SFO concludes Deferred Prosecution Agreement with Rolls-Royce

Summary

On 17 January 2017, Sir Brian Leveson QC approved a deferred prosecution agreement (DPA) between the Serious Fraud Office (SFO) and two Rolls-Royce entities. The UK multi-national faced 12 counts of conspiracy to corrupt, false accounting and failure to prevent bribery, spanning a 24 year period, involving its civil, defence and energy businesses across multiple jurisdictions and relating to payments made through intermediaries in the public and private sectors.

Under the DPA, which has a term of up to five years, Rolls-Royce must disgorge tainted profits and pay a substantial penalty sum along with the SFO’s costs, all totalling over £½ billion. It must also improve its compliance controls. Rolls-Royce “apologised unreservedly” for conduct that first caught the SFO’s attention in 2012 as a result of internet postings by whistle-blowers. Although it had not self-reported, a key factor in the court’s willingness to approve the DPA was Rolls-Royce’s “extraordinary co-operation” with the SFO throughout the investigation, including making available the product of lengthy and wide internal investigations. This co-operation also materially influenced the penalty element of the DPA, with Rolls-Royce benefiting from a 50% discount on the amount otherwise payable.

Rolls-Royce has also reached a DPA with the US Department of Justice (DoJ) and a Leniency Agreement with Brazil’s Ministério Público Federal (MPF) in connection with similar issues, including in jurisdictions not covered by the UK DPA, paying those authorities $169,917,710 and $25,579,179 respectively. The authorities co-ordinated to announce these outcomes at the same time.

This is the third and largest DPA to be concluded in the UK since they became available as a prosecutorial tool under the Crime and Courts Act 2013 (the Act) in February 2014. The first two DPAs, also approved by Sir Brian Leveson QC, were concluded in November 2015 and July 2016 with Standard Bank plc and a UK SME currently referred to only as XYZ (to avoid any prejudice to ongoing prosecutions of individuals), respectively. (Click the links for our articles on those earlier DPAs.)

Background

This matter concerned conduct by Rolls-Royce plc and, to a lesser extent, its Delaware incorporated subsidiary, Rolls-Royce Energy Systems Inc (together RR). For simplicity we refer generally below to RR, although much of the conduct related to Rolls-Royce plc alone. Allegations emerged in early 2012, when a former RR employee and a separate anonymous blogger posted allegations online concerning RR’s civil aerospace business in China and Indonesia. (The employee, Dick Taylor, alleged that he had previously tried to raise these matters internally, but had been ignored.) The SFO contacted RR about the allegations and RR commenced an internal investigation, which uncovered wide-ranging issues implicating additional businesses and jurisdictions. RR voluntarily supplied all of its investigation reports to the SFO, which opened its own investigation in December 2013.

The conduct and practices uncovered gave rise to the following indictment against RR (in summary):

• six offences of conspiracy to corrupt (contrary to s.1 of the Criminal Law Act 1977) in relation to agreements to make corrupt payments to or through intermediaries in RR’s civil, defence and energy businesses in India, Indonesia, Russia and Thailand;
• five offences of failure to prevent bribery (contrary to s.7 of the Bribery Act 2010 – the corporate offence) in relation to corrupt payments to intermediaries in RR’s civil and energy businesses in China, Indonesia, Malaysia and Nigeria; and
• one offence of false accounting in relation to RR’s defence business in India (contrary to s.17(1)(a) of the Theft Act 1968).

What is a DPA?

DPAs are public, judge-approved agreements negotiated between a prosecutor and a corporate (on invitation only from the prosecutor), under which the corporate avoids a prosecution for economic crimes by agreeing to certain terms on the basis of agreed facts, and complying with them during the life of the agreement. Before approving a DPA, the judge must be satisfied that the DPA would be in the interests of justice and that its terms are fair, reasonable and proportionate in all the circumstances, including the seriousness of the offending.

The court’s analysis

Interests of Justice

The judge was satisfied that this test was met, applying the six-point approach from the XYZ case.

1. Seriousness of offending: RR’s conduct covered “extensive systemic bribery and corruption” and involved a number of aggravating features as noted above, including involvement of senior employees, some of whom might constitute the directing mind and will of the company or companies. In the absence of “strong countervailing public interest factors”, the court considered that prosecution of RR would be appropriate.
2. Co-operation: The court noted that “incentivising self-reporting is a core purpose of DPAs” and the fact that the SFO’s investigation was not triggered by a self-report would usually be “highly relevant”, particularly where the conduct is especially “egregious”. However, the court decided not to treat this as a differentiating factor here, as RR’s “extraordinary” co-operation (which together with its internal investigations and compliance improvements had already cost over £123m) identified far more extensive matters than may otherwise have been uncovered. That co-operation included:
   • voluntarily disclosing all internal investigations with limited waiver of privilege over materials;
   • providing un-reviewed digital material to the SFO and co-operating with independent counsel in the resolution of privilege claims, with the use of digital methods to identify privilege issues; and
   • co-operating with the SFO in the conduct of RR’s internal investigation, including the timing and recording of interviews and reporting on a rolling basis.
3. Prior conduct: The court was not concerned by the parallel investigations into RR by the DoJ and MPF on different matters, nor by the settlements of bribery issues in two other RR-related businesses (one where the conduct pre-dated RR’s acquisition of the business and one relating to a joint venture where there was no suggestion that RR was aware of the conduct). The court concluded that these matters did not indicate a prior history of wrongdoing.
4. Corporate compliance: In 2013, RR appointed Lord Gold (a compliance expert) to conduct an independent review of RR’s compliance procedures and to act as a “quasi-monitor” of its compliance programme, which is ongoing. Resulting improvements included:
   • appointing experienced compliance personnel in key positions and local ethics advisers;
   • reorganising the compliance function to be independent of the business divisions;
   • improving its risk assessment and due diligence requirements for intermediaries; and
   • generally demonstrating management commitment to ethics and compliance through improved communication and training (which included targeted training for specific risk areas).
5. Change of culture and personnel: It was of “real significance” to the court that no member of the current RR senior management was implicated in the issues; had this not been the case, the court indicated its approach may have been affected.
6. Impact of prosecution: A potential debarment from participation in public tenders following a conviction would affect RR’s ability to trade in sectors in which it is a world leader. The court noted that this could have affected around 30% of RR’s business based on 2014 figures, with a knock-on impact on share price, shareholder confidence, the UK defence industry, RR’s supply chain and employees, the corporate pension scheme and competition.
7. Other considerations: The court also took into account the significant resource and cost requirements to prosecute RR, diverting resources from other investigations (although individuals connected with these matters may yet be prosecuted, which would reduce this benefit). The court also noted that agreeing a DPA in a case like this would help to incentivise self-reporting by other organisations in a similar position. The court even suggested that approving a DPA would help RR to become a “flagship of good practice”, but one might have expected RR to do this now, in any event.

The court was particularly persuaded by RR’s co-operation and what this indicated about its culture today and the wider consequences arising from a potential conviction. It decided a DPA was in the interests of justice, subject to the terms being fair, reasonable and proportionate.

Terms of the DPA

The DPA, which may last up to five years, requires RR to (i) disgorge tainted profits of £258,170,000; (ii) pay a financial penalty of £239,082,645; (iii) pay the SFO’s costs of £12,960,754; (iv) complete a compliance programme following the recommendations of the reviews it has already commissioned; and (v) co-operate with any relevant authorities, including those overseas and any multilateral development banks, in relation to investigations into the conduct arising out of the circumstances underlying the DPA. The calculation of the financial elements – disgorgement and penalty – were complex and detailed but, as with the earlier DPAs, applied a process based on the sentencing guidelines that would have applied to the relevant offences following a conviction.

Compensation

Given the factual complexity of the allegations in this case, it was impossible to quantify the bribes actually paid and the loss arising from any of the conduct and to whom. No compensation was therefore sought by the SFO or included in the DPA.

Disgorgement of profit

The Act contemplates the removal of any gain from the wrongdoing as an element of any DPA. The court treated this as requiring the removal of the gross profits associated with the wrongdoing (which contrasts with the more onerous approach in Standard Bank where gross revenues of the defendant bank and its sister company were disgorged).

Given the complexity, specialist financial consultants were appointed by each of RR and the SFO to assess the position. The approach followed was not the same as would apply under relevant reporting standards: in particular, RR accepted that certain expenses, including research and development, did not fall to be deducted from revenue to reach a gross profit figure.

The court relied on the financial experts’ conclusions, but in relation to the charges for the corporate offence, any profits earned prior to the implementation of that Act (in July 2011) were not required to be disgorged since the offending under s.7 had not caused that profit being earned. Nor did the court require, on the basis of considerations of “totality” (see below), disgorgement of profits earned subsequent to the final payment made to the relevant intermediary. The rationale for this decision is unclear, but it was noted to be fact specific and without prejudice to the appropriate approach in other cases.

Financial penalty

Assessing the harm

The court then turned to assessing the financial penalty to reflect the seriousness of the wrongdoing. As with the previous DPAs, the court followed the sentencing guidelines that would have applied if RR had been successfully prosecuted. This involves an assessment of the culpability of the defendant and the harm caused by the offence, applying various multipliers under a process set out in more detail in our previous LawNows on the Standard Bank and XYZ cases.

The court noted that in cases of corruption, the harm is normally the gross profit from the contract unlawfully obtained. Where there is no gross profit, the harm can be assessed by determining the likely costs avoided by failing to put in place appropriate measures to prevent bribery. Despite noting that the corporate offence is “less egregious” than an offence of bribery or corruption (because the operative minds of the company are not involved in the predicate offence), the court considered that the gross profit figure was an appropriate starting point for the five charges under the corporate offences in this case.

However, the court also explicitly took into account the issue of ‘totality’ (as this was a case involving charges for multiple offences) applying the applicable sentencing guidelines to ensure the final penalty was overall just and proportionate. Where multiple offences arose out of the same incident or were repetitive in nature, a penalty based on the most serious offence adjusted to reflect the totality of offending was appropriate. Here, for the corporate offence charges, the court considered it “fair” to take an average of the gross profit figure attributable to those offences, akin to imposing a concurrent (rather than consecutive) penalty. A different approach would apply where the relevant conduct related to different incidents, with separate fines being appropriate for each offence, but adjusted to ensure they were just and proportionate when considered in the aggregate.

Multiplier

Given RR’s leading role in the wrongdoing over a substantial period, involving foreign public officials and the efforts made to conceal the misconduct and prevent detection, all but two of the counts were treated as falling into the highest culpability category (the other two being medium).

The seriousness of the offending was aggravated by the substantial harm caused to the integrity of the markets and national governments and the cross-jurisdictional nature of the offending. The only mitigating factors for RR were the absence of previous enforcement action, and the change in the company’s senior leadership since the offending took place.

Discount

Having established the initial penalty amount for all of the offending (£478,165,290), the court then considered what discount may be appropriate, bearing in mind that any financial penalty should be comparable to a fine imposed on conviction after a guilty plea (which allows a reduction of up to one third). The SFO and RR argued that this was appropriate in this case. Taking into account RR’s “extraordinary co-operation”, however, the court actually went further and applied a discount of 50% to reflect additional mitigation, as it had done in the XYZ case. The financial penalty was therefore £239,082,645.

Comment

The SFO can achieve substantial outcomes in complex cases and co-operation works

This case obviously represents a huge success for the SFO and highlights the benefits of co-operative engagement with them (including not taking points on whether privilege attaches to interview materials and other documents), in avoiding prosecution and achieving an outcome significantly more beneficial to the corporate than even an early guilty plea would provide. Those benefits include the potential for coordinating a resolution across multiple jurisdictions swiftly and effectively where relevant. It is a further shift away from the more draconian approach in the Standard Bank case and suggests that the courts will support the DPA policy aims. The size of the financial penalty will also send a powerful message to businesses that the DOJ is not the only prosecutor to be worried about where corporate economic offending is concerned. The impact of this outcome in demonstrating that the SFO can deliver on its strong rhetoric cannot be over-estimated, and will do much to enhance both the reputation and morale of the SFO.

What would it take for a case to be too serious for a DPA to be approved?

That said, the judgment in this case raises some interesting and even concerning issues. Whilst the court stated that RR, notwithstanding its size and importance as a company of central importance to the UK, was not “immune from prosecution” the DPA nevertheless sends somewhat mixed messages in this regard. In his judgment, Sir Brian Leveson QC admitted having initially queried “if [RR] were not to be prosecuted in the context of such egregious criminality over decades […] then it was difficult to see when any company would be prosecuted.” If this case was not so serious that only a prosecution would suffice in the interests of justice, what would it take for the court ever to reach such a conclusion?

The DPA Code of Practice (the Code) states that a prosecution will “usually” take place “unless there are public interest factors against prosecution which clearly outweigh those tending in favour of prosecution” (emphasis added). The judgment offers further insight into what factors the court will be swayed by in approving a DPA, but also highlights how subjective this can be in any given case. Some may query whether the factors relied on here “clearly” outweighed those favouring prosecution.

Failing to self-report may not completely shut the door on a DPA – co-operation can save you and provide an overall better financial outcome

While self-reporting is a key factor in determining whether a DPA is appropriate, it was not a directly applicable consideration in this case, as RR’s co-operation only followed the SFO asking questions. Nevertheless, RR’s “extraordinary co-operation” was considered so powerful that it was able to outweigh the size, scale, nature and time-period of the wrongdoing and to be treated – because the co-operation generated new issues for investigation beyond the initial areas raised by the SFO – as akin to a self-report on those matters.

The court’s view of RR’s co-operation also played heavily in its receiving a 50% discount on the financial penalty element of the DPA as additional mitigation. This approach may incentivise other corporates not only to self-report, but failing that, to co-operate fully with any SFO investigation. Indeed, this was the approach Sir Brian Leveson QC hinted at in the XYZ DPA: “a discount of 50% could be appropriate not least to encourage others how to conduct themselves when confronting criminality”.

Is the risk of debarment a driver towards DPAs and is the impact of debarment being over-stated?

In the context of the interests of justice test, consideration of the threat of debarment following conviction seems to have become a significant factor favouring a DPA, which is somewhat paradoxical, given the purpose of the debarment regime. This factor has appeared in a number of non-conviction outcomes over recent years and this latest case perhaps indicates that there is an issue here that warrants further consideration. The court’s analysis also ignores that many public procurement regimes now factor into their assessments any investigations by authorities into the activities of a tenderer (not just actual convictions), so the benefits of approving a DPA in the context of debarment may be somewhat overstated in this regard.

Effective anti-bribery controls must be tailored to the actual risks faced by the corporate

While not overly focused on RR’s anti-bribery controls, this case again highlights (like Standard Bank) the need for any controls to be carefully crafted to meet the risks relevant to the specific business and to demonstrate that the corporate really does have a supportive management and a strong ethical culture. Even substantial and sophisticated procedures that follow the six principles in the Government’s guidelines on developing adequate procedures will not be adequate if they do not properly reflect and mitigate the risks that the business should be mitigating.

A blot on the copy book?

One aspect of the judgment that may lead to critical commentary is the assurance from the SFO, recorded by the court, that any historical wrongdoing involving RR that emerges from the SFO’s ongoing Airbus and Unaoil investigations will not be pursued against RR, or even investigated further. It is not obvious why the facts that (a) the Airbus and Unaoil investigations are currently not very advanced and (b) the US DPA covers certain conduct relating to Unaoil by certain Rolls-Royce entities, justify the SFO handcuffing itself to such an assurance more generally. The SFO has been criticised in the past for taking a similar approach (e.g. the BAE settlement), and such an approach does not accord with the intent of the Code (see para 7.7(i) and footnote 5 of the Code).

It would be unfortunate if any criticism of this aspect diverts attention from what is a very significant outcome and success for the SFO, heralding its largest ever DPA. It is also a significant, even positive, outcome for corporates who may find themselves in the same position as RR; genuine and full co-operation can yield positive results for corporates, even without a self-report, including a significantly better financial outcome than on a conviction following a guilty plea.

The judgment of Sir Brian Leveson QC is available here and the DPA and related documents are available on the SFO’s website, here.