Summary: January 2017 saw Rolls Royce settle the SFO’s largest DPA to date, at a cost of over £500M. What lessons should be taken to ensure your firm has the controls in place to monitor intermediary activity and avoid the pitfalls faced by Rolls Royce?
On 17 January 2017, the SFO entered into its latest Deferred Prosecution Agreement (DPA), this time with Rolls Royce. This is by far the largest DPA to date, with Rolls Royce agreeing to settle the SFO’s long-running investigation into Rolls Royce relating to their use of intermediaries and agents to pay bribes in overseas jurisdictions. The terms of the DPA include the disgorgement of profit of £258,170,000, a financial penalty of £239,082,645, the SFO’s costs of £11,960,754, co-operation in all matters relating to the relevant conduct and completion of a compliance programme. The DPA was approved by Sir Brian Leveson, President of the Queen’s Bench Division. The Judge described the conduct in question as “egregious criminality over decades, involving countries around the world, making truly vast corrupt payments and, consequentially, even greater profits”.
This should serve as a timely reminder to firms of the potentially enormous cost of deficient compliance systems and controls around the use of intermediaries and agents. We expect regulators (especially the FCA) and prosecutors to use the facts set out in the Rolls Royce case to educate themselves on bribery and corruption typologies. All firms using intermediaries, particularly those in the regulated sector, should ensure that they analyse their systems and controls around intermediaries with the lessons from Rolls Royce in mind.
The DPA and the related Statement of Facts detail a culture of tolerance of corrupt practices on the part of its intermediaries and agents, and a deficient compliance environment within Rolls Royce, from the late 1980s until 2013. The charges, which are suspended for the term of the DPA, include conspiracy to corrupt, false accounting and failure to prevent bribery, and relate to activities in Rolls Royce’s civil and defence aerospace businesses, and its former energy business, across multiple jurisdictions.
In brief, the charges relate to:
- Agreements to make corrupt payments to agents in connection with the sale of engines for civil aircraft in Indonesia and Thailand between 1989 and 2006;
- Concealment or obfuscation of the use of intermediaries involved in its defence business in India between 2005 and 2009 when the use of intermediaries was restricted;
- An agreement to make a corrupt payment in 2006/7 to recover a list of intermediaries that had been taken by a tax inspector from Rolls Royce in India;
- An agreement to make corrupt payments to agents in connection with the supply of gas compression equipment in Russia between January 2008 and December 2009;
- Failing to prevent bribery by employees or intermediaries in conducting its energy business in Nigeria and Indonesia between the commencement of the Bribery Act 2010 and May 2013 and July 2013 respectively, with similar failures in relation to its civil business in Indonesia; and
- Failure to prevent the provision by Rolls Royce employees of inducements which constitutes bribery in its civil business in China and Malaysia between the commencement of the Bribery Act 2010 and December 2013.
In early 2012, internet postings raising concerns about the operation of Rolls Royce’s civil business in China and Indonesia came to the attention of the SFO which sought information from Rolls Royce. An investigation was immediately commenced by Rolls Royce itself which led to a report on the findings into these and other issues in its civil and defence work.
In deciding that a DPA was in the interests of justice, the Judge noted that the nature and extent of the co-operation provided by Rolls-Royce in this case had been “extraordinary”. Amongst other examples of the “extraordinary” cooperation that was cited, it was noted that Rolls Royce provided all material requested by the SFO on a voluntary basis and disclosed legally privileged interview memoranda to the SFO.
Lack of controls around intermediaries and agents
The findings from this extensive investigation display an array of control failures around the use of intermediaries and agents. Examples include:
- A failure to consistently and properly categorise intermediaries according to their risk profiles;
- The use of intermediaries and agents masquerading as service providers. One particular count related to the use of a warehouse in Dubai for defence parts traded in India. The agreement with the warehouse specified a “service fee” of 9% of the value of the shipped parts to be paid to the warehouse providers. The contract didn’t show any services beyond warehouse services;
- Payment of excessively high commissions to agents in high-risk jurisdictions for bribery and corruption;
- The use of “consultancy agreements” to pay intermediaries on an ongoing basis and the payment of inflated administrative costs and expenses to intermediaries and agents;
- A failure by senior management to take into account bribery and corruption-related concerns raised by staff;
- The use of non-cash benefits to obtain business benefits, including cars and high-value training courses; and
- Unacceptable interference by the business in decisions to on-board, and the ongoing risk assessment of, intermediaries and agents.
This is the third DPA that the SFO has entered into which relates to breaches of the section 7 Bribery Act 2010 corporate offence of failing to prevent bribery. Each of the three DPAs has described the use by firms, to a greater or lesser extent, of intermediaries and agents to pay bribes to obtain and/or retain business. The use of intermediaries remains very high risk from a Bribery Act 2010 perspective. As such, we would encourage all firms, and especially regulated firms whose anti-bribery and corruption systems and controls are supervised by the FCA, to test the strength of their systems and controls around the use of intermediaries. In particular firms should:
- Ensure that due diligence and risk assessments conducted on new and existing intermediaries are fulsome, consistent and well-documented.
- Think carefully about the ways in which intermediaries and agents can be hidden in your firm’s broader population of service providers and, as such, may currently be subject to less scrutiny than is appropriate. A key lesson from Rolls Royce is that intermediaries can come in many different shapes and sizes, and may not always be labelled clearly.
- Payments to intermediaries and agents should be assessed on an ongoing basis. Payments monitoring should include both an assessment of each individual payment to ensure that these are legitimate and in line with the agreed contractual terms and a review of cumulative payments to intermediaries and agents to ensure that the overall amount being paid to each intermediary (including associated costs and expenses) is acceptable from a compliance perspective.
- Compliance departments should be empowered by senior management to critically analyse what they are being told by both the business and by the intermediaries themselves. Intermediaries that pose an unacceptably high bribery and corruption risk should not be used and records of these decisions should be retained by firms.