Following the recent DPAs with Rolls Royce, and now Tesco Stores Limited (TSL), we set out below the Serious Fraud Office’s stance on DPAs and where they see the trend progressing. We also summarise the recent TSL DPA.

The Serious Fraud Office (SFO) view

Ben Morgan, Joint Head of Bribery and Corruption, recently delivered a speech at a seminar for General Counsel and Compliance Counsel from corporates and financial institutions. He set out six statements from the SFO on the future of DPAs:

  • “For those that behave responsibly, this is the new normal. I don’t necessarily mean ever increasing financial sanctions; what I mean is that disposal of corporate criminal risk through resolutions like those in Standard Bank, XYZ and Rolls-Royce will become increasingly common. I have seen lawyers from some firms in the press saying DPAs are not sufficiently attractive, are not here to stay, or have no significance compared to the impact of regulation. In my view – they are wrong; not least because for obdurate companies prosecution is the alternative.”
  • Benchmarks are developing for the discounts applied for particular levels of co-operation
  • If businesses are to benefit from discounts in payments for co-operation and self-reporting, then the sentencing guidelines should be applied in full for those cases where there is no co-operation
  • Although the recent high-profile case of Rolls Royce was not instigated by self-reporting, this does not mean that self-reporting is dead, or not to be encouraged
  • Continued co-operation is extremely important, both in terms of intelligence sharing and enforcement, within the international community
  • The SFO recognises the line between incentivising business to confront bribery and corruption and correct it, and not appearing tough enough on businesses that are committing economic crimes.

SFO confirms DPA agreed in principle with Tesco

The SFO has confirmed that it has reached an agreement with TSL, which was approved by the Crown Court at a public hearing on 10 April 2017. This judicial approval has resulted in a DPA becoming effective.

The DPA will result in a financial penalty of just under £130million plus the SFO’s costs. The DPA does not address whether liability attaches to Tesco PLC or any employee or agent of Tesco PLC or TSL.

Could Brexit give UK companies leverage when negotiating terms for DPAs?

As the crackdown on global corruption gathers pace there is a tension developing between the perceived need for greater co-operation between countries to ensure an effective and cohesive anti-bribery and corruption environment for business, and the UK’s decision to trigger Article 50 and begin the process of leaving the European Union.

Brexit raises the obvious question of whether the UK will continue to act in concert with Europe in terms of its policy making and enforcement practices. Additionally, however, some commentators have speculated that the UK government may find itself indirectly held to ransom by companies threatening to withdraw jobs and operations in the UK as a negotiating tactic to secure more favourable terms in any DPA negotiations.

The Organisation for Economic Co-Operation and Development (OECD) view

In March, the OECD published its Phase 4 report by the Working Group on Bribery in International Business Transactions.

The OECD’s report sets out that the UK has taken significant steps to increase enforcement of the foreign bribery offence and is now one of the major enforcers among the Working Group countries. The report praises the increase in the number of investigations and enforcement actions, as well the introduction of DPAs.

The report urges HMRC to improve its capacity to detect and report foreign bribery. It suggests that the UK’s Crown Dependencies and Overseas Territories should play a more proactive role in the identification and prosecution of corrupt practices.

One of the key highlights, however, is the statement that “NGOs believe that Brexit could increase the risk of UK companies threatening to relocate and potential loss of UK jobs as a bargaining chip in negotiations with prosecutors over charges. Given that the SFO has on its books some very large UK companies that are significant partners in the government’s industrial strategy, this is a real concern for several NGOs in the UK.” [Paragraph 106].

The report then repeats concerns about the SFO’s independence from political intervention in circumstances where it is dependent on “blockbuster funding”.

The wider view

The UK authorities’ response has been to stress that the UK’s commitment to anti bribery and corruption remains undiminished, and the UK’s ability to fulfil mutual legal assistance requests is an area that will be “under close scrutiny” during Brexit negotiations.

In reality, however, a serious problem remains and is likely to remain for some time. Most people agree that the SFO has significant experience and expertise and could play a much greater role in leading the fight against corruption both inside the UK and internationally. The issue has always been the limitation of its resources.

The real concern is that, with the economic uncertainty surrounding Brexit likely to continue for the next two years at least, the SFO could see itself put under significant pressure by businesses (or, as in 2006 with the case of BAe systems and the Blair administration, the Government). Pressure might be brought to bear to interpret questions of “national interest” as “national economic interest”, leading to a situation, at least in theory, in which it is the companies under investigation that have the upper hand in DPA negotiations, rather than the SFO.

How likely that fear will be realised will depend on the terms agreed in DPAs over the next two years and the nature of the deal concluded by the EU and the UK government in March 2019. It will be interesting to see whether the Government follows recommendations to secure the independence of the Director of the SFO. It is our view, however, that an attempt to lever the SFO by threats of withdrawal of business is a highly risky strategy. It certainly contradicts the spirit of “amicable settlement” that DPAs are meant to encompass and exposes the proponent to the risk of the DPA being withdrawn altogether.

Overseas corruption and the London property market

Also this month, Transparency International UK (TI), the world’s leading non-governmental anti-corruption organisation, published “Faulty Towers – Understanding the impact of overseas corruption in the London property market”.

The key findings and recommendations are set out below. We also give our view on the likelihood of these recommendations being implemented and, if they are, what the practical effects there might be on the Private Wealth, Real Estate and Construction sectors.

Key findings

  • Over £4.2 billion worth of properties bought in London with “suspicious wealth”
  • Since 2006, instability abroad caused by corruption has led to £100 billion of “crisis capital” being placed in safe havens like London’s property market, fuelling the increase in house prices
  • In 14 landmark London developments, nearly 40% of future homes were bought by purchasers from high corruption jurisdictions.

Recommendations

Greater transparency

  • Better implementation of the register for beneficial ownership for overseas companies owning UK property
  • Land registry to collate details of all off-plan contract exchanges to capture how many times individual properties are flipped before completion, and by whom.

Reform the UK’s Anti Money Laundering system

  • Law enforcement agencies should make greater use of Unexplained Wealth Orders (UWO). If the response to these UWOs cannot explain the source of suspicious wealth, law enforcement agencies should pursue confiscation proceedings.

Retain tackling global corruption as a key priority

  • Introduce public registers of beneficial ownership in the UK’s Overseas Territories and Crown Dependencies. Produce a clear timetable for this and adopt measures to force implementation if registers are not introduced
  • The UK-based International Anti-Corruption Coordination Centre should create an international anti-corruption “rapid reaction unit” comprising anti-corruption governance, military, law enforcement, legal, diplomatic, development and procurement advisers
  • The National Crime Agency’s International Corruption Unit should be given increased funding to target corruption and money laundering from non-DfID priority countries, expanding its remit to include China and Russia.

Practical impact

Of these recommendations, the most likely to be put into practice, in our view, is the better implementation of the register of beneficial ownership.

Despite opposition concerns that the UK risks becoming a low tax haven, the overall move towards greater transparency in the ownership of beneficial interests, particularly from overseas companies, is a trend that we believe will continue. The UK Government will want to see the property market continue to strengthen across the country as well as in London. That said it is also aware of the growing public dissatisfaction with the pressures on affordable available housing contrasted with the number of large, empty properties owned by overseas companies and individuals in London.

Public opinion has been broadly in favour of greater transparency in the UK’s Overseas Territories and Crown Dependencies, although the implementation of registers in these territories that are heavily reliant on financial structuring for their revenue will likely be slow.

Perhaps the most interesting recommendation given the squeeze on funding for various sectors will be whether we see law enforcement agencies actively encouraged to use UWOs under the upcoming Criminal Finance Act. A couple of high profile confiscations would generate recoveries for the Crown (albeit that would not be a stated aim) as well as giving the appearance of being tough on corruption.

Overseas companies owning property in London, construction companies and private wealth managers would be well-advised to keep a close eye on the Government’s action over the coming months and, in particular, the approach to be taken on the new weapon of UWOs. It is a moot point whether professionals should be using TI’s “suspicious wealth” criteria as part of their transactional KYC, if they are not doing so already.

It is also worth considering the extent to which an adviser may be negligent if they do not advise clients of the risk of confiscation by UWO in the event that the property is purchased with “suspicious funds” when recommending acquisition of a London property through an overseas company.