Second Deferred Prosecution Agreement highlights the financial benefits of self-reporting

Introduction

On 8 July 2016, Sir Brian Leveson LJ approved a deferred prosecution agreement (DPA) between the Serious Fraud Office (SFO) and a company, XYZ, for offences of conspiracy to corrupt, conspiracy to bribe and failure to prevent bribery (under s.7 Bribery Act 2010) in relation to offending between 2004 and 2012.

The financial terms of this DPA, in the unique circumstances of the case, are less severe than those that Standard Bank was required to agree (see our LawNow). Notwithstanding those unique circumstances, the court’s general approach suggests that the authorities may now be more willing to approve a DPA with a more beneficial financial outcome for companies who choose self-reporting, rather than seeking to keep quiet or hide things under the carpet.

This is only the second DPA approved and it is the first one approved at a time when there will be a trial of individuals in relation to the underlying issues and offences. The court imposed reporting restrictions regarding the DPA, including as to the identity of the company concerned and the detailed facts of the case, to avoid any prejudice to the ongoing criminal proceedings relating to individuals. This LawNow explains the reasoning of the SFO and court so far as presently known.

Background

XYZ was a UK SME with modest resources. It earned the bulk of its revenue from exports to Asia. Between June 2004 – June 2012 it systematically offered and/or paid bribes through intermediaries to win 28 contracts (four of which were concluded after the Bribery Act came into force in July 2011). These bribes were paid via “fixed commissions” paid to the intermediaries, at the intermediaries’ instigation, which were then used to influence individuals able to award contracts on behalf of their companies. The revenues earned on the 28 contracts was £17.24m (15.81% of total turnover in the period) and provided gross profits of £6,553,085 (or 20.82% of total gross profit) with estimated net profit on the contracts of £2.5m.

XYZ’s innocent US parent company (ABC) provided various back-office support, overall strategic planning, management and marketing services to XYZ. It received £2.3m in management fees and dividends of £6m in the relevant period.

XYZ admitted as part of the DPA process that it did not have adequate procedures in place. In late 2011, ABC sought to implement its global compliance programme into XYZ. This process brought to light, in August 2012, concerns about certain contracts. XYZ instructed external lawyers to carry out an investigation. Informal self-reports were made in late 2012 and a formal written self-report was made to the SFO in January 2013 (i.e. more than a year before the DPA power was created by statute). The SFO then carried out its own investigation and XYZ’s lawyers also continued to investigate. In total 74 contracts were investigated, of which 28 were implicated.

The Director of the SFO was satisfied that there was sufficient evidence to provide a realistic prospect of conviction against XYZ on all 3 counts (conspiracy to corrupt, conspiracy to bribe and failure to prevent bribery), but that a DPA was likely to be in the public interest and so XYZ was invited to commence negotiations in August 2015. This led to the application in court.

The Court’s analysis of the DPA

Interests of Justice

The court considered whether it was in the interests of justice to proceed down the DPA route rather than prosecution and concluded that it was. In particular:

(1) Seriousness of offending – the court noted XYZ’s conduct was “grave” including “substantive offences of bribery”. It was also systematic lasting over 8 years, involving 7 agents in as many countries and forming part of the company’s established business conduct generating gross profits of £6.5m. Contrast that with the Standard Bank DPA which was penalised only for failing to prevent the bribery of its sister company from which it also benefited.

(2) Self-report – “very considerable weight must be attached” to XYZ’s behaviour on discovering the wrongdoing, namely self-reporting comprehensively and adopting “a genuinely proactive approach”, volunteering the relevant evidence, making available accounts of witnesses and making the witnesses themselves available as well as timely responding to requests for information. The court noted that the offending would most likely have gone uncovered but for the self-report (as it had done for the previous 8 years) and there was “no suggestion of a whistle-blower or any other mechanism whereby the matter might have come to the attention of the authorities”. This is interesting in that it suggests that a company who self-reports in part because of a fear that the matter is likely to be exposed in some other way, may get less credit for this element.

(3) History of similar conduct – the court noted that XYZ had no prior criminal history (even though it had now admitted to bribery stretching back 8 years).

(4) Compliance programme – XYZ had inadequate compliance protections in place at the time of offending, but it was improvements to those protections in 2012 that helped uncover the wrongdoing and led to the self-report.

(5) Change in culture and personnel – XYZ “in its current form is effectively a different entity from that which committed the offence”; two senior employees were dismissed, relationships with the agents terminated and bids for suspect transactions withdrawn.

(6) Impact of prosecution is proportionate – The court noted that there would be severe collateral effects on the employees of the organisation and local economy, as well as a severe impact on the organisation itself (including debarment from competing for EU public contracts), which was on an “economic knife-edge” in a sector that was struggling.

Overall, the court noted that this was not a straightforward case justifying a DPA, but it appeared to be particularly swayed by the need to “send a clear message… that a company’s shareholders, customers and employees (as well as those with whom it deals) are far better served by self-reporting and putting in place effective compliance structures… openness must be rewarded and be seen to be worthwhile”. In essence, even though the company had behaved extremely poorly over an extended period and had benefited substantially from doing so over the years, the self-report and extensive cooperation provided in circumstances where there was no evidence that the SFO would otherwise have discovered the wrongdoing, appears to have been sufficient to allow the court to deem the DPA to be in the interests of justice.

Fair, reasonable and proportionate

The court then turned to the terms of the proposed DPA and considered whether they were fair, reasonable and proportionate. The proposed DPA would be in place for a term of 3 – 5 years. It provided for:

(a) No compensation – it was not possible to identify specific victims: the countries involved had no established mutual legal assistance process nor a mechanism for compensation being paid to authorities; the amounts of the bribes were not always clear and it was not clear that the contract prices were actually affected by the bribe amounts; the SFO was not able to demonstrate whether and if so in what amounts the agents actually paid bribes nor to whom.

(b) Disgorgement of gross profits of £6,201,085 (including £1,953,085 to be contributed by ABC within 7 days, as a voluntary repayment of dividends, although the court actually noted that all bar £352,000 of the financial penalties was only going to be payable with ABC’s financial support). The court determined that taken together with the financial penalty, the DPA achieved the goal of “removal of gain”.

(c) Financial penalty of £352,000 being the unencumbered balance of cash available based on XYZ’s cashflow projections over 3 years.

(i) The court noted that the fine element should be “broadly comparable to the fine… imposed… on conviction… following a guilty plea”. This required an assessment of the culpability and harm of the offending pursuant to the relevant sentencing guidelines for the relevant offences.

(ii) Culpability – this was clearly in the high category (i.e. a 300% multiplier as a starting point subject to aggravating and mitigating factors) – XYZ played a leading role in the wrongdoing, involving senior executives over a sustained period in “a culture of wilful disregard of commission of offences” by staff and agents “with no effort to put effective systems in place”.

(iii) Harm – the appropriate figure is normally the gross profit on the tainted contracts (i.e. £6,553,085).

(iv) Aggravating factors – the corruption was endemic; the tainted contracts accounted for 16% of the company’s business; attempts were made to conceal it (using terms like “fixed commission” to hide the bribes); and it was committed across borders.

(v) Mitigating factors – no prior convictions; full cooperation with early admissions; committed under previous management; and XYZ gave up the possibility of winning two contracts worth £1.7m.

(vi) Therefore, the appropriate multiplier could be at the lower end of the high culpability range, namely 250%. But this was academic because XYZ simply could not pay the resulting figure - £16.4m.

(vii) However, the court noted that the guidance required the court to “step back” and consider the overall effect of the combination of its orders to achieve removal of gain and appropriate punishment and deterrence. The court also noted the need to apply a discount and that the normal discount for an early guilty plea at the earliest stage was a third. However, in this case, because the self-report was made significantly in advance of the “first reasonable opportunity having been charged and brought before the court”, the discount could be increased to reflect additional mitigation. The court noted that, in the circumstances, “a discount of 50% cold be appropriate not least to encourage others how to conduct themselves when confronting criminality as XYZ has”.

(viii) However, that still only reduced the figure to £8.2m. So how did the court decide £352,000 was the right amount? The answer was that when the court “stepped back” and considered all of the circumstances, this entitled it to take account of the value and means of XYZ and the impact any larger penalty would have, including on staff and the wider economy (but not shareholders). Gross Profit “cannot be the only denominator when stepping back”. In that regard, the court noted that it was relevant that XYZ had already spent £3.8m in legal and other fees investigating the matter, self-reporting and cooperating with the SFO. It was also relevant to consider the disgorgement that XYZ was prepared to make. When taken together with the proposed fine, this achieved full removal of gain. In the circumstances, the court was satisfied that this sum was fair, reasonable and proportionate. The final analysis justifying this outcome is somewhat opaque, but it seems that the court, once it had decided a DPA was in the interests of justice, was going to find a way to ensure the amounts available were fair, reasonable and proportionate.

(d) Past and future cooperation with the SFO – XYZ agreed to “continue to cooperate fully and truthfully with the SFO in any and all matters relating to the conduct arising out of the circumstances at issue in the present DPA”, including disclosing all non-privileged information concerning its activities and those of current or former directors, employees or agents. It also confirmed that all information provided to date was not inaccurate, misleading or incomplete. The court noted that these provisions were also included in the Standard Bank DPA and are likely to become standard provisions in all DPAs.

(e) Costs – in the unusual circumstances of this case, with XYZ being of such limited means, the SFO chose not to seek any costs from the company.

(f) Compliance programme – XYZ undertook to carry out a review of its existing internal controls and the company’s Chief Compliance Officer must prepare a report within 12 months and then annually on the company’s implementation of the controls.

(g) No tax reduction sought in relation to the financial elements. The financial elements will be paid in instalments over 3 - 5 years and the court deemed this acceptable in order to maximise the amount of profit disgorged.

Comment

This case has not added to our understanding of the SFO’s or court’s approach to assessing the adequacy of a company’s anti-bribery procedures, as XYZ accepted that they were essentially non-existent at the relevant time, although the fact that the procedures implemented in late 2011 helped to uncover the wrongdoing and led to the self-report was an important factor in justifying the DPA.

However, this case is significant in suggesting a softening in the authorities’ approach to the financial terms of a DPA. The authorities seem to have approached this DPA with the intention of demonstrating that the benefits of self-reporting are wholesale, even in relatively extreme cases of corporate wrongdoing over an extended period by senior management to win high value contracts in multiple jurisdictions. It is not just avoidance of conviction and the potential for more positive publicity; the financial terms can be more attractive than those available following an early guilty plea too. That would be a welcome development if correct and will certainly assist in incentivising more corporates to go down the self-reporting route in future.

Unlike Standard Bank, who paid penalties under its DPA on the basis of the revenues earned under the tainted contracts, and on the basis of the combined revenues of itself and its sister company (who was not subject to the DPA), XYZ agreed an outcome based only on gross profits earned under the tainted contracts (a far lower starting sum). Unlike Standard Bank, the value of the bribes themselves were not added to the penalties (although this was apparently due in part to the lack of evidence that the value of the bribes had been incorporated into the contract price of the tainted contracts in the first place).

Equally important, while it did not play a part in the end in determining the fine element that XYZ should pay, the court was at pains to indicate that in future a company which self-reports matters not known to the authorities and cooperates, may agree a fine element in a DPA which overall provides a larger reduction than one third on the penalty (which is what would be available where a corporate pleaded guilty at the earliest opportunity following charge). As noted above, this could be to reflect additional mitigation and that “a discount of 50% cold be appropriate not least to encourage others how to conduct themselves when confronting criminality as XYZ has”.

While it will be necessary to consider the impact of this DPA in more detail once the embargo on the full judgment and statement of facts is lifted, this second DPA may be a more significant and positive development in the evolution and incentivisation of corporate self-reporting than expected.