On 4 October 2021, Petrofac Limited (“Petrofac”) was ordered to pay £77 million following the company’s guilty plea to seven counts of failing to prevent bribery in contravention of section 7 of the Bribery Act 2010 (the “Section 7 offence”). The sentencing, which took place at Southwark Crown Court on 1 and 4 October 2021, follows a four-year investigation by the Serious Fraud Office (“SFO”) into Petrofac’s historical use of agents and marks the third prosecution of a Section 7 offence in the courts of England and Wales.
In this briefing, we provide a brief overview of the SFO’s investigation before drawing out some of the key points made by the judge at the sentencing hearing.
Petrofac is a public limited company listed on the London Stock Exchange. It is registered in Jersey with a corporate service office operating from London. It is the parent company of multiple subsidiaries (the “Petrofac Group”) and provides services to the oil and gas production and processing industry across the world.
The SFO announced on 12 May 2017 that it was investigating failures by Petrofac to prevent certain former senior executives of the Petrofac Group from offering and making payments to agents with a view to influencing the award of contracts worth £2.6 billion (USD $3.5 billion) in Iraq, Saudi Arabia and the UAE. These corrupt payments, made between 2011 and 2017, amounted to £32 million (USD $44 million).1
Petrofac appeared before Westminster Magistrates’ Court on 24 September 2021 facing seven counts of the Section 7 offence, and indicated its intention to plead guilty following a plea agreement having been reached with the SFO.2 The Section 7 offence imposes criminal liability on corporate entities for failing to prevent “associated persons” from committing bribery on the corporate’s behalf. There is a defence of having in place “adequate procedures” to prevent the occurrence of bribery.
David Lufkin, a British national and former head of sales for the Petrofac Group, pleaded guilty on 6 February 2019 to eleven counts of bribery, and three further counts of bribery on 14 January 2021. Mr Lufkin’s guilty pleas relate to his role in offering and making payments of approximately £60 million (USD $81 million) in order to influence the award of contracts to Petrofac worth over £5.5 billion (USD $7.5 billion).3 Seven of Mr Lufkin’s counts mirrored those of Petrofac’s and relate to the same contracts. The sentencing of Mr Lufkin was heard alongside that of Petrofac.
The sentencing hearing
At the sentencing hearing, which was presided over by Her Honour Judge Deborah Taylor, Petrofac pleaded guilty to seven separate counts of failing to prevent bribery between 2011 and 2017.
We have drawn out below a number of key considerations arising from comments made by the judge at the hearing.
Jurisdictional scope of the Section 7 offence
The Section 7 ‘failure to prevent’ offence applies not only to UK-incorporated companies but also to, inter alia, bodies corporate (wherever incorporated) which carry on a business, or part of a business, in any part of the UK. The question of what “carrying on part of a business” in the UK entails has been one of much debate and commentary since the Act was passed.
It seems that, in light of Petrofac’s corporate service office (which includes the compliance function) being located in and operating out of London during the relevant period, Petrofac (a non-UK entity) was considered to be a ‘relevant commercial organisation’ and subject to the Section 7 offence. It is unclear to what extent this was contested by the parties but it is a useful reminder to non-UK parent companies who are conducting business from the UK that they may be subject to the Act in respect of conduct primarily taking place overseas.
A commercial organisation is liable under Section 7 if a person “associated” with it bribes another person intending to obtain or retain business or a business advantage for the organisation.
During the relevant period, the Petrofac board provided strategic and governance oversight of the Group, including activities relating to the appointment of agents and other subsidiary activities. Whilst Petrofac did not enter into any of the contracts listed on the indictment, the relevant subsidiaries were under the ultimate control of Petrofac as parent. The court found that the “associated persons” were a number of senior executives of the Petrofac Group (seemingly from Petrofac and a key subsidiary) and that bribes were paid for the benefit of Petrofac, despite the fact that the contracts were entered into with the subsidiaries.
Petrofac admitted that, until May 2017, its anti-bribery and corruption (“ABC”) procedures were inadequate since they failed to prevent certain senior executives from paying £32 million in bribes. The ABC procedural failures noted by the judge included:
Ineffective ABC policies and procedures;
Failure by the London-based compliance function, with responsibility for compliance procedures for the entire group, to detect compliance issues in the Middle East. This included failure to detect the creation of false documentation or the use of sub-contractors to channel funds and payments for corrupt activities;
Lack of independent oversight into the agency arrangements; and
Inadequate investigation into agents and enabling senior corrupt executives to override any further investigation into possible corruption when concerns were raised.
Petrofac was ordered to pay £77 million which comprised of: a confiscation order of £22.8 million, a fine of £47.1 million and legal costs of £7 million. We note below some of the particularly interesting factors that the court grappled with when deciding on the financial penalty.
A. Compensation: In line with most of the previous Deferred Prosecution Agreements (“DPAs”) relating to overseas corruption, the Court found that this was not a suitable case for compensation.
B. Confiscation: The court had to decide the level of benefit Petrofac as the parent company obtained in connection with the offending. The relevant contracts were entered into by Petrofac’s subsidiaries and whilst some were profitable, others were lossmaking. Petrofac accepted that it benefited from the contracts despite the fact that profits were obtained by subsidiaries with further sums being absorbed through the corporate structure en route to Petrofac. The court accepted the parties’ recommendation in respect of confiscation which amounted to £22.8 million. This represented Petrofac’s profits on the contracts plus the financial advantage for Petrofac of not having in place adequate procedures (which the judge placed at £6 million) minus certain adjustments which were made.
C.Offence category by reference to harm and culpability: Each count on the indictment was considered to be a category A offence, the highest category available for this type of offence, in terms of culpability and harm. This was on the basis that:
Petrofac is the parent company with responsibility for implementing adequate procedures;
The offending took place over sustained period; and
Four of the counts involved bribes being paid or offered to government officials.
When ascertaining the degree of harm, the appropriate figure according to the sentencing guidelines will normally be “the gross profit from the contract obtained, retained or sought as a result of the offending”. In terms of profitable contracts, the court accepted that harm should be calculated by reference to gross profit. In terms of loss making contracts, the court accepted that calculating the figure on the basis of the profits sought, albeit not achieved, would be disproportionate in this case, and adopted the same approach as in the Airbus SE DPA (see our briefing here) of calculating the harm on the loss-making contracts based on the value of the minimum amount which Petrofac intended to achieve. This equated to the value of the agent fees which Petrofac paid by way of bribes which it would have sought to recoup at a minimum. Where a contract was sought but not awarded, no additional calculation of a harm figure was undertaken.
The court accepted the parties’ proposal of a starting harm figure and applied a multiplier of 325%.
D. Adjustment of the fine: Having arrived at the fine level, the guidelines require the court to step back and consider the overall effect of its orders. The court in this case adjusted the fine down taking into account a number of factors, including:
Petrofac was a changed company with transformed leadership and a new CEO. The senior executives named on the indictment no longer worked for Petrofac.
Petrofac had made significant changes to its compliance and due diligence program. Such changes included the establishment of an independent committee to oversee the appointment of agents and contractors.
The financial position of Petrofac, having particular regard to its levels of debt and the fact that it would not be in the interests of justice for Petrofac to be penalised so heavily that it would be put out of business.
Petrofac cooperated with the investigation by the SFO and pleaded guilty. It was however noted by the judge that Petrofac did not make an early or voluntary admission and only pleaded guilty in light of the evidence supplied by Mr Lufkin.
E. Discount: In light of Petrofac’s guilty plea, a reduction of one third was applied bringing the fine to £47.1 million (USD $64 million).
At the same hearing, Mr Lufkin received a suspended sentence of two years’ imprisonment for his role in the offering and/or making of corrupt payments. The judge took into account the fact that Mr Lufkin cooperated to the fullest extent possible and provided a “treasure trove” of information which was used to secure the conviction against Petrofac. We understand that as part of his cooperation, Mr Lufkin entered into an agreement with the SFO under section 73 of the Serious Organised Crime and Police Act 2005 which allows for a reduction in sentence for a defendant who has provided assistance in an investigation provided they plead guilty.
Prior to this case, there had only been two prosecutions (as opposed to DPAs) for the Section 7 offence since the introduction of the Bribery Act 2010:
The first involved Sweett Group plc (“Sweett Group”), which in February 2016 pleaded guilty to one count of failing to prevent bribery and was ordered to pay £2.25 million4. The conviction arose from the group’s use of corrupt payments to secure a hotel construction contract worth £63 million with the Al Badie Group in the UAE.5
The second concerned Skansen Interiors Ltd (“Skansen”), a small London based furniture business, which was, in February 2018, convicted for paying bribes of £39,000 to secure office refurbishment contracts worth £6 million.6 This case marked the first contested prosecution under the Section 7 offence, in which Skansen unsuccessfully argued that it had in place “adequate procedures” to prevent bribery. As the company was dormant at the time of sentencing, it received an absolute discharge.
The small number of prosecutions for the Section 7 offence to date is, in part, due to the introduction of DPAs in 2013 (please see our previous briefings for more information on the DPA regime and agreements secured by the SFO). The SFO has to date entered into twelve DPAs, with nine of these involving Section 7 offences7. This contrasts with the courts having only grappled with three prosecutions under Section 7; two of which avoided a trial in light of the companies’ guilty pleas (Sweett Group and Petrofac) and one which was tried in front of a jury resulting in Skansen’s conviction.
The Petrofac case seems to have bucked the trend of prosecutions under Section 7 being reserved for smaller companies and more straight forward incidents of corruption. Nonetheless, Petrofac’s £77 million penalty appears comparatively low in the context of the scale of corruption which spanned multiple jurisdictions, the seniority of relevant executives, the value of the contracts in question, and the companies’ apparent failures in its ABC procedures – particularly when compared to the financial penalties imposed on the likes of Airbus SE8 and Rolls Royce Plc9 under DPAs in recent years. The financial resources available to Petrofac and the fact that it is due to repay a COVID-related loan from HM Treasury were important factors in this regard.
There continues to be a dearth of court argument regarding “adequate procedures”. Nonetheless, the sentencing remarks given by the judge in this case provide some guidance on the meaning of “adequate procedures”, in particular for multi-national companies whose compliance functions based out of the UK are responsible for overseeing compliance issues for the businesses’ global operations.
The sentencing remarks may also be of interest to companies in the context of expenditure on ABC procedures. The judge in the Petrofac hearing estimated that, for the duration of the relevant period, Petrofac saved £6 million by not having adequate ABC procedures in place. This contrasts with the eventual cost to Petrofac of failing to implement such procedures being at least £77 million as well as reputational harm.