On 30 November 2015, the U.K Sir Brian Leveson, President of the QBD approved the first U.K. deferred prosecution agreement (“DPA”) between the Serious Fraud Office (“SFO”) and Standard Bank. The DPA is a ground- breaking development in the U.K. regulatory sphere and has deservedly received substantial attention.
However there are wider lessons to learn from the rulings made by the Court in approving the DPA for the interpretation of the Bribery Act 2010 (the “Act”) itself and the practical implications for companies faced with self-reporting dilemmas. The issues we will address in this alert are:
- Is there now a Court approved benchmark for the elusive adequate procedures defence?
- Is “smoking gun” evidence needed to prove the active bribery requirement of section 7?
- In what circumstances will the U.S. DOJ and SEC cede control of global settlements to the SFO?
- Does the DPA make decisions on self-reporting any easier?
Recap on the Key Facts
Whilst the facts of the investigation may now be familiar to some, it is worth recapping on the key elements:
- ICBC Standard Bank carried on business in the U.K. and had a subsidiary in Tanzania – Stanbic Bank.
- Stanbic wished to be considered for a deal involving $600 million of sovereign debt issued by the Tanzanian government as part of its five-year economic plan.
- During negotiations in 2012, Stanbic quoted arrangement fees of 1.4% of gross funds raised. This later increased by 1%, to 2.4% when Stanbic introduced a “local partner”, a Tanzanian company, Enterprise Growth Market Advisors Ltd (“EGMA”) to the deal.
- EGMA’s Chairman and one of its shareholders and directors was the Commissioner of the Tanzania Revenue authority (and as such, a serving member of the Government of Tanzania). In addition, until 2011, EGMA’s MD had been the CEO of the Tanzanian Capital Markets and Securities Authority.
- No due diligence was performed on EGMA by Standard Bank before they were engaged as a local partner. Stanbic conducted limited KYC checks when EGMA opened a Stanbic bank account.
- There was no written evidence that EGMA provided any services.
- The 1% fee, amounting to $6 million, was paid into EGMA’s bank account at Stanbic and swiftly withdrawn in cash.
Is there now a Court approved benchmark for the adequate procedures defence?
Under the DPA, Standard Bank was subject to an uncontested indictment under section 7 of the Act and as a result, the factors and scope of the defence under section 7(2) has not yet been tested by the court. However, Sir Brian Leveson made a number of comments in his judgment which provide some guidance for understanding why all parties and the Court considered that Standard Bank was unable to rely on the defence of adequate procedures. A number of key action points can be identified from the judgment:
- Due Diligence: Be in a position to evidence the enhanced due diligence performed whenever red flags arise in a transaction;
- Ensure that policies are drafted with clarity, setting out what must be done to comply with expectations.
- Demonstrate that the policies are reinforced effectively and communicated to the company’s deal team;
- Training: It must be tailored, relevant and regular.For example, in Standard Bank there should have been specific guidance about relevant obligations and procedures where two entities within the same group are involved in a transaction and the other entity of the group engages an introducer or a consultant;
- PEPs: Ensure that robust processes are in place to identify the presence of politically exposed persons;
- Risk Management: Deals in high-risk territories where there is interaction with government officials must result in comprehensive and thorough due diligence checks being conducted (in Standard Bank only basic KYC checks, similar to those conducted when a bank account is opened, were performed on an intermediary due to receive a $6 million fee);
- Reliance on Group companies: Relying on the accuracy and completeness of due diligence checks performed by another company in the group will not be sufficient for the adequate procedures defence – oversight and quality control will be essential; and
- Expertise: Where the corporate in question, such as Standard Bank, has experience and knowledge of the emerging market where it is conducting business, it will be treated as having ‘special’ knowledge of red flags and its adequate procedures will be measured against that benchmark.
Whether we are much further forward than the 2011 Ministry of Justice Guidance to the Act1 as a result of this DPA remains questionable. It is too early to hail this DPA as providing a court approved benchmark for adequate procedures. Nevertheless, it does, in our view, take us several steps further forward from the high-level generalisms of the Ministry of Justice guidance. In particular, the emphasis on careful and clear policy drafting, the dangers of relying on the performance of other group companies and the special knowledge credited to some are all welcome touchpoints for fine-tuning compliance systems.
Is “smoking gun” evidence needed to prove the active bribery requirement of section 7?
Many corporates are faced with transactions or arrangements that struggle to pass the ‘smell’ test, but find it difficult, without a “smoking gun” to conclude that corruption is occurring or being planned. In the Standard Bank DPA, Sir Brian Leveson reached the conclusion that active bribery (contrary to section 1 of the Act) was the “only inference” from a number of facts that Standard knew or should have known about prior to engaging, or in default of that, paying the agent EGMA. A number of these factors will be familiar to many, but whether or not they lead to compliance officers consistently reaching the same conclusions as those of Sir Brian Leveson, is not certain.
The factors considered to be clear evidence of corruption were:
- Due diligence was inadequate for EGMA, being a third party in a high risk jurisdiction;
- The fee due to EGMA was high U.S.$6 million (1% of the contract value);
- EGMA did not provide evidence of having provided services; and
- EGMA’s introduction led to the proposal proceeding quickly.
Collectively these four factors were enough, in the Court’s view, to support the conclusion of actual corruption, which is a necessary prerequisite to trigger the Act’s corporate liability provisions. This should be wake-up call to compliance and legal functions within corporates subject to the Act to ensure that they identify, assess and weigh-up the surrounding circumstances of arrangements and transactions against the benchmark imposed by the Standard Bank DPA ruling.
In what circumstances will the U.S. DOJ and SEC cede control of global settlements to the SFO?
The Standard Bank case involved cooperation between the SFO, Securities Exchange Commission (“SEC”) and Department of Justice (“DoJ”), in which the SFO took the lead in a global settlement. In light of the DPA, the SEC imposed a penalty of $4.2 million against Standard Bank to settle fraud charges relating to its failure to disclose the payments made to Stanbic in connection with debt securities issued by the Government of Tanzania to be sold in the U.S. (violation of section 17(a)(2) of the Securities Act). The SEC did not seek additional penalties which, it claims, would have been appropriate but for the SFO action. Furthermore, the DoJ declined to bring any charges against the bank. The DPA allowed Standard Bank to settle criminal liability on a global basis – an important and favourable factor for corporates.
These facts may prove welcome news for corporates nervous of self-reporting for fear of having to settle multiple issues with multiple government enforcement agencies. However, due caution must still be applied, particularly in light of the fact that the Standard Bank case involved a number of special factors that may not always be repeated. For example:
- This was an isolated and confined event. It did not amount to a course of conduct beyond Tanzania;
- The SEC did not have jurisdiction to charge Standard Bank under the Foreign Corrupt Practices Act 1977 (as amended) (“FCPA”), because the bank was not an “issuer” as defined by the books and records and internal controls sections of the FCPA; and
- The DoJ’s jurisdiction was limited – the connection with the U.S. was confined to the fact that the bond issue was denominated in USD; the public interest in separately pursuing Standard Bank would not have been high.
Despite these special considerations, the cooperation evident in this case is a positive development towards settling global cases; however, whether or not the U.K. SFO will be able to retain the lead role in a case with significant nexus with the U.S. remains an open question.
Does the DPA make decisions on self- reporting any easier?
It is clear from Sir Brian Leveson’s judgment and comments made by the SFO that significant weight was placed on Standard Bank’s early self-reporting and cooperation. David Green, Director of the SFO, stated that in order for DPAs to be used in the future
“significant cooperation from the company will be required to convince the overseeing judge that the agreement is fair and just”.
A further key consideration is that worldwide government enforcement are increasingly requiring executives suspected of wrong-doing to become the focus of internal investigations and for evidence relating to their culpability to be turned over the authorities as part of the cooperation package (see for example the Yates memo2).
The Court provides some guidance on what it considers necessary actions, beyond prompt self- reporting, to be taken by a company to be viewed as cooperating with the SFO, including:
- providing summary of first accounts of interviews;
- facilitating interviews of current employees;
- timely and complete responses to requests for information and material; and
- providing access to the document review platform.
Perhaps at least in part a result of the Standard Bank DPA, the SFO’s expectations as to the level of cooperation it will expect from corporates in order to be considered for a DPA is significantly higher. Due care will be needed in making the decision on whether or not to self-report – given the level of cooperation required (which also may include waiving privilege).If the self-report fails to result in a DPA, the SFO may still prosecute the conduct and may use the evidence gathered during the self-reporting phase in any prosecution.
Whether or not the Standard Bank DPA will make it easier for corporates considering self-reporting remains open to debate. It is important to note that regulated financial institutions, such as Standard Bank, have separate obligations to deal with their regulators in an open and cooperative way, and must disclose to the appropriate regulator anything relating to the firm of which that regulator would reasonably expect notice. As part of the regulated sector, they also have money laundering obligations which are triggered by having ‘reasonable grounds to suspect’. These obligations may have made the Standard Bank decision to self-report straightforward in comparison to the additional complex dilemmas faced by those operating outside the regulated sector. While it is certain will be additional DPAs in the future, how many and from which economic sectors remains to be seen.
On 18 December 2015, the SFO achieved its first conviction against a corporate under section 7 of the Act with Sweett Group PLC pleading guilty to failing to prevent bribery in the Middle East in connection with the construction of a hotel in Dubai. Sweett Group will be sentenced on 12 February 2016. Close attention will be paid to the sentencing remarks for any further clues on Bribery Act compliance.
It is likely that 2016 will see further DPA’s. There are numerous cases on the SFO’s books that are potential contenders, but whether any of them will be able to show the high levels of cooperation necessary to achieve a DPA is very much an open question.