On 22 October 2019, Davis J approved a deferred prosecution agreement (“DPA”) between the Serious Fraud Office (“SFO”) and Güralp Systems Ltd (“GSL”). This is the sixth DPA concluded by the SFO since they became available in February 2014. Reporting restrictions were in place until 20 December 2019, after the acquittal of the individuals prosecuted in connection with the same issues.
The DPA relates to charges of conspiracy to make corrupt payments and failure to prevent bribery, spanning the period 2002 – 2015 in relation to dealings with a South Korean official, which were intended to help the company win business. Reflecting the limited financial position of the company and in order to deliver a fair outcome, the five year DPA provides that GSL will pay £2,069,861 as disgorgement of tainted profits by the end of the DPA term (but without having to comply with any specific timetable); no other financial terms were imposed. Additionally, the company agreed to continue to cooperate with the SFO until all related investigations and prosecutions conclude (as they now have), to report on any other allegations of serious and complex fraud discovered by the company during the DPA period and to report annually on its anti-bribery compliance controls.
The DPA is novel in requiring direct reporting by the company to the SFO on certain elements of its compliance controls, albeit without giving the SFO any power to direct the development of those controls. It also unusually imposes no truly punitive financial sanction, due to the particular facts of the case and the limited resources of the company to pay. This highlights one of the potential advantages of self-reporting and cooperating with the SFO. However, the conflicting outcomes for the company and prosecuted individuals also highlights an increasingly concerning problem arising from the nature and structure of the DPA process that may warrant a review.
Background: DPA Statement of Facts
GSL is a UK SME (with around 110 employees). It designs and manufactures seismic measuring instruments and systems for a variety of uses. It has customers all over the world, including public sector and international public organisations.
According to the Statement of Facts agreed by GSL, in 2002, GSL’s founder and member of its senior management team, Dr Cansun Güralp (“Dr Güralp”) caused the company to enter into a corrupt arrangement with Dr Heon-Cheol Chi (“Dr Chi”), a senior employee of the Korea Institute for Geoscience and Mineral Resources (“KIGAM”), under which he agreed to use his influence to help secure business for GSL in return for payments. KIGAM was a government-funded research institution established by statute and supervised by a Government Ministry and so Dr Chi was a public official.
Between November 2003 and May 2015, GSL paid Dr Chi USD $1,034,931 (approximately GBP £640,000) under this arrangement. Dr Chi invoiced for the payments as “technical advice fees” and later “technical consultancy on parametric information and product development”. The cost of these payments was included in the prices charged to customers by GSL without being specifically identified or disclosed to them. USD $70,451 were made in cash across eight separate payments with a further USD $964,480 paid to Dr Chi’s US bank account over 31 separate payments.
Partly as a result of the arrangement, GSL’s business grew in South Korea from revenues of £20,146 in 2003 to over £1.4m in 2015.
Self-report to the SFO
A new Executive Chairman appointed at GSL in December 2014 became aware of the arrangement in September 2015. After further investigation, the arrangement was terminated and the company self-reported to the SFO and the US Department of Justice (“DoJ”) on 23 October 2015. On 3 December 2015, following a presentation by GSL’s lawyers, the SFO opened an investigation. GSL cooperated extensively with the SFO in its investigation, including:
- reporting on the outcome of its own internal investigations;
- sharing documents (including interview notes) and information both voluntarily and when requested;
- refraining from conducting interviews before the SFO had done so;
- consulting with the SFO on its communications with customers and suppliers; and
- keeping the SFO informed of all contact with Dr Chi and his travel arrangements.
(It is unclear whether GSL waived privileged over any materials shared and this was not specifically referred to by the Judge when considering the extent of the company’s cooperation.)
As part of its investigation, the SFO conducted nine interviews under caution and 24 witness interviews, as well as issuing 51 separate notices under Section 2 of the Criminal Justice Act 1987; requests for mutual legal assistance were made to two overseas jurisdictions.
In July 2017, Dr Chi was convicted in the US for money laundering offences arising from his receiving corrupt payments from GSL and another US company. He was sentenced to 14 months in prison, together with a $15,000 fine. According to a subsequent DoJ press release, “The evidence at trial included numerous emails in which Chi admitted that he was acting illegally and that he accepted bribes…”. In August 2018, the DoJ declined to take further action against GSL, in light of its self-reporting, cooperation, remediation and the fact that it was under investigation for similar matters by the SFO.
Conspiracy to corrupt: The company, Dr Güralp and two other individuals connected with authorising and arranging the payments to Dr Chi (namely Andrew Bell (from 2010 the company’s ex-finance director and later its managing director) and Natalie Pearce (the company’s ex-head of sales)) were charged with conspiring with each other and Dr Chi between 1 April 2002 and 15 September 2015 that corrupt payments would be made by GSL to Dr Chi, contrary to section 1 Criminal Law Act 1977. Dr Chi’s activities in this regard included:
- recommending GSL equipment to other Korean organisations (including public bodies/departments) and attesting to their reliability even during a period in 2006 – 2008 when there were problems with the company’s software and hardware;
- advising on pricing and negotiation strategy with the KIGAM procurement team (including advising on inflating price lists and avoiding discounting of products and including his own undisclosed fee in the price quotes);
- influencing the equipment specifications of contracts to favour GSL;
- providing confidential information (including competitor pricing information and presentations); and
- supporting the reputation of GSL and its products.
There was also evidence that at various times Dr Chi had asked Dr Güralp and Natalie Pearce to delete emails that evidenced his requests for agent or advice fees.
Failure to prevent bribery: Separately, GSL was charged with failure to prevent bribery, contrary to section 7 Bribery Act 2010 between 1 July 2011 (i.e. the date when the Bribery Act came into force) and 15 September 2015. The Judge noted, however, that this count was of secondary importance and added little to the first count. The Statement of Facts noted that prior to 2012, GSL had not adopted any anti-bribery/corruption (“ABC”) policy, did not routinely offer ABC training to its staff, and did not undertake any ABC due diligence of its agents and distributors. While a policy was adopted in July 2012, that policy was produced by the ex-finance director and was not effective to prevent the ongoing payments to Dr Chi.
Justification of 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 prosecution for economic crimes by agreeing a statement of facts as to the underlying wrongdoing, accepting certain terms and complying with them during the life of the agreement. Before being approved, the judge must be satisfied that the proposed DPA is in the interests of justice and its terms are fair, reasonable and proportionate in all the circumstances, including the seriousness of the offending involved.
In considering whether a DPA could be in the interests of justice here, the Judge noted that many of the features of the wrongdoing by GSL (“i.e. bribery of foreign public officials, persistent offending over many years, criminal conduct involving careful planning, involvement of very senior employees within the organisation”) were present in the Rolls-Royce DPA case (see our Law Now here) albeit that Rolls-Royce’s offending was on a much grander scale and geographic spread. Yet Rolls-Royce’s wrongdoing had not prevented a DPA in that case.
The Judge noted in GSL’s favour that:
- GSL had self-reported the matter and its lawyers made a detailed presentation to the SFO of the findings of its investigation, which were relied on to back up the DPA and prosecution of individuals (supported by the SFO’s own investigation). As noted by the Judge, “those who had taken over the running of the company in 2015 identified the conduct, instructed outside solicitors to investigate and self-reported to the SFO. Had they wished to do so, they presumably could have covered up what had gone on and/or allowed the corrupt practices to continue”;
- Those responsible were no longer with GSL, which has a completely different approach to business today;
- There was no prior history of criminal offending – although the Judge noted that this was of limited value given the lengthy period of wrongdoing. The Judge did, however, also note that unlike Rolls-Royce, the wrongdoing was isolated to Dr Chi;
- Substantial steps had been taken by GSL since discovering the wrongdoing to clean up the business, including terminating five separate significant distribution relationships on a “safety first” basis where there were compliance concerns, and the introduction of a new compliance programme; and
- A DPA would formalise the cooperation already provided to ensure it continues.
Given the international nature of GSL’s business, it was accepted that a DPA may be less damaging to the company’s future prospects in winning international public procurements than a conviction, and thus a more proportionate response. However, more important was GSL’s precarious financial position. The Judge noted that if convicted, the financial implications would likely put the company out of business. That would be particularly harmful to innocent employees, it would undermine the efforts of current management to remedy the position and cooperate with authorities and it would lead to reduced global availability of rare seismological expertise. In light of the above, the Judge was satisfied that a DPA was in the interests of justice. The particular terms in this case included some novel provisions in light of the specific circumstances of the company.
Term: Despite the relatively modest financial terms, the DPA is for five years, to allow GSL sufficient time to generate enough revenue to pay the disgorgement penalty. There was evidence that it would not be possible for the company to do so otherwise and the DPA permits earlier payment if possible, but also potential variation if the company is unable to pay by the end of the five-year term.
Financial terms: GSL must disgorge £2,071,878 (representing the agreed gross profits generated from the wrongdoing) within five years, but – unusually – without any specific timetable for doing so. It was accepted that there were no additional funds available to meet any financial penalty that might otherwise be imposed and, considering the terms in the round, the Judge was satisfied that a financial penalty was not appropriate. As a result, there was no detailed assessment of culpability and harm factors that would otherwise inform the level of fine (although it was noted that culpability would be considered high). For similar reasons, neither costs nor compensation was ordered (partly as it was not possible to establish clearly which contracts were tainted or by how much).
Cooperation: GSL must provide ongoing cooperation to the SFO (but not to any other authority) in relation to the conduct concerned. Further (and similar to the then novel provision in the Serco DPA), if the company’s directors learn at any time during the term of the DPA of any other evidence or allegations of serious or complex fraud which they reasonably believe meets the case acceptance criteria of the SFO, the company must promptly report it to the SFO.
Compliance programme: Through its Compliance Officer (who must cooperate generally with the SFO and report directly to GSL’s Board), GSL must review and, during the term of the DPA, annually report to the SFO on the implementation of its various ABC controls. The report should cover:
- an annual compliance risk assessment and how any risks were dealt with;
- third party due diligence activities;
- any dealings with third party intermediaries (whether or not formalised);
- training on ABC and its effectiveness;
- the ability of staff to obtain timely advice/guidance on compliance issues; and
- confidential internal reporting mechanisms and investigation policies.
While implementation of improvements to its controls will not provide an automatic defence in any future proceedings, it will be open to the company to assert such a defence if appropriate.
Like the Serco DPA concluded in July 2019, this DPA requires direct reporting by the company to the SFO on specific elements of its compliance controls (rather than via the imposition of a costly independent monitor), albeit without giving the SFO any power to direct the development of those controls. Unlike the Serco DPA (where Serco had already implemented substantial compliance improvements across its business since 2013), this DPA identifies specific elements of the compliance controls that the company must report on. Corporates should consider carefully whether they would be able to report meaningfully on those same controls if required. Of particular note is the requirement to report qualitatively on the effectiveness of the company’s training and the levels of ABC awareness among staff. Such a requirement appears consistent with the DoJ’s 2019 internal guidance on the Evaluation of Corporate Compliance Programs, including the need to assess whether the controls work in practice (see our Law Now here).
Further, for reasons peculiar to this case, the only financial element of the DPA was disgorgement of tainted profits. Therefore, this DPA involves minimal truly punitive sanction (the company will still have benefited from the revenues of the tainted business, assisting in covering their costs and helping the business grow over the 12 years during which the wrongdoing occurred). Arguably, this is a good example of why companies should self-report – i.e. the prospect of an outcome that has a more benign financial impact than could be obtained following a prosecution. It also highlights the particular advantages of self-reporting and co-operating where there are multi-jurisdictional issues, as that coordinated approach helped the company to obtain a declination from the US authorities.
However, the DPA also highlights an increasingly concerning problem arising from the nature and structure of the DPA process that may warrant a review. The dichotomy between the outcomes for the company and the implicated individuals could not be more stark. In agreeing the DPA, GSL not only accepted liability for failing to prevent bribery under s.7 Bribery Act, but also for the more serious offence of conspiracy (through its senior officers) to commit bribery. The Judge relied on the Statement of Facts and underlying evidence to conclude that the “criminal conduct was planned by senior officers and employees of the company and it continued over many years… On the face of it the activity of GSL richly merits prosecution”.
Yet GSL was not prosecuted and a jury determined that the relevant individuals did not commit the criminal conduct alleged. Given the outcome in the US and the fact that the individual defendants reached civil settlements with the company, it is hard to reconcile these conflicting outcomes.
The problem of irreconcilable outcomes arises where individuals are able to be prosecuted in the UK, but this case is not exceptional in that regard – this is the fourth of six DPAs where the individuals alleged to have committed the wrongdoing that underlay the DPAs were either acquitted (XYZ/Sarclad, Tesco) or never prosecuted at all (Rolls-Royce). In the other two cases, individuals have been charged in relation to the Serco matter and, in Standard Bank, the key wrongdoing took place outside the UK so that the relevant individuals could not be prosecuted here.
Regardless of the commercial and pragmatic benefits of DPAs that may make them attractive options for corporates (and the SFO), there is something highly unsatisfactory about this emerging pattern of DPAs being concluded on the basis of accepted “facts” agreed by a company and which implicate named individuals, who are later acquitted when prosecuted on the basis of the same evidence. Questions will inevitably now follow as to whether companies should agree DPAs unless the SFO can successfully prosecute the relevant individuals or those individuals plead guilty to the wrongdoing. A more radical approach may be to hold back DPAs from judicial approval until the conclusion of any parallel individual prosecutions due to take place in the UK.
While this alternative approach may undermine certain perceived benefits of the DPA regime – notably speed and finality – it would, importantly, avoid undermining the perceived justice of the final outcome and the treatment of the individuals whose actions underpin the DPA. In this case, there was no time-saving through the DPA, which was rushed through the court immediately before the imminent trial of the three individuals took place; there was nothing to stop the prosecution of the individuals being completed first to test whether a DPA (or any prosecutorial action) was a justified step to take in relation to the company. Had that approach been followed, the outcome may have been less beneficial to the public purse, but it would at least have been consistent and clear. (It may also still have been possible to conclude a DPA on the basis of the failure to prevent bribery offence.)
Alternatively, and if a reformed approach to the application of the modified Full Code Test were applied, perhaps the SFO could make greater use of civil recovery in cases where individuals are also to be prosecuted, itself noted as an option in the DPA Code of Practice. That approach would have the benefit of achieving removal of tainted gains without creating irreconcilable criminal outcomes.
Given the substantial financial, resource, culture and speed benefits that the DPA regime has delivered, notwithstanding the inconsistencies and potential unfairness in outcomes when individuals are also prosecuted, perhaps reform of the scheme is unlikely. Regardless, the SFO should be commended for taking on difficult cases and prosecuting those involved whose conduct underpins DPAs. Although the trend in acquittals in related individual prosecutions is concerning, this also demonstrates the success and effectiveness of the DPA regime. Corporates gain certainty and closure on historical issues caused by employees or other individuals for whom the corporate is responsible (and sometimes more quickly and cost-effectively than a prosecution), whilst authorities gain notable successes in gathering intelligence of wrongdoing. This allows investigations to be closed more quickly and cheaply, and substantial financial redress to be achieved on a pragmatic basis, whilst demonstrating the importance of corporates developing effective anti-bribery controls to support an ethical business environment.