The SFO secures approval of its ninth DPA with Airline Services Limited

Introduction

On 30 October 2020, the Southwark Crown Court (Mrs Justice May) approved a deferred prosecution agreement (“DPA”) between Airline Services Limited (“ASL”) and the Serious Fraud Office (“SFO”) in respect of charges for failing to prevent bribery under section 7 Bribery Act 2010. This is the ninth DPA entered into by the SFO since the power to do so was granted in 2014.

Background

ASL is a UK company whose business, over the years, has involved the provision of various services to airlines. These have included manufacturing and adapting parts for aircraft interiors (its “Interiors” business) and other services, such as de-icing. Following various corporate changes culminating in the sale of its Interiors business in 2018, it became a non-trading entity. However, no doubt after some negotiation with the SFO, ASL has been kept in existence for the sole purpose of entering into and fulfilling the DPA. After the DPA has expired, ASL will be wound up.

When it was trading, ASL used agents to secure business from airlines. The agents were considered to have better contacts with individual airlines than ASL’s personnel alone. Commission agreements (both between ASL and its personnel and between ASL and its agents) were based on price rather than profitability. The events in question have to do with ASL’s relationship with Lufthansa, facilitated by a particular agent, based in Germany. The name of the agent has not yet been released publicly and he or she is referred to as “Agent 1”.

The facts

On 7 October 2011, ASL’s Germany-based sales personnel entered into an agreement with “Agent 1”, under which it agreed to pay a 10% commission based on contract price for any business won as a result of Agent 1’s efforts. The 10% was later reduced to 5%. At the same time, Agent 1 was also engaged by Lufthansa as a project manager. In that role, Agent 1 worked on projects for improvement of Lufthansa’s aircraft, including working on RFPs, evaluating bid documents and making recommendations to the Decisions Committee on the bids received.

As such, Agent 1 had a major conflict of interest – owing duties of loyalty and confidentiality to Lufthansa which they should not have compromised by agreeing to be paid commissions by anybody bidding for contracts from Lufthansa in respect of which Agent 1 was assisting Lufthansa.

Between 2011-2013, ASL submitted contract bids to Lufthansa. In preparing its bids, it was provided with a considerable amount of valuable confidential information by Agent 1, all of which was relevant to the bids. For example, ASL was told it should increase its bid figure for a particular contract. Agent 1 also provided information about rival bids and/or Lufthansa’s internal process for evaluating bids. On numerous occasions, Agent 1 used his/her personal email address to share sensitive information with ASL employees.

Perhaps un-surprisingly, ASL won three contracts on which Agent 1 had given it various tip-offs. Agent 1 was paid commission by ASL on the strength of these wins. The gross profit received by ASL on the three contracts is now estimated (with admirable precision) at £990,971.45.

The vocabulary used in committing the offending is interesting. Agent 1 referred in correspondence to some of the information provided as “confidential” and to offering “support” or to “pushing” ASL and their bids in his role with Lufthansa. These types of euphemisms tend to be quite double-edged for people in such a position.

The offences

The DPA relates to three counts of failing to prevent bribery by an associated person (in this case, its sales personnel in Germany who induced Agent 1 to improperly perform a relevant function in his/her professional capacity at Lufthansa) over the period 2011 to 2013.

This is more-or-less the classic type of conduct which Section 7 of the Bribery Act was designed to capture. It would be interesting to discover whether the SFO ever considered adding counts under Section 1 of the Act – i.e. not failure to prevent but active bribery itself. Concerns about attribution of the relevant mental state of employees to the company may have prevented that course from being taken. Pursuing a section 7 offence of failure to prevent is both more straightforward and fits more naturally with resolution via DPA from the point of view of optics.

The investigation and self-report

ASL initiated an internal investigation in 2014, initially into concerns about a different agent and airline, which ASL’s external advisors concluded were unsubstantiated. However, as often happens, the investigation process identified concerns about other matters, in particular the activities of Agent 1, and external solicitors were engaged to investigate. ASL ultimately self-reported the issues with Agent 1 to the SFO in July 2015.

Based on information provided by ASL, the SFO then conducted its own investigation, including interviews with senior management and employees, and covering many different airlines and jurisdictions. It is interesting to note that the SFO reached a different conclusion to ASL’s external advisors in respect of the agent/airline of concern that gave rise to its first internal investigation – i.e. the SFO considered that there was a case to answer. However, it seems that the SFO did not consider there to be sufficient evidence or for it to be in the public interest to investigate that issue further. The result is that Lufthansa is the sole case that is the subject of this DPA.

Obviously Inadequate Procedures

A perennial question for anti-bribery lawyers is: what does an effective corporate anti-bribery programme look like?

An offence under Section 7 of the Act can be defended if the corporate concerned can show it had in place “adequate procedures” designed to prevent those performing services on its behalf from undertaking such conduct (i.e. active bribery intended to obtain or retain business or a business advantage for the corporate). Whether any particular set of procedures might satisfy the requirement of adequacy is always fact-specific and, as a result, is rarely an easy question to answer. Rarely, but not always. The case of ASL can be counted as one of the easy ones – a very clear example of what not to do.

The Statement of Facts records that ASL had engaged external advisors, prior to the implementation of the Bribery Act 2010, to advise on anti-bribery controls. The use of overseas agents had been identified as presenting a high level of bribery risk.

To address this risk, the advisors recommended:

• Including contractual protections in ASL’s standard terms and conditions.
• Appointing a senior representative to review and monitor overseas corruption risks.
• Implementing regular training.
• Implementing internal policies and procedures to address compliance with the Bribery Act 2010.
• Implementing a due diligence checklist for third party suppliers/contractors.

To assist ASL with these recommendations, the advisors provided:

• A risk assessment checklist.
• A due diligence checklist for third party suppliers/contractors.
• Advice on anti-bribery contractual protections that could be implemented in third party contracts.
• A draft “Anti-Corruption Policy and Guidelines”.

So far, so orthodox. But it seems that ASL at some point decided that this advice should be ignored. The Statement of Facts records that in September 2011, one of ASL’s senior executives told the external advisors that ASL would be taking a “different approach” than that recommended.

In fact, none of the external advisor’s recommendations were implemented. The Anti-Corruption Policy and Guidelines were not communicated to staff. ASL did not have any anti-bribery controls in place until the beginning of 2015 (after the key offending took place).

Obviously, therefore, ASL was unable to rely on an adequate procedures defence to escape liability. Of course, one cannot be sure what would have happened had the recommended action been taken. It might be that the agent and those working with him could have evaded the controls. However, the apparent decision to ignore the recommendations altogether ended any prospect of having a defence to the offences.

The interests of justice test

The proposed DPA terms were considered by the Judge to be in the interest of justice and therefore was approved by the court. This was because:

• ASL self-reported the matter to the SFO in a timely manner.
• ASL actively cooperated in the SFO’s investigation, including facilitating interviews and providing materials.
• ASL is essentially a different company with a differently constituted board (the previous management left the board in 2014/2015 following the company’s internal investigations).
• The offending is not recent – why this is a relevant factor is unclear; it simply highlights that it took a long time for the company to report and/or the SFO to discover the matter and a further lengthy period for it to be investigated.
• ASL has no prior history of offending or misconduct.
• ASL took steps to identify deficiencies in its compliance programme.
• The offending did not involve public officials or result in major disruption to, or loss of confidence in, markets or governments.
• Relative to other DPAs that have been approved, the gains to ASL were not very significant in terms of profitability.
• ASL is now dormant and the current board have chosen not to wind it up, but to keep it in existence to resolve these matters. (That said, had the owners sought to wind it up, the SFO could have sought to prevent this.)

DPA terms

The key terms of the one-year DPA were:

1. Disgorgement of profit of £990,971.45

This represents ASL’s benefit from the offending – the gross profit from the three tainted contracts with Lufthansa.

1. Payment of a financial penalty of £1,238,714.31 and the SFO’s reasonable costs of £750,000 within 7 days.

The fine was calculated on the basis of ASL’s benefit of £990,971.45. This figure was treated as the baseline harm suffered. The detailed methodology of calculating penalties was straightforward in this case because the SFO and ASL had been able to agree that the gross profit figure would be used as representing the harm caused by the offending.

Once such a figure is established, a multiplier for culpability must be applied. Following the Sentencing Guidelines for corporate fraud, the starting point for a multiplier is a 300% uplift to reflect high level culpability. ASL was considered to have high level culpability because the offending was committed over a sustained period and ASL had a culture of “wilful disregard” as to the commission of the offences. However, the judge was satisfied that mitigating factors listed above (mostly concerning more recent good faith conduct) slightly outweighed the aggravating factors, justifying a downwards adjustment to 250% as the final multiplier. There was no need to alter this figure further when “stepping back”.

A discount of 50% was then applied to reflect ASL’s early self-report and cooperation with the SFO’s investigation. This resulted in a financial penalty of £1,238.714.31. The rationale for the 50% discount (as opposed to the usual 33% for a guilty plea) is the same as that expressed in previous cases, including SFO v Sarclad [2016] 7 WLUK 211 and SFO v Airbus [2020] WLUK 435 – the wish to incentivise proper conduct by companies after the fact.

As to compensation, this was not ordered because the SFO had not been able to identify a quantifiable loss to a particular party as a result of ASL’s criminal conduct. It was said to be difficult to establish a “but for” case as regards rival bidders or harm due to defects in the products supplied.

One understands the complexities, but there is an established working presumption in civil cases that the loss to a party whose agent has been bribed can be valued at at least the same amount as the bribe itself (Mahesan v Malaysia Housing Society Ltd [1979] AC 374). So Lufthansa might, in principle, have been entitled to such a figure.

The judgment records the SFO’s view that any person affected was capable of seeking compensatory damages itself, via civil litigation. Whether there might be any hope of recovery given ASL’s circumstances must be questionable. In our view this approach should be considered in the wider context of the elevated status of compensation within the Sentencing Guidelines (particularly where the defendant may have limited means to meet any determinations).

1. Continuing cooperation with the SFO and other investigative agencies

As has become standard, ASL agreed to cooperate with the SFO’s ongoing investigation into allegedly culpable individuals and with any other domestic or foreign law enforcement agency investigations. It also agreed to retain (in England and Wales) all materials gathered as part of its investigation for the term of the DPA – again a standard term of recent DPAs. ASL also agreed to use its best endeavours to obtain materials held by the purchasers of its Interiors business that was sold in 2018.

Given ASL is a non-trading entity and will be wound up upon expiry of the DPA, no compliance-related obligations were included in the DPA.

Comment

This DPA has some unusual features, but the outcomes are not surprising given what we know about the operation of DPAs in general and given the particular facts. Some brief take-aways:

1. The use of external agents remains risky, even in jurisdictions where corruption is not endemic, such as Germany.
2. “Private to private” corruption is still criminal and will still be investigated and prosecuted by the SFO.
3. “Small figure” cases (i.e. cases in the single millions) will still be investigated and prosecuted by the SFO once they meet other threshold criteria.
4. SFO investigations may well go on un-announced, and for a long time. In this case the SFO was investigating this relatively small matter for five years, but did not announce this until the DPA was agreed in principle on 22 October 2020. Until the public hearing on 30 October 2020, no information was known about the allegations against ASL. In some ways, that demonstrates a further potential benefit of the self-reporting process where it ultimately leads to a DPA – the potential for a more positive and carefully managed reputational impact.
5. Even cases involving companies which are now dormant and non-trading can be investigated and resolved via DPAs. The SFO’s approach is in stark contrast with the CPS’ approach in the Skansen Interiors Limited (“SIL”) prosecution. In that case, SIL was a dormant company with no assets. Despite this, the CPS charged SIL with a s.7 Bribery Act offence and determined that a DPA was not an available option because SIL was dormant and it was believed that there could be no ongoing benefit that could accrue from a DPA. Instead, it prosecuted SIL and while it secured a conviction, SIL was given an absolute discharge because it had no assets to pay any fine imposed. Our previous Law-Now on the SIL case is available here. The CPS may have obtained a more long-term advantageous outcome had they been willing to adopt a more innovative approach.