The UK Serious Fraud Office (the “SFO“) has secured its second Deferred Prosecution Agreement (“DPA“). The agreement was approved by Lord Justice Leveson (the same judge who approved the SFO’s first DPA) on Friday 8 July 2016. For companies currently, or potentially, under the SFO’s spotlight, this second DPA offers another helpful insight into the approach of the SFO and the judiciary to this developing and important area of criminal enforcement.
At present, only a press release and redacted judgment approving the DPA have been released by the SFO due to ongoing legal proceedings. A copy of the redacted judgment and the SFO’s press release can be found here. We will provide a further update when the full DPA, Statement of Facts and judgment are published.
Background and terms of the DPA
The counterparty to the latest DPA is a UK SME that cannot currently be named due to ongoing, related legal proceedings. The DPA relates to the offer and/or payment of bribes by a number of the company’s agents and employees to secure contracts in overseas jurisdictions. The conduct was found by Lord Justice Leveson to be “part of [the company’s] established business conduct”. 28 contracts were found to have been procured as a result of the bribes and £17.24 million was paid to the company from those 28 contracts. The total gross profit from the contracts amounted to £6,553,085.
The wrongdoing took place between 2004 and 2012. As such, the suspended indictment included offences under the old UK bribery law, as well as Section 7 of the UK Bribery Act 2010.
The key terms of the DPA are as follows:
- The company will pay financial orders of £6,553,085 (comprised of a £6,201,085 disgorgement of gross profits and a £352,000 financial penalty).
- £1,953,085 of the disgorgement will be paid by the company’s US registered parent company as repayment of a significant proportion of the dividends that it received from the company over the indictment period. The disgorgement sum will be paid by way of instalments over five years. Payment in that way reflects the company’s means and ability to pay.
- The company has agreed to continue to cooperate fully with the SFO and to provide a report addressing all third party intermediary transactions, and the completion and effectiveness of its existing anti-bribery and corruption controls, policies and procedures within twelve months of the DPA and every twelve months for its duration.
- The SFO did not seek its costs.
- The indictment against the company has been suspended for a minimum of two and a half years and a maximum of five years, dependent upon when the financial penalty is paid in full.
A further insight into the future use of DPAs?
Even the little information we know about this second DPA is of interest to those working for or representing companies who are, or may become, the focus of an SFO investigation.
- Co-operation. Like the first DPA, this second DPA highlights the impact of genuine co-operation by the company on the SFO’s decision to enter into a DPA, the decision by the judiciary that a DPA is in the public interest and the financial penalty ultimately imposed. For example, key factors taken into account by Lord Justice Leveson when weighing up the public interest were: the promptness of the company’s self report to the SFO (within 4 weeks of retaining a law firm to conduct an internal investigation), the extent of the information provided by the company to the SFO as part of that self report (e.g. the provision of oral summaries of witness interviews and lists of documents provided to those witnesses) and the timely and complete responses by the company to requests for information and material from the SFO. Lord Justice Leveson concluded that “[t]aken together, [the company’s] timely self reporting and full and genuine co-operation militates very much in favour of a finding that a DPA is likely to be in the interests of justice”. The company’s co-operation also served to mitigate the seriousness of the offence when it came to calculating the applicable financial penalty.
- Judicial scrutiny. Like the first DPA, Mr Justice Leveson approached his task in a methodical and robust way. However, the judgment confirms that Mr Justice Leveson adjourned the preliminary hearing to give the SFO and the company the opportunity to “put more information before the court”. The message from the judiciary is clear: the judiciary will not merely provide a “rubber stamp” on DPAs, they will provide proper judicial oversight of the deals made between prosecutors and companies.
- The speed at which the SFO resolves cases. The judgment also provides an interesting insight into the current speed at which matters are being resolved by the SFO. The company first self reported the matter to the SFO on 2 October 2012 and, some four months later, submitted a written report of its internal investigation. Between April 2013 and January 2016 the SFO conducted its own investigation. Negotiations regarding a possible DPA began in August 2015 and the matter was finally resolved by way of a DPA in July 2016. For companies hoping for a speedy resolution of corruption issues with the SFO, this delay of almost four years between discovery and resolution will be of some concern. However, the timing does not appear to be significantly longer than other recent, comparable SFO investigations and resolutions.
- The use of corporate monitors. Like the first DPA, the SFO did not insist on the appointment of a corporate monitor in this case. Appointments of such monitors as part of a corporate settlement have been a feature of the US anti-bribery enforcement landscape for some years. Like the Standard Bank DPA, this second DPA only required the company to, in effect, “self-monitor” and provide a report to the SFO. The fact that the SFO and the courts do not currently appear to be insisting on the appointment of a corporate monitor, who can often be expensive and disruptive, is likely to be welcomed by many.
- The relevance of the company’s financial position. The second DPA raises for the first time the problems generated when a modestly resourced company commits bribery offences, in particular the issue of extracting a financial penalty from a company if there is a risk that the penalty would force the company into insolvency. In this case, the fact that the company was operating on an “economic knife-edge” was a factor taken into account by Lord Justice Leveson in deciding whether the DPA was in the public interest. In addition, it appears that the financial penalty of £352,000 was calculated on the basis of “a reasonable estimate of the unencumbered balance of cash available following a review by the SFO of [the company’s] cash flow projections over three years”. The starting point for the financial penalty was just under £16.4 million. However, Lord Justice Leveson was prepared to reduce this figure to £352,000. It is clear from the judgement that one of the factors weighing heavily in favour of such a reduction was the fact that “[t]here is no doubt that the value, worth and available means of [the company] fall to be considered together with the impact of the financial penalties including on employment of staff, service users, customers and local economy (but not shareholders).” Lord Justice Leveson was careful to distinguish this case from the case in which a company is set up “to provide an impecunious vehicle through which corrupt payments might be made.” In such a case, it appears that the prospect of insolvency would not mitigate the financial penalty.
- Parent company involvement. This case is also of interest because of the role of the parent company. Lord Justice Leveson was at pains to point out the benefit derived by the company from the global compliance program put in place by the parent when it took over the company. The role of the parent company was also relevant to the question of disgorgement. The company’s parent agreed to loan the company £4.6 million to satisfy the disgorgement of profits element of the DPA and also agreed to repay approximately £1.9 million of dividends the parent received from the company.
- The importance of good compliance. Finally, this case also, yet again, highlights the compliance risks associated with the use of third party agents, in this case, working mostly in Asia. Lord Justice Leveson concluded that the company “spiralled into criminality as a result of the conduct of a small number of senior executives bending to the will of agents.” Companies must ensure that compliance procedures are robust, especially when it comes to agents acting in high risk markets. Those compliance procedures must also be regularly revisited and re-evaluated to ensure they are fit for purpose. The fact that the company in this case had subsequently put in place a proper compliance programme was a factor considered by Mr Justice Leveson when determining that the DPA was in the public interest. Ultimately, Lord Justice Leveson concluded that “it is important to send a clear message…that a company’s shareholders, customers and employees (as well as all those with whom it deals) are far better served by self-reporting and putting in place effective compliance structures. When it does so, that openness must be rewarded and be seen to be worthwhile.”
Overall, this second DPA provides further, helpful guidance for companies wishing to co-operate with the authorities and avail themselves of the DPA regime. The case also highlights the costs and benefits of the decision to self report corporate wrongdoing. On the one hand in this case, even after the self report had been made, it took four years of further investigation by the SFO and further disruption and expense for the company to conclude the matter. The matter also resulted in a relatively large fine for the company (which would almost certainly have been significantly greater if the company had more assets), a lengthy period of uncertainty while the DPA is in place and (when the name of the company is released) adverse publicity. On the other hand, had the company not self reported and the wrongdoing had been discovered by the SFO, it seems quite possible that it would have been the subject of a criminal prosecution, liable for a much larger fine (which may have forced the company into insolvency) and/or significantly damaged its business if it had been debarred from public procurement contracts. In this case, the court emphasized the credit it was giving for self reporting and, therefore, the benefits of doing so for companies. However the decision to voluntarily self-report corporate wrongdoing to any authority is not one that should be taken lightly. It is a decision that requires very detailed and careful consideration with the benefit of specialist expertise in this area.
A DPA is an agreement between a prosecutor and an organisation facing prosecution for certain offences. The effect of the DPA is that proceedings are instituted by the prosecutor, but are then deferred on terms agreed between the prosecutor and the company and must be approved by the court. These terms can include the payment of a financial penalty, compensation and disgorgement of profit along with implementation of a compliance program, co-operation with the prosecutor’s investigation and payment of costs. If, within the specified time, the terms of the DPA are met, the criminal proceedings are discontinued. A breach of the terms of the DPA can lead to the suspension being lifted and the prosecution being pursued.