Earlier this month the SFO entered into its second deferred prosecution agreement (‘DPA’) with a corporate entity.
XYZ Limited (anonymised due to ongoing criminal proceedings) had accepted engaging in systematic offering and payment of bribes to secure contracts in foreign jurisdictions during the period of June 2004 to June 2012.
The payments in question were identified by XYZ Limited as part of the company’s implementation of a global compliance programme throughout the group of companies. XYZ Limited then promptly instructed a law firm to carry out an independent investigation and subsequently self-reported to the SFO.
Under the terms of the DPA, XYZ Limited will have to disgorge profits of £6,201,085 and pay a financial penalty of £352,000. XYZ Limited will also have to comply with several requirements as part of the DPA, namely to review, maintain and report to the SFO on its compliance programme.
HHJ Leveson (who has adjudicated on both DPAs to date) applied a 50% discount to the financial penalty element of the sentence. This is a substantial increase compared with the 33% (one third) discount he awarded in the Standard Bank case. Both HHJ Leveson and David Green (Director of the SFO) have been quoted as highlighting the importance of adequate discounts to incentivise companies to self-report.
Other factors taken into account by HHJ Leveson included the fact that XYZ Limited cooperated fully with the SFO including disclosing (in full) the outcome of its internal investigation, and the fact that XYZ Limited had already implemented new compliance programmes (which had led to the company’s discovery of the wrongdoing in the first place).
Whilst DPAs are not available to companies being prosecuted in Scotland, companies are able to self-report violations of the Bribery Act 2010 to the Crown Office and Procurator Fiscal Service. Such reports are made by a solicitor or forensic accountant on behalf of the company to the Serious Organised Crime Unit (SOCU) and the SOCU will then consider whether the case should be referred to the Civil Recovery Unit (CRU) for civil settlement, or whether the company should be prosecuted. Guidance provides that SOCU and SFO will liaise and co-operate so that appropriate cases will be dealt with by each of the SFO and SOCU. Factors which suggest a business should report to the Crown Office rather than the SFO include; the fact that the business has its headquarters or registered office in Scotland, the business predominantly carries on its business in Scotland or the wrongdoing has taken place in Scotland.
In order to be eligible for the self-reporting initiative, companies must:
- have conducted a thorough investigation;
- describe what has been done to prevent a repetition of the reported conduct; and
- agree to have a meaningful dialogue with the Crown.
Where a civil settlement is entered into following a referral to the CRU, the company will be required to disgorge the profits from the wrong-doing. Recent such cases include the Abbott Group in 2013, Brand-Rex Limited in 2015, and the Braid Group in 2016.
Scotland’s self-reporting regime was introduced on 1 July 2011, for an initial period of 12 months. The initiative was then extended in July 2013 has now been extended further by Scotland’s Lord Advocate to run until 30 June 2017. The fact the initiative has already been running for five years, and has now been extended further, suggests that the Scottish government considers the initiative to be a success and it could be inferred that a more permanent regime may be on the cards.
At the same time, across the pond, the Department of Justice is also running a one year self-reporting initiative. Under this pilot scheme, companies are invited to self-report violations of the Foreign Corrupt Practices Act (“FCPA”) in exchange for a reduction of up to 50% on the criminal fine awarded, declination (i.e. non-prosecution) and, in certain circumstances, settlements without a requirement to appoint a compliance monitor. The most recent report under the scheme came from Johnson Controls, a shipping firm, which reported improper behaviour by employees of its marine business in China. Johnson Controls was fined US$14.4 million and agreed to a one year reporting period.
Recent activity within the British courts and in the US suggests a renewed focus on incentivising corporates to self-monitor and report, with substantial benefits on offer compared to penalties that would have been imposed after a prosecution. In the UK, the level of discount applied to the financial penalty under a DPA has already been as high as 50%, whilst Scotland has extended its temporary self-reporting scheme off the back of several key successes. The US launched its FCPA self-reporting pilot in April and is already reporting successes.
There are a number of common factors running through the various cases that will be of note to company directors, general counsel and compliance officers:
- In all of these cases, companies acted quickly, instructing lawyers and (in most cases) sharing the outcome of their investigations with the enforcement agencies within days of the offending behaviour being identified.
- Throughout proceedings, companies continued to cooperate and share intelligence with the enforcement agencies.
- During proceedings, companies made clear and significant improvements to their compliance programmes in order to demonstrate a commitment to eradicating further misconduct in the future.
- In many cases, the corporate wrongdoing was identified at subsidiary level, and reported by the parent company, against whom no misconduct charges were levelled.
The increase in discount applied in the XYZ case represents a substantial shift in assessing the balance between the commercial benefits of self-reporting and those of fighting / defending an investigation. Your legal advisor should take you through the commercial risks of a DPA (such as the requirement to implement enhanced compliance programmes and to comply with ongoing monitoring and reporting requirements) as compared with those of defending the proceedings (adverse publicity, legal fees and higher sanctions on conviction).
However, it is still difficult to draw meaningful conclusions from the XYZ judgment at this stage, given that so much seems to have been left unsaid, due to the related criminal proceedings and attendant reporting restrictions. Most significantly, XYZ received a 50% discount in circumstances not markedly different from the previous DPA in which Standard Bank received just 33%. The judge was careful to emphasise that he was awarding XYZ a discount of 50% “not least to encourage others to conduct themselves as XYZ Limited has when confronting criminality”. However, the impact of the discount was then somewhat diluted, because XYZ was able to escape with a far lower financial penalty due to its poor financial circumstances.
What remains clear is HHJ Leveson’s desire to show companies that self-reporting makes sense in purely financial terms. Whether such a discount will be equally attractive to every company that finds itself having to consider whether to make a report remains to be seen.