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

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

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

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

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

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

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

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

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

Corruption

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

Mr Alderman takes the view that:

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

Self-Reporting

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

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

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

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

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

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

How Self-Reporting actually works

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

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

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

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

Civil Recovery

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

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

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

Deferred Prosecutions

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

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

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

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

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

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

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

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

Plea Bargaining

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

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

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

Companies that do not self report

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

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

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

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

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

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

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

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

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

In a recent Bribery Library post, Adam Greaves provides a useful summary of Transparency International UK’s (TI-UK) report, ‘Deterring and Punishing Corporate Bribery’,  which analyses UK enforcement trends in overseas bribery cases.  From a US perspective, we found particularly interesting the Report’s examination of whether US-style Deferred Prosecution Agreements (DPA) might be appropriate in the UK regulatory environment.  TI-UK makes the following recommendation in that regard:

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.

In the report of the International Development Committee published yesterday, evidence was given to the committee by a number of witnesses including government ministers, Transparency International and other NGOs and the Director of the Serious Fraud Office, Richard Alderman QC. The report is well worth a read although much of it centres on the BAE Systems corruption investigation and the delay in it paying the agreed sum of £30m to the people of Tanzania.

The Chair of the committee Malcolm Bruce, appeared to take a dim view of the conduct of BAE itself  in its conduct and words AFTER the deal with the SFO had been struck in late 2010, in particular what he saw as the very late payment to the people of Tanzania of the agreed sum. At Question 92 of the transcript of evidence there are exchanges in oral evidence between Mr Alderman and the committee on the subject of BAE's perceived poor attitude.

Later on the committee asked Mr Alderman how he thought the possibility of plea bargaining, much criticised by the court and the court of appeal in the last year or so in the context of a number of corruption cases which came before the court, could be improved. Mr Alderman said:

"Q105 Hugh Bayley: You told us earlier this morning that you had great difficulty with the antiquated law under which this case had to be brought. You say in your written submission that you would not want to see the current Bribery Act amended. If you do not amend the Act what needs to be done to make the current arrangements for plea bargaining more transparent, and to enable payments of this kind, where a compensation payment is made to a third party, another country, more easily enforceable?

Richard Alderman: Perhaps I may take that question in two parts. First of all, the antiquated law was really about what was needed to be able to establish a charge of corruption. In those pre-Bribery Act days we needed to establish that what is called the directing mind of the corporation was involved in the illegal activity. Basically, that meant that we had to prove that the board of BAE, or people very close to it, were involved in the corrupt payments. I have made no secret of the fact that that test may well be suitable in terms of very small organisations but it is totally unsuitable for a modern globalised corporation. That is why the Bribery Act is such a big improvement. We no longer have to prove that the directing mind was involved in orchestrating and directing the corruption. We have to prove that there was a failure to prevent corruption and that there were not adequate procedures to prevent it. That is a very different test, and one that in my view is a very, very significant advance. Plea bargaining needs to retain and obtain public confidence if it is to be successful, and it must have judicial confidence. We are now dealing with a range of cases, particularly involving very large global corporations, where there are parallel investigations in other jurisdictions. The question arises: how are these cases to be brought to an end, given the particular issue of double jeopardy that I have mentioned? There are very difficult issues here. In my view, the corporations want certainty before the criminal justice system starts, and that is a legitimate request. On the other hand, we have to ensure that what we do has public and judicial support. My view is that that can be obtained only through having a judicial ruling before the agreement can be reached and charges are brought. If for one moment I take as an example the scenario of the BAE case, agreement was reached at about half-past 10 on a Thursday night, after lengthy negotiations. In the United States, the Department of Justice was going to go into court at about nine o’clock their time, two o’clock our time, to announce a settlement relating to eastern and central Europe and Saudi Arabia. That would have an impact on our case. My view has always been that if I had had the opportunity to take my agreement to a judge on the Friday morning it would have been a far better system.

Q106 Hugh Bayley: Forgive me; you have made this point twice. You are saying that the Bribery Act does not need to be changed but some bit of law does, I guess, in order to have the ability to go to a judge earlier in proceedings.

Richard Alderman: That is right.

Q107 Hugh Bayley: Could you possibly send us a note to explain which Act needs to be changed?

Richard Alderman: I can certainly do that. This is a criminal justice issue about the ability of a judge to be involved in a criminal case before any criminal charge is brought."

We at the Bribery Library agree with Mr Alderman's approach as set out in his evidence and consider that a change in the criminal justice system is over due. Change is needed in order to deal with the situations which arise in the very high value, international and often very complex cases such as corruption prosecutions which frequently take place in many countries in parallel. The UK court's reactions so far to the sort of bargains which the SFO has tried to reach with defendants have been reactionary and discouraging to the criminal justice process. These deals were plainly done in the best interests of encouraging defendants to come forward at an earlier stage, and to saving the enormous legal costs of a trial and yet the courts have been very prickly.  Courts in the UK need to stop thinking parochially about their own coveted powers and start thinking globally about how to stamp out international corruption where frequently one case affects many countries. There needs to be much more pragmatic thinking in the UK, of the kind seen much more often in the US criminal justice system.  If prosecutors are not allowed to reach agreements with defendants, then of course more of them will contest their charges, and this is something which the SFO and the court system simply cannot afford, with budgets being ever more tightly squeezed due to the current unparalled crisis in public expenditure funding. These are very different times, so we all need to develop different ways of thinking.

We will blog further on the debate about plea bargaining as it develops. If it is anything like the current debate on deferred prosecution agreements, it is likely to be some years before anything actually gets changed.