On 8 January 2016, Recorder Andrew Mitchell QC at the Southwark Crown Court sentenced Smith & Ouzman Ltd (an Eastbourne-based printing company) to pay £2.2m in respect of bribery offences (under the pre-Bribery Act legislation), after the company and certain senior executives had been found guilty in December 2014. This case is significant because it is the first UK conviction of a corporate for overseas bribery offences following a contested trial and it provides helpful guidance as to how the courts will apply the relevant sentencing guidelines for fraud, bribery and money laundering offences (the “Guideline”) going forward.
In December 2014, Smith & Ouzman Ltd (“SO”), along with two of its former directors, were found guilty of making corrupt payments totalling £395,074 to public officials in Kenya and Mauritania in exchange for contracts to print ballot papers. The offending took place over the period 2006 to 2010. Mr Christopher Smith (former chairman of SO) and Mr Nicholas Smith (former sales and marketing director of SO) were both found guilty of offences under section 1(1) of the Prevention of Corruption Act 1906 (the “PCA”), which applies to acts pre-dating the Bribery Act’s coming into force in July 2011. Unlike the Bribery Act, the PCA did not contain a strict liability corporate offence and so corporate liability could only attach to SO if a jury considered that Messrs Smith were the “directing mind and will” of the company when paying the bribes. This so-called identification doctrine set a high threshold for corporate culpability and was historically criticised by prosecutors as being a bar to corporate prosecutions. This was one of the reasons why the Bribery Act introduced the section 7 corporate offence of failing to prevent bribery – to make it easier to prosecute corporates. However, in this case, the jury considered that the test was met and a corporate conviction for overseas bribery was secured, the first of its kind for the Serious Fraud Office (“SFO”).
The two individuals were sentenced to a 18 months’ suspended sentence (Christopher Smith) and 3 years’ imprisonment (Nicholas Smith) for their roles (see our previous LawNow on that sentencing here). However, SO was sentenced separately (almost 11 months later) and was required to pay a total of £2.2m. This comprised a fine of £1,316,799, a confiscation order for £881,158 and £25,000 towards SFO costs. (Messrs Smith were ordered to pay the bulk of the SFO's costs.) The fine is payable in instalments every six months. The confiscation order must be satisfied within 28 days and the costs paid within six months.
Details of the sentencing
The confiscation order of £881,158 was arrived at by considering the value of the contracts to SO (£2,450,454), then deducting the value attributable to contracts where bribes were not paid. To the value remaining (the ‘gross profit’ of £438,933), the judge added the value of the actual bribe amounts (which at the time of the offending had been added to the price of the contracts so that the bribes had effectively been funded from the public purse of Kenya and Mauritania). This resulted in a figure of £836,859.
To this sum, the judge applied the change in the value of money. Previous cases have relied on RPIJ (an RPI based measure that uses a geometric (Jevons) formula in place of an arithmetic formula) to reconcile this change. However, the judge considered that the correct approach for corporates (as opposed to individuals) was to use an index reflecting the increase in the cost of business in the sector in which the entity is engaged – in this case, the Printing and Reproduction Index – which increased the confiscation amount to £881,158.
The two individual directors also received confiscation orders based on the personal remuneration benefit they obtained as a result of the tainted contracts. (The defence had argued that the amounts should be reduced to reflect income taxes paid on the remuneration at the time, but the judge dismissed this argument on the basis that it was not disproportionate to refuse this given the low amounts involved – rather than it being wrong in principle.)
Relatively unusually, no compensation was awarded. While the judge acknowledged that the people of Kenya and Mauritania were victims in this case, attempts to liaise with their respective governments as to compensation had not provided satisfactory evidence that any compensation would be delivered into the ‘right hands’. The judge’s decision was also impacted by the fact that there had been no formal request for compensation from either Kenya or Mauritania.
Determining the level of fine
Under the Guideline (see our previous LawNow on the Guideline here), when making a sentencing decision, the court is asked first to classify the corporate’s culpability (high, medium or low) by considering the offending corporate’s “role and motivation” in the wrongdoing. This classification then informs a percentage multiplier to be applied to the financial sum calculated by reference to the harm caused by the wrongdoing. Examples of factors that suggest the corporate had high culpability include the corporate playing a leading role in organised, planned unlawful activity, targeting vulnerable victims, corruption of local or national government officials, wilful obstruction of detection of the wrongdoing etc. Medium culpability factors include the corporate playing a significant role in unlawful activity organised by others, the activity not being unlawful from the outset and the making of reckless false statements. Lesser culpability factors include the corporate playing a minor, peripheral role in unlawful activity organised by others, making some effort to put bribery prevention measures in place but insufficient measures to amount to a defence of adequate procedures, and involvement through coercion, intimidation or exploitation. This categorisation can mean the difference between a percentage multiplier of up to 400% (the top range of high culpability) down to 20% (the low range of low culpability).
In this instance, the judge classified the offending in the high culpability range (i.e. in a range of 250% to 400%, the judge opted to use 300% as the starting point). This was on the basis that the corporate’s directors had a leading role in planning/organising the bribes, the bribes involved corruption of public officials over a sustained period, there was an abuse of a dominant market position and the bribes were paid with a motive of substantial financial gain.
In terms of the financial harm (the actual figure to which the multiplier should be applied), the Guideline suggests that the appropriate figure would usually be the gross profit from the contract obtained as a result of the offending. In this case, as noted above, the judge determined the gross profit to be £438,933. After applying the 300% multiplier, this resulted in a fine of £1,316,799. No other adjustments were made to the value of the fine.
The defence had argued that the Guideline was not applicable, given the offences committed were under the PCA, not the Bribery Act. However, the judge disagreed and followed the Guideline as he considered it was equally relevant and appropriate in the circumstances.
The judge had regard to submissions from SO’s lawyers as to the impact a large fine would have on the company. However, while he stated that it was not his intention to put the company out of business, he had not been convinced that SO did not have the means to pay. This resulted in the judge ordering payment of the fine over a 60 month period, on a bi-annual basis.
SO’s sentencing follows hot on the heels of the Standard Bank deferred prosecution agreement (“DPA”), published on 30 November 2015 (see our LawNow here).
The approach taken in these two cases to the fine element of the punishment are not easy to reconcile and may suggest a relatively harsh approach was taken in respect of Standard Bank when determining the appropriate level of its penalty. (However, it should be noted that the fine imposed on Standard Bank was determined pursuant to an agreement with the bank itself.) In the case of SO, the offending was committed by senior officials within the company, over a number of years in multiple jurisdictions and included bribery of foreign public officials. The SO directors involved gained personally as well as the wrongdoing increasing the company’s turnover. The judge’s assessment that this resulted in high culpability for the purpose of the Guideline is unsurprising in light of these considerations.
By comparison, in the Standard Bank DPA, the judge applied the same overall percentage multiplier as in SO’s case (i.e. 300% - albeit based on medium culpability at the upper end of that scale), where it was acknowledged that the bribery was a one-off case and the UK bank (and its staff) had no knowledge or direct involvement in the actions of its Tanzanian sister company, who had paid a significant bribe to representatives of the Government of Tanzania in return for securing a mandate to raise funds for the Government. Standard Bank’s failings were in relation to its internal controls, whereas SO’s key directors had actively bribed public officials in multiple countries over a number of years in return for securing contracts. Yet the culpability multiplier applied in the two cases was the same.
This case is also interesting given the judge’s reluctance to award compensation to the people or governments of Kenya or Mauritania. While the Guideline and the DPA Code of Conduct both highlight the importance of compensating the victims of bribery, the judge considered that this was not appropriate where he was not comfortable that the money would get into the ‘right hands’. It is unclear how (if at all) any award of compensation may have impacted on the level of fine ultimately imposed on SO, given SO's alleged limited financial resources.