS’s members), and the FCA will be the conduct regulator, thereby separating out these different responsibilities. The Bill creating the PRA and the FCA makes it clear that only the FCA will have enforcement powers, and not the PRA, in order to avoid the obvious risk of duplication of resources, and any overlapping functions.

Ms McDermott also announced that the third sector to receive the thematic reviews of her department will be asset managers and that their first visits are imminent.  The review will sample 22 firms and will look at these firm’s systems and controls to counter both money laundering and bribery and corruption.  She said:

“... we are about to start a thematic review of how asset managers handle the risks of money laundering and bribery. Let me now give you the details. Perhaps this review is overdue: the asset management sector holds over £4 trillion in assets, with APCIMS members alone collectively managing assets of half a trillion pounds for 6 million clients. Clearly this is a huge industry, and the scope for damage should financial crime risks be mishandled is enormous.

London is an attractive destination for the world’s wealthy and their money – unfortunately including those whose wealth is illegitimate. I expect you, as UK-based wealth management professionals, to be developing your business by offering peerless service and unmatched expertise: not by accepting money without properly gauging its provenance.

We hope the findings of this review will be better than the disappointing findings of our 2011 review into banks handling of high risk situations. We were greatly concerned by the findings of that 2011 review, and Enforcement actions followed.  Since publication we have fined three banks with more to go....”.

We at the BriberyLibrary suspect that, even having had the opportunity to review the FSA’s 2010 report on the insurance broking industry review and its’ 2012 report on the investment banking sector review, the FCA will find many of the same problems and failures arising within the asset managers sector, and that the FCA’s report will also be depressing reading. We feel almost certain that further fines will follow. But if this is what is required to make all these companies wake up and smell the coffee of the new regulatory regime in the UK, following the 2008 financial crisis, then British voters and tax payers are unlikely to complain. And London should be a safer place for all investors, British or foreign.

If you are one of the 22 specially selected asset manager firms in the review sample, this would be a good time to start upgrading your systems and controls, although you may still receive criticisms and fines if they are still deficient when the FSA/FCA visit you. For everyone else in this sector not in the sample, who has not recently reviewed their systems thoroughly, now is time to get on with reviewing and improving your compliance department's systems and controls. Or start saving for a massive fine.

We will report back on the FCA’s findings in the third quarter of 2013 when Ms McDermott has indicated their report will be published.

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”.

The new FCPA guidance ("Resource Guide") states that the FCPA’s anti-bribery provisions can apply to conduct both inside and outside the United States and that issuers and domestic concerns (as well as their officers, directors, employees, agents or stockholders) may be prosecuted for using the US mails or any means or instrumentality of interstate commerce in furtherance of a corrupt payment to a foreign official.

The FCPA defines “interstate commerce” as:

“trade, commerce, transportation, or communication among the several States, or between any foreign country and any State or between any State and any place or ship outside thereof…”

The term also includes the intrastate use of any interstate means of communications or any other interstate instrumentality.  The guide explains that by way of example placing a telephone call or sending an email, text message or fax from, to, or through the United States involves interstate commerce as does sending a wire transfer from or to a US bank or otherwise using the US banking system, or travelling across state borders or internationally to or from the United States.

This is very interesting, because clearly very little indeed needs to be done in order for the United States’ courts to take jurisdiction over foreign defendants.  The jurisdictional hurdle is so low that defendants can pretty much fall over it without even realising!

By way of comparison with the UK Bribery Act, section 7 (which deals with the failure by commercial organisations to prevent bribery) applies to foreign corporations and partnerships which carry on

 “a business, or part of a business, in any part of the United Kingdom”.

The British government’s Guidance on the Bribery Act, dated 30 March 2011, provides at paragraph 35:

“…the Government expects that whether such a body or partnership can be said to be carrying on a business will be answered by applying a common sense approach…”.  The BriberyLibrary thinks that that particular piece of guidance is challenging in its vagueness, as we find that common sense is not something everyone shares, and even those who do possess it, may find that there is not an entirely common standard of it.  The UK Guidance points out that, of course, the courts will be the final arbiter as to whether a business was being carried on in the United Kingdom “however, the Government anticipates that applying a common sense approach would mean that organisations that do not have a demonstrable business presence in the United Kingdom would not be caught.  The Government would not expect, for example, the mere fact that a company’s securities had been admitted to the UK Listing Authority’s Official List and therefore admitted to trading on the London Stock Exchange, in itself, to qualify that company as carrying on a business or part of a business in the UK and therefore falling within the definition of a “relevant commercial organisation” for the purposes of section 7.  Likewise, having a UK subsidiary will not, in itself, mean that a parent company is carrying on a business in the UK, since a subsidiary may act independently of its parent or other group companies”.

There are some anti-corruption practitioners (including those blogging at the BriberyLibrary), however, who believe that the courts, when these issues are put before it in the future, may take a different view to the government’s Guidance and that the fact that a foreign company has agreed to abide by the rules and laws of the United Kingdom in relation to the listing of its securities on the London Stock Exchange means that it should also be expected to adhere to the laws in the Bribery Act.

Further, in relation to the parent-subsidiary relationship, where a parent has a controlling interest, it does by definition control the subsidiary, so the subsidiary could in our view never be regarded as acting truly independently: this is something else for the court to consider in due course.

We would not necessarily expect the British courts to go to the same lengths of finding that merely placing a telephone call in the United Kingdom (perhaps while passing through the UK on your way to another country) means that one is necessarily doing business here, but the court might find, for example, that foreign businesses which sell goods into the United Kingdom via a website, which are paid for from the United Kingdom by the purchaser using a Sterling bank account, and which are delivered into the United Kingdom means that even if the seller has no physical presence and no employees in the United Kingdom, that nevertheless it is clearly doing business in the UK and is susceptible to the Bribery Act’s provisions.

The FCPA Guidance continues that a foreign national or company may also be liable under the FCPA if it aids and abets, conspires with, or acts as an agent of an issue or domestic concern, regardless of whether the foreign national or company itself takes any action in the United States.

In truth, it is increasingly likely that two or more foreign prosecutors could simultaneously have jurisdiction over a defendant, due to the international nature of many illegal transactions, and the increasing globalisation of trade generally.  This may lead to related (but not identical) charges being pursued in several jurisdictions, although it is unlikely there would be direct overlap because of the double jeopardy rule (which many countries adhere to, although not always in the same way).  We blogged on Transparency International’s publication “Deterring and Punishing Corporate Bribery” on 30 January 2012.  Recommendation 7 sets out TI UK’s position on double jeopardy.  For its part, the SFO currently regards the double jeopardy rule as applying across borders.

In practice we suspect that the SFO will probably only prosecute if British interests are adversely affected by a rigged competitive bid process abroad, and not on a pure jurisdictional hurdle test of any calls made in the UK etc.

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.

The SFO has today published new guidance on self-reporting, business expenditure and facilitation payments.  The new Director has made it all a lot simpler, and in effect the guidance is that the Bribery Act itself is what people should consider and not any government guidance. It is almost startling in its brevity, and rather refreshing, as a consequence!   We have blogged on the previous guidances for these subjects on several occasions including here, here and here.

The SFO’s press release and the new guidance is very short so, for ease of reference for the reader, we will quote from it all in full:

“The Serious Fraud Office has reviewed its policies on facilitation payments, business expenditure (hospitality) and corporate self-reporting.  The purpose is to:

1. restate the SFO's primary role as an investigator and prosecutor of serious or complex fraud, including corruption;
2. ensure there is consistency with other prosecuting bodies; and
3. meet certain OECD recommendations.

The Director of the SFO, David Green CB QC, wishes to re-emphasise that all decisions to prosecute unlawful activity will be governed by the Full Code Test in the Code for Crown Prosecutors and the applicable joint SFO/CPS prosecution guidance.

Self reporting corruption

Whether or not the SFO will prosecute a corporate body in a given case will be governed by the Full Code Test in the Code for Crown Prosecutors, the joint prosecution Guidance on Corporate Prosecutions and, where relevant, the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010.

If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. The fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the Guidance on Corporate Prosecutions. That Guidance explains that, for a self-report to be taken into consideration as a public interest factor tending against prosecution, it must form part of a "genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice". Self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts.

In appropriate cases the SFO may use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution; see the Attorney General's guidance to prosecuting bodies on their asset recovery powers under the Proceeds of Crime Act 2002. If the SFO uses its powers under proceeds of crime legislation, it will publish its reasons, the details of the illegal conduct and the details of the disposal.

In cases where the SFO does not prosecute a self-reporting corporate body, the SFO reserves the right (i) to prosecute it for any unreported violations of the law; and (ii) lawfully to provide information on the reported violation to other bodies (such as foreign police forces).

This statement of policy has immediate effect. It supersedes any statement of policy or practice on self-reporting previously made by or on behalf of the SFO.

Business expenditure

The Bribery Act 2010 came into force on 1 July 2011.

Bona fide hospitality or promotional or other legitimate business expenditure is recognised as an established and important part of doing business. It is also the case, however, that bribes are sometimes disguised as legitimate business expenditure.

Whether or not the SFO will prosecute in respect of a bribe presented as hospitality or some other business expenditure will be governed by the Full Code Test in the Code for Crown Prosecutors and the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010. Where relevant, the Joint Guidance on Corporate Prosecutions will also be applied.

If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. In appropriate cases the SFO may use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution; see the Attorney General's guidance to prosecuting bodies on their asset recovery powers under the Proceeds of Crime Act 2002.

This statement of policy has immediate effect. It supersedes any statement of policy or practice on business expenditure previously made by or on behalf of the SFO.

Facilitation payments

The Bribery Act 2010 came into force on 1 July 2011.

A facilitation payment is a type of bribe and should be seen as such. A common example is where a government official is given money or goods to perform (or speed up the performance of) an existing duty. Facilitation payments were illegal before the Bribery Act came into force and they are illegal under the Bribery Act, regardless of their size or frequency.

Whether or not the SFO will prosecute in respect of a facilitation payment (or payments) will be governed by the Full Code Test in the Code for Crown Prosecutors and the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010. Where relevant, the Joint Guidance on Corporate Prosecutions will also be applied.

If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. In appropriate cases the SFO may use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution; see the Attorney General's guidance to prosecuting bodies on their asset recovery powers under the Proceeds of Crime Act 2002.

This statement of policy has immediate effect. It supersedes any statement of policy or practice on facilitation payments previously made by or on behalf of the SFO.”

Clearly the new Director believes that there was previously too much guidance and that the combination of the Bribery Act (and other relevant criminal justice statutes)  together with the Code for Crown Prosecutors, the Joint Prosecution Guidance and the Joint Guidance on Corporate Prosecutions was more than enough, and to have additional detailed guidance would only serve to confuse businesses, defendants and their advisers.

Also, the guidance reinforces a widely held belief by the legal profession that Mr. Green is likely to prove to be a much tougher prosecutor than his predecessor Richard Alderman, who had (perhaps a little unfairly) acquired a reputation for seeking civil settlements with corporate defendants rather than prosecuting them through to trial.

In relation to self-reporting,  some corporates may feel that the SFO's latest pronouncement is hardly likely to encourage potential defendants to come forward and self-report, with the risk that the SFO may refuse to agree to a civil settlement, and prosecute the corporation anyway.

The new Director of the Serious Fraud Office (SFO), David Green QC, who took office in April this year, has this week made a series of senior appointments.

A senior former judge, two solicitors from the Crown Prosecution Service (CPS) and an investigator from Her Majesty’s Revenue Customs (HMRC) will join the SFO.

The SFO is made up of lawyers, forensic accountants, investigators, computer forensic experts and other related specialist services which enable the SFO both to investigate and subsequently, if appropriate, to prosecute defendants who have committed a serious economic crime.

His Honour Geoffrey Rivlin QC is the most high profile of these new appointments.  He will act as an adviser to David Green QC.  One of his tasks will be to liaise with the Director of the SFO in relation to quality assurance on cases, from the point of an individual being charged with an offence all the way through to the moment that the case goes to trial.

His Honour Judge Rivlin QC was called to the bar in 1963 and was made Queen’s Counsel in 1979.  He practised in the north eastern circuit between 1963 and 1989 and was a Recorder of the Crown Court between 1978 and 1989.  He was a circuit judge from 1989 to 2004 and a senior circuit judge from 2004.

It is believed that this is the first time that a retired judge has been appointed to the SFO.  This is a positive step forward for the agency which has suffered considerable bad publicity both this year and in the past, but most recently in relation to the debacle involving the Tchenguiz brothers, upon which we have blogged in the past.

Matthew Wagstaff, who hitherto has been at the CPS, will join the SFO as one of four case division heads, and Kristin Jones, who was previously at the Attorney General’s Office, will become head of policy at the SFO.

Alun Milford, who was previously at the CPS, will become the new general counsel replacing Vivian Robinson QC who left almost one year ago to join our firm, McGuireWoods.  Mr Milford previously headed the CPS’s organised crime division (which was established in 2005 in order to provide a one stop shop for investigators from the Serious Organised Crime Agency (SOCA)) and was directly accountable to the Director of Public Prosecutions.  It appears from media reports that his role will be much more inwards looking at what the SFO is actually doing and the cases it is pursuing.

Finally, Kevin Davis has been appointed as the SFO’s chief investigating officer on a two year attachment from HMRC, replacing Keith McCarthy who is now at the accountancy firm, PwC.

In our view, these are excellent if somewhat overdue appointments from the white collar crime legal community.

Mr Green has already demonstrated that he is still able to attract high quality people to the agency, in spite of the recent bad publicity which the agency has attracted over the last year in relation to criticisms from the court relating to the Tchenguiz case, the drastic reduction of the SFO’s budget by the Government (which itself is a consequence of the general public expenditure cut backs and the threat (subsequently withdrawn) by the Government to reverse the SFO into another prosecuting agency.

We at the BriberyLibrary wish the new recruits well in their new appointments and that the SFO regains its mojo!

The new SFO director, David Green, has his work cut out for him as his budget strapped department heads towards the first anniversary of the Bribery Act, without having initiated a single corporate prosecution for corruption.

As the Act has no retrospective effect, there was always going to be a lag before the SFO would begin enforcement of the Act with any vigour; offences would need to have been committed after 1 July 2011, be detected/reported and investigated before any enforcement action could commence....and even then, there is a great deal of pressure on the SFO to commence its enforcement regime under the Bribery Act with a strong case.

Certainly the SFO is well underway with harvesting leads.  In November 2011 the SFO launched its confidential whistleblower hotline “SFO Confidential”, for the reporting of serious or complex fraud or corruption.  According to a report in the Financial Times yesterday, SFO Confidential has logged approximately 100 complaints a month since its launch. 

To date not a single official investigation has been commenced as a result of the information received via SFO Confidential.  It is fair to say that not all of those leads will be worth pursuing, but where there is so much smoke there must surely be a fire somewhere. 

We have previously blogged on two high profile whistleblower cases, concerning BP Tankers and EADS, both of which involve allegations of corruption having been handed to the SFO on a platter.  We await with interest the SFO’s next move with respect to BP and the supplier that is alleged to have paid bribes to a BP employee.  The allegations came to light in March 2012 and we expect it will take some time for both BP and the SFO to investigate.  In the meantime, the EADS investigation has been underway for over a year, with still no outcome.  While this case involves allegations of conduct pre-dating 1 July 2011, the length of time required for the SFO to complete its investigation suggests we may have to wait some time before we see enforcement by the SFO of Bribery Act cases. 

While a significant prosecution under the Act would no doubt kick many of those who are complacent about corruption risks into action, many organisations are nevertheless coming under pressure to develop and implement anti-corruption policies and procedures.  This pressure is not coming from the direct fear of prosecution, but is driven by the need to meet the standards expected of counterparties and others who wish to mitigate their organisation’s exposure to corruption through associated parties.  It remains to be seen, however, how long this momentum will continue in the absence of enforcement.

We attended a seminar on deferred prosecution agreements at the offices of the leading white collar crime barrister set, QEB Hollis Whiteman.  The guest speakers were Her Majesty’s Solicitor-General, Edward Garnier QC, MP and Amy Jeffress, a Department of Justice attaché from the US Embassy, together with Sean Larkin QC and Edward Brown QC, both of QEB Hollis Whiteman.

We learnt some interesting statistics from the United States, from where the idea of deferred prosecutions and non-prosecution agreements has been taken.  By 2007 there were 39 deferred prosecution agreements and non-prosecution agreements a year and since then they seem to have been averaging at approximately 30 per year.

As a consequence, there has been growth in the total amount of fines.  The combined total for 2010 and 2011 was US$7.6 billion.  The growth is consistent with the Department of Justice’s priorities in relation to Foreign Corrupt Practices Act, healthcare fraud and anti-trust.

According to a report by the US law firm Gibson Dunn and Crutcher, FCPA violations form nearly half (at 45%) of all economic crime prosecuted by the DOJ.

Factors which might influence a prosecutor in deciding whether or not to negotiate a deferred prosecution agreement might include the following factors:

• The nature and seriousness of the offence – how serious is the criminal conduct?
• The extent of wrongdoing within the corporation – how evasive is the criminal conduct?
• Whether there is any history of similar misconduct.

The additional following factors in terms of how the company has behaved will also be considered by the prosecutors:

• Disclosure of the wrongdoing and cooperation with the prosecuting authority – was the disclosure made in a timely fashion and did it fully disclose the criminal conduct.  Is the company now demonstrating a willingness to cooperate?
• Is there a pre-existing compliance program, and was it effective?
• In terms of remedial action – what steps has the company taken to address the issues?

Other considerations might include:

• Collateral consequences – what is the impact of enforcement on employees, investors and the public in general?
• In relation to the prosecution of individuals, has this been caused by a poor corporate culture or are they simply bad individuals within an otherwise good corporation?
• Are civil or administrative enforcement actions adequate to address the problems?

In the US key provisions of a deferred prosecution agreement (or a non-prosecution agreement) would include the following:

1. The Department of Justice policy is to charge the most serious provable offence.  Criminal information will be filed for the deferred prosecution agreement (but not for a non-prosecution agreement).
2. A statement of facts will be filed at court.
3. Penalties will be agreed upon between the prosecution and defence
4. The agreement will set out steps which the defendant will need to take in order to ensure compliance – this is most usually the imposition of a monitor who will review the compliance program and ensure that remedial steps are put in place.
5. A period of probation or good behaviour is agreed which tends to range from six months to five years although apparently the average is two years.

In the event of a breach there are various options open as the prosecutor could decide if you require an extension of the term of the deferred prosecution agreement or non-prosecution agreement or to revoke the agreement and to file or pursue criminal charges.

Apparently, revocation has been extremely rare and extensions to the probationary period are much more common.

In conclusion it appears to be the view of the American justice system, and one with which Edward Garnier QC, MP the Solicitor General agrees strongly, that the option of resolving investigations of corporate crime with these type of agreements is very beneficial.

The Solicitor General confirmed that draft legislation will be introduced for deferred prosecution agreements in the next parliament i.e. it will be legislated no later than May 2013.

In addition he confirmed that:

• There would be no non-prosecution agreements, but only deferred prosecution agreements
• It would only be for corporates, and not for individuals
• It is likely that DPAs would be available to the Financial Services Authority and the Office of Fair Trading, as well as the Serious Fraud Office
• A statutory power for the SFO to negotiate DPAs would be introduced.  It is unclear yet whether this would be a short bill specifically for DPAs or whether the statutory powers would be tacked on to another criminal justice bill.

Anyway the political will within the government is that there should be royal assent to this new legislation no later than Spring 2013 following which there would need to be secondary legislation to ensure that DPAs actually work in practice.  As always, Mr Garnier says, the “devil is in the detail”.

Mr Garnier admitted that the idea had been taken from the United States but the intention was the UK would “leave behind the worst bits” and that “I will learn the lessons of Innospec and of BAE Systems…we don’t want to get kicked around by the court again”.

Mr Garnier pointed out that the UK courts had already made it very clear that prosecutors, specifically the SFO, are not permitted to make so-called “private deals” with the defence and that sentencing is purely within the jurisdiction of the court.  All that prosecutors are permitted to do are to advise the court of the range of possible sentences under the relevant statute.  Mr Garnier concluded therefore that in order for DPAs to work, English judges would need to be involved at a much earlier stage of the criminal proceedings so that they could see what was being discussed and could indicate what they, the judge had in mind.

  “…I am going to need judicial buy-in to deferred prosecution agreements and to ensure that judicial control is preserved for the judiciary…”

Mr Garnier said that he had been speaking to many people over the last few months about the possibility of DPAs and that most of the big law and accountancy firms with whom he had spoken were very positive about the introduction of DPAs.

In order to ensure that DPAs started off smoothly his view is that Lord Justice Thomas, (who had been very critical in recent corruption prosecutions of so-called private deals between the SFO and defendants), ought to be the judge who hears the first deferred prosecution agreement in order so that he could set the rules for the court generally thereafter.  Beyond that, Mr Garnier believes that a small group of specialist judges should deal with serious economic crime so that they developed a particular expertise in this area of criminal enforcement.

In our view, the Solicitor General’s confirmation that DPAs would be introduced into UK law is a very positive step forward in the enforcement of complex international crime.  Although the road to its introduction may be bumpy, it is clear that he is very determined that it should happen and he is working with the judiciary to ensure that it is a success.

There is bound to be a great deal more to blog on on this subject in the coming months and years.

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?

We have previously posted blogs on this story on 8 June 2011 and 13 October 2011.

In the last post we reported that the Attorney General, Dominic Grieve, was said to be considering whether the Serious Fraud Office should be permitted to continue to investigate allegations that GPT, a UK subsidiary of the global defence manufacturer, EADS, made illicit payments to a member of the Saudi Royal family in order to secure a contract worth £2 billion.  We previously suggested that if this report were true, then it echoed the BAE Systems case in 2006 when Tony Blair, the then Prime Minister caused an international outcry by effectively forcing the SFO to drop an investigation into allegations of bribery in the multibillion dollar Al Yamamah UK – Saudi defence contract.

Six months later, it appears that the Attorney General has decided not to get involved because, we suppose,  of the risk to Britain’s international reputation if there is further political interference in the workings of the criminal justice system.  A decision to stop the SFO’s investigation would be politically explosive, both domestically and internationally.

For those of you who are following this story, the investigation started as a result of an employee of GPT, Lt Col Ian Foxley, who was stationed in Saudi Arabia, whistleblowing on the company’s alleged illicit activities.  Our first blog post on this story looked at a comparison of relevant whistleblower laws in the US and the UK.  In short, however, it seems that the life of a whistleblower becomes particularly difficult once he or she has decided to go down that path.  In the US, within certain very strict parameters, whistleblowers can be well rewarded or compensated for taking this courageous step.  We have previoulsy posted on the new SEC whistleblower rules here and here.  In the UK, by comparison, there is no compensation for whistleblowers generally, other than to a limited extent within the competition arena.

In the Financial Times on 6 March 2012 it was reported that the Foreign Office had confirmed in late 2011 that allegations of bribery against GPT had been discussed by Foreign Office officials with representatives of the Kingdom of Saudi Arabia on a number of occasions.  Further, in GPT’s 2010 accounts, it stated that it was not yet clear what would be the outcome of the SFO’s investigation.  It stated:

“The certain allegations have been made in connection with the company’s contracts with a subcontractor group.  These allegations have been notified to the UK authorities with whom EADS is maintaining a dialogue…the relevant subcontracts were terminated.  This termination has led recently to an unquantified claim from the subcontractor group for monetary damages…”

It is further reported by the FT that the SFO is allowing GPT to undertake its own internal investigation into the matter which will then be reported to the agency itself.  This is not at all unusual.  The SFO is generally happy for companies to undertake their internal investigations, on understanding that the results will be shared with them, as it saves the SFO a significant amount of time and precious resources.

This is an interesting story which will probably run on for some time yet.  However, the fact that the Attorney General has decided not to get involved in trying to block the investigation is a sign that the government is taking the Bribery Act and the recent enhanced enforcement of the UK’s existing corruption laws much more seriously than it was six years ago.  If the Saudis are trying to use the threat to withdraw from the intelligence sharing agreement, it appears not to have gained traction with the current British government.

It was reported this week that one of the US Department of Justice’s largest ever prosecutions under the FCPA has collapsed during trial.  It was formally dropped on 21 February 2012 at the DOJ’s request.  The prosecution first hit the headlines over two years ago in January 2010 when the DOJ charged 22 individuals with agreeing to pay bribes to an FBI agent posing as a buyer of security equipment for Gabon.  However, two six month long trials in the case produced unsatisfactory results.  It is reported that juries could not reach a verdict with respect to seven defendants; two were acquitted by a jury and another was acquitted by a judge although three others pleaded guilty earlier on.

The prosecutors made a court filing in which they stated “the government has carefully considered (1) the outcomes of the first two trials…(2) the impact of certain evidentiary and other legal rulings in the first few trials and the implications of those rulings for future trials…and (3) the substantial governmental resources, as well as judicial, defence and jury resources, that would be necessary to proceed with another four or more trials…in light of all the foregoing, the government respectfully submits that continued prosecution of this case is not warranted under the circumstances”.

In a separate but well-timed move the US Chamber of Commerce has published its own strong objections to the way in which the FCPA is being enforced and its effect on corporate America in terms of both the added expense of compliance and also its ability to win business overseas.  On 21^st February 2012 the US Chamber of Commerce and 36 other business organisations and professional associations across America sent a joint letter to Lanny Breuer, the Assistant Attorney General at the DOJ, and Robert Khuzami, the Director of Enforcement at the US Securities and Exchange Commission, requesting guidance to “address several issues and questions of significant concern to businesses seeking in good faith to comply with the FCPA.

The signatories to the letter claim to represent more than 3 million businesses and organisations.

The letter is 10 pages long and too detailed to do justice to in this blog post but you can read it here.

In summary, the issues which the senders of the letter have asked for guidance include:

• Definitions of “foreign official” and “instrumentality” under the FCPA

The letter states that “without a clear understanding of the parameters of “instrumentality” and “foreign official”, companies have no way of knowing whether the FCPA applies to a particular transaction or business relationship, particularly in countries like China where most, if not all, companies are at least partially owned or controlled by the state.  The result of these circumstances has been a chilling effect on legitimate business activity (as companies perceive a real risk of prosecution even in scenarios involving only the most remote and attenuated connection to foreign governments) and a costly misallocation of compliance resources…”

By comparison Section 6 of the Bribery Act deals with bribery of a foreign public official section 6(5) defines foreign public official as meaning an individual who (a) holds a legislative, administrative or judicial position of any kind, whether appointed or elected of a country or territory outside the United Kingdom; (b) exercises a public function (1) for or on behalf of a country or territory outside the United Kingdom or (2) for any public agency or public enterprise of that country or territory or (c) is an official or agent of a public international organisation.

Although the definition in the UK law is reasonably clear, there is bound to be debate when this section and definition first comes before the courts, whenever that is, whether it is one year or ten years from now.

• Consideration of compliance programs in enforcement decisions

The letter continues that under the current FCPA enforcement regime the business community lacks confidence that the DOJ and the SEC will give sufficient consideration to potential defendant companies’ strong, pre-existing compliance programs when making enforcement decisions.  Although the DOJ and the SEC recommend that prosecutors should consider a company’s compliance program when making enforcement decisions, the letter suggests that the guidance given is presented in a manner which is so general that it provides little concrete aid to companies attempting to implement or enhance compliance programs.  It goes on to suggest that the guidance should establish standards that businesses may adopt and incorporate as part of their compliance programs, and identify the specific components that the DOJ and the SEC consider to be essential to a robust FCPA compliance program.

By comparison, of course, under UK law the British government issued a 40 page Guidance on 30 March 2011 pursuant to section 9 of the Bribery Act.  Even though that guidance is not prescriptive, it does offer some considerable assistance to corporations which are trying to comply with the Bribery Act.

The letter also suggests that the DOJ and the SEC should describe in the guidance how they would factor companies’ voluntary disclosures of FCPA violations by their employees into enforcement decisions.

• Parent-subsidiary liability

The letter continues that the FCPA itself does not set out circumstances when a parent company may be held liable for a foreign subsidiary’s violations of the anti-bribery provisions of the FCPA.  It points out that the approach taken by the DOJ and by the SEC are not identical.  It continues

“in the absence of any judicial guidance on the contours and the limits, if any, of this potential parent-company liability, it remains a source of significant concern for US companies with foreign subsidiaries.  Accordingly, we respectfully request that the forthcoming guidance clarify and confirm that both the Department and the SEC consider parent-company liability under the FCPA’s anti-bribery provisions to extend only to circumstances in which the parent actually authorised, directed or controlled the improper activity of its subsidiary…”

Under the UK Bribery Act, by comparison, the issue of the liability of a parent for its subsidiary is addressed in the Guidance at paragraph 36 “…likewise, having a UK subsidiary will not, in itself, mean that a parent company is carrying on a business in the UK, since a subsidiary may act independently of its parent or other group companies…”

Under paragraph 42 of the same Guidance, it states that, in describing the liability for associated parties under the Bribery Act

“…so, for example, a bribe on behalf of a subsidiary by one of its employees or agents will not automatically involve liability on the part of its parent company, or any other subsidiaries of the parent company, if it cannot be shown the employee or agent intended to obtain or retain business or a business advantage for the parent company or other subsidiaries.  This is so even though the parent company or subsidiaries may benefit indirectly from the bribe.  By the same token, liability for a parent company could arise where a subsidiary is the “person” which pays a bribe which it intends for result in the parent company obtaining or retaining business or vice versa…”

• Successor liability

Under the FCPA, a company may be held liable for the actions of a company that it acquires or merges with, even if those actions took place prior to the acquisition or merger and were entirely unknown to the acquiring company.  While a company in certain circumstances may mitigate its risk by conducting due diligence prior to an acquisition or merger (or, in certain circumstances, immediately following the transaction), such due diligence is only a factor that the DOJ or the SEC may consider when deciding whether to exercise their discretion not to prosecute or file claims.  The letter continues to say that the

 “threat of successor liability even if a thorough investigation is undertaken prior to a transaction has had a significant chilling effect on mergers and acquisitions, and therefore clearer parameters for successor liability under the FCPA are needed…”

It points out that although the DOJ addressed this topic in Opinion Release 08-02, the Department’s guidance required the company in question to conduct due diligence on a scale equivalent to a massive internal investigation in order to avoid prosecution for any FCPA violations committed by the acquired company prior to the transaction.  The letter concludes on this topic that the sweeping expectations set out in Opinion Release 08-02 are unrealistic and unduly punitive and merit thorough reconsideration.

In relation to the Bribery Act, by comparison, the UK Guidance offers no comment in relation to due diligence on mergers and acquisitions.  Cautious purchasers will ask their lawyers to establish that there are “adequate procedures” in place at the target company prior to its acquisition and will demand suitable warranties and indemnities.  In practice if the purchasing company later discovers that offences have taken place at the acquired company, the SFO will look much more favourably on the purchaser if it approaches the SFO to discuss circumstances as quickly as possible.  This can be done confidentially and the SFO will offer guidance very quickly.

• De minimis gifts and hospitality

The DOJ has stated that it does not prosecute conduct involving de minimis gifts and hospitality to foreign officials although it states that in fact such gifts and hospitality remain subject to prosecution at the whim of the government.

The letter points out that compliance officers of corporations are routinely called upon to address questions relating how much can be spent on a meal; how many meals in a year may an official be invited to attend and similar issues.  The letter concludes that in the absence of any guidelines from the government regarding the threshold below which it ordinarily would not bring such cases has resulted in a serious misallocation of compliance resources to detect and address potential breaches that should fall below any reasonable threshold.

By comparison, the UK Guidance under the Bribery Act gives many examples of and “case studies” for gifts and hospitality.  Again, whilst they are not wholly prescriptive, they do give a good indication of the reasonable approach that UK prosecutors will take in considering such circumstances.

Indeed, the letter concludes on this topic “As you know, the UK Ministry of Justice already has provided such Guidance regarding the application of the UK Bribery Act” and it cites from the UK guidance and concludes “similar concrete examples in your forthcoming Guidance would be extremely useful to the business community”.

• Mens rea standard for corporate criminal liability

Although the FCPA expressly limits an individual’s liability for violations of the anti-bribery provisions to situations in which the individual has committed those violations “wilfully”, it does not contain any similar language with regard to corporate criminal liability.  The letter continues “this inconsistency in the statutory language appears to expose companies to criminal penalties for violations of the FCPA even if there is no identifiable person of authority who knew that the conduct was lawful or even wrong…”

By contrast of course the corporate liability offence in the UK Bribery Act, in Section 7, is a strict liability offence so no knowledge of any person of authority in the company is required.  The UK legislative intention by making it a strict liability offence was to put a very heavy burden on the organisation to put in place adequate procedures in order to protect itself from the risk of committing an offence under Section 7, in other words failing to prevent bribery.  The strict liability offence also addressed the considerable difficulties in securing convictions of corporate defendants on the “controlling mind” theory in the UK.

The letter concludes by requesting that the formal guidance which the DOJ and SEC are to issue in 2012 should have the same force as other policies of the DOJ and the SEC and that to ensure uniform policy it should be issued by or adopted by both agencies.

We will blog further on this subject should either of the agencies respond to the letter publicly or indeed when the guidance which has been promised by them in 2012 is issued.

Four men have been convicted of conspiring to corruptly obtain payments by supplying confidential information about a series of high-value engineering projects in the oil and gas engineering industry.

According to a press release from the Serious Fraud Office dated 25th January 2012, the fraud amounted to around £70 million. The contracts affected were for engineering and procurement projects based in Iran, Egypt, Sakhalin Island (Russia), Singapore and Abu Dhabi, over the period 2001 to 2009.

The case, named Operation Navigator, was heard at Southwark Crown Court. The convicted defendants are

• Andrew Rybak (d.o.b. 28/03/56) of Newbury, Berkshire
• Ronald Saunders (d.o.b. 01/02/47) of Hook, Hampshire
• Philip Hammond (d.o.b. 11/06/54) of Brussels, Belgium
• Barry Smith (d.o.b. 19/04/40) of Hindhead, Hampshire

In summary, according to the SFO, the confidential information supplied to bidders was held by companies acting as procurement agents for the projects. It is an industry where individuals who work for such companies often do so on a short term basis. Crucially, the defendants had access to inside information which they passed on to targeted bidding companies who either made, or agreed to make, corrupt payments for the information. Disguised as "consultancy services", the illicit payments were shared out amongst the co-conspirators.

The SFO reports in a 31st January press release that the convicted defendants received sentences respectively of:

• Rybak -  Five years' imprisonment on each count, to be served concurrently
• Saunders -. Three years and six months' imprisonment on each count, to be served concurrently, 
• Hammond - Three years' imprisonment on each count to be served concurrently.
• Smith - Twelve months' imprisonment, suspended for a period of 18 months and 300 hours of unpaid work.   

In addition Rybak and Hammond were also disqualified from acting as company directors for a period of ten years. 

Confiscation actions are to be undertaken against the first three defendants. Commenting on the sentences, SFO Director Richard Alderman said:

"Demanding backhanders in exchange for confidential and advantageous information saps business and is completely unacceptable to society.  Hopefully these sentences will ring out the message loud and clear that the criminal justice system will do all it can to combat wrong-doing like this." 

This case, and the sentencing of the defendants, is further proof that the British authorities are ramping up their enforcement of anticorruption laws and the sentencing of so-called white collar criminals. As the offences were committed prior to 1^st July 2011, the case was tried under the old legislation which existed prior to the coming into force of the new Bribery Act.

Earlier this week Dr David Turner a former sales and marketing director at Innospec, a fuel additives manufacturer, pleaded guilty to two charges of conspiracy to make corrupt payments to officials in Indonesia and Iraq. See The Daily Telegraph of 17th January 2012, for example. Also here is the Serious Fraud Office's own press release dated 17th January 2012.

Dr Turner pleaded guilty to bribing officials in Iraq in order to induce them to ensure tests on a competitor product to Innospec’s lead additive in fuels were not favourable.

Two other Innospec former executives, Dennis Kerrison and Paul Jennings, had their cases adjourned until 4 April 2012.

Innospec itself has already been prosecuted by the US and the UK authorities in a joint investigation and Innospec has paid heavy fines and legal costs.  In addition, it has had to settle a civil suit brought by its former joint venture partner, NewMarket Corporation, in related US proceedings.

Innospec remains under a court monitorship agreed with the US and UK prosecutors.  This apparently was the first case where the US and UK judges talked directly to each other about sentencing.

We have blogged on this story here on 28th October 2011. This story has been in the media a lot for a variety of reasons not least because the deal agreed between Innospec and the Serious Fraud Office was criticised by the judge handling the case, although the deal was in fact allowed to stand.

It is reported that Dr Turner has previously agreed to pay around £25,000 ($40,000) to settle a case brought against him by US prosecutors.  In terms of the scale of the fines and legal costs paid by his employers, Innospec, this was of course an extremely modest amount.

Dr Turner will be sentenced at a later date by the court.  We await the sentencing with interest as the courts have in previous cases indicated that punishment for corruption will be more severe than hitherto, and that corruption is not a white collar crime, and those convicted are “common criminals”.  By way of comparison: in the case of the court clerk who pleaded guilty to corruption last year, Munir Patel, he received a sentence of 3 years for corruption and 6 years for misconduct in public office. See our blog post on this story.

There will be more on this story when the other two individual defendants come back before the court in April.

One question is: will the Serious Fraud Office now pursue the shareholders of Innospec for dividends paid out as the proceeds of the corrupt activities, under the Proceeds of Crime Act, in the same that they did against the shareholders of the defendant in another long running corruption case involving the British bridge building company, Mabey & Johnson? See my colleague Vivian Robinson QC's post on this dated 19th January 2012. That was a very important development in this prosecutor's armoury and there is much debate in legal circles about how far the SFO might pursue this new strategy.

The Chief Inspector of Police in the United Kingdom, Sir Denis O’Connor has called for an end to the “freebie culture” within the police service and an end also to the “revolving door” that permits police officers to leave their jobs and start working immediately for one of their police forces’ contractors.

A report by Her Majesty’s Inspectorate of Constabulary said that while it found no endemic corruption in the police service, many police forces had become complacent about the risks to their reputation from relationships with the media, businesses and contractors.  Just published, the report is worth reading even if you are unconnected with the police but are interested in anti-corruption compliance for your own company or clients.

Sir Denis O’Connor reported that accepting free tickets to sporting events such as the FA Cup Final and Wimbledon Tennis Tournament risked creating the deception that officers had conflicts of interest, which could damage the police service’s reputation in the eyes of the public.

The report, Without Fear Or Favour: A Review Of Police Relationships recognises that the public might wish to show their appreciation for the police (also, we suppose, sometimes possibly the reverse!).  The report concludes that among most police officers

 “a box of chocolates was seen as entirely acceptable, whereas an invitation to attend a sporting event or pop concert was felt to be unacceptable”.

Further,

“we found numerous examples of senior officers accepting hospitality from suppliers and others who are tendering for business…concert and premier sporting tickets were accepted from companies which were tendering for business or have been successful in tender”.

Twenty out of the 43 police forces in England and uidance to help them to decide whether to accept or decline a gift, with 15 placing an acceptable value on gratuities of between £5 and £75.  All forces have mechanisms for formally recording hospitality although these were not consistently completed in most cases.

Interestingly, the report does not offer the same guidance as the Government’s guidance which was issued on 30 March 2011 by the Ministry of Justice under the Bribery Act 2010.  This suggests that for businesses, ordinary hospitality could continue and would normally be acceptable including tickets to popular sporting events.

Whilst some of us may disagree with the Government’s Bribery Act guidance not least because there may be a view that inviting customers to expensive sporting events is of course intended to influence the customer’s decision making processes (whether that influence is improper is of course very much a subjective issue), it should be remembered that the police are not in the same position as ordinary businesses as they are in a very particular position of trust and authority to the community and to the country as a whole.  It follows, therefore, that one should not expect the public’s tolerance for the levels of hospitality for police officers to be the same as those people within the commercial sector.

In addition, if individual police officers, by accepting hospitality, undermine the confidence of the public within their particular police force, this naturally has an effect on the public’s perception all police forces around the country, particularly when reported in the media.

It is clear that the police, like employees in commercial organisations all around the world, need to receive much better training and much clearer guidance from their employers as to what is acceptable and what is not in order to avoid the suspicion of corruption.  Further, as with ordinary business people, there needs to be proper enforcement of these guidelines against the police themselves, because corruption within organs of the state undermines the very fabric of the state itself and of the society it serves.

We have previously blogged on the SFO's controversial decision not to prosecute BAE Systems in relation to an investigation into corruption of Tanzanian government officials who purchased a highly expensive air traffic control package which was over specified for Tanzania's needs. On 21st December 2010 BAE Systems Plc was fined £500,000 after admitting it had failed to keep adequate accounting records in relation to this defence contract. Here is the SFO's press report on it.

To recap: the Judge took into account in sentencing BAE that the group had committed itself to a process of change following the Report of Lord Woolf and that BAE would be making a payment for the benefit of the people of Tanzania of £30 million less the fine. The Judge said that the people of Tanzania were the real victims. The Judge decided in these circumstances to impose a fine of £500,000. The Judge, Mr Justice Bean, was not pleased at all about the decision not to prosecute the company for corruption and he suggested that the fine which had been agreed for the offences to which BAE pleaded guilty was totally inadequate. He said in his judgment:

"I also cannot sentence for an offence which the prosecution has chosen not to charge. There is no charge of conspiracy to corrupt, nor of false accounting contrary to section 17 of the Theft Act 1968. More obviously still, the Court does not decide who should be prosecuted"

On 5 February this year BAE concluded settlement negotiations with the US Department of Justice in relation to contracts with Saudi Arabia and Central and Eastern Europe, and with the SFO in relation to the Tanzania contract.

This week it was reported that a British cross-parliamentary committee, the International Development Committee, also wants any others involved in the deal to face prosecution including those individuals in Tanzania. The Commons committee is reported as saying that it is appalled to find that the compensation has still not been paid.

BAE Systems says it is now working with the Department for International Development as to how the money should be spent.

It is noteworthy how long this type of investigation and prosecution last. Even though it was disposed of by the court almost one year ago in the UK, the bad publicity for BAE Systems continues in the media and is still now being debated by senior politicians within the British government and the Tanzanian government.

“This report should be welcomed by all those who are concerned about bribes paid overseas by British companies. Bribery is not a victimless crime and it is important that reparations are also made to the countries whose citizens suffer when bribes are paid.

    

“The long saga of allegations about corruption involving BAE Systems has been a national embarrassment to both the UK and Tanzania, and it is astonishing that no individual has yet been found guilty despite the company having to pay fines and reparations of $450 million for Tanzania and other cases. We are pleased to hear that the Tanzanian government may prosecute individuals, and hope that the UK authorities will cooperate fully if UK nationals are found to have broken Tanzanian law.  We particularly endorse the suggestion that the Government’s Anti-Corruption Champion should publish annual reports on his work.”

Let's also not forget that the $400m fine which was paid in the US for related corruption offences was one of the largest imposed in the last year, so that very fact too attracts further publicity of the wrong kind (not all publicity is good publicity, contrary to the old saying) around the world.

The Financial Services Authority (“FSA”) has clarified its approach to UK Anti-Bribery and Corruption (“ABC”) Enforcement.

The FSA is a Regulator with criminal prosecuting powers. It is not a general fraud prosecutor and does not prosecute bribery.  As such, the FSA will investigate bribery cases in order to identify failures in the regulated sector, as a result of which it will either:

1. take regulatory action, or
2. refer the case to The Serious Fraud Office (“SFO”) or other investigator.

The FSA has consolidated its expectations with regard to ABC systems in firms which it regulates. These are embodied in Chapter 7 of the publication ‘Financial Crime: a Guide for Firms’.  This is consistent with, but separate from, the published Ministry of Justice (“MOJ”) Guidance relating to ‘adequate procedures’ under section 7 of the Bribery Act 2010.

When reviewing the adequacy of their anti-corruption policies and procedures, firms within the regulated sector should bear in mind that the scope of the Bribery Act is different from the FSA Rules and Principles.

Before the Bribery Act came into force on 1 July 2011, the FSA brought two significant bribery cases, (Aon and Willis) under Regulatory Principle 3, which requires regulated entities to take reasonable care to organise and control their affairs responsibly and effectively, with adequate managements systems.

Both cases involved systems and controls and governance issues surrounding payments to third parties, rather than direct evidence of bribery.  In each case the conduct was mitigated by settlement at an early stage of the FSA’s investigation.

Thematic Review / Industry Sweep

The FSA has been undertaking a thematic review of a range of randomly selected firms within the regulated banking sector, both large and small.

This review, which commenced in August 2011 and is running through to December 2011, is an intensive programme, which involves interviewing front line sales staff and relationship managers, as well as senior managers.  It also involves looking at due diligence conducted on high risk third party payments to people such as introducers and consultants and may include overseas visits to UK authorised firms, in order to establish how procedures are working in a global context.

Should this review uncover questionable behaviour, then action will be taken – either via the FSA regulatory route or by referral to the SFO or the police.

The FSA intends to publish a comprehensive report early next year, which will highlight any failings in the systems and will make recommendations for future compliance action.

Shares in the Brazilian based airplane manufacturer, Embraer S.A. have declined substantially since the US Securities Exchange Commission recently announced its investigation into Embraer for possible violations of the US Foreign Corrupt Practices Act.

Embraer is listed in San Paolo, on Brazil’s benchmark Bovespa index as well as on the New York Stock Exchange.

The FCPA prohibits companies which are listed in the United States from bribing foreign government officials or making other illegal payments to obtain or retain business.  Sanctions include criminal fines, civil disgorgement and possible debarment from public procurement contracts with the US government.  In addition, executives may be sentenced to 5 years in prison.

Embraer itself has revealed that it has hired external lawyers to conduct an internal investigation into transactions in several countries. Embraer is quoted as saying:

“The company is unable to foresee the duration, the scope or the results of the investigation”.

This statement is very telling and, in our view, accurate: once you are being investigated by prosecutors you need to be prepared for a very long haul (possibly several years), high legal costs and a great deal of management time will be incurred, not to mention the intense media interest and damaging headlines.  Further, you will be totally unable to predict the end of the investigation.  It can take many years for it to be completed, especially if it involves investigations and prosecutions in other jurisdictions.

In addition, of course, a company’s share price may become depressed, because the market and especially the analysts fear that large and costly fines may be imposed on the company by different regulators or courts around the world.

As reported in the Press Gazette, the Justice Secretary, Ken Clarke, has said he is “not persuaded” that there needs to be a public interest defence to protect journalists who fall foul of the U.K. Bribery Act by paying for stories.

Clarke, who was speaking at the Society of Editors Conference on Monday, was asked by Richard Caseby, the managing editor of the Sun newspaper, to consider the introduction of a public interest defence for journalists under the Bribery Act.

It was the Sun newspaper that exposed Munir Yakub Patel, a court clerk, who accepted £500 from one of its reporters for fixing a motoring offence.  Patel subsequently became the first person to be convicted of an offence under the Bribery Act.  Caseby complained that, as there was no public interest defence, the Sun reporter conducting the sting was himself potentially at risk of prosecution – and, given that he had personally authorised it, so was he as managing editor of the newspaper.

However, Clarke said that he was not minded to consider a change to the law: 

"We didn't invent that law, all we did was bring it up to date. There has never been a public interest defence for bribery. Your journalist could have been arrested for bribery any time in the last 100 years."

Instead, Clarke explained that the public interest considerations would be taken into account when the Director of Public Prosecutions (“DPP”) considers whether to give the go ahead to bring a case to court.  He went on to state that he could not imagine the DPP sanctioning such a prosecution, as a jury would probably acquit in such circumstances and, if not, a judge would opt for a conditional discharge.

Image © Crown Copyright 2011

Following the news that a former Business Unit Director of Innospec Ltd, David Turner, appeared before Westminster Magistrates' Court on Tuesday, charged with conspiring to make corrupt payments to public officials in Indonesia and Iraq, the Serious Fraud Office (“SFO”) announced yesterday that two further Innospec executives have now been charged with associated corruption offences.

Along with Turner, it is alleged that Dennis Kerrison and Paul Jennings, both former CEO’s of Innospec, gave, or agreed to give, corrupt payments to public officials and other agents of the Governments of Indonesia and/or Iraq as inducements to secure, or as rewards for having secured, contracts from those Governments for the supply of products, including Tetraethyl Lead, by Innospec.  The alleged offences took place variously between 2002 and 2008.

Turner and Jennings are additionally accused of conspiracy to defraud Ethyl Corporation by making payments to public officials and other agents of the Government of Iraq as inducements to ensure that tests on MMT, a competitor product manufactured by Ethyl Corporation, conducted by or on behalf of the Government of Iraq concluded with an ‘unfavourable’ assessment of that product.

Last year, Colorado based Innospec agreed to pay the U.S. authorities $27.5 million and the U.K. authorities $12.7 million, and pleaded guilty to 12 U.S. criminal counts (including violations of the Foreign Corrupt Practices Act (“FCPA”)), having admitted to bribing Iraqi oil officials, defrauding the United Nations through its Oil for Food Program and selling chemicals to Cuban power plants in violation of a U.S. embargo.  Earlier this year, Jennings also settled charges brought by the U.S. Securities and Exchange Commission ("SEC"), without admitting or denying the allegations that he had authorised the speciality chemicals company to pay bribes to Iraqi and Indonesian officials.

The cases have been sent to the Crown Court at Southwark, where Turner will appear on 2 November 2011 and both Kerrison and Jennings will appear on 6 January 2012.   

Following on from my post about the first person to be charged under the U.K. Bribery Act, Munir Yakub Patel recently appeared before Southwark Crown Court to answer the charge that, in exchange for £500, he used his job as an administration clerk to avoid putting details of a traffic summons offence on a court database.

Details of the incident were first uncovered in August 2011 and, having come into force on 1 July 2011, a prosecution was commenced under section 2 of the U.K. Bribery Act; which prohibits an individual from requesting and accepting a bribe in order to improperly perform their functions.

At the hearing, Patel admitted bribery and also misconduct in a public office, dating from 23 February 2009 to August 2011, in relation to which he advised people how to avoid being summoned for similar offences. 

Patel, who is due to be sentenced on 11 November 2011, could face up to 10 years in prison.

The real catalyst for the Bribery Act being drafted from 2007 to 2010, and eventually passed in April 2010, was the acute embarrassment caused to the United Kingdom when Tony Blair’s government, acting through the then Attorney General, Lord Goldsmith, blocked the 2006 Serious Fraud Office investigation into allegations of corruption by British Aerospace of a Saudi Royal who was also a member of the Saudi government.  The OECD and Transparency International, together with other international bodies, were extremely critical of the Blair government’s failure to investigate and prosecute the significant alleged acts of corruption.  Mr Blair justified his decision to block the investigation on the grounds that the Saudi government was threatening to withdraw from an intelligence sharing agreement with the United Kingdom in relation to information concerning terrorism.  Whilst this may well have been a significant motivating factor in his decision making process, Mr Blair would also have been extremely conscious of the fact that Saudi Arabia is one of Britain’s most significant trading partners.  To some it looked like he had sold the UK’s reputation.

So one might take the view that “here we are again” five years later more allegations of corruption; involving a Saudi Royal again; the only difference is it is a UK subsidiary of EADS/GPT, on this occasion, and not British Aerospace.  Presumably the Cameron government is faced with the same sort of dilemma, with similar pressure from the Saudi government.

I have previously blogged on this story in a post dated 8 June 2011, although this new investigation was not widely reported in the British media at the time.

Transparency International UK made a press release on 10 October 2011 stating that “…Transparency International UK is calling on the Government to support a full investigation by the Serious Fraud Office (SFO).  The UK Attorney General is reportedly deliberating over whether the SFO should continue to investigate allegations that GPT made illicit payments to the Saudi Royal Family in order to secure a contract worth £2 billion.  The Attorney General’s decision will face a high level of international scrutiny because the UK’s anti-corruption record is currently under review by the United Nations, the Council of Europe and the OECD.  Under Article 5 of the OEC Anti-Bribery Convention, to which the UK is a party, a state cannot allow political, economic or diplomatic considerations to interfere with the investigation and prosecution of foreign bribery cases.  This echoes the BAE Systems case in 2006, when the Blair government caused an international outcry by forcing the SFO to drop an investigation into allegations of bribery in the Al Yamamah UK-Saudi defence contract…”  The executive director of Transparency International UK, Mr Chandrashekhar Krishman then goes on to say “…we would expect EADS, as leading members of the international defence industry’s own anti-corruption initiatives such as the Common Industry Standards for Anti-Corruption and IFBEC, to cooperate with the SFO and undertake a thorough internal investigation into these allegations…it is imperative that the Government sticks by the international rules and ensures this investigation goes ahead”.

It is to be presumed that the Saudi government will try to play the intelligence sharing agreement card again, since it worked well last time, but if it does not, then the British government is clearly on the horns of a dilemma, for a decision to stop the SFO’s investigation would clearly be enormously embarrassing to the UK’s coalition government and damaging to the reputation of the UK as a whole on ethical standards.  On the other hand, given that the UK economy is in a parlous state and the government’s own finances are dire, to investigate and prosecute alleged defences in relation to the EADS/GPT contracts could be enormously damaging to Britain’s significant business relationship with Saudi Arabia.

Dominic Grieve, the current attorney general, will be receiving enormous pressure from all quarters from within his own government, from the Saudi government, from Transparency International, from EADS/GPT and who knows who else?  Who would want his job?

Curiously, this very significant news has not been widely reported in the UK media although it is in the Telegraph online on 9 October 2011 and on Indian and Iranian news websites.

As I previously blogged, the investigation by the SFO into EADS/GPT commenced as a result of report by a whistleblower, Lt. Col. Ian Foxley who claimed he had been sacked by GPT after informing the SFO that Saudi officials had been given luxury cars, jewellery and cash in return for business being awarded to GPT.

The Daily Telegraph reports that Lt. Col. Foxley’s evidence has subsequently been supported by a second whistleblower, who apparently corroborates the evidence already given to the SFO.

An additional interesting factor is the possibility that there may be a US angle to this corruption investigation.  This could arise either because the companies involved have some sort of business presence in the US or at its simplest is that a wire transfer took place through a US bank.  In any event, with defence manufacturer companies of this size it seems highly probable that the US regulators would have some involvement and that they would take a significant interest, particularly where they suspect that an American company may have lost out to a foreign bid as a result of corruption by a non-US company.  It seems likely therefore that either the Securities Exchange Commission (SEC) or the US Department of Justice (DOJ) would also be investigating these allegations.  Therefore, whatever Dominic Grieve decides about the SFO’s investigation, the US authorities may pursue EADS/GPT themselves.  This is what happened previously with British Aerospace.  The US authorities still pursued British Aerospace but did not, apparently, suffer the fate threatened to Mr Blair’s government by the Saudi government.  This could be of course because of the relative size and importance of the United States to Saudi Arabia as opposed to the much smaller United Kingdom (lets not forget the US soldiers based in Saudi Arabia).  It will be no surprise (to me anyway) if once again the rule of law is sacrificed to international politics and the demands of big business.

As regards the UK’s new Bribery Act 2010: Just to be clear, the alleged offences must have taken place after 1 July 2011.  Therefore this hot potato has no relation to the new Bribery Act itself as the alleged acts pre-date 1 July 2011 (but would be investigated/prosecuted under the old corruption law) but really the debate concerns the effect on the UK’s reputation as a vigorous enforcer of anti-corruption law and its general ethical reputation globally.

I will report back when there is more news.  Our best guess at the BriberyLibrary is that the intelligence sharing agreement reason will be trotted out again by the Attorney General as a reason not to pursue it and that this investigation will never proceed.  British jobs and foreign faces will be saved but British justice will take another body blow.

If this investigation doesn’t go ahead, then courageous whistleblowers like Lt. Col. Foxley will be much more unlikely to come forward, which is the reverse  of the situation for which the SFO had hoped.

In order to entice corporates to voluntarily disclose instances of fraud and corruption, meaningfully cooperate with government investigations, and/or undertake remedial measures, the US Department of Justice and Securities and Exchange Commission will, in appropriate circumstances, enter into Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) with corporations.  The US Attorneys Manual describes the agreements as follows: ‘[A] deferred prosecution agreement is typically predicated upon the filing of a formal charging document by the government, and the agreement is filed with the appropriate court. In the non-prosecution agreement context, formal charges are not filed and the agreement is maintained by the parties rather than being filed with a court’. While DPAs and NPAs are not, by any means, agreed in most DOJ and SEC investigations, they turn up more frequently than one might guess. 

The DOJ has a long-established, though increasingly common, practice of negotiating and entering into DPAs and NPAs with corporates in appropriate circumstances.  DPAs are particularly popular with the DOJ for resolving corporate fraud matters, and are most frequently employed in connection with FCPA violations.  According to a United States Government Accountability Office Report, summarized here, the DOJ entered into four deferred and non-prosecution agreements in fiscal year 2003 and 38 agreements in 2008.  The DOJ entered into 35 agreements in fiscal year 2010, and based on its activity in the first half of 2011, the Justice Department appears to be on pace to meet or exceed that number in 2011.   The SEC, too, is beginning to make use of DPAs and NPAs, having entered into its first deferred and non-prosecution agreement within the last year. 

Through these agreements, federal regulators agree to forgo criminal prosecution and/or civil enforcement actions.  In exchange for the agreement, a corporate may be required to admit to some wrongdoing, pay fines or restitution, take remedial measures, commit to a future course of conduct, and/or submit to a corporate monitorship.  Both the SEC and DOJ view DPAs and NPAs as a means of encouraging companies and individuals to cooperate with ongoing investigations and enforcement actions.  One key principal underpinning the use of DPAs and NPAs is that prosecutors and enforcement staff can sanction corporates without resorting to a formal criminal prosecution or civil enforcement action and, thus, without subjecting the corporate to any unintended consequences that might come with formal enforcement proceedings. 

Taking an overly simplistic view of the matter, it may useful to think of DPAs, NPAs, and plea agreements (which we address in Part V of this series) not as extraordinary dispute resolution tools, but as something akin to a Tomlin order (or another form of consent decree, which is not uncommon in the English civil justice system).  In the US, at least, these agreements are viewed by the courts and practitioners as simple agreements memorialized in a written document.  The terms can be modified by the courts or the rejected by the courts and, indeed, enforced in the courts – as with any consent order. 

At present, however, deferred prosecution agreements simply do not exist in the UK.  The SFO, however, seem to like the idea of deferred prosecution agreements.  In a speech delivered at the London School of Economics on 30 March 2011, Richard Alderman, Director of the SFO, discussed the US Department of Justice’s use of deferred prosecution agreements, and explained how they might work for the SFO. 

In the wake of the Arthur Andersen and Enron scandals, Mr Alderman said, the DOJ devised the concept of deferred prosecution agreements, through which corporates ‘enter into a settlement with the Department of Justice under which the firm or corporation agreed to plead guilty to various charges, but the DOJ deferred the prosecution for a number of years to allow the corporation to pay substantial fines together with other remediation including monitoring’.  If the corporate meets the requirements of the agreement, the prosecution ends without conviction. 

Mr Alderman admits he ‘find[s] the model of deferred prosecutions attractive’.  While he recognises that some debate exists in the UK as to the efficacy of DPAs, Alderman believes ‘deferred prosecutions are … the best answer to a complicated and very real problem’.  Alderman does not advocate, however, a system in which prosecutors and corporates enter into ‘private agreements’ with wrongdoers.  Judicial oversight is paramount, he says, for ‘[o]nly a judge can decide whether the terms are appropriate’.  Nevertheless, Alderman insists there is ‘considerable scope’ for the use of DPAs in SFO matters. 

Indeed, according to Philip Urofsky and Josanne Rickard of Shearman & Sterling LLP in a recent Reuters blog, ‘the SFO and companies should continue the experiment of negotiating pre-charge alternative dispositions – known in the U.S. as ‘deferred prosecution agreements’ – which will be a less expensive option for the budget-constrained SFO and a more predictable process for companies.’   This, they say, will demonstrate that the UK Bribery Act is ‘effective and enforceable’ by ensuring that ‘prosecutions are resolved quickly and with clear and certain consequences’.

Interestingly, Mr. Urofsky and Ms. Rickard note that the SFO have already engaged in ‘pre-charge alternative dispositions’, citing the 2008 case of Balfour Beatty.  In that case, Balfour Beatty agreed to admit ‘payment irregularities’ related to a construction project in Alexandria, Egypt, and to pay a £2.25m penalty, in exchange for the SFO’s agreement not to bring charges.  This, Urofsky and Rickard submit, ‘was essentially a deferred prosecution’. 

Whether the SFO will adopt the DPA (and NPA) as a tool for resolving fraud and corruption practices remains to be seen.  It might, however, present a useful alternative to the problems UK regulators face in attempting to fashion binding plea agreements.  We will discuss those issues in greater detail in our next post on Identifying and Resolving Fraud and Corruption Cases in the US and the UK.

The McGuireWoods Guest Bloggers are Robert Plotkin, a partner based in McGuireWoods LLP's Washington and New York offices and head of the firm's SEC Enforcement Defense group, and Kurt E. Wolfe, an associate based in McGuireWoods LLP's Washington office and a member of the firm's Government, Regulatory and Criminal Investigations department.

In our last blog, we addressed the importance – and benefits – of voluntarily disclosing instances of fraud or corruption to appropriate US and/or UK regulators.  Of course, corporates do not always have the opportunity to identify and voluntarily disclose instances of fraud or corruption before an enterprising insider blows the whistle on some potential violation.  In June, our London Partner Adam Greaves posted an instructive article on Bribery Library comparing whistleblower laws in the US and the UK.  Simply put, the US and the UK have in place vastly different whistleblower schemes: while the US offer handsome rewards as a means of encouraging whistleblowers, the UK declines to provide whistleblowers any remuneration whatsoever, and the UK government insists it has no plans to mirror the US system. 

In May 2011, the SEC adopted a final set of rules implementing its Whistleblower Incentives and Protection program, which handsomely rewards whistleblowers who voluntarily provide original information that leads to a successful enforcement action in which sanctions exceed $1 million.  To incentivize would-be whistleblowers, the program offers an award of 10-30% of the amount collected in the SEC enforcement action and certain related actions that rely upon the same original information.  The impact of the SEC’s new whistleblower rules is yet to be determined, as the rules are not effective until August 12, 2011.  The SEC, however, already claims to be receiving an appreciable uptick in high-quality tips from whistleblowers. 

The DOJ, too, has an existing framework for encouraging whistleblowers to come forward with information regarding possible violations of the laws.  Through the qui tam provisions of the False Claims Act, whistleblowers can bring lawsuits on behalf of the United States against defendants that allegedly perpetrated some fraud against the United States government.  Under the False Claims Act, whistleblowers are given a mandatory award of 15-25% of any sanction or settlement achieved in the lawsuit, and in certain circumstances they can be awarded attorneys’ fees. 

The FCA has been an immensely popular outlet for whistleblowers.  Since its inception, whistleblowers’ recoveries in FCA matters are estimated to be in the billions; perhaps as high as $20 billion.  In 2009, for example, a former Pfizer sales rep was awarded $51.5 million for his role as a whistleblower in an investigation of Pfizer’s marketing practices.  And in December 2010, a Florida-based professional whistleblower company called Ven-a-Care was awarded $88.4 million in connection with a $421 million settlement between the US government and three drug manufacturers.

The SFO and MOJ have offered precious little public guidance on whistleblowers.  In its Guidance on the Bribery Act, for example, the MOJ identifies ‘speak up’ or ‘whistleblowing’ procedures (later referred to as ‘protection and procedures for confidential reporting of bribery (whistleblowing)’) as nothing more than an aspect corporates should include in their bribery prevention policies.  Indeed, to the extent the MOJ and SFO deal with whistleblowers at all, their guidance relates principally to ways companies can devise or improve effective internal whistleblowing or ‘speak up’ policies. 

In fact, the SFO and MOJ appear disinclined to implement a whistleblower incentives program.  Adam Greaves explains:

"Sources close to the UK government insist that the Dodd-Frank Act will not be mirrored in the UK. It seems that the general establishment feeling is that this type of legal device, which is intended to bring crime out in to the open, is far too mercenary an approach and that it would give rise to all sorts of ethical concerns." 

Still, it would appear, particularly in the Bribery Act era, the UK is primed to consider some sort of whistleblower program as a means of ferreting out fraud and corruption.  As recently reported here on Bribery Library, in the UK ‘using whistleblowers is standard investigative procedure world-wide against cartels, including in the UK.  Indeed, it seems that these days the UK Office of Fair Trading (OFT) (the competition law regulator) will not investigate suspected cartels without a whistleblower’.

The McGuireWoods Guest Bloggers are Robert Plotkin, a partner based in McGuireWoods LLP's Washington and New York offices and head of the firm's SEC Enforcement Defense group, and Kurt E. Wolfe, an associate based in McGuireWoods LLP's Washington office and a member of the firm's Government, Regulatory and Criminal Investigations department.

The SEC and DOJ have long encouraged corporates to voluntarily disclose possible violations of the law.  And both the SEC and DOJ offer lesser sanctions – even amnesty in certain cases – for corporates that timely self report suspected violations.  Both the DOJ and the SEC stress that the key to receiving credit for self reporting is promptness.  Corporates are expected to timely report potential violations identified through internal reporting or compliance programs or an internal investigation. 

In its oft-cited ‘Seaboard Factors’, for example (see Exchange Act Release No. 44969 (2001)), the SEC includes self reporting in a list of factors it will consider in determining whether to pursue an enforcement action and/or the amount or extent of sanctions it will impose in any settlement.  For example, earlier this year when the SEC entered into its first-ever deferred prosecution agreement (related to a ‘foreign bribery scheme’ carried out by employees at Tenaris S.A.), the Commission lauded ‘[t]he company’s immediate self-reporting’ as a key consideration in its decision to settle with the company.

The DOJ has long been in the business of encouraging corporates to self report.  Since the Federal Sentencing Guidelines first implemented guidelines specifically directed at organizations in 1991, accommodations have been made for companies that voluntarily disclosure potential criminal violations.  The DOJ has reiterated its fondness for voluntary disclosures on several occasions, most notably, perhaps, in its 2006 McNulty Memorandum.  And the Justice Department has weighed in on the topic as recently as November 2010, when it released amendments to the Federal Sentencing Guidelines that make clear ‘the Department of Justice has a well-established amnesty program for organizations that self-report [offenses]’. 

It should be noted that, generally speaking, there is no requirement in the US for corporates to report FCPA violations or other instances of known fraud or corruption.  (However, a reporting requirement may arise in certain circumsances, for example, under Sarbanes-Oxley.)   Yet, the system of incentivizing voluntary disclosure through the promise of lesser sanctions has worked wonderfully well for the SEC and DOJ.

Self-reporting is, arguably, the area where the UK appears most likely to adopt the US model.  The best evidence of this trend comes, perhaps, from the SFO itself, which has publicly encouraged organisations to self-report problems relating to fraud or corruption.  In 2009, the SFO published their ‘Approach to Dealing with Overseas Corruption’, which calls on corporates to self report known cases of corruption.  ‘[T]he benefit’, according to the SFO, ‘will be the prospect (in appropriate cases) of a civil rather than a criminal outcome as well as the opportunity to manage, with [the regulator], the issues and any publicity proactively’. 

This guidance includes several noteworthy aspects, including a catalog of limited circumstances in which a corporate can obtain an ‘opinion letter’ from the SFO regarding some potential violation.  (The DOJ provide a similar ‘Opinion Procedure’ through which corporates can obtain an opinion from the US Attorney General as to whether specific conduct conforms with the DOJ’s enforcement policies).  The guidance also enumerates several factors the SFO will consider in determining the terms of any settlement agreement.  (Similarly, both the SEC and the DOJ have opined on the factors they will consider in determining the scope and amount of any settlement agreement.)

Finally, in an area where the SFO depart from the SEC and DOJ approach, the guidance makes clear that the SFO will likely make use of their criminal prosecution and confiscation powers in cases where corporates decline to self report instances of known corruption.  If the SFO learn of a violation from a source other than the corporate, it will ‘assume … the corporate has chosen not to self-report.  The chances of a criminal investigation leading to a prosecution [in those cases] are therefore high’. 

The SFO continue to promote the self reporting route, offering the following advice on their website: ‘Early reporting of the fraud or corruption to us will benefit your organisation because’: (i) the SFO ‘will consider the full range of options for dealing with your case, including criminal and civil alternatives’; (ii) ‘coming forward to discuss your concerns with [the SFO] will be treated sensitively'; (iii) ‘you can discuss with [the SFO] about the possibility of conducting and internal investigation in a discreet way (to lessen the impact on your business)’; and, (iv) ‘there may be greater opportunities to secure evidence that will result in a successful outcome for both [the SFO] and your company against fraud or corruption’. 

The MOJ, for its part, is also keen on encouraging self-reporting.  In its Guidance on the 2010 Bribery Act, for example, the MOJ explains:

The application of bribery prevention procedures by commercial organisations is of significant interest to those investigating bribery and is relevant if an organisation wishes to report an incident of bribery to the prosecution authorities – for example to the Serious Fraud Office (SFO) which operates a policy in England and Wales and Northern Ireland of co-operation with commercial organisations that self-refer incidents of bribery (see ‘Approach of the SFO to dealing with overseas corruption’ on the SFO website). The commercial organisation’s willingness to co-operate with an investigation under the Bribery Act and to make a full disclosure will also be taken into account in any decision as to whether it is appropriate to commence criminal proceedings.

Whether the US and UK self reporting cultures will come to mirror one another remains to be seen.  But it appears the groundwork has been laid for similar environment.  In light of the broad reach of the FCPA and Bribery Act, corporates would be well advised to consider the particular benefits of voluntary disclosures in either jurisdiction. 

The McGuireWoods Guest Bloggers are Robert Plotkin, a partner based in McGuireWoods LLP's Washington and New York offices and head of the firm's SEC Enforcement Defense group, and Kurt E. Wolfe, an associate based in McGuireWoods LLP's Washington office and a member of the firm's Government, Regulatory and Criminal Investigations department.

How do you root out corruption?  Well, to a competition lawyer one answer is obvious; whistleblowing. 

In a recent post my colleague Adam Greaves pointed out that corruption is a crime carried out in secret, so inevitably the evidence is difficult for prosecutors to find or obtain.  This is exactly the same issue faced by competition law regulators; cartels are generally secret so difficult to find.

Recognising this issue in the securities field, the US has recently introduced new whistleblowing rules as part of the Dodd-Frank Act.  Adam commented that sources close to the UK Government insist that the Dodd-Frank Act provisions will not be replicated in the UK in relation to corruption enforcement, apparently since this would be too 'mercenary' an approach and would raise ethical concerns.

Yet, using whistleblowers is standard investigative procedure world-wide against cartels, including in the UK.  Indeed, it seems that these days the UK Office of Fair Trading (OFT) (the competition law regulator) will not investigate suspected cartels without a whistleblower.  Why?  Because, just like the UK Serious Fraud Office (SFO) in relation to corruption investigations, using its limited resources it needs to find the evidence to mount its inquiry in the first place and the evidence needs to stand up to the inevitable appeals.  Also, like the SFO, it needs to justify its existence, and failed (or no) cartel investigations do not help.  It needs successful cartel busting with large fines which stand up in court, so that it can demonstrate the benefits to consumers.  The easiest and safest route to this is using whistleblowers' evidence.  

The whistleblowing model used in the competition law field for cartel enforcement usually includes a corporate scheme (the leniency programmes which virtually all sophisticated competition law regulators have introduced) and, less commonly, a personal reward scheme.  Corporate schemes (including that used by the OFT) typically reward the first company to provide evidence demonstrating the existence of a cartel with a 100% reduction in any eventual fine imposed against it for being involved in a cartel (in other words, full immunity).  Second, third, fourth etc. companies in the line receive lesser reductions in any eventual fines (leniency).  In the UK, which includes as part of its arsenal potential individual criminal penalties for cartel involvement, the corporate leniency programme can also provide protection against criminal sanctions for individual employees of the companies which admit involvement.

Although the decision whether to 'go in' is complex (for example: will we ever be found out anyway?; what about future private damages claims for increased prices arising out of the cartel?), companies regularly do so, spurred by the huge fines imposed for cartel infringements and the commensurate benefit from obtaining immunity/leniency, as well as (in the UK) the focussing element of possible protection from individual criminal prosection.  Indeed, following 'dawn raids' against suspected cartelists in the UK, there is often an unseemly race for the OFT's door as companies try to benefit from some fine reduction by providing further evidence.  Wouldn't this type of scheme help the SFO in the corruption field?

The OFT has also introduced a personal whistleblowing incentive scheme.  Although it is possible that an individual who was (peripherally) involved in a cartel could benefit, it is really aimed at those who have inside information about it, but were not involved.  Disgruntled employees, for example, could be a good source.

Advertising this scheme, the OFT comments:

"Cartels are generally conducted in secret and they can be hard to detect and also hard to prove. Given their potentially very harmful effects and their secretive nature, the OFT believes that it should offer financial rewards for information which helps in the detection and investigation of cartels and which, in appropriate cases, leads to the fining of the companies and the criminal prosecution of the individuals involved."

The OFT has never admitted to paying out under this scheme.  Perhaps this is because it indicates that the maximum reward is £100,000, which is anyway discretionary, and this must be balanced by the potential whistleblower against a number of factors (loss of employment, future employability etc.).  If it paid out along Dodd-Frank rules (between 10% and 30% of the total monetary sanctions collected from companies involved) then the incentive would clearly be hugely increased.  Cartel fines, even at the UK level, can run into the 100s of millions.  Again, wouldn't this type of scheme help the SFO?

What about loss of employment, however?  The UK employment law concerns arising out of personal whistleblowing such as this, where there could be a reward from the OFT, have not, in the absence of examples, been worked through.  There may be an issue as to whether the disclosure to the OFT was not made in good faith due to the monetary incentive (therefore potentially negating protection under the Public Interest Disclosure Act).  However, surely any reasonable employment tribunal would find that rewarded whistleblowing to the OFT was made in good faith, not least since an alternative finding would in turn negate the public policy benefit of rooting out cartels.  

If the SFO is serious about finding corruption, the use of corporate and personal whistleblowing incentive schemes in the cartel field seems to provide an obvious model.  Cartels are usually secret, just like corruption, and, in the words of the OFT "can be hard to detect and... to prove" (which is an understatement).  The SFO needs to use all weapons and tricks at its disposal.

The McGuireWoods Guest Blogger is Matthew Hall, a partner based in McGuireWoods LLP's Brussels office who specialises in all aspects of EU and UK competition law.

Yesterday, 21^st July, Willis Limited, the insurance brokers, were fined £6,895,000 for potentially corrupt practices by the UK Financial Services Authority (FSA), the regulatory body for the financial services industry. This was a penalty for breaches of the FSA’s Principles for Businesses and Rule SYSC 3.2.6 R of the FSA’s Senior Management Arrangements, Systems and Controls Handbook. The breaches occurred in the period 14 January 2005 and 31 December 2009. This report is important not least because Willis is one of the largest insurance and reinsurance brokers and risk management firms in the UK. The penalty levied on Willis is the highest such penalty so far by the FSA in relation to financial crimes systems and controls. There are lessons to be learned for all businesses in the FSA’s 24 page report. 

Principle 3 of the FSA’s principles for Business states that: 

“A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems” 

Rule SYSC 3.2.6 R of the FSA’s Senior Management Arrangements, Systems and Controls Handbook states that: 

“ A firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be sued to further financial crime”. 

In the “Final Notice” on the investigation by the FSA, it reported that because the FSA had agreed to settle at an early stage in the investigation and had therefore earned a discount of 30% - the penalty would otherwise have been £9,850,000. 

The complaint was that Willis did not take reasonable steps to establish and maintain effective systems and controls for countering the risks of bribery and corruption associated with making payments to overseas third parties who helped Willis win and retain business from overseas clients. 

The FSA found that:- 

• Willis failed to ensure that it had established a commercial rationale for using overseas agents;
• Willis’ policies did not provide any written guidance on the amount of detail required to justify using overseas agents;
• In the case of nearly half of the agents in high risk countries who introduced business to Willis in this period, the reasons for using them were inadequately recorded;
• Without adequate documentation, Willis could not adequately monitor the effectiveness of its procedures;
• Willis did not ensure that adequate due diligence was carried out on overseas third parties to evaluate the risk of doing business with them;
• In relation to the overseas agents on whom they had carried out due diligence, in nearly all cases it was insufficient to address the risk that the overseas third party may have been connected to the insured, the insurer or public officials;
• Willis did not adequately monitor its staff to ensure that an adequate commercial rationale for hiring overseas agents was recorded and that sufficient due diligence had been undertaken;
• These failures contributed to a weak control environment giving rise to an unacceptable risk that payments made by Willis to overseas agents could be used for corrupt purposes;
• In August 2008 Willis introduced improved policies and guidance aimed at mitigating its bribery and corruption risks – however, Willis failed to implement them adequately.
• The Board of Willis did not receive adequate management information which would have allowed them to assess whether bribery and corruption risks were being mitigated effectively; 

After the FSA investigation into Willis began, Willis started its own internal investigation and identified a number of suspicious payments made to overseas third parties. It reported these matters to the Serious Organised Crime Agency (SOCA). Willis ended up making two suspicious activity reports to SOCA. 

Even though the FSA had written to all CEOs of wholesale insurance broker firms in November 2007, including Willis, and even though the FSA had fined Aon, another large insurance broker firm, in January 2009, Willis’ steps, which they took in 2007 and 2008, to review the adequacy of their policies, were insufficient and their implementation continued to have substantial failings. 

Enhancement of systems and controls 

Willis has taken on board the criticisms of the FSA and has put in place: 

• A committee for the approval of third party introducers;
• Enhanced monitoring, capable of ensuring Employees’ consistent adherence to Willis’ policy;
• Improvements in the practical application of Willis’ policy;
• Consistency in the business unit compliance officer’s understanding of Willis’ policy and how this translates into their work with account executives;
• Increased accountability for each of the account executive, business unit compliance officer and managing director responsible for the third party proposal before the committee;
• Enhanced production of specific relevant management information through the committee’s direct reporting to the board of directors;
• Better retention of documentation;
• The business unit compliance officer now reports to group compliance and his/her budget now falls under group compliance and not under its own business unit;
• Willis now prevents any entry being placed on its books until the third party approvals process has been completed;
• Willis has updated its systems so that it can identify and categorise payments made with greater specificity;
• Training has been enhanced so that annually employees have to confirm that they have read all of Willis’ policies including the Group Anti Bribery & Corruption Policies and Procedures. This includes completing an electronic questionnaire relating to those policies and procedures. Those in the bottom 10% in the training are recommended to receive enhanced training;
• Further workshops to help identify the different categories of third party relationships and extra training for divisions of the company operating in high risk industries;
• Training by an external law firm on the new Bribery Act 2010;
• A review of past payments to overseas third parties, to identify any inappropriate past payments;
• A commitment by top management (CEO) downwards to ensure that here is a culture of compliance. 

So, another large insurance broker has been publicly criticised and fined. In this case there was no finding of actual corruption, although it is possible that further proceedings could take place involving one of the UK's other prosecutorial bodies, but the fine related to Willis' inadequate bribery and corruption prevention systems.  According to the FSA, this was avoidable as Willis knew what they had to do in terms of compliance and they knew the risks to their business in relation to bribery and corruption, but it appears that their compliance was inadequate in several different respects. What is not very clear is whether this was the fault of the compliance units within Willis not doing their job properly or whether it was a lack of interest and investment in the compliance programme by the firm’s management, or a combination of the two. In any event, it has been an expensive lesson for Willis, but others in the insurance broking industry and indeed in other industries will learn from Willis’ experiences. This will all be to the good as it should lead to many more companies all over the UK ramping up their compliance programmes and ensuring that they are active, thoughtful and tailored compliance programmes and not just paper tigers. 

As mentioned in a previous blog, the FSA is now working through its lengthy review of the banking industry. I predict further such reports and fines from the FSA as a consequence as it is clear that even very large and well organised companies like Willis are unable to get their compliance systems right first time. The banks would do well to read the Willis report very carefully.

The SFO has devised its own guidance for considering how to deal with organisations that continue to make "small" facilitation payments after 1 July. 

Our sources at the SFO have informed us that the SFO will be looking to see:

1. whether the company has a clear issued policy regarding such payments;

2. whether written guidance is available to relevant employees as to the procedure they should follow when asked to make such payments;

3. whether such procedures are being followed by employees;

4. evidence that all such payments are being recorded by the company;

5. evidence that proper action (collective or otherwise) is being taken to inform the appropriate authorities in the countries concerned that such payments are being demanded;

6. that the company is taking what practical steps it can to curtail the making of such payments.

There remains a number of grey/ challenging areas.  Where is the line between "small" payments and payments which the SFO would condemn?  How many small payments collectively amount to a significant breach of the Bribery Act?  If you have a zero tolerance policy, but payments are still being approved, what message is being given to your employees and business partners?

For those organisations that are doing their best to avoid making facilitation payments, but are finding it difficult to stop making them altogether, this insight into the SFO's thinking will offer some limited breathing room.  However, the clear message from these six points is that the SFO will be expecting to see a positive approach by organisations towards the goal of eradicating such payments from their operations.

Certainly the suppliers of facilitation payments can make efforts to avoid being in situations where they are susceptible to demand for payments, but long term eradication must surely rest as much on inroads being made into the demand side itself.  Organisations are encouraged to take collective or other action to inform authorities that demands are being made, but pressure also needs to be applied at government level.  Will we see the UK Government supporting British organisations to take a stand against facilitation payments by working with foreign governments to tackle the issue of demand?

In the meantime, it will be interesting to see in 2 years time whether the SFO's tolerance with respect to facilitation payments has changed.

On 24 May 2011 Transparency International released its seventh annual Progress Report on Enforcement of the OECD Convention, which shows a continuing trend towards little or no enforcement and raises concerns about whether the Convention is losing momentum as an instrument for combating global corruption.

The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions was adopted in 1997 and came into force in February 1999.  It requires parties to take measures to criminalise bribery of foreign public officials, with the intention of combating global corruption by focussing on the supply side.  There are currently 38 parties to the Convention (the 34 OECD member countries and 4 non-members), which is overseen by the OECD Working Group on Bribery.

The Progress Report reached the following overall conclusions:

• There has been no overall progress in the last year with enforcement.  All of the countries have remained in the same categories as 2010, which means there have been no new active enforcers, no increase in the number of moderate enforcers and 21 countries still demonstrate little or no enforcement. 
• There is a real risk that with over half the signatories demonstrating little or no enforcement, enforcing governments may start to backslide, posing a serious threat to the stability of the Convention and the progress made over the last decade.
• The principal cause of lagging enforcement is a lack of political commitment by government leaders, in the face of which criticism by the OECD is having little effect.

The UK was moved to the "active enforcer" category in 2010, following the increased enforcement efforts of the SFO.  The 2011 report recognises the Bribery Act as being a major step forward for enforcement, particularly in the wake of the termination of the BAE Systems investigation in 2006 and much procrastination by the UK over the last decade.  However, the trend towards little or no enforcement by the majority of parties to the Convention will certainly fuel the argument made by a number of British organisations that their ability to compete for foreign business will be significantly affected by the coming into force of the Bribery Act and will make them less competitive compared to their counterparts from other countries.  Notably, the 21 countries that demonstrated little or no enforcement activity represent 15% of world exports, with a further 20% being represented by those classed as moderate enforcers.

The Government’s answer to the competition argument is the vast extraterritorial reach of the Bribery Act, which is intended to level the playing field for British businesses.  However, whether or not the SFO will vigorously pursue foreign companies, particularly where evidence of wrong doing and key witnesses are all largely outside the UK remains to be seen.  The Guidance issued by the Ministry of Justice on 30 March 2011 has led Transparency International to question how rigorously various aspects of the Bribery Act will be enforced and this uncertainty is being exacerbated by the threats posed to the future of the SFO.

As can be seen from a recent post by my colleague, Adam Greaves, the general worth of the Guidance, which was published by the Ministry of Justice on 30 March 2011, has been called into question.  However, with regard to certain specific issues, the Guidance does provide some 'useful' commentary on the wording used in the Bribery Act and the way in which it is to be interpreted by the Serious Fraud Office (the “SFO”). 

One such issue is the potential liability of companies involved in joint ventures; whether operating through separate legal entities or through contractual arrangements.

In the case of a joint venture operating through a separate legal entity, the Guidance states that a bribe paid by that separate legal entity may lead to liability for a company that is involved in the joint venture if: the joint venture is performing services for that company; and, the bribe is paid with the intention of benefiting that company.  However, the mere existence of such a separate legal entity will not, in itself, mean that it is “associated”, for the purposes of the offence, with any of the companies which are involved in the joint venture.

Where a joint venture is conducted through a contractual arrangement, the Guidance identifies the determining factor as being that of control.  Specifically, the level of control that a company has over the relevant contractual arrangement will be considered by the SFO in deciding whether a person, who paid a bribe in the conduct of the joint venture business, was “performing services for or on behalf of” that company.  Consequently, an employee or agent of a company who has paid a bribe in order to benefit his employer will not be automatically regarded by the SFO as a person “associated”, for the purposes of the offence, with all of the other companies that are involved in the joint venture.

Whether a joint venture operates through a separate legal entity or through a contractual arrangement, to bring a prosecution the SFO will have to show the required intent on the part of the person who paid the bribe.  Therefore, even if it can properly be said that an agent, a subsidiary, or another person acting for a company that is involved in a joint venture was also performing services for all of the other companies involved in that same joint venture, an offence will only be committed if that agent, subsidiary or person intended to “obtain or retain business or an advantage in the conduct of business” for those companies.  Therefore, the fact that companies involved in a joint venture benefit indirectly from a bribe will not, in itself, amount to proof of the specific intention required by the offence.  

In specifically addressing the potential liability of companies that are involved in joint ventures in the way that it has, and identifying the actions such companies should take to enable them to rely on the “adequate procedures” defence, the Guidance appears to have severely restricted the basis upon which the SFO can seek to bring a prosecution against a company which has 'wilfully shut its eyes' to the corrupt activities of its joint venture partner.  Is this a further example of the corporate offence being watered down under the guise of providing clarity?

Jeffrey Tesler, a British solicitor, pleaded guilty in Texas to counts of conspiracy and of violating the US Foreign Corrupt Practice Act (‘FCPA’), which criminalises the bribery of foreign public officials. The FCPA applies to foreign agents of US companies located outside the US and Mr Tesler faces a possible jail sentence of up to 10 years imprisonment together with a fine of up to $150,000 at his sentencing hearing on 22 June 2011.  Mr Tesler was arrested in London in February 2009 and was subsequently extradited to the US in March 2011.

This matter relates to the payment of bribes over a period of 10 years to Nigerian government officials for the award of contracts to build a liquefied natural gas facility on Bonny Island in Nigeria. Mr Tesler acted for Kellog Brown & Root (‘KBR’),  a US engineering company and former subsidiary of the US company Halliburton, once headed up by the 46^th US Vice President Dick Cheney.

Mr Tesler admitted funneling bribes worth more than $130m (£80m) to Nigerian officials on behalf of four construction firms who were joint venture partners. The payments were made via bank accounts in Monaco and Switzerland.

In the same matter, Halliburton and KBR have already agreed to pay $579 million in settlement with the US Authorities, whereas the Italian company ENI SpA and its former Dutch subsidiary Snamprogetti Netherlands BV agreed to pay jointly $125 million to settle with the US prosecutors. Likewise, in June 2010, the French Group ,Technip,  agreed to pay the sum of $338 million.

On 16 February this year in the UK, following an action commenced by the Serious Fraud Office (‘SFO’), the High Court made an order under Part 5 of the Proceeds of Crime Act 2002 against MW Kellogg Limited (‘MWKL’) to pay over £7 million in disgorgement. These monies represented share dividends arising from profits generated by criminal activity relating to the same Nigerian matter.

This matter illustrates the extraterritorial effect of the FCPA and shows that co-operation by prosecuting authorities in various jurisdictions can lead to heavy fines and jail sentences being imposed on international companies and individuals.  The Bribery Act, once in force, will have similar effects and could lead to similar prosecutions under sections 6 and 7, including severe prison sentences and unlimited fines and the possibility of debarment from public procurement in the US and in the European Union.