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.

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.

The resolution of cases involving corporates is guided by the Principles of Federal Prosecution of Business Organisations, set out in the U.S. Attorney’s Manual.

This recognises that the resolution of cases by means other than indictment, including non-prosecution and deferred prosecution agreements, may be appropriate in certain circumstances.

Nine factors are identified as being relevant to such a determination:

1. the nature and seriousness of the offence;
2. the pervasiveness of wrongdoing within the corporation, including management        involvement;
3. the corporation’s history of similar misconduct;
4. the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to   cooperate in the investigation of its agents;
5. the existence and effectiveness of the corporation’s pre-existing compliance programme
6. the corporation’s remedial actions;
7. collateral consequences; 
8. the adequacy of the prosecution of responsible individuals;
9. the adequacy of remedies such as civil or regulatory enforcement actions  

In deciding what, if any, action to take, both the DOJ and the SEC place a high premium on Self-reporting:

• Cooperation       
• Remedial action
• Effectiveness of a company’s pre-discovery compliance programme

Most, if not all, of these considerations will be relevant factors also for the SFO, when considering whether to pursue a criminal investigation in any given case.

The clear articulation of these matters in the Resource Guide provides a useful template for use by those corporates which might be exposed to the UK Bribery Act.

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 guidance is quite a tome at 120 pages, including the appendices, and is around 3 times longer than its UK Bribery Act counterpart, itself dated 30 March 2011. It is divided into the a number of chapters. This is what is inside:

1. Introduction
2. The FCPA: anti-bribery provisions
3. The FCPA: accounting provisions
4. Other related US laws
5. Guiding principles of enforcement
6. FCPA penalties, sanctions, and remedies
7. Resolutions
8. Whistleblower provisions and protections
9. DOJ opinion procedure
10. Conclusion

We will be working our way through it methodically over the next few days and will provide some initial thoughts on it as we proceed. A comparison with the UK Bribery Act guidance may be informative.

We do notice, however, that, like the UK version of the guidance, it is not intended to have legal effect, and so therefore will not bind any court or indeed any prosecutor.

Also, we do not know whether the guidance has addressed the many concerns which corporates and practitioners have been voicing about the FCPA.  A comparison with the February letter may also indicate whether these concerns have been adequately addressed.

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.

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?

“The relationships between the press and police and the extent to which that has operated in the public interest”. 

If you are interested in following the inquiry you can watch it live from your computer by clicking on the link on www.levesoninquiry.org.uk under “latest news”.

More and more evidence is emerging from the inquiry which indicates that there was wide spread corruption of the police and other public servants by representatives of the media.  The evidence of corruption by the press has spread beyond the News of The World, the defunct news publication that was closed down by Rupert Murdoch last year and now it also allegedly stretches to The Sun, another of the tabloid newspapers within Mr Murdoch’s stable of UK publications.

It seems fairly certain that there will be a string of prosecutions over the coming years of members of the media and police officers and other public servants who are apparently involved in this growing scandal.

It seems likely that if these allegations are proved in court that it will demonstrate that the UK is a much more corrupt country than many of us had all previously assumed.  One consequence will be that the UK will slip further down the Transparency International index, which is published annually, notwithstanding the Government’s best efforts to put in place the tough, gold plated, Bribery Act 2010 which came into force on 1 July 2011.

In fact, it is a great shame that the events which are currently being investigated by the Leveson Inquiry did not take place after 1 July 2011, for it would have given the Government and the UK courts a good opportunity to test the Bribery Act and to send out strong messages under the Bribery Act across the UK and also around the world’s business community about the UK’s determination to stamp out corruption.

As it is, the trials which will take place following the Leveson Inquiry will, we assume, be prosecuted under the old corruption laws, some of which date back to the late 19^th century and early 20^th century, and other related offences (e.g. misconduct in public office) will also, likely, be prosecuted.

It has been suggested in the press just this week that the Serious Fraud Office is already considering some investigations under the Bribery Act, which must, by definition, be for offences which have taken place since 1 July 2011.  This is good news.  The quicker the Serious Fraud Office can bring a prosecution of some large scale, high profile corruption, the better it will be for publicising the Bribery Act and its effects around the world.  We believe that many companies around the world, whilst aware of the Bribery Act, are still in denial that it might apply to them.  Our perception is that certainly in some countries very little is being done to comply with the Act, notwithstanding the obvious application of the Act, jurisdictionally, to those particular international companies.  By analogy, it is rather like when the law was introduced many years ago compelling car passengers to wear seat belts: people didn’t wear them because they always assumed the car crash happened to someone else, and never to themselves.  The enforced use of seat belts in fact prevented many injuries and saved lives.  Likewise a robust compliance programme will save companies from financial and reputational damage, but, some will only spend the money on compliance when they see their competitors being prosecuted.

In the meantime, in the last week, it has been announced that the Serious Fraud Office itself is being investigated by the much larger Crown Prosecution Service which prosecutes all other crime i.e. not serious economic crimes.  The CPS is the body that the Home Secretary planned to reverse the SFO into but was “persuaded” by a number of people within the legal establishment in the UK that this would not be beneficial and that the timing was poor, particularly at a time when the SFO was trying to promote and broadcast the effects of the new Bribery Act on businesses around the world.

It must be particularly galling, however, for the SFO to be investigated by the CPS.  One can’t help wondering whether the CPS might make some self-serving findings in their report as to the way in which the SFO is working if the CPS believes that it would be better off having the SFO merged in with it.

One can’t help also feeling, despite the official denials, that the investigation by the CPS into the SFO is linked with, amongst other things, the news story that the SFO has had to apologise to the billionaire Tchenguiz brothers whose offices the SFO raided in a high profile operation in March 2011 for alleged fraud involving the now defunct Kaupthing Bank.  The Tchenguiz brothers were both arrested although one year on neither has been charged.

The SFO has now admitted that information was put before the court (in order to obtain the search warrants) which was not accurate.  The court was misled due to a number of “human errors”, according to the Director of the SFO, Richard Alderman.  Human error when conducted by a professional sounds to us to be professional negligence, so it is not altogether a surprise that the Government ordered the CPS to conduct an investigation.  It might suggest that Theresa May’s original plans are merely on hold.

This story will continue for a while, despite the SFO’s apology, because the Tchenguiz brothers will be pursuing the Serious Fraud Office not only for their costs, but also, we understand, for damages.  Ultimately, though, that cost will not fall upon any individuals at the SFO but will have to be borne by the taxpayer which funds the SFO.

But back to News International which launched a new British newspaper this week, The Sun on Sunday.  Whilst the timing of the launch of this new publication seems particularly dubious during the second module of the Leveson Inquiry, it is reported by Mr Murdoch that its first edition was very successful and that the number of copies sold beat expectations at 3.26m copies.

However, the news is not all good for News International because one of the MPs at the heart of the campaign for an investigation into the media, Chris Bryant MP, the Shadow Justice Minister, has been speaking out again.  He claimed this week at a private members debate held in Westminster Hall that the phone hacking scandal will be the single largest corporate corruption case for 250 years.  He has also claimed that the cover-up extended to James Murdoch, the former Chairman and Chief Executive of News Corporation, something which James Murdoch has strenuously denied when giving evidence to the House of Commons Culture, Media and Sport Committee.  One can only assume that Mr Bryant’s comments are covered by parliamentary privilege.  On 29 February James Murdoch resigned from any further involvement with News International’s British newspapers, perhaps fearing further criticism of his stewardship of News International.

As News Corporation, the parent company of the News of the World and The Sun, is US based, stories surface upon time to time as the whether US prosecutors will pursue an FCPA investigation.  The signs seem to be, for the moment, that the US prosecutors will let the British prosecutors have the first run at it all, which makes sense as it does seem to be a British problem, even though, technically, some of the alleged offences may also constitute offences under US law.

All in all, the last week’s news has been quite hectic and disturbing, particularly under the themes of wide scale public corruption and the perceived (but unrelated) problems within the Serious Fraud Office itself, the main prosecuting body charged with pursuing corruption in the UK.  Let’s hope the SFO stays focussed.  The new Director, David Green, takes up his position in April.

Of course, we will continue to keep you posted on developments on these interesting stories.

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.

The settlement came as US authorities have stepped up enforcement of the [FCPA], which bars US companies from bribing foreign officials.  Smith & Nephew and other medical-device companies were asked by the SEC and the Justice Department [DOJ] in late 2007 to look into possible improper payments to government-employed doctors and to voluntarily report any issues.

Indeed, according to the SEC, ‘[t]he charges stem from the SEC’s and DOJ’s ongoing proactive global investigation of bribery of publicly-employed physicians by medical devise companies.’  This global initiative to crack down on instances of bribery in the medical services industry is, perhaps, typified by the $70 million settlement the SEC and DOJ reached with Johnson & Johnson last April, resolving charges that the company paid bribes to public doctors in Greece and other European countries.  The $48 million collected by the SEC in that matter was the largest FCPA settlement the SEC attained in 2011. 

Although the SEC alleges that Smith & Nephew “failed to act on numerous red flags of bribery as employees at the company and its subsidiaries became aware of the payments,” the company was permitted to settle the matter without admitting or denying guilt in exchange for its consent: (i) to pay the SEC $5.4 million; (ii) for the entry of a court order permanently enjoining it from future violations; and (iii) to obtain an independent corporate monitor for eighteen months to review its FCPA compliance.  Smith & Nephew also negotiated a deferred prosecution agreement with the DOJ, pursuant to which the company will pay a $16.8 million fine. 

At $22 million, the Smith & Nephew settlement is unlikely to be the largest FCPA settlement in 2012.  It demonstrates, however, the US regulators' continued focus on FCPA enforcement.  The SEC and DOJ continue to investigate the matter.  It is unclear whether the Serious Fraud Office assisted in the US authorities’ investigation or if it is conducting a parallel inquiry.

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 Government should consider the introduction of DPAs or some similar sentencing procedure after a thorough assessment of the alternatives. DPAs have proved to be a useful procedure to settle [Foreign Corrupt Practices Act (FCPA)] cases in the USA but the process has also been criticised with little judicial oversight.

As discussed more fully below, this recommendation reveals two themes that recur throughout the Report.  First, TI-UK is of the view that US-style DPAs are potentially problematic because they lack adequate transparency and judicial oversight.  Second, in spite of these perceived shortcomings, TI-UK concludes US-style DPAs are nevertheless an efficient and effective means of resolving overseas bribery cases. 

DPAs are plea or settlement agreements negotiated by the US government – typically by the Department of Justice (DOJ) or the Securities and Exchange Commission (SEC) – and a corporate or individual defendant, pursuant to which the defendant avoids formal prosecution by admitting guilt, paying a fine and/or restitution, and in appropriate circumstances agreeing to additional terms or conditions, such as the appointment of a corporate monitor.  Importantly, the agreement is null, and the defendant may be prosecuted, if she is deemed to have violated the DPA. 

TI-UK regards the DOJ’s ‘track record of achieving corporate settlements for overseas bribery’ as ‘second to none’.  This is, in part, because DPAs have emerged as a widely popular and successful means of settling bribery (i.e., FCPA) cases in the US.  DPAs are attractive, TI-UK explains, because they ‘incentivize self-reporting, properly label corruption as criminal, and meet public policy requirements and sentencing outcomes by encouraging future compliance programmes’.  Still, ‘[t]he use of DPAs is not available under current UK law, albeit that this may change after a review was announced recently by the Attorney General’.  The head of the Serious Fraud Office (SFO), too, has expressed support for the use of DPAs. 

Transparency and Judicial Oversight

DPAs may not yet be available in the UK because, as TI-UK notes, ‘[s]ome concerns have been expressed about the approach of the DOJ in settling offences under the [FCPA] in a less than transparent and fair manner’.  The TI-UK report explains that the terms of DPAs are negotiated by the DOJ (or the SEC) and the corporate or individual defendant ‘without any scrutiny’ by the courts.  Because they are not familiar with all the facts, in assessing the appropriateness of a proposed DPA, the courts are ‘necessarily limited to the evidence and charges laid before them, in essence to the confines of the plea agreement’.  In order for the process to be a ‘more predictable and transparent’ one, TI-UK suggests, the agreements themselves must ‘adequately reflect[ ] the underlying criminal conduct’ and ‘be subject to judicial scrutiny independent from the prosecutor’s office’. 

To be sure, TI-UK is not the first to voice this concern.  Indeed, in November 2011, Judge Rakoff of the Southern District of New York famously declined to approve a proposed SEC settlement, ruling that the court must ‘exercise independent judgment’ in evaluating a proposed settlement, and the terms of the proposed agreement did not supply the court with enough evidence to evaluate its appropriateness.  Less than a month later, somewhat less famously, Judge Randa of the Eastern District of Wisconsin too refused to endorse a proposed SEC settlement on grounds that he could not assess the fairness of the proposed settlement without an adequate factual basis for the agreement. 

TI-UK’s concern is, perhaps, more apt with regard to developing countries (or ‘high risk’ jurisdictions) that have adopted anti-bribery legislation in recent years or otherwise purport to deter and punish bribery offenses.  There may be little visibility into criminal or regulatory matters in those jurisdictions; and DPAs or similar agreements may not be subject to stringent judicial or administrative scrutiny.  A lack of transparency in high risk jurisdictions is of grave concern, because the international business community cannot adequately gauge whether a country actively engages in anti-bribery enforcement or has merely enacted policies that are not effectively implemented. 

Adopting the US Model

Despite TI-UK’s concerns – and in light of the recent opinions of Judges Rakoff and Randa – the US’ DPA model presents an efficient and largely transparent procedure for settling bribery cases.  DPAs are filed with and vetted by the court overseeing the criminal or regulatory matter, and the terms of the agreement are publicly available.  Moreover, as TI-UK points out, compared to the SFO, the DOJ publishes ‘far more information’ on its settlements. 

From a US perspective, at least, there are a number of key efficiencies to be gained through the use of DPAs, including incentivizing self-reporting; settling matters at an earlier stage; effectively combating bribery despite ‘a modest number of attorneys working in a dedicated FCPA unit;’ and promoting public policy.  These efficiencies have long outweighed concerns about transparency and judicial oversight.  As we are seeing in the US, however, there may be effective methods to ‘tweak’ the US model by requiring more fulsome factual statements or admissions in proposed settlement agreements.  These simple policy adjustments might allow UK regulators to adopt the US model without undermining their regulatory mandates.

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 report contains a very useful review of the following:

• Plea agreements and civil settlements, including the legal framework that governs plea agreements, protocols that govern the conduct of prosecutors, plea negotiations and the principles of civil recovery;
• Sentencing, including fines, confiscation, rehabilitation (monitors), restitution (compensation) and debarment;
• Alternative legal procedures including prosecutions in the United States for FCPA offences and in other jurisdictions;
• Case studies in criminal proceedings including the recent cases of Mabey & Johnson, Innospec Ltd, the BAE Systems case;
• Commentary and issues in criminal plea agreements including prosecution, conduct and sentencing issues;
• Case studies and civil settlements including the recent cases of Balfour Beatty, AMEC, the Aon settlement with the Financial Services Authority, MW Kellogg Limited, Depuy, Macmillan Publishers, and the Willis settlement with the Financial Services Authority;
• Commentary and issues on civil settlements including the use of civil powers under Proceeds of Crime Act, prosecution practice, sentencing issues and the role of the FSA;
• Emerging issues and recommendations including the primacy of criminal settlements, transparency, the respective roles of the judiciary and prosecutor in criminal plea agreements, the seriousness of overseas bribery, rehabilitation – the appointment of monitors, bribery offences and debarment, limitations of civil settlements, deferred prosecutions and international cooperation on investigations and prosecutions.

TI states that the report intends to provoke discussion and to make recommendations to the UK government and prosecuting authorities that will “help to ensure just, fair and transparent outcomes”.  Transparency International states that “the right balance, both on the exercising of prosecutorial discretion and in sentencing, has yet to be realised…”.

Transparency International make 23 recommendations (set out on pages 6 to 8 of the report).  The ones which we find particularly interesting include:

• Recommendation 6: Protocols in international cases:  The Attorney General should agree some form of protocol or Memorandum of Understanding with his counterparts, especially with the US, which deals with the underlying principles of settling concurrent jurisdictional issues.  Decisions should be taken on grounds of public interest rather than narrow national self interest.  Defendants should not be encouraged to believe that they can forum shop in the expectation that they can play jurisdictions against each other.
• Recommendation 7: Double jeopardy:  Double jeopardy should not be used to frustrate criminal proceedings in the UK, in those cases where there is a strong public interest to argue for primacy of the UK courts.  In those cases where double jeopardy is pleaded as a reason for not proceeding with criminal charges it should be fully reasoned and publicly justified.  The SFO should contribute to the legal debate over double jeopardy by publicly explaining its view on the application of double jeopardy in US and European cases.
• Recommendation 8: Sentencing guidelines:  The Sentencing Guidelines Council should issue guidance on sentencing in overseas bribery cases, reflecting the seriousness of the offences, the damage that bribery inflicts on society and to provide an effective deterrent to future corporate defending.  There should be greater clarity and certainty over the level of fines and the method of calculation, and the aggravating or mitigating factors that should be taken into account in the sentencing.
• Recommendation 12: Corporate liability:  The work of the Law Commission on corporate criminal liability should be finalised as soon as possible to enable the SFO to seek to clarify its application in respect of offences under the Bribery Act and if necessary test its interpretation before the courts.
• Recommendation 19: Debarment:  There should be more clarity on the process for entering and exiting the debarment process, including taking into account any remedial action taken by the company.  TI–UK recognises that the current uncertainty over the risk and nature of debarment can play a disproportionate role in pre-negotiations, which may result in an inappropriate charge being laid before the court.
• Recommendation 20: Appointment of monitors:  The process by which monitors are appointed, their terms of reference, their powers and reporting need to be subject to clear published guidelines.
• Recommendation 22: Earlier judicial oversight:  Prosecutors should have access to the court at an earlier stage in plea negotiations to obtain tacit judicial approval of plea agreements and to obtain an indicative range of the fine and confiscation.  It is important that whatever extended role is played by the judiciary, the independence and separation of powers between the judiciary and prosecutors is not undermined.
• Recommendation 23: Use of Deferred Prosecution Agreements:  The Government should consider the introduction of DPAs or some similar sentencing procedure after a thorough assessment of the alternatives.  DPAs have proved to be a useful procedure to settle FCPA cases in the USA but the process has also be criticised with little judicial oversight.

We will blog further on this comprehensive and stimulating report, including US perspectives on it, in due course.

One of the DOJ’s current priorities is FCPA enforcement and the suggestion has been made that by being ‘overzealous’ in this regard, the DOJ is making it more difficult for US companies to compete abroad.

In 2010 the DOJ brought 48 new FCPA actions, nearly double the number for the previous year. Thus far in 2011, the DOJ has entered into 12 deferred prosecution agreements and 8 non-prosecution agreements with corporates, 5 of which stemmed from voluntary disclosures to the DOJ.

However, Lanny Breuer, who heads the Justice Department’s criminal division, considers the level of enforcement to be ‘just right’.

Hitherto, few cases brought by the DOJ reached court. But this is changing, as an increasing number of cases are being brought against individuals, who are tending to contest the allegations. So far this has resulted in only mixed success for the prosecution.

By contrast, corporates are less disposed to let a case proceed to court, with all the attendant cost and bad publicity.

The question being asked is whether the DOJ is being too enthusiastic in its enforcement approach.

This is being compounded by what some perceive as a lack of clarity in areas such as the ambit of the term ‘foreign official’, or where the line is drawn between what might be considered a legitimate gift as opposed to a bribe, or on questions of successor liability following company mergers or acquisitions.

A number of legislative reforms are being proposed in these areas. There is also a suggestion that a compliance defence be introduced along the lines of the ‘adequate procedures’ defence available under the UK Bribery Act, something about which the DOJ currently appears to be less than enthusiastic although informally the adequacy of a company’s compliance is something the DOJ will have regard to when (a) deciding whether to prosecute and (b) determining the appropriate level of any sanctions.

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 Dodd-Frank Act requires the Commissions Office of the Whistleblower to report annually to Congress on its activities, whistleblower complaints and the response of the Commission to such complaints.

In its first report, just published, it is stated that the Office of the Whistleblower, in the Division of Enforcement, currently consists of six attorneys and one senior paralegal.

Since the whistleblower hotline was established for members of the public to call with questions about the program, the Office has returned over 900 phone calls from members of the public.

During this period the Whistleblower’s Office has been busy publicising the new program actively through participation in webinars, presentations, press releases and other public communications, and also conferring with regulators from other agencies’ whistleblower offices including the Internal Revenue Service, Commodity Futures Trading Commission, Department of Justice, and Department of Labour to discuss best practices and experiences.

The Whistleblower's Office reports that because the Final Rules only became effective on 12 August 2011, in fact only seven weeks of whistleblower tip data is available for the fiscal year 2011.  Notwithstanding that, within that period 334 whistleblower tips were received which break down into different categories as follows:

• Manipulation – 16.2%
• Offering fraud – 15.6%
• Trading and pricing – 5.1%
• Insider trading – 7.5%
• Corporate disclosure and financials – 15.3%
• FCPA – 3.9%
• Municipal securities and public pension – 2.7%
• Unregistered offerings – 5.4%
• Market event – 3.3%
• Other 23.7%
• Blank (nothing specified by the caller) – 1.5%

Although this is, of course, only a short period of statistical samples, it puts the issues with the FCPA into context with all the other types of SEC violations, at approximately 4% of the total.

Geographically the whistleblower submissions arise from individuals in 37 states within the United States, as well as several foreign countries of which China at 10 callers and the United Kingdom at 9 callers were by far the highest.

The SEC concludes that as a result of the very recent launch of the whistleblower program and because of the small sample size, it is too early to identify any specific trends or conclusions from the data collected to date.

The SEC further reports that on 12 August 2011 the Office of the Whistleblower posted notices of covered actions for the 170 applicable enforcement judgments and orders issued from 21 July 2010 to 31 July 2011 that included the imposition of sanctions exceeding the statutory threshold of $1 million.  The 90 day deadline for all applications for the initial list of covered actions is 11 November 2011 and because the 90 day application period had not passed with respect to any notices of covered actions as at the end of the fiscal year (which the report covers), applications for awards have not yet been processed: therefore the Commission has not paid any whistleblower awards during the fiscal year 2011.

Presumably when the SEC produces its annual report at the end of the fiscal year for 2012, there will be a great deal more information and, we assume, a significant number of whistleblower awards will have been paid.  The analysis should then be much more informative and interesting.

We, at the BriberyLibary, follow this new program with great interest as we are of the view that financial incentives and compensation designed to encourage people with knowledge and evidence to come forward to blow the whistle on corporate corruption (and other legal wrongs) should be seriously considered in the UK without further delay. As we have previously posted, in the competition context, on 3rd August 2011, rewards for whistleblowers already exist in the UK in the competition context and are payable by the Office of Fair Trading, although they are not on the scale potentially foreseen by the SEC’s own program but are limited to £100,000 (which may not be enough to compensate someone whose career might be damaged by speaking out). As always, the US leads the way in developing intelligent "heat seeking" legal strategies and methods to root out serious and systemic crime. Even taking into account the greater size of the US economy, in terms of enforcement it is far ahead of all other developed economies in rooting out large scale national and international bribery and corruption.

The political will to eradicate corruption is growing in many countries, but there are decades of catching up to be done to get to the same level of enforcement with the US.

It is reported that Pfizer and its rival Johnson & Johnson, which itself settled a bribery investigation earlier this year, have provided US authorities with information about widespread industry practices that could violate the FCPA.

The Department of Justice has previously reported that Johnson & Johnson had received a $17 million discount on its $21.4 million criminal fine for “substantial assistance in the prosecution of others”.

This latest settlement is part of an industry focus by the SEC and the DOJ on the pharmaceutical and medical device industry globally (something which my colleague, Patrick Gilfillan, has previously blogged on), including financial arrangements with foreign doctors some of whom may be regarded as foreign public officials under the FCPA

Deloitte reports that companies have increased their focus on preventing and detecting corrupt activities and their global operations in response to the increase in prosecutions under the US Foreign Corrupt Practices Act (FCPA) and the increased size of penalties.  However, only 29% of the 276 executives surveyed by the Deloitte Forensic Centre were very confident that their company’s anti-corruption program would prevent or detect corrupt activities.  Deloitte concludes that this low level of confidence indicates that many companies may need to evaluate and upgrade their anti-corruption efforts.

A combination of the increased enforcement of the FCPA, and the increase in the size of penalties over the last few years, together with the coming into force of the new UK Bribery Act 2010 means that organisations all around the world are re-examining their anti-corruption compliance programs.  Indeed several we at the Bribery Library have spoken to over the past year have no anti-corruption controls in place at all, which is perhaps surprising when you realise that they are entities with turnovers of $billions.

Some other interesting statistics from the Deloitte report:

• 90% of executives said their company had an anti-corruption policy (one wonders precisely who Deloitte were surveying, because this is not necessarily our experience).
• Only 45% of the companies surveyed had a stand alone anti-corruption policy, while the remaining companies have a policy that was part of a broader code of conduct.  Deloitte offer the commentary that in their experience anti-corruption issues may not receive adequate attention unless they are addressed by the policies specifically focussed on corruption, is a view with which we agree.
• Although roughly 80% of executives said their company conducted internal audits of its foreign operations to identify corrupt activity, only 32% said these audits were conducted annually or more often.

Third party risks

• 52% of executives see the activities of third parties as the greatest source of corruption risk.
• 43% of executives considered that identifying and managing third party relationships was a significant challenge, more than for any other issue.
• Despite these concerns, only 41% of executives said their company regularly conducted due diligence on third parties in foreign countries that interact with foreign government officials.
• 9% of executives said that they conducted very detailed monitoring of third parties to ensure that they are complying with the company’s anti-corruption requirements.  This statistic certainly is in line with our experience of talking to clients and contacts.
• When conducting anti-corruption internal audits, only 50% of executives said that their company’s audits covered foreign sales agents.

Increased corruption risk in emerging markets

• 55% of executives said their company was extremely concerned about the potential impact on their business of corruption in China.
• 43% had the same view about Russia.
• 39% had the same view about India.
• 26% had the same view about Brazil.

“Tone from the top”

• 80% of executives said that their board of directors received updates on the status of their anti-corruption compliance program, and roughly two thirds said that they received updates annually or more often.
• However 32% of executives from smaller companies (with less than $1 billion in annual revenues) said that their board of directors did not receive any updates on their compliance programs.

Assessing risky activities

• Approximately one third of executives considered that customs clearance and importation of goods, and entertainment or business development expenses related to government business or to government relations, presented a significant corruption risk for their companies.
• 20% or more of executives felt that a number of other activities pose a significant risk including bribes, gifts to foreign government officials, expenses incurred in connection with sponsored travel and lodging for foreign government officials and facilitating payments.
• 63% of executives at larger companies believe that the use of third parties posed a significant risk, compared to 33% of those at smaller companies.
• 35% of executives from larger companies received a significant risk from entertainment or business development expenses related to government business or to government relations, while only 19% of those at smaller companies shared that concern.
• 58% of executives said that their companies relied extensively on internal risk assessments and past experience with corruption issues.
• One third of executives said that their companies relied extensively on industry information or on the ratings of the Transparency International Corruption Perceptions Index.
• In spite of the very significant financial incentives arising out of the Dodd-Frank SEC whistleblower provisions, 37% of smaller companies and 20% of larger companies said that they were not likely to re-evaluate their anti-corruption programs in light of these new rules.

Training and communication

• 73% of executives said that their companies provided anti-corruption training, of whom 64% said that they trained select employees such as those in higher risk positions.  However, many executives said that their company cast a much wider net for anti-corruption training.
• Half of the executives said that their company trained all international employees, while 44% said that they trained all domestic employees.
• Roughly one third of executives said that their company also trained members of its board of directors on the company’s anti-corruption policy.
• Only 26% of executives said that their company trainer third parties on anti-corruption requirements which, Deloitte comment, is surprising given the general concern over corrupt activities involving third parties.

Personally, we are surprised at the low level of training revealed by this survey and feel certain that this must increase rapidly and extend to all staff if companies are to meet the UK Bribery Act Guidance published on 30 March 2011.

Deloitte conclude that while training is important in helping all employees understand the legal requirements and company policy on what constitutes corrupt activity and its consequences, it is unlikely to be enough.  Anti-corruption training programs should be supplemented by a robust monitoring programme throughout the year, and by an effective approval process for transactions and for the use of third parties.

In conclusion, this survey is a stark reminder that there is a great deal more work to be done by companies all around the world, including those in countries where there is already medium or high levels of enforcement, to deal with the risk of corruption and to meet the expectations of regulators, especially in the US and the UK.

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.

The SFO Director, Richard Alderman, said:

“I want people to come forward and tell us if they think there is a fraud or corruption going on in their workplace.  Company executives, staff, professional advisers, business associates of various kinds or trade competitors can talk to us in confidence.”

The SFO’s whistleblowing hotline is aimed not at victims of serious or complex fraud , but at those who want to give information about serious or complex fraud or corruption on the understanding that their identity will not be inappropriately disclosed. The service is confidential and the SFO has agreed that it will only reveal the whistleblower’s identity on a strictly “need-to-know basis” or if a Judge orders the SFO to do so.  The information provided will be stored centrally by the SFO and any information sent via the SFO’s website will be encrypted immediately.  Such information will be handled by trained staff at the SFO.

However, it remains to be seen whether the SFO whistle blowing hotline will increase the number of corruption offences enforced by the SFO.  In the US, the Dodd-Frank Act of 2010 provoked a large number of investigations by the Department of Justice (DOJ) and by the Securities and Exchange Commission (SEC), due to the rewards provided to whistleblowers who can be entitled to a maximum of 30% of monetary sanctions exceeding US$1m that the government recovers as a result of their assistance.

For example, in March this year, the sum of US$96m was paid to Cheryl Eckard under the Dodd-Frank Act as a reward for acting as a whistleblower at the conclusion of a US$750m settlement with GlaxoSmithKline. 

For further information on this topic, please read the blog of my colleague Adam Greaves posted on 23 October 2011.

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.