Economic crime: corruption conundrum

Prompted by a global push led by the Organisation for Economic Co-operation and Development, the UK enacted the Bribery Act in July 2011.

This promised zero tolerance on corruption both at home and abroad, sending ripples of fear through the boardrooms of UK plc. For the first time, a company could be criminally liable for failing to prevent bribery by people working for it or on its behalf. British commercial organisations, particularly those with a presence in emerging economies, found themselves at risk of an unlimited fine and 10 years’ imprisonment.

Three years on, however, no company has been charged under the new legislation for failing to prevent bribery. The Serious Fraud Office (SFO), which is tasked with the ‘top tier’ of fraud and bribery investigations, and prosecutions, has to date only prosecuted four individuals under the act, following an investigation into the promotion and selling of biofuel investment products to UK investors. The trial – linked to Sustainable AgroEnergy, whose parent company went into administration – started on 6 October at Southwark Crown Court. The four defendants deny the allegations.

Downing Street is clearly concerned about the UK’s reputation for tackling bribery and white-collar crime. Earlier this year, it ordered a high-level review into the effectiveness of the SFO and other investigative and prosecuting agencies. An anti-corruption plan is expected soon.

Bespoke measures

The Bribery Act has kept solicitors busy. Dan Hyde, a partner in the business crime and civil fraud team at Howard Kennedy, says: ‘I spend a lot of time advising businesses on how to implement bespoke anti-bribery and anti-corruption measures and procedures.’ He adds: ‘A lot of companies now take very seriously that they have to have adequate measures in place [to prevent bribery].’

‘The Bribery Act has had a significant impact from the compliance perspective,’ adds Barry Vitou, head of Pinsent Masons’ global corporate crime team, and the founder of thebriberyact.com blog. ‘The act was a catalyst for corporations to revisit or introduce anti-bribery systems and controls that they had never had before, putting bribery firmly on the corporate agenda of UK businesses.’

While the new law has been ‘extremely effective’, according to Vitou, there has also been ‘a noticeable shift’ on the enforcement front.

Vitou notes the SFO’s current caseload, with high-profile investigations into alleged overseas bribery by the likes of Rolls-Royce, GlaxoSmithKline and Barclays (as well as ongoing probes into alleged Libor rigging and foreign exchange market manipulation).

Rolls-Royce declined to comment on recent developments, but has been reported as conducting an internal probe. GSK has said it cannot comment during an investigation. Barclays has declined to comment during the SFO investigation on dealings with Qatari investors in 2008.

Although these cases pre-date the act, which is not retrospective, Vitou says: ‘It is irrelevant whether it is a UK Bribery Act offence, which is being investigated and potentially prosecuted, or whether it is one of the old corruption offences [emanating from 1800s/early 1900s legislation]. It is pretty inconceivable to me that a decade ago the SFO would have been looking into Rolls-Royce.’

However, for Jeremy Summers, who leads the business crime and regulation team at Slater & Gordon, the lack of corporate prosecutions under the act means ‘there is no real means of assessing how effective or otherwise the act has been’.

With continuing economic uncertainty and a ‘big stick’ that has remained unwielded, there is a question mark as to whether spending on compliance is still top of companies’ agenda. ‘In the period before [July] 2011 when the act was coming in, there was a great deal of compliance activity in terms of drafting policies, training and getting systems in place. Whether those are still at the forefront, when everyone had thought there would be a lot of prosecutions, is conjecture,’ Summers says.

The lack of enforcement also means that there is uncertainty over compliance with the act.

‘The big sea change was the corporate offence, in effect bringing in a strict liability environment, whereby a company can be prosecuted for failing to prevent bribery unless it can establish that it has adequate procedures in place,’ Summers explains. ‘Although there is guidance issued by the Ministry of Justice, [section 7] still hasn’t been tested. So there is a huge degree of uncertainty as to how far a company would need to go to be able to satisfy a court that it had in place adequate procedures, and therefore avail itself of the defence to the corporate offence.’

Section 7 covers both bribery in the UK and abroad, and a commercial organisation may be liable for the actions of what are described in the act as ‘associated persons’, including employees, subsidiaries, sub-contractors, suppliers, agents and joint ventures.

‘The classic concern is where you are dealing with third parties,’ Hyde adds: for example, in situations where a UK company is seeking business in a BRIC country (Brazil, Russia, India and China) using third parties based there. ‘The questions they will start asking include what level of due diligence am I supposed to go into when checking out the third party; and how can we do that without spending too much?’

The big sea change was the corporate offence, in effect bringing a strict liability environment, whereby a company can be prosecuted for failing to prevent bribery

Jeremy Summers, Slater & Gordon

Other areas of concern surround corporate hospitality and facilitation payments, which are bribes typically paid to public officials to secure or speed up the performance of an existing duty. Unlike the US, which recognises the latter for ‘routine government action,’ such as obtaining licences and permits, or processing visas, the UK does not, so they are illegal.

Hyde argues that businesses should start getting the clarity they seek once corporate prosecutions start building case law to guide them.

So why no prosecutions? First, the act does not cover offences committed before 1 July 2011. Second, shrinking budgets have been widely reported to be a factor in the delay. Third, as Summers notes, ‘David Green [CB QC] has made no secret of the fact that he took over [in April 2012] an organisation faced with internal issues that needed to be resolved, and which may have had an impact on their ability to take forward cases.’

Allegations of mismanagement led to a report by the Commons public accounts committee in July 2013 in which it said that the SFO’s reputation had been ‘undermined by a catalogue of errors and poor judgement’. These included the £300m damages claim brought against the SFO by Robert and Vincent Tchenguiz following a botched investigation into the two property entrepreneurs. An out-of-court settlement of £4.5m – plus reasonable costs – was reached in July.

Green cuts a very different figure to his predecessor Richard Alderman. Neill Blundell, head of fraud and investigations at Eversheds, says: ‘Green is not the warm and friendly chap you’d go and have  coffee with. He is an out-and-out prosecutor who will want to see results. I expect that we will see action against corporates under s7 of the Bribery Act before too long.’

Ben Morgan, joint head of bribery and corruption at the SFO, tells the Gazette : ‘Corporate prosecutions are possible pre- and post-Bribery Act, and we are investigating conduct that covers both sides of that milestone. The reason we have not charged any corporates under that provision [section 7 of the Bribery Act] relates to the complexity of the type of cases that we handle.

‘It can take a long time to reach the point of charging major corporate entities for foreign bribery due to the scale of material involved and the jurisdictional scope of the investigation,’ Morgan says.

He points to the example of Alstom Network UK Ltd, a British subsidiary of French conglomerate Alstom, which was charged with three offences of corruption under pre-bribery legislation in June. The SFO probe started in 2009. Alstom has said allegations relate to past conduct, and that it is simply seeking a ‘fair hearing’.

Morgan rejects suggestions that budgetary constraints are holding the agency back.

He says that although the SFO’s core budget has reduced since 2008, when it stood at £52m, ‘we were one of the few government agencies to receive an increase this year’. The agency’s budget for the 2014/15 financial year was raised by 10% to £37m. ‘We also have available to us additional “blockbuster” funding by which any case likely to cost more than a certain percentage of our budget is paid for from the reserve,’ he says.

UK v US

On a global scale, the UK looks up to, and is often compared with, the US. With the enactment in 1977 of the Foreign Corrupt Practices Act (FCPA), the US was the first country in the world to prohibit companies from paying foreign government officials to secure business advantage. The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) – which jointly enforce the FCPA – have earned a reputation for aggressively pursuing FCPA cases.

Enforcement actions under the act were rare until 1998, but have ramped up significantly in the last decade. Between the FCPA’s enactment and through April 2013, the SEC and DOJ brought 189 FCPA bribery actions, according to a June 2014 report by the Searle Civil Justice Institute, of which 70% date from 2005.

High-profile corporate prosecutions under the far-reaching FCPA include French oil giant Total and Weatherford International of Switzerland. In 2013 they paid fines of $398m and $152.6m respectively to the DOJ and SEC to settle bribery charges. The highest penalty to date involves another non-US company – Siemens of Germany – which was fined $800m in 2008 for FCPA violations.

So, what lessons can be learned from the US? ‘The US prosecuting agencies are far better resourced than the UK [agencies],’ Summers says. ‘They have a very high calibre of lawyers’ and ‘far more draconian powers’ than their UK counterparts, he adds. And that is not just in terms of imposing hefty fines.

As Aaron Stephens, partner in corporate crime and investigations at Berwin Leighton Paisner, says, in the US the ‘threshold’ for any prosecutor to be able to indict and prosecute a company is much lower than it is in the UK. Under the respondeat superior doctrine, if an employee in the course of their employment commits a criminal offence, the company is criminally liable for the employee’s conduct. ‘In the US the moment [prosecutors] have enough evidence that an employee has committed an offence the corporate is on the line, and companies are much more incentivised to cooperate and to settle,’ Stephens says.

In contrast, for a corporate to be convicted in the UK, a prosecutor must apply a much tougher test, known as the ‘directing mind’ or ‘controlling mind’ test for corporate criminal liability. ‘It relies on being able to demonstrate that someone of a very senior nature, so normally someone on the board, had the requisite mens rea for the offence,’ Stephens says. ‘At the moment it is incredibly difficult to track the evidence of somebody at board level being involved in or knowing about some criminal activity.’

Morgan describes the difficulty of prosecuting corporate criminal conduct that pre-dates the Bribery Act: ‘The UK has a high legal bar to prove corporate criminal liability. It has to be shown that the controlling mind was complicit in the relevant criminality. But there is hardly ever any “smoking gun” evidence of this, meaning that constructing such a case requires a detailed investigation into the full circumstances and context of the way a corporate behaved, and skilful presentation of that to a jury.’

Morgan adds that the logic of the ‘identification principle’ to determine whether the offender was a directing mind and will of the company is ‘deeply flawed because in effect it means a criminal justice remedy is less likely the larger the offending corporate becomes, which is nonsense from the perspective of any victim’.

Section 7 of the act was introduced precisely to circumvent these hurdles – and to move the UK closer to the US.

Widening liability

To further boost the SFO’s ability to pursue corporations, Green has been lobbying to amend section 7 to create the offence of a company failing to prevent acts of financial crime – so not just bribery, but also fraud, money laundering and theft. Attorney general Jeremy Wright has said the government is considering the proposal, which has cross-party support.

Morgan says: ‘Our appetite for undertaking high-profile operations has increased in recent years.’ He adds that Green’s lobbying for legislative changes shows ‘the SFO’s desire to continue to pursue economic crime at the highest level’.

Lawyers welcome the proposal, although Stephens says: ‘Every type of financial crime is actually very different.’ For example, putting systems and controls in place to prevent employees from committing fraud, money laundering or insider trading may prove to be much more complicated than for bribery. Rather than amending section 7 of the act, a better approach would be to do away with the directing mind test, and ‘legislate to create a standard that is more akin to the US’, he says.

Summers agrees: ‘Arguably, a better way of dealing with the lacunae in corporate criminal liability is to take away the controlling mind test and have a system similar to the US, whereby if something happens on a company’s watch a company can be prosecuted.’

Meanwhile, Kingsley Napley partner Eve Giles warns of other potential risks of creating a corporate offence of a company failing to prevent acts of financial crime. In section 7 as it stands, the company benefits from the corruption offence committed by, for example, one of its directors or employees, Giles argues.

But she adds: ‘You will find that where fraud has been committed it is often against the shareholders or against the company, so in effect you are punishing the company twice for that.’ Hyde concurs, adding: ‘You can end up with a bizarre situation. First, the company is defrauded by its employee and then it is facing prosecution for failing to stop that.’

There is an upside, for lawyers at least: more work. If the proposal translates into law, businesses may soon be required to put additional systems and controls in place to prevent all kinds of financial crimes. ‘If I want to be blunt about it, this is fantastic for me,’ Hyde says. But more regulation could stifle the competitiveness of UK plc, he warns.

Some ask where the incentive is for companies to spend more on compliance when no one has yet been penalised for failing to do so. ‘If they try and amend section 7 of the act to include other economic crimes and there has not been a successful prosecution, then I would describe it to clients of mine as an empty threat,’ says Blundell. ‘From a prosecution angle, if you want to sell your message, there is nothing better than a high-profile prosecution.’

DPAs

That is also the reason most of the lawyers the Gazette spoke to remain sceptical about US-style deferred prosecution agreements, or DPAs, available to prosecutors since February. DPAs are voluntary agreements between a prosecutor and an organisation to defer prosecution if certain conditions, including the payment of a fine, are met. In addition to bribery, DPAs cover other economic offences such as fraud, theft, money laundering, forgery and counterfeiting.

In use in the US since 1999, DPAs have become a powerful enforcement tool in the armoury of the DOJ and SEC for all manner of corporate misconduct. In August, Bank of America reached a record $16.65bn settlement with the DOJ in exchange for deferring prosecution for selling mortgage-related securities to large institutional investors, and improperly concealing the risks. Last year, the DOJ fined JPMorgan Chase $13bn and this year Citigroup $7bn for similar offences.

US prosecutors also have access to Non-Prosecution Agreements (NPAs) under which they can decide not to prosecute a company in return for compliance with a set of terms. Last year, Ralph Lauren Corporation reached such an agreement  with the DOJ and SEC, paying $1.6m to settle charges that it had contravened the FCPA by bribing government officials in Argentina.

As for the UK, one big advantage of DPAs for businesses is to avoid a conviction for a corporate offence, which in turn could lead to mandatory debarment from public contracts under the EU public sector procurement legislation.

For prosecutors, since the DPA regime encourages self-reporting, it brings cost and time savings. Polly Sprenger, of counsel at Eversheds, says that with DPAs the SFO can ‘encourage companies to come forward and self-report what they would never find out about, and also save time and resources on disclosure.’ Sprenger, formerly head of strategic intelligence at the SFO, explains that the normal disclosure obligations for prosecutors in criminal proceedings do not apply to DPAs.

‘Disclosure is what makes the SFO’s cases last for years. It takes up a huge proportion of the SFO’s budget,’ she says.

The upshot for the agency would also be positive headlines, says Blundell. DPAs would also raise money for the public purse.

As with compliance or a more ambitious section 7, the absence of enforcement action is a real issue.

‘I don’t think you can divorce DPAs from the lack of prosecutions,’ Summers says. ‘There is a view in the corporate sector that at the moment, the risk of getting caught is not sufficient to justify the risk of coming forward and accepting liability in circumstances where otherwise it might not come to light. The reason DPAs work so well in America is that there is a risk of being caught and of more draconian sanctions being imposed there than here.’

Furthermore, as Blundell notes, unlike in the US, DPAs have to be ‘judicially sanctioned.’ The SFO must satisfy a judge that the disposal is in the interest of justice and that there are public interest factors against prosecution.

For Giles, judicial scrutiny may increase the risk for corporates as there is no certainty the judge will approve the agreement or what the likely fine will be. ‘There is a lot more uncertainty here, and at the moment I can’t see [DPAs] taking off here as they have in the US.’

In the US, the judge essentially performs a ‘rubber-stamp exercise,’ Stephens explains. But he says that there might be reform to this approach on the other side of the Atlantic, depending on whether judicial scrutiny ‘was working really well and it was seen to be more fair and transparent’. If this were the case, Stephens believes the US might start taking lessons from the UK.

The majority view, however, remains that the success of DPAs in the UK is linked to reforming corporate criminal liability across the board. ‘Why enter into DPA negotiations unless you think there is a realistic chance that you are going to get prosecuted? Where you will start seeing DPAs used more often is if the law is changed to lower the traditional threshold of corporate criminal liability,’ Stephens concludes.

New sentencing guidelines for fraud, money laundering and bribery offences came into force on 1 October: companies convicted of these offences can be fined as much of 400% of their profits from the crime.

According to the guidelines, published by the Sentencing Council, fines must be ‘substantial enough to have a real economic impact which will bring home to both management and shareholders the need to operate within the law.’

It has been argued that the new sentencing guidelines make the UK one of the toughest fining regimes in the world. Vitou says it is about keeping up with the Americans: ‘They are being put in with the sole objective of coming up with fines that match the US.’

However, until there is a successful prosecution this is all somewhat theoretical. And uncertainty among corporates and the legal profession will persist.

Marialuisa Taddia is a freelance journalist