An interesting article by journalist and fraud-insider Trevor Maggs, entitled ‘Has staff morale collapsed at the SFO?’ outlines his impressions of what life is like at the moment inside the regulator’s office. http://www.trevormaggs.com/?p=196
Monthly Archive for April, 2010
We have reported previously on Depuy executive’s John Dougall’s prosecution here. (In short, he was a marketing executive at a Johnson & Johnson subsidiary, who pleaded guilty to participating in a bribery scheme with Greek doctors).
He co-operated fully with the SFO investigation, and was described by the SFO as “the first co-operating defendant in a major SFO corruption investigation.” He handed documents to the SFO prosecutors and undertook to give evidence in any future trials against other individuals,
He had signed an agreement with the SFO under s73 of the Serious Organised Crime and Police Act 2005, which allows the Court to take into account the extent and nature of the assistance given or offered when considering what sentence to pass on the defendant (more here).
Accordingly, the SFO looked for a light sentence, and at the sentencing hearing, both the prosecution and the defence asked that a suspended sentence be given.
But Justice Bean at Southwark Crown Court thought otherwise and went again the SFO’s wishes. The judge said that he accepted the public policy consideration of prosecutors being able to promise/recommend more lenient sentences in return for co-operation
….But it does not justify a suspended sentence in a case where corruption was systemic and long-term and involved several million pounds in corrupt payments.
Dougall was accordingly sentenced to a year in jail.
It is not clear what reduction the Judge allowed for the co-operation, but I think Dougall can feel justifiably let down. It is clear that the SFO’s prosecution strategy is not finding favour with the judiciary, who is rightly unhappy about cosy deals taking place behind closed doors. Plea agreements with corporates have little history in the UK, and are not going to be forced through quickly by a prosecution agency.
The Innospec debacle (which we commented on here) and now this, leaves us wondering whether Richard Alderman can deliver on his bribery strategy of ‘come and talk to us and we’ll be lenient’. We don’t think he will have that many volunteers until the extent of his ability to deliver on plea agreements is clarified.
The SFO press release can be found here.
The long-shot legal challenge to the BAE Systems settlement (which we have previously reported on here) brought by pressure groups The Corner House Group and Campaign Against The Arms Trade has been dropped. The SFO has been injuncted since 1 March 2010 from taking the agreement to court for sanction while the pressure groups appealed a High Court decision not to grant them a judicial review to challenge the settlement with BAE and to drop “conspiracy to corrupt” charges against former BAE agent Count Alfons Mensdorff-Pouilly.
The Judicial Review process was the only realistic challenge that could have been made against a decision not to prosecute, however the judiciary overturns the decisions of prosecutors only in exceptional circumstances, and on 8 April, press releases announced however that the appeals were not going to be proceeding. Instead of the legal challenges, CAAT will instead be concentrating its efforts towards protesting at the forthcoming BAE Annual General Meeting on 5 May.
The Corner House website sets out the key problems that they saw with the proposed settlement:
- The SFO has apparently given an undertaking to BAE that it will never in future prosecute any individual if doing so involves alleging that BAE was guilty of corruption.
- No explanation has been given as to why the US plea bargain settlement on BAE’s deals in Eastern and Central European countries took priority over the SFO’s prosecution in the UK, given that BAE Systems is headquartered in the UK and the allegations relate to activities emanating from the UK.
- The SFO Director acknowledges that “a conviction for an offence of corruption would have had the effect of debarring BAe for tendering for public contracts in the EU” under Article 45 of the European Union Public Sector Procurement Directive 2004. The SFO’s own Guidance on Corporate Prosecutions states that “a decision not to prosecute because the Directive is engaged will tend to undermine its deterrent effect”, which “is intended to be draconian”. Yet the SFO Director states that this consequence would have been “a disproportionate outcome.”
The papers we have seen highlights to us a distinct lack of co-ordination with the DOJ, and gives the impression that the SFO has again been railroaded by the DOJ into agreeing something at the last minute, and on terms that were less favourable to the prosecutors than they might have otherwise been.
The SFO explains that was aiming to finalise its case on Eastern Europe by the end of January 2010 and to submit papers in mid-February to the Attorney General requesting consent to prosecute. On 29 January, however, the DOJ contacted the SFO and indicated that a plea agreement was imminent, with guilty pleas in respect of Eastern Europe and Saudi Arabia, and a payment of $400 million.
The SFO contends that this US deal would be “highly likely” to prevent prosecution in England for the offences involving Eastern Europe because of the principle of double jeopardy – a defendant cannot be prosecuted twice for the same crime on the same set of facts.
It is unclear whether this is really double jeopardy if the charges in the US were not of a similar character to those that would have been charged in the UK: in the US, BAE pleaded guilty to conspiring to make false, inaccurate and incomplete statements to the US authorities and to file false export licences; in the UK, the SFO was investigating corruption offences.
The next important step for the SFO is putting the settlement before the Crown Court for ratification. However in light of the Court’s very recent criticism of the SFO’s approach to plea agreements in the Innospec matter (see here) and Robert Dougall’s sentencing (see here), we predict that this is not going to be an easy rubber-stamping exercise for Richard Alderman’s team.
The Corner House and CAAT press release can be found here. The SFO’s grounds for contesting the Judicial Review claim can be found here.
We have often felt frustrated during recent UK and European bribery and corruption conferences, when the focus has been biased towards US lawyers talking about how European corporates should comply with the FCPA. Hopefully this can now change to a far more Euro-centric focus, because after a tortuous drafting and review process, the Bribery Bill was rushed through the final Parliamentary review processes with barely a comment, so focused were the MPs on the forthcoming general election. Accordingly, the Bribery Act 2010 received Royal Accent on 9 April, shortly before the formal dissolution of Parliament (more here)
The text of the Act is here.
As we have written here previously, the Bribery Act represents a wholesale update of the antiquated and discredited UK bribery laws. Our lawyer friends have all written excellent summaries of the new rules (see for example Fulbright’s summary here and Norton Rose’s here which we will not try to replicate for breadth or depth. But we will try to produce the briefest summary to be found on the web to date…..
- The Bribery Act applies to all companies with a UK nexus. It applies to worldwide acts. It crimanalises offering, paying, requesting or receiving bribes. It prohibits bribery in both the public and private sectors.
- Bribery is defined in terms of intending to procure the “improper performance” of a person’s duties. This means that the recipient of the bribe would be expected to act otherwise than in good faith, an impartial manner or in accordance with a position of trust. Expectations are judged by UK, not local, standards.
- A new strict liability offence for businesses of failing to prevent bribery is introduced. The only defense is if “adequate procedures” were in place to eliminate bribery.
- There is personal criminal liability for senior executives with whose “consent or connivance” the bribery was committed.
- A business is liable for bribery carried by “associated persons”, defined as persons or entities which perform services on behalf of the principal.
Importantly for corporates, the Bribery Act is far wider in scope than the FCPA, and so foreign multinationals must take heed. “FCPA reviews” for global corporates should really now be replaced by far more stringent “Bribery Act reviews”, as companies cannot simply rely on their FCPA compliance programs to be covered under the Act.
- The Bribery Act applies to business to business activities, not just to the bribery of foreign public officials (FPO)
- It applies to receiving as well as paying bribes
- Bribery of an FPO need not be done “corruptly”
- There is no exemption for facilitation payments
- It has a wider extra-territoriality
So having a place of business in the UK, a foreign company can commit the failure to implement “adequate procedures” offense in relation to conduct in a foreign country. The overseas bribery need not be connected with the specific UK business.
Innospec Settles (but only just) in the UK and the US: the SFO’s prosecution strategy is severely dented
Innospec is a specialty chemical maker listed in the US, and with a significant operation – Innospec Ltd – based in Ellesmere Port in the UK.
Executives were charged with conspiring to give corrupt payments to executives of Pertamina, an Indonesian state owned refinery in return for contracts to supply its old-technology anti-knock fuel additive Tetra-ethyl Lead between 2002 and 2006. Prosecutors also investigated making payments to Iraqi officials under the Oil for Food program, and in the US, selling some $20m of chemicals to Cuba without a license from the Treasury Department’s Office of Foreign Assets Control (OFAC), which is a still a violation of the Trading With the Enemy Act.
The US authorities began to investigate Innospec in 2005, and the SFO began to take a serious interest in 2007. The directors decided to admit wrongdoing in late 2008, and following the usual protracted negotiations as to the amount of the fine, with involvement by the SFO, DOJ, SEC, and OFAC, a deal was eventually struck. It was heralded as the first formal joint SFO/DOJ settlement, with a agreed fine being divied-up between UK and US regulators, and the appointment of a joint UK/US compliance monitor.
Innospec’s ability to pay was a key factor in the relatively small amount of the penalty – which had been agreed at $25.8m (payable in stages up to 2013) plus a further $14.4m which was contingent and performance-related (making a total of $40.2m). Profits resulting from the transgressions were likely to have been in the hundreds of millions of dollars, and following current US sentencing formulae the penalties could easily have been in the $500m ballpark. The total penalty here is a comparative drop in the ocean, and a great result for Innospec.
The SFO thought that they should take 50% of the agreed penalty, on the basis that the criminality was largely orchestrated and controlled from the UK (perfectly reasonable you might think). The US authorities on the other hand thought that they should have the majority of the fine, because, they had done some of the work, there were more of them, and er…. they could. So after some behind the scenes machinations, the UK’s share of the penalty was eventually agreed at 31% ($12.7m). Of this, $6.7m was planned to be allocated to a criminal fine or confiscation to be imposed in the Crown Court (in respect of Indonesia transgressions) with the balance being the subject of a civil settlement (in respect of Iraq OFF transgressions). Meanwhile, in the US, the penalty had been negotiated at $27.5m, comprising a fine of $14.1m to the DOJ, disgorgement of $11.2m to the SEC and $2.2m to OFAC. As part of both plea agreements, Innospec agreed to enter into a compliance monitoring agreement and it was proposed that a joint US and UK monitor be appointed. The press releases and 10-K announcements were duly drafted.
Such FCPA settlements have been routine in the US over the past few years. All that was required was the respective UK and US courts to rubber stamp the deal. But this is when the real problems started…..
The SFO initially put the agreed Innospec settlement in front of Southwark Crown Court for the deal to be approved. However, the Court was not impressed. His Honour Geoffrey Rivlin QC, the Senior Resident Judge recused himself from the hearing, describing the plea bargaining proposals as:
He instructed the parties to return properly represented at a later date to present the case to a more senior Court of Appeal Judge. Accordingly, the matter came again before Southwark Crown Court on 18 March 2010 when the company formally pleaded guilty. Lord Justice Thomas (Britain’s second most senior criminal judge) also declined to endorse the deal. So concerned was he that he deferred sentencing to 26 March and provided a detailed sentencing memorandum (which can be found here). Although he does not overturn the plea bargain, he concluded that the SFO does not have power to enter into plea arrangements such as this and unequivocally stated that:
We have set out the Court’s objections below, but in fact there was little about the deal that the Thomas really did like.
The level of the penalty
He made it clear that he considered the fine much too low, in part because the profits made in the UK by Innospec Ltd alone may have been as high as $160m, all of which could (should?) have been subject to disgorgement. If it had been up to him to decide, the fine would have been in the tens of millions.
He commented that:
The Judge was seemingly also unhappy with the agreed split, thinking that there was scant rationale for deviating from an equal split between the penalty to be paid in the UK and the US.
Ultimately though, Thomas LJ upheld the agreed $12.7m fine, however he did so because he viewed that it would be unjust and unfair to impose a penalty greater than the amount agreed over a period of extensive negotiations between the SFO, the US authorities and the company’s advisors.
Prosecutors agreeing the level of a fine with the defendant
Although counsel for the SFO pointed out that the penalties agreed were merely suggestions, they were clearly more than this. This does not bode well for the SFO’s pipeline of prosecutions.
Compliance monitors
The Judge also had a major problem with the appointment of the compliance monitor. Such appointments have been commonplace in DOJ settlements, although their scope and cost has been reined in since the early “$50m…boonbongles” (per District Judge Ellen Segal Huvelle – more here).
The Judge considered that imposing a compliance monitor on a company with new management team in place is an expensive form of checking, some of which can be done by its auditors. The huge cost of an Innospec compliance monitor would be far better used for fines, confiscation or compensation.
The use of civil recovery orders
The SFO see CROs as one of their key weapons in their bribery prosecution strategy, hoping that corporates will be encouraged to self-report and accept a negotiated civil penalty for the less serious crimes. Such civil penalties would not amount to a criminal conviction, which of course leads to automatic mandatory debarment from government contracts under the EU procurement directives.
As part of a CRO, part of the proceeds goes to the people or country which suffered. In this case however, it would have been unfair for Indonesia (the behavior in respect of which was dealt with by a fine) and Iraq (the behavior which was deal with by a CRO, and who would therefore have received some degree of reparations) to be treated differently.
The SFO allocating an agreed penalty between a fine and a confiscation
Under protocols agreed with the Home Office, the prosecuting authority and the investigating authority both keep 18.75% of the fine. So when the SFO act in both roles, they are entitled to 37.5% of any confiscation. There is a potential conflict therefore in the SFO’s role, if it is recommending to Courts (or going even stronger than this and all but agreeing the amounts with the corporate) how a settlement should be split between fines and confiscations.
Press releases agreed between the company and the SFO
Enough said.
The sentencing remarks can be found here.
To summarise therefore, again per Thomas LJ, the SFO “had no power to enter into the arrangements made” to settle the matter and “no such arrangements should be made again.” So its now going to be a busy time for Alderman to talk to the senior judiciary to plan how future plea negotiations are going to look.