• SFO obtains second Deferred Prosecution Agreement since legislation introduced
  • Un-named SME paid bribes to customers via agents for eight years
  • Company must disgorge £6m in profits but only a small extra fine
  • Penalty reduced to reflect cooperation, own investigation costs and financial circumstances

The UK Serious Fraud Office has entered its second deferred prosecution agreement (DPA) with a company accused of bribery. Links to the SFO press release, and the detailed preliminary and final judgments of the court are provided here for your reference.

The name of the defendant company remains embargoed apparently to protect ongoing proceedings/investigations into individuals. The company is referred to in the judgment as “XYZ”.

The judgments are worth reading in detail and we may comment further later. However, one point which emerges strongly is the flexibility of the SFO in accepting a low financial penalty in the circumstances of this case. This was because XYZ, despite having a wealthy parent company, was described as a “small to medium-sized enterprise” which was in a parlous financial situation. A heavier fine might have pushed it into insolvency.

The Agreed Facts

The agreed facts were that XYZ relied on local agents in various overseas territories. The agents offered bribes to representatives of XYZ’s customers and won orders as a result. This went on over eight years. Twenty-eight separate contracts were tainted by bribery. The revenue earned on the business won as a result of the bribery was of the order of £17.24 million, about 16% of XYZ’s turnover in the relevant period. The tainted contracts earned XYZ profits of £6.5 million.

In 2011, the parent company put ABAC procedures in place which led to the discovery of suspicious facts in August 2012. External lawyers were immediately hired to investigate, which investigation led to discovery of the bribery and a self-report, complete with the investigation report and supporting documents, to the SFO. A detailed (though apparently not final) report was made to the SFO in January 2013. Further investigation by the external lawyers and the SFO led to the discovery of further issues and the making of further self-reports by the company.

Culpability

The offending was accepted by the SFO and the court as being very serious. It was systematic. It was part of the company’s established conduct. It extended back in time at least eight years, that is, prior to the coming into effect of the Bribery Act in 2011.

The SFO alleged it could establish conspiracy by the company to pay bribes under the 1906 Prevention of Corruption Act which applied at that time. This conspiracy was to be taken into account alongside the Bribery Act offence of failure by a commercial organisation to prevent bribery1 which applied to more recent events.

Up to Standard?

SFO, and the judge, accepted a figure of £6,201,085 as disgorgement of profits earned from the bribery but, surprisingly, only imposed an additional penalty of £352,000. The court also made no order for costs. This was despite the fact that the likely offending was more serious than in the first DPA case, that of Standard Bank (discussed in our note here).

Although each case differs according to its facts, a comparison to the Standard Bank outcome is inevitable. This case reveals just how fact-sensitive these DPA exercises are going to be. In Standard, the terms of the agreement were:

  • A financial penalty of $16.8 million (reduced by a third from the likely sentence on conviction after a trial, so about 66% of the starting point)
  • Compensation to the victim, the government of Tanzania, of $6 million plus more than $1 million in interest
  • Disgorgement of profit by the bank of the fees earned, coming to $8.4 million
  • Prosecution costs of £330,000 (about $500,000)

In this case, XYZ’s terms were:

  • A financial penalty of £350,000 (reduced from the likely sentence on conviction after trial of £16.4 million, i.e., about 2% of the starting point)
  • No compensation to victims as no specific victim could be identified
  • Disgorgement of profit of £6,201,085
  • No payment of costs

The court also recognised that XYZ and/or its parent company had paid about £3.8 million in professional fees in connection with investigating the bribery and reporting to the SFO.

The Quality of Mercy

Obviously the two outcomes are very different. Why? The main reason seems to have been that the SFO and the judge accepted that XYZ was in such a bad condition financially that any larger penalty would push it into insolvency, or at least into a position whereby it would have to depend on further transfers from its parent company. Cooperation and self-reporting were also important, although the conduct of the company does not seem any more cooperative than that of Standard Bank. It’s notable that the (solvent) parent company was not implicated in the bribery scheme, and the judge praised the parent as having acted entirely properly when it discovered the facts.

Should the penalty imposed depend so heavily on the effects it may have on the ongoing solvency of the offending company? The judge said:

“It might be thought that the outcome of this case has been only to remove from XYZ the gross profits which flow from its criminality and that little can be achieved by way of deterrence by not imposing a much more substantial penalty for such egregious criminality. In this case, which can be considered exceptional, the critical question was whether XYZ should be forced into insolvency bearing in mind the self-reports, the sterling assistance provided by ABC (whose conduct has been exemplary in these very difficult circumstances and which should be seen by its customers, shareholders and employees as revealing the highest standards of corporate integrity), the compliance mechanisms now put in place and the fact that all those facing prosecution no longer work for XYZ and that the company is operating effectively and in the public good.

“Once it was decided that it was in the public interest that XYZ should not be forced into insolvency, what was fair, reasonable and proportionate fell to be considered in the context of the work put into the company to ensure that it was viable and operated in accordance with the law, the expense incurred and whether sufficient financial assistance could be sought to ensure that the criminality had not led to profit. By disgorging or paying by way of financial penalty the total of gross (as opposed to net) profit and by doing so by incurring long term liability to ABC (save for ABC’s reimbursement of the dividends it received), I believe that the conclusion is fair, reasonable and proportionate. This is not least because it provides an example of the value of self-report and co-operation along with the introduction of appropriate compliance mechanisms, all of which can only improve corporate attitudes to bribery and corruption.”

Pragmatism and a Paradox

One can see the arguments for this outcome, in particular the argument for incentivising cooperation. In this case, the work done by the company and law firm in question seems to have been particularly thorough and helpful to the SFO. I also suspect that the widespread view that the sentence in Standard was too harsh may have had something to do with the SFO’s much gentler approach in XYZ. As a strong endorsement of “doing the right thing”, and of pragmatism in corporate sentencing, the result is to be welcomed.

But looking at the Standard and XYZ cases side-by-side, one cannot but be struck by the obvious paradox. A less culpable firm, which happened to be solvent, has ended up with a much heavier sentence than a more culpable firm, which happened to be in financial trouble. An economist might recognise this as a species of moral hazard. The case highlights some deeper legal, economic and even philosophical issues which underlie the whole concept of corporate criminal liability.