Tag Archive for 'Comment'

The Line is Drawn Under the BAE Bribery Allegations

Published on 24/12/2010. Closed Tags: , , , .

After a couple of long-awaited, and fairly frantic days in the UK courts, BAE Systems Plc’s settlement with the SFO was finally consummated on 21 December. The case continues though to demonstrate the procedural and legal difficulties still faced by the SFO in bringing corporate corruption cases to trial, and as one of the most significant UK-based corruption cases to see its way through the courts, we present here our thoughts on it.

The conclusion to this case, which involved allegations of bribery in several countries, had been a long time coming. Plea agreements with both the DOJ and the SFO had been announced in February, over 8 months previously. The SFO settlement – described by the Judge as “loosely and perhaps hastily drafted” – stated that BAE would “pay £30m comprising a financial order to be determined by a Crown Court judge with the balance paid as an ex gratia payment for the benefit of the people of Tanzania”. All that was needed was the settlement to be approved by the Court.

The BAE investigation

The December sentencing hearing should have been the conclusion to six years of investigation by the SFO. The case involved allegations of bribery and corruption in a number of deals that BAE had concluded in Chile, the Czech Republic, Hungary and Austria, Qatar, Romania, Saudi Arabia, South Africa and Tanzania. More here.

Indeed, the Saudi Al-Yamamah contract between BAE and the Saudi Arabian government had the UK government intimately involved throughout. It has been described as ‘the biggest [U.K.] sale ever of anything to anyone’ and even has its own Wikipedia page, here.  The BBC reports (here) that “The UK’s biggest arms dealer, BAE Systems, paid hundreds of millions of pounds to the ex-Saudi ambassador to the US, Prince Bandar bin Sultan…. with the full knowledge of the Ministry of Defence.” The SFO inquiry into the Al Yamamah deal was stopped in December 2006. The decision – although taken by the SFO – appears to have been taken in the context of briefings from Attorney General Lord Goldsmith on the national interest. Tony Blair has said that if the SFO investigation into BAE had not been dropped, it would have led to “the complete wreckage of a vital strategic relationship and the loss of thousands of British jobs”.

Back in February, after what Private Eye described as a deal that the SFO ‘scrambled to cobble together’ BAE agreed to pay a settlement/fine of $450 million. As is now common, the settlement appears to be an overall amount, which was then reverse engineered into component parts. The DOJ took Saudi Arabia, the Czech Republic, and Romania and $400m, whilst the SFO took Tanzania and £30m.

The US end of the BAE settlement is described well by our friends at the FCPA Blog here, or the FCPA Professor here.

BAE’s UK settlement

In 2001, the Tanzanian government paid £28m to BAE for a military air defence radar system.  Having  no air force and a GDP per head of just £465, most observers now agree it did not really need and could ill afford it.  To secure the contract, ‘commissions’ were paid by BAE to a marketing agent Shailesh Vithlani, the company’s former marketing adviser in Tanzania. Between January 2000 and December 2005 around $12.4 million was paid to Vithlani’s two companies . The payments to were recorded in the accounting records of the relevant BAE entities as payments for the “provision of technical services”.

Following investigations, BAE agreed in February 2010 to plead guilty in the UK to one charge of breach of duty to keeping accounting records in relation to payments to Vithlani, and to pay £30m which would be used to settle a UK fine against BAE Systems Plc, with the balance of the £30 million to be allocated to charitable payments “for the benefit of Tanzania.” In the plea agreement there was no allegation by the SFO that BAE had paid bribes, and there was no admission of this on the part of BAE.

The delay between February and December has not really been explained, but must in part have been due firstly to the legal challenge to the settlement mounted by two anti-corruption NGOs Campaign Against Arms Trade (CAAT) and The Corner House (ultimately unsuccessful). BAE then had to deal with the clear hostility of the judiciary to comparatively lenient plea agreements, and ensure that all the information and evidence was before the Court to allow the SFO to justify the deal. UK judges had previously passed on a clear message to Richard Alderman that international bribery was too serious to be dealt with by deals which did not mention at all the word ‘bribery’. They set out their opposition in both the Innospec settlement hearing (£8m agreed fine “wholly inadequate” – for previous posts see here) and then the Dougall/De Puy settlement hearing (for previous posts see here) to extra-judicial settlements which have been the norm in the US for years and what the SFO chief would like to see over here.

The judge on the BAE case was Mr Justice David Bean, a judge who is known to be critical of plea agreements like this – he was the judge who heard the plea agreement with Robert Dougall of Du Puy, and refused to rubber stamp it, sending it to the court of appeal. This case showed no thawing in the tension between the SFO and the Courts in relation to settlements concerning corrupt conduct, and the judge made critical comments about the settlement agreement and of the SFO’s handling of the case generally.

The Hearing – Day 1

In what BAE might once have hoped was going to be a short procedural hearing at Southwark Crown Court on a snowy 20 December, the judge, Mr Justice Bean, started to  question barristers for both BAE and the SFO, making clear that he thought the terms of the agreement did not make sense. Outside the Court, supporters of the Campaign Against Arms Trade (CAAT) and The Corner House held a colourful protest in the freezing weather singing “We won’t go until there’s justice” to the tune of ‘We Wish You a Merry Christmas’.

Under the terms of the proposed February settlement , BAE agreed to plead guilty to one charge of accounting irregularities in a deal with Tanzania, expecting a fine, possibly of around £2 million. In return, the SFO would drop all corruption investigations into BAE, including those involving deals with South Africa, Romania and the Czech Republic as well as Tanzania. The details of the allegations and the payments are set out in the Judge’s sentencing remarks, which can be found here.

The SFO might have been concerned that it did not have sufficient evidence to secure a conviction on an explicit bribery offence, but the Judge made it clear that he would be happy to see BAE tried before a jury. So it was clear that this was not going to be a rubber stamping exercise. He instructed the parties to return the next day, with further information about the precise nature of the payments made to or via Vithlani.

The Hearing – Day 2

Bean J held reluctantly that he had no power to vary or to set aside the settlement agreement. He also could not “sentence for an offence which the prosecution has chosen not to charge” (e.g. conspiracy to corrupt), or decide who should be prosecuted. There was considerable incentive for the fine to be kept as low as possible so that the majority of the cash would end up with the people in Tanzania. Eventually therefore BAE was fined £500,000 (plus £225,000 in costs) for aiding, abetting, counselling or procuring an offence under Section 221(5) of the Companies Act 1985, by the officers of its subsidiary, British Aerospace Defence Systems Ltd, (“BAEDS”) “to keep accounting records which were insufficient to show and explain payments” made pursuant to contracts with certain companies owned by a Tanzanian agent, Mr Vithlani.

The offence under s221, with some minor variations, is now at s387 of the Companies Act 2006, and as the s221 offence can only be committed by directors or officers of the company, BAE could only be prosecuted for aiding and abetting the offence.)

s387 Companies Act 2006 – Duty to keep accounting records: offence – detailed here. (1) If a company fails to comply with any provision of section 386 (duty to keep accounting records), an offence is committed by every officer of the company who is in default. (2) It is a defence for a person charged with such an offence to show that he acted honestly and that in the circumstances in which the company’s business was carried on the default was excusable. (3) A person guilty of an offence under this section is liable (a) on conviction on indictment, to imprisonment for a term not exceeding two years or a fine (or both); (b) on summary conviction— (i) in England and Wales, to imprisonment for a term not exceeding twelve months or to a fine not exceeding the statutory maximum (or both); (ii)  in Scotland or Northern Ireland, to imprisonment for a term not exceeding six months, or to a fine not exceeding the statutory maximum (or both).

No Admission of Bribery

The SFO made no allegations against BAE or its officers of involvement in any corruption offences. No officer of BAEDS or BAE has been or now can be prosecuted for the main offence, although the SFO has an avenue to bring personal charges relating to Czech Republic or Hungary (see below). Watch this space??

The Focus on Accounting Offences

Companies are finding that a plea of failing to keep proper books and records under s221 of the Companies Act 1985 is a convenient way of settling bribery offences. It avoids a plea to a crime, which can have all sorts of nasty knock on effects, such as debarment under EU Procurement Directives (more here). From a company’s perspective, it makes sense to admit the least they can get away with.

But Bean J was clearly unhappy about allowing BAE with getting away with a plea that excluded a bribery offence. He went into detail about the admission of incorrect accounting, asking why it was such a big deal unless corruption were involved. He wanted to know the exact nature of payments made through offshore companies to Vithlani. He was sceptical about the nature of the services offered by Vithlani and the $12 million paid to him. That the commission amounted to over 30% of the cost of the contract (when a normal agent’s commission was said to be nearer to 3%) led the judge to suppose that payments of such size were not spent on legitimate lobbying and marketing, but instead given to allow the agent to make bribes.

The Judge’s problem though was that those allegations had not been made by the SFO, and he wanted to know why. Commenting on the payments, Bean J asked,

If this wasn’t money to be used for corrupt purposes, then why was 97 per cent of it paid through a British Virgin Islands company established by British Aerospace?

Crucially, Bean J also asked how the payments to Vithlani’s companies should have appeared in BAE’s accounts instead of “technical services”. The SFO’s barrister said that they should have been recorded instead as “public relations and marketing services”. It was that simple offence which ostensibly made up the entirety of the case.

The Judge noted that there were no sentencing guidelines for the Companies Act accounting offences, and he questioned why the case had been brought at all if the payments had truly been for PR and marketing services and it was a simple mis-description in a set of accounts on which the case hung.

Certainly the s.221 offence would have been suitable for being sentenced in the magistrates’ court. I would myself have imposed a fine of at most £5,000.

The fact that a far larger penalty had been agreed led him to suspect that bribery was the elephant in the room. In the event, Bean J said he would not sentence on the basis of an accounting mis-description, but instead on the basis that BAE had been

concealing from auditors and ultimately the public the fact that they were making payments to Mr Vithlani, 97% of them via two offshore companies, with the intention that he should have free reign to make such payments to such people as he thought fit in order to secure the radar contract for the defendants, but that the defendants did not want to know the details.

Further Non-prosecution

As part of the settlement, BAE also agreed to pay up to £30 million (less any fine imposed by the Court for the offence) as an ex gratia payment to compensate Tanzania, in return for the SFO:

  • terminating all further investigations into BAE, not just its investigations of the radar contract
  • not prosecuting or bringing civil claims against any member of the BAE group for conduct preceding 5 February 2010, nor naming them as, or alleging them to be, a co-conspirator in any proceedings against anyone else
  • agreeing not to prosecute “any person in relation to conduct other than conduct connected with the Czech Republic or Hungary”.

The settlement was neither limited in time nor by reference to the events that the SFO had previously been investigating , and it appears to suggest that the SFO will never prosecute BAE for corruption, anywhere, ever. The unusually wide scope of what was described by the Judge as a “blanket indemnity” also received criticism, but the Judge also had no power to vary or set aside the settlement agreement.

Monitor

It will be recalled that David Gold was appointed as compliance monitor back in September. We reported on this here.

Reparations in Tazmania

A side effect of BAE agreeing a single figure of £30m to include a fine and reparations is that it pushes a moral burden onto the Judge to keep the headline fine low so as to maximise reparations in the affected country, and means BAE can walk away with a headline criminal fine much lower than it might otherwise have been. This approach is not without difficulties though to the SFO and judiciary in the UK, which continues to see headline fines far lower than those imposed in the US for seemingly comparable offences.

And although admirable in theory, making reparatory payments to countries where bribery or related offences has occurred is not without difficulties also. Mainly the issue being who actually gets the money? Simply put – if a country is corrupt enough to be involved in the first place, what guarantees are there that the reparations won’t also simply be pocketed by the same, or a new lot of corrupt officials?

The judge made no comment as to how the £29.5m should be paid and to whom, presumably leaving this for BAE to address. The Government of Tanzania has already pressed through an official delegation that the money came from the Government of Tanzania and that is where it should return, not to a Tanzanian charity. But all is not well in Tanzania. The Guardian’s investigation of the recent Wikileak-ed US diplomatic messages suggest the head of Tanzania’s anti-corruption bureau, Edward Hoseah,  feared for his life and pressured to drop his investigations into the deal. More here and here. It is understood that the SFO handed the Tanzanian anti-bribery organisation – the Prevention and Combating of Corruption Bureau (PCCB) – a full case file on the transaction with evidence of corruption against prominent individuals, but many suspect that the PCCB will base a decision on this resolution and the fact that reparations will be paid to Tanzania to shut down its corruption investigation.

This is not the first time that a payment has been made to an affected country – it was seen recently in the settlement with Messent (more here). NGOs such as the World Bank have initiatives – the World Bank’s Stolen Assets Recovery Initiative is run in conjunction with the UN Office on Drugs and Crime. It repatriates misappropriated assets. However, this operates through requests by governments for assistance. Further thought at an international level is likely to be needed as to how best to achieve this.

Conclusion

The BAE settlement was concluded prior to the Court’s decision in Innospec and De Puy. If the plea agreement in the BAE case had been entered into after these cases, it is likely that the Court may have felt so constrained. Notably, the judge refused to accept the agreed facts in the settlement agreement where he felt they were “an artificial basis” for sentencing.

But the SFO still retains the discretion on what offences to charge. Also, the use of an agreed figure to be split between a fine and reparation at the judge’s discretion also worked in this case.

Had it taken place under the Bribery Act 2010, a conviction would have looked more likely on the strict liability corporate offence under section 7. BAE might have satisfied the Court that it had adequate procedures in place designed to prevent corruption. If however the SFO persuaded the Court that BAE had deliberately set up a structure involving a secret offshore corporate known only to the most senior executives in the company, in order to pay large commissions to intermediaries to assist them to win business, without wishing to know how they did it, then my money would not be on the defence succeeding.

A bribery conviction though would have been a disaster for BAE in that it would have then faced the prospect of debarment from tendering for EU public contracts.

Taking Bean J’s comments into account, we expect UK settlements based on accounting irregularities to become rarer. With the Bribery Act properly in force in spring,  the majority of future actions will be brought under the new Act wherever possible, where a real bribery conviction and higher fine will be easier to secure.

EU Debarment Rules on Bribery Set to Ease?

Published on 10/12/2010. Closed Tags: , , , .

One of the main issues facing a company being found guilty (or admitting to) bribery  was mandatory debarment from competing for contracts given by EU government bodies. Fines were bad, invariably unwelcome, but the inability to do government work would put many infrastructure providers out of business.

The rules were set out in the 2004 EU Procurement Rules, codified as European Union Directives 2004/18/EC and 2004/17/EC here, and enacted in the UK as Regulation 23 of the Public Contracts Regulation 2006 (here) and regulation 26 of the  Utilities Contracts Regulations 2006 (here). These state that a public contracting authority having actual knowledge of an economic operator or its directors or certain other representatives,  that has been convicted of the offence of corruption or bribery or fraud or money launderings, should treat that entity as ineligible and it not be selected in the tendering procedure.

The US has rules relating to US government contracts – Part 9.406 of the Federal Acquisition Regulations, here, although the rules are not mandatory and debarment requires the active intervention by a federal official. Currently, because FCPA actions are usually resolved by execution of a non-prosecution agreement (“NPA”) or deferred prosecution agreement (“DPA”), contractors need to be aware of the consequences of  the Act when negotiating such agreements. Specifically, contractors must ensure that the negotiated NPA or DPA does not expressly require the company to admit to violating the FCPA or committing bribery and so come under the ambit of the Federal Acquisition Regulations.

Mandatory debarment is draconian, and the fact that it is mandatory regardless of the seriousness of the offence and the presence of mitigating factors makes it especially damaging.  It is unclear whether conviction for failure to prevent bribery under the new Bribery Act 2010 would lead to mandatory debarment. Putting companies out of business though was not the aim of the Act, and there has been much disquiet about the effects of the EU Procurement Directive when it comes into full effect in April 2011 (and when prosecutions for bribery become arguably much more straightforward?).   Indeed, most of the recent plea agreements were focused on accounting breaches and did not contain admissions of bribery specifically to avoid debarment.

The Daily Telegraph has reported here on a very welcome development that the Government is reviewing the debarment laws and the good arguments for why this should not be triggered in every case. Crispin Blunt, a junior Justice minister at the Ministry of Justice has reportedly said:

“We are currently considering how the regulations implementing the 2004 EU Procurement Directives should be amended to reflect the new Bribery Act and we intend to clarify this point before the commencement of the Act.”

If debarment is not a factor in the resolution of bribery cases, we are likely to see more companies admitting the obvious, and less reliance on artificial accounting offences. Surely a welcome development?

Bribery Act 2010 – ‘Adequate Procedures’. The consultation process begins

Published on 15/09/2010. Closed Tags: , , .

The new UK Bribery Act 2010 introduces a strict liability corporate offence of failing to prevent bribery committed by employees, agents, or any other ‘associated person’ of the company. Under Section 7, a relevant commercial organisation commits an offence if a person associated with it engages in bribery, unless it can show that it had in place “adequate procedures” designed to prevent the offence. This element of the Act is due to come into force in April 2011.

In response to much business disquiet about what all this means in practice,  the Secretary of State was required to publish guidance about procedures that commercial organisations can put in place to prevent persons associated with them from bribing people.   Although much of this is already fairly well established by compliance professionals in this space, we have waited with baited breath to see if this guidance actually contained tangible, concrete procedures which will be useful to business, or just more dishy-washy statements about the importance of tone at the top.

A consultation document has just been published to start the process.  This consultation begins on 14 September 2010 and ends on 8 November 2010. The consultation period will last 8 weeks, and is shorter than the standard 12 week period in order to allow enough time for views to be considered and for guidance to be published early in the New Year in advance of the Act coming into force in April.

The Government proposes guidance formulated around six general principles, designed to be of general applicability. The guidance states that it is not intended to be prescriptive or standard setting, or impose any direct obligation on business, however the flip side to this is that the guidance is vague and overly-generic, leaving the reader in many instances feeling: ‘This is all very good – but what should we actually DO?’.

The principles are as follows:

Principle 1 – Risk Assessment

The commercial organisation regularly and comprehensively assesses the nature and extent of the risks relating to bribery to which it is exposed.

Principle 2 – Top-Level Commitment

The top-level management of a commercial organisation is committed to preventing bribery. It establishes a culture within the organisation in which bribery is never acceptable. It takes steps to ensure that the organisation’s policy to operate without bribery is clearly communicated to all levels of management, the workforce, and any relevant external actors.

Principle 3 – Due Diligence

The commercial organisation has due diligence policies and procedures, which cover all parties to a business relationship, including the organisation’s supply chain, agents, and intermediaries, all forms of joint venture and similar relationships, and all markets in which the commercial organisation does business.

Principle 4 – Clear, Practical, Accessible, and Enforceable Policies and Procedures

The commercial organisation’s policies and procedures to prevent bribery being committed on its behalf are clear, practical, accessible, and enforceable. Policies and procedures take account of the roles of the whole work force, from the owners or board of directors to all employees, and all people and entities over which the commercial organisation has control.

Principle 5 – Effective Implementation

The commercial organisation effectively implements its anti-bribery policies and procedures and ensures that they are embedded throughout the organisation. This process ensures that the development of policies and procedures reflects the practical business issues that an organisation’s management and workforce face when seeking to conduct business without bribery.

Principle 6 – Monitoring and Review

The commercial organisation institutes monitoring and review mechanisms to ensure compliance with relevant policies and procedures and identifies any issues as they arise. The organisation implements improvements where appropriate.

Some of the guidance is as expected, not really very guiding, such as the several statements of the obvious ….

What constitutes adequate risk assessment procedures will vary enormously depending on the size of an organisation, its activities, its customers and the markets in which it operates…

The case studies at the end are well worth a read though. They deal with:

  • Intermediaries and agents
  • Hospitality and promotional expenditure
  • Business partners – joint ventures, consortia, etc.
  • Facilitation payments
  • Political and charitable donations

I’ll take the liberty of quoting the one that deals with facilitation payments in its entirety.

You are a medium sized UK IT installation company that is under contract to a large US consortium to install an IT system in a new hospital in the capital of Beneficia, where corruption is rife. In compliance with a contractual requirement you supplied the consortium with information about your existing anti-bribery regime, which is approved on the basis that it meets US Foreign Corrupt Practices Act (FCPA) standards. These standards exempt facilitation payments. Your installation project is a highly technical process requiring time sensitive management of component importation, storage and on site delivery. At an early stage your staff in Beneficia consider that, in light of the FCPA standards of the consortium and despite the prohibition of facilitation payments in the company’s anti-bribery code, they have no choice but to commence payment of local “customs fees” and “transport taxes” in order to facilitate reasonably efficient on site delivery of their components. After a few weeks your local managers strike a deal with local union leaders in which Benefician transport workers and customs officials agree to stop their demands for facilitation payments in return for free IT services for local union run educational centres. Shortly afterwards the Benefician Government supplies a dossier to the US and UK authorities detailing payments paid by your employees to customs officials and the gratis IT services for the union-based political opposition, alleging that these payments breach Benefician law.

Principle 1 – Risk Assessment

  • Did you undertake a risk assessment for the Benefician project informed by the political, social and media environment in Beneficia?
  • Was your Benefician project risk assessment informed by an objective analysis of the consortium’s contractual standards, their relationship to both the FCPA defence for payments of facilitation payments, the relevant UK law and the law regulatory environment in Beneficia?

Principle 2 – Top level commitment

  • Did your senior management provide leadership on developing and implementing anti-bribery policies and procedures tailored to Benefician law and regulatory environment?
  • Have you offered any leadership within your Chamber of Commerce or in partnership with local anti-corruption initiatives to develop alternative options for dealing with demands for facilitation payments in Beneficia?

Principle 3 – Due diligence

  • Did your enquiries extend to the political connections of the Benefician transport workers and customs officials demanding facilitation payments?
  • What did you do to assess the nature of the Benefician government’s policy on facilitation payments to officials?
  • Did your appraisal of the Benefician contract include any analysis of the potential impact of the local political situation?

Principle 4 – Clear Practical and Accessible Policies and Procedures

  • Is your policy on facilitation payments and the applicable legal frameworks clear and accessible to all staff and in particular all staff in Beneficia and all those concerned with the Benefician contract?
  • To what extent does the Benefician project solution comply with your policy on facilitation payments?
  • Did you tap into the experience and expertise of your Benefician staff and management when formulating our policy on facilitation payments?

Principle 5 – Effective implementation

  • Are there procedures in place for employees to feedback on local Benefician management’s solution to the facilitation payments problem in a safe and confidential manner?
  • Are your procedures linked to operational concerns, such as anticipating and managing the impact of a refusal to pay facilitation payments?
  • Do your procedures require management of projects such as the Benefician project to report any changes in circumstances, such as the union brokered Benefician deal on facilitation payments, to top-level management?
  • Did your procedures and policies provide for full comparative training in UK law and the FCPA standard?

Principle 6 – Monitoring and reviewing bribery-free business policies

  • Do you have procedures in place to provide a regular review of your risk assessment as regards facilitation payments associated with the Benefician contract?
  • Do you have a means of using your experience in Beneficia to improve your procedures on facilitation payments?
  • Have you considered external verification of your policy on facilitation payments with bodies other than the consortium?

The consultation document (in pdf format) can be found here.

FSA concludes that Commercial Insurance Brokers are Unready for the Bribery Act

Published on 10/06/2010. Closed Tags: , , .

Commercial insurance brokers have been in the cross-hairs of the Financial Services Authority for some time now. The FSA wrote to CEOs of wholesale insurance brokers in late 2007 reminding firms of the criminal offences of bribery and corruption. On 8 January 2008, they fined AON Ltd £5.25 million for failing to take reasonable care to establish and maintain effective systems and controls to counter the risks of bribery and corruption associated with making payments to overseas firms and individuals.

In late 2008, the FSA began a thematic review of anti-bribery and corruption systems and controls in commercial insurance brokerage firms.  The interim report on this was published in September 2009, and the final report on this topic has just been published. Titled ‘Anti-Bribery and Corruption in Commercial Insurance Broking: Reducing the Risk of Illicit Payments or Inducements to Third Parties’, the report focused on 17 broker firms between January 2009 and January 2010 to gather information on current anti-bribery controls.

The main failings identified were as follows:

  • Weak governance of anti-bribery and corruption efforts and a poor understanding of bribery and corruption risk among senior managers.
  • Failure to implement a risk-based approach to anti-bribery and corruption in practice.
  • Poor responses by many firms to significant bribery and corruption events which should have led them to reassess the adequacy of their preventative systems and controls.
  • Very weak due diligence on, and monitoring of, third party relationships and payments with a worrying lack of documentary evidence of due diligence taking place.
  • Very little or no specific training was provided on anti-bribery and corruption, even for staff in higher risk positions. Anti-bribery and corruption in commercial insurance broking Reducing the risk of illicit payments or inducements to third parties Page 5
  • Although payment authorisation controls appeared generally adequate, virtually no firms took steps to identify unusual payments to third parties. As a result, some firms failed to report suspicious activity until after our visit or follow-up work.
  • Inadequate compliance and internal audit monitoring of anti-bribery and corruption work.
  • Weak vetting of staff compared with other financial sectors, with a heavier reliance on personal referrals and market gossip than usual.
  • Although controls over staff expenses and accounts payable generally appeared to be effective, some firms gave large cash advances to staff to assist travelling in higher risk countries where they said credit cards were not readily accepted.
  • Some firms awarded their brokers large bonuses directly related to the income or profit they generated. This could encourage risk-taking and negligence, and increase the risk of bribery and corruption, particularly where brokers use third parties to win business.

Due diligence on third party relationships came in for particular scrutiny and criticism:  but the controls found lacking in insurance brokers are in our experience exactly the same as are found lacking in many firms in many varied industry sectors: 

  • many firms relied very heavily on an informal ‘market view’ of the integrity of third parties and took no steps to check the accuracy of account opening documentation;
  • few firms conducted detailed checking of higher-risk third parties to ensure they were not connected with either the assured, the client or public officials;
  • most firms had historically not taken any steps to establish and document the business case for using third parties in insurance transactions. However , there were signs this was changing;
  • most firms had historically not conducted regular reviews of their relationships with approved third parties;
  • several firms had not reviewed (or conducted their own) due diligence on third parties when teams or business were acquired from other firms;
  • there was no real consideration of whether payments made to third parties were commensurate with the services they provided;
  • some firms, acting on the instructions of third parties, had made payments to persons other than the approved third party without understanding or verifying the reasons behind the request;
  • in some firms, there was no independent checking of due diligence and the approval of third parties outside the producing department;
  • some firms did not have – and could not produce – a central list of third parties used to obtain or retain business. Others could not easily produce lists of payments made to third parties; and
  • most firms did not take adequate steps to confirm approved third parties’ bank details, increasing the risk that they might unwittingly make payments to somebody else.

The report states  that the FSA will be taking further action against some of the firms reviewed: 

As a result of this review and our concurrent casework, we have commissioned a skilled persons report to assess past payments to third parties made by a firm and issued a formal private warning to another after we became aware of a number of third party payments which were made without an adequate business case being established and documented. We are considering whether further regulatory action is required in relation to other individuals and firms and it is likely that there will be referrals to Enforcement.

We have been saying for some time that companies do not appearing to be taking their very onerous obligations under the Bribery Act seriously enough.  The FSA seems to agree.   

The report can be found here.

Innospec Settles (but only just) in the UK and the US: the SFO’s prosecution strategy is severely dented

Published on 08/04/2010. Closed Tags: , , , , , .

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:

deeply wrong

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:

no such arrangements should be made again.

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

wholly inadequate as a fine to reflect the criminality displayed by Innospec

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:

both the SFO and DOJ agreed that the fines and other penalties which might be imposed in the US and the UK might exceed $400m in the US and $150m in the UK.

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

SFO cannot enter into an agreement … with an offender, as to the penalty in respect of the offence charged

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

it will…rarely be appropriate for criminal conduct by a company to be dealt with by means of a civil recovery order.

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

it would be inconceivable for a prosecutor to approve a press statement to be made by a person convicted of burglary or rape; companies who are guilty of corruption should be treated no differently to others who commit serious crimes.

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.