Rolls-Royce plc, the British engineering giant, announced on 16 January 2017 that it had agreed to pay a total of approximately £671 million by way of settlement with the UK Serious Fraud Office (SFO), US Department of Justice (DoJ) and the Brazilian Ministério Público Federal (MPF), after years of investigations into allegations of bribery and corruption by several of the company’s subsidiaries. The approval by the English Crown Court on 17 January 2017 of the deferred prosecution agreement (DPA) with the SFO made the Rolls-Royce agreement the third approved DPA for the UK prosecutor since DPAs were introduced in the UK in 2014. It is also by far the highest penalty imposed under a DPA, and for once, the penalty imposed in the UK was significantly higher than that imposed by the DoJ.
The SFO began its criminal investigation of Rolls-Royce (more specifically, two subsidiaries of Rolls-Royce Holdings plc, Rolls-Royce plc and Rolls-Royce Energy Systems Inc.) in December 2013, and it became the largest investigation the SFO has ever conducted. The conduct investigated was alleged bribery and corruption offences committed by intermediaries used by Rolls-Royce in seven jurisdictions, spanning a period of more than 20 years.
Concerns about Rolls-Royce’s conduct first surfaced via internet articles published in 2012. The SFO contacted Rolls-Royce in response to those articles, which then started a long and thoroughly cooperative process between the two organisations. That a DPA was available to Rolls-Royce at all, given the extremely serious nature of the allegations and the fact that the conduct was not self-reported to the SFO, is testament to the breadth and depth of the cooperation maintained by the company throughout the SFO’s four-year investigation.
The DPA covers Rolls-Royce’s conduct in seven jurisdictions (Nigeria, Indonesia, Russia, Thailand, India, China and Malaysia), over a period of 24 years and in relation to its defence, energy and civil engineering businesses. The misconduct includes: agreements to make corrupt payments; concealment or obfuscation of the use of intermediaries; failure to prevent bribery by employees or intermediaries; and failure to prevent the provision by its employees of inducements which constituted bribery.
The conduct first came to light in 2012, after the SFO became aware of posts on the internet that raised concerns over Rolls-Royce’s civil engineering business in China and Indonesia. The SFO requested information from the company, which immediately launched an internal investigation. In 2013, the company voluntarily provided the SFO with reports arising as a result of its internal investigations, which reports included further indications of corrupt conduct that had not been known to the SFO prior to receipt of the reports.
Under the DPA, the FTSE 100 company has agreed to disgorge profits and pay a fine totalling £497,252,645 (plus interest) under a payment schedule lasting up to five years, as well as £13 million to cover the SFO’s costs. The £497 million payment comprises disgorgement of profits in the sum of £258,170,000 and a financial penalty of £239,082,645. The SFO’s indictment, which alleges six offences of conspiracy to corrupt contrary to section 1 of the Criminal Law Act 1977, five offences of failure of a commercial organisation to prevent bribery contrary to section 7 of the Bribery Act 2010, and one offence of false accounting contrary to section 17(1)(a) of the Theft Act 1968, has been immediately suspended.
The DPA will last for five years (or four if the SFO confirms in writing that the agreement has been concluded after all payments and obligations have been satisfied). Rolls-Royce is required during the terms of the DPA to comply with a series of conditions relating to its continued cooperation with the SFO, as well as its adherence to a compliance programme. Should the company breach any of the terms of the DPA, the SFO may make an application to the Court for termination of the DPA and if that application is successful, criminal proceedings may be reinstituted.
The company has also agreed to make payments totalling $169,917,710 to the DoJ and payments amounting to $25,579,179 to the MPF, in relation to similar conduct by a Rolls-Royce subsidiary involved in its energy business. It is notable that this is the first instance of the financial order agreed with the SFO being higher than that agreed with the DoJ (albeit that the two settlements do not relate to exactly the same conduct).
Commentary on Judgment
The DPA was approved by Lord Justice Leveson sitting in the Crown Court at Southwark, at a hearing on 17 January 2017 (see the judgment at Serious Fraud Office v Rolls-Royce plc and Rolls Royce Energy Systems Inc Case No: U20170036). He concluded (as he is required to do under Schedule 17 of the Crime and Courts Act 2013 if the DPA is to take effect) that approval of the DPA was in the interests of justice and that its terms were fair, reasonable and proportionate.
Given the limited number of DPAs that have been entered into by the SFO, the judgment provides useful guidance and insight for other companies who may wish at some stage to be invited to enter into discussions with the SFO about concluding such an agreement.
In his judgment, Leveson LJ noted that the investigation was, “in a very large part conducted and voluntarily revealed to the SFO by Rolls-Royce itself”. He frequently emphasised the very high level of cooperation demonstrated by the company, even described by Sir Edward Garnier QC (acting for the SFO) as “extraordinary”. For example, the company conducted 229 internal interviews and reviewed more than 250 of its relationships during the course of the investigation. Leveson LJ went as far as to say, “that I entirely accept that Rolls-Royce could not have done more to address the issues that have now been exposed”.
It is clear that this level of cooperation, maintained over a number of years and at a high price to the company (estimated to be around £123,115,643 in costs associated with the investigations), was crucial in persuading the Judge that this DPA should be approved. This is particularly so in circumstances where the original notification of the criminal conduct to the SFO was not a self-report by Rolls-Royce, but internet articles speculating about illegal business practices. The SFO persuaded the Judge that the DPA was in the interests of justice, despite the usual position being that a DPA is unavailable to companies that have not self-reported the criminal conduct.
Improvements and changes
The company appointed Lord Gold (a senior English lawyer) to act as a ‘quasi-monitor’ of its compliance programme in 2013. Leveson LJ noted that it had made significant efforts to improve its compliance procedures since that time, in particular by addressing the possible risks associated with its use of intermediaries.
In determining that the DPA was in the interests of justice, it was also important to the Judge that no current member of the Board was involved in any of the wrongdoing. He stated that his approach to the question of whether to approve the DPA could have been different had any of the current senior management been implicated in the criminal conduct, or had been in a position where they should have been aware of the culture and practices at Rolls-Royce, which were described as “clearly endemic”
Never too big to be punished
Leveson LJ noted that Rolls-Royce is a very large company, the success of which is important to the British national interest. He acknowledged that a criminal conviction against Rolls-Royce would be highly detrimental to the company, which would in turn impact the UK defence industry and innocent persons who did not commit any misconduct. Whilst this was a factor to consider in deciding whether the DPA was in the interests of justice, it could not be determinative in a case of such grave conduct as this.
The Judge found that the company was a changed organisation, which will still have to suffer the impact of negative publicity regarding the DPA. It could of course only ever have been fined following a conviction. As the Judge found that the financial penalty imposed was broadly commensurate with that of a guilty plea (as it must be under paragraph 5(4) of Schedule 17 to the Crime and Courts Act 2013), he considered that it was in the interests of justice to approve the DPA.
Size of fine
Rolls-Royce received a 50 percent reduction in the size of the financial penalty that would have been imposed had it fought the case to trial and been convicted. Note that this reduction is only in the size of the fine, and does not impact on the disgorgement of profits.
This reduction is in line with the reduction approved in the case of the SFO’s second DPA with XYZ Limited. This reduction was clearly linked to Rolls-Royce’s high level of cooperation with the SFO. Leveson LJ (who also approved the XYZ Limited DPA) has stated that he considers that the size of fine under a DPA should be sufficient to punish wrongdoing and deter others from engaging in similar conduct, whilst being sufficiently smaller so as to encourage companies to self-report and to confront misconduct, thereby avoiding the much greater risks of a full investigation and conviction.
This DPA marks a serious step up for the SFO. Securing a DPA of this size marks a successful end to its largest investigation to date. The prosecutor (and it seems, the Judge) will no doubt be hoping not only that the level of penalty involved will serve as a deterrent to companies and motivate them to ensure their compliance procedures are up to scratch; but also that the DPA will incentivise large companies to confront serious issues of bribery and corruption head-on.
The (still rather small) body of case law in this area now seems clear in this regard; self-reporting and committed, long-term cooperation with the SFO should enable organisations to use DPAs and avoid the potentially disastrous consequences resulting from a criminal conviction – even if that conduct is very serious and longrunning. While the level of financial penalty imposed on Rolls-Royce is high, it would have been much higher but for the DPA, and this case should serve as an example to companies of how damage can be limited in even the most difficult circumstances.