Making companies pay compensation for bribery could be an important tool in the fight against corruption. The “victim compensation” aspects of the Serious Fraud Office’s Guidance on Corporate Prosecutions may provide an opportunity for States to obtain compensation as part of the settlement process, particularly following the recent introduction of Deferred Prosecution Agreements under the Crime and Courts Act 2013.
Paragraph 32 of the SFO’s Guidance lists a number of public interest factors that, if demonstrated, may tend against criminal prosecution being pursued against a company. These include whether the offender has shown "a genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice, involving self-reporting and remedial actions, including the compensation of victims". Therefore, for companies, the issue of victim compensation will also be of significance when seeking to avoid prosecution, which could be netted off against any financial penalty.
Victim compensation to States: the story so far
At an early stage in settlement negotiations, prosecutors are likely to discuss whether compensation should be paid to the victim State. Companies should be well prepared for this dialogue, and ready to make their own proposals. In the most serious instances of corruption, any meaningful level of compensation is likely to be substantial, especially if the company has derived significant commercial benefits from the corruption to the detriment of a victim State.
There are precedents for compensation to States. In 2010, BAE pleaded guilty to an offence under section 221 of the Companies Act 1985 (failure to keep accurate accounting records) for secret payments of £7.7 million to a Tanzanian middleman for marketing purposes in connection with the sale of a £28 million radar system to the Government of Tanzania.
BAE was fined £500,000 by the Court and voluntarily agreed under a settlement to make a payment to Tanzania of £30 million, less the fine imposed by the Court. That compensation payment was to be used for a specific purpose - to benefit the people of Tanzania, namely funding textbooks for all primary schools as well as providing all 175,000 primary school teachers with teachers' guides, syllabi and syllabi guides to help improve their teaching skills. A further £5m was to be spent on the purchase of desks for primary school children living in nine districts where the need for investment in education was considered greatest.
At the sentencing hearing, Mr Justice Bean was not enthusiastic about the deal that was struck. This was because (1) the settlement gave blanket immunity to any member of BAE for any conduct preceding 5 February 2010 whether disclosed or otherwise, a point that, for example, the US Department of Justice would not concede, and (2) he said the SFO's characterisation of the sums paid to the middleman as lobbying payments was "naïve in the extreme".
However, Mr Justice Bean noted that the "structure of this Settlement Agreement places moral pressure on the Court to keep the fine to a minimum so that the reparation is kept at a maximum".
BAE took two years to pay the compensation and was criticised for the delay. The problem was that the compensation payment was not subject to a specific court order that dictated the terms and timing of the payment. BAE explained that the delay in making the payment was caused by its desire to ensure that the compensation was used for its stated purpose, namely for the people of Tanzania. The International Development Committee, however, criticised a situation where the defendant could exercise any control as to the mechanics and timing of a payment.
In 2009 Mabey and Johnson became the first major British company to be convicted of foreign bribery following its admission that it had systematically paid bribes around the world to win contracts. A string of foreign politicians and officials were named as having received corrupt payments from the firm. In that case, it was agreed that the company would make voluntary payments to the victim Governments of Jamaica and Ghana. Those payments represented the identifiable bribes paid to public servants. Again, there was wrangling about when and to whom the money should be paid.
In a separate but well-known case involving Innospec, no compensation was paid, perhaps because the company was on the edge of bankruptcy.
A detailed and informative report prepared by Transparency International in May 2012 entitled "Deterring and Punishing Corporate Bribery" recommended that: "Convicted companies should not be allowed to play any role in devising and implementing compensation arrangements. The convicted company should have no element of control over the disbursement of the payments that were subject to the court order or terms of the settlement agreement."
In its May 2012 paper, Transparency International recommended that "victim countries should receive restitution and prosecutors should work with development agencies, such as DFID, to manage this process." Transparency International was of the view that, certainly in the case of BAE, the mechanics and timing of the compensation payment should have been dealt with in the terms of the plea agreement and been subject to judicial supervision. That approach may well be adopted in future with the advent of Deferred Prosecution Agreements (“DPAs”) which will involve a much greater level of judicial oversight certainly in relation to their approval and in terms of subsequent compliance with its terms.
Introduction of Deferred Prosecution Agreements
On 25 April 2013, the UK Parliament passed the Crime and Courts Act of 2013. Schedule 17 addresses the procedures and requirements of DPAs. DPAs have been an effective prosecutorial tool in the US for some time but, until now, have been unavailable to prosecutors in England and Wales.
No effective date has been announced, but DPAs are likely to be in force in early 2014. They will apply to a wide variety of economic crimes, including accounting fraud and bribery offences. A more detailed analysis of the new DPA regime is available here.
It will, of course, be interesting to see whether DPAs in the UK will in practice be used to compensate victims. Section 5 of Schedule 17 states that DPAs may impose, but not be limited to, the following requirements:
- to pay to the prosecutor a financial penalty;
- to compensate victims of the alleged offence;
- to donate money to a charity or other third party;
- to disgorge any profits made from the alleged offence;
- to implement a compliance programme or make changes to an existing compliance programme;
- to co-operate in any investigation related to the alleged offence;
- to pay any reasonable costs of the prosecutor in relation to the alleged offence or the DPA.
It is expressly envisaged in the Act that DPAs will provide an avenue for victims to obtain redress which reflects the sentiments in the Ministry of Justice’s response to the Consultation on DPAs: “It [the Government] is committed to the introduction of DPAs as an additional tool available to prosecutors to deal with economic crime and hold organisations to account. DPAs will allow prosecutor to bring organisations to justice, with tough and stringent penalties for wrongdoers which are commensurate to the likely sentence upon conviction and with measures to ensure victims are compensated”. But query whether this is in reality aimed at individual victims of fraud through say ponzi schemes, who can be readily identified, rather than say State victims of corruption. In the United States, for example, DPAs have not generally been used to award compensation payments to victim states.
One difficulty is that it could be considered unconscionable to compensate a victim States which itself may have allowed the wrongdoing to be perpetrated in the first place. This was an issue in the US in 2010 in relation an investigation into the French company Alcatel-Lucent. That company admitted bribing Costa Rica’s state-owned electricity and telecommunications provider, the Instituto Costarricense de Electricidad, S.A. (“ICE”), to win contracts. ICE objected to a proposed DPA, and asserted that it was a victim of the bribery and should receive compensation. Ultimately the US Courts rejected ICE’s intervention finding that ICE effectively acted as a co-conspirator in Alcatel-Lucent’s bribery scheme. The argument that the victim State, in effect, has been complicit in bribery could be made in many cases. But this is to confuse the State with those representatives that have engaged in corruption.
The real debate should be as to how to ensure that compensation is put to proper use. Concerns that compensation may itself be misappropriated may make it improper or politically unacceptable to provide the compensation pot directly to a State or State entity, for example, where the corrupt regime is still in place. However, there may be other routes to providing reparation, say, by compensating citizens of the state, as per the BAE example above. This will work, however, only if the Courts are willing to class citizens of a victim State as ‘victims’for the purpose of the Crime and Courts Act. In addition, companies paying compensation in this way will be concerned that they will remain vulnerable to civil claims by victim States despite having paid compensation.
The Serious Fraud Office should be giving thought now to ensuring that DPAs act not just as a deterrent to corruption, but also as a means of ensuring viable mechanisms to compensate its ultimate victims. The UK could play a powerful exemplary role in this area. On the flip side, any company self-referring corrupt activities may wish to consider some means of providing redress to a victim State or State entity or its people, which may not only assist that company escape prosecution but also potentially avoid costly follow-on civil proceedings, as well as minimising the inevitable damage to its reputation.
Victim State civil claims
For those representing the State’s interests, the availability of compensation payments through criminal proceedings may be a relevant factor for victim States when considering the timing or desirability of bringing a civil action against a potential briber or bribee, assuming a criminal investigation has been commenced in the UK.
The key point is that the existence of civil proceedings, or the fact that they are being contemplated, may lead to an impending plea agreement or Court sentencing excluding or reducing compensation for the victim pursuant to Section 6(6) of the Proceeds of Crime Act 2002. This is because the duty to order compensation becomes discretionary in circumstances where the Court “believes that any victim of the conduct has at any time started or intends to start proceedings against the defendant in respect of loss, injury or damage sustained in connection with the conduct”, to avoid the risk of a State being compensated twice.
However, those advising States will also need to consider whether it can obtain more compensation by making a civil claim against a bribing competitor than available through criminal compensation. An admission of wrongdoing by a company within a DPA, or a conviction, will make any civil claim much easier to pursue.
There needs to be greater debate and consideration as to the amount and mechanics of compensation paid to State victims, and how such compensation is paid. A significant concern is, of course, to minimise the risk that compensation is misappropriated or used for improper purposes. It would be a very unfortunate situation indeed for compensation to fall into the hands of the self-same wrongdoers.
Creative but practical solutions to ensure proper reparations are made following wrongdoing should be deliberated now. Perhaps Government, international agencies or NGOs could be used to supervise compensation to victim States to ensure the money is used wisely, for example, to provide anti-corruption training at State level, to reform corrupt entities, to fund certain initiatives or simply to provide direct financial assistance to citizens that need it the most.