UK: Investigating And Prosecuting Fraud & Corruption In The International Business Environment - Part 2

Article by Monty Raphael, Joint Head of the Fraud and Regulatory Department.

6. CORRUPTION IN AN INTERNATIONAL BUSINESS COMMUNITY

US Developments

Foreign Corrupt Practices Act 1977, (amended in 1998 by the International Anti-Bribery Act of 1998)

In 1977, the United States Congress passed The Foreign Corrupt Practices Act. The FCPA was introduced as an attempt to ensure commercial fair dealing, government integrity and accountability, and the efficient and equitable distribution of limited economic resources. In order to do this, the FCPA established both civil and criminal penalties for payments made to foreign officials by US corporations or US nationals abroad.

The US has a particularly aggressive attitude towards seeking out and prosecuting corruption, the deterrent effects of which are obvious. If up to 5 years imprisonment or £100,000 fine for individuals were not sufficient to dissuade delinquency then fines of $2million or twice the gain for firms is certainly enough for companies to take a tough line on corruption²¹.

The FCPA has led to numerous successful prosecutions for bribery, since 2005 there have been more than 68 new investigations, 10 prosecutions against individuals last year and 24 new proceedings against corporations. According to Transparency International USA, the number of prosecutions in the US has dramatically increased in the last few years²². At the end of last year, the U.S. federal government investigated 84 companies, up from three in 2002, according to Shearman & Sterling LLP, a law firm based in New York that tracks anticorruption cases²³.

In particular, there have been two recent high profile convictions, former Halliburton Co. executive Albert J. "Jack" Stanley and Baker Hughes Inc. Jack Stanley led a scheme to bribe Nigerian government officials to secure natural-gas contracts, he was sentenced to seven years imprisonment, the longest term ever given in the 30-year history of the Foreign Corrupt Practices Act.

In April 2007, Baker Hughes Inc. pleaded guilty to bribing foreign officials to win oil-related work. The company agreed to pay $44 million in fines combining a criminal fine of $11million and a civil fine of £33million in connection with Baker Hughes's improper business practices in a number of countries²⁴. It was the largest financial penalty ever given under the FCPA.

Mark F. Mendelsohn, deputy chief of the U.S. Justice Department's fraud section, said that pursuing anticorruption cases has become "a significant priority in recent years." The Justice Department is assigning more lawyers to corruption cases and, last year, the Federal Bureau of Investigation created a team to work on foreign bribery and antitrust cases.²⁵

UBS: Swiss Banking Secrecy

Last month, UBS reached a $780million settlement with the US DOJ over the allegations that UBS bankers in Geneva, Zurich and Lugano helped American clients evade tax in a number of ways including creating complex shell companies to hide their identities. More interestingly, the bank, on instructions from the Swiss bank regulator, passed on names of up to 300 US clients who allegedly used sham companies to evade tax. The Inland Revenue Service has also announced that it will pursue a separate civil action demanding the bank divulge thee names of US holders of up to 52,000 accounts with about $14.8billion in assets

A few weeks ago, the Chairman of UBS, Peter Kurer, stepped down saying that he would not seek re-election. Although not directly linked to the DOJ settlement, his standing was hurt by intensifying US regulatory pressure over the allegations that UBS helped US clients evade tax. In 2006, Mr Kurer received a letter from a whistleblower, his handling of which has since been deemed inadequate by the US DOJ.

In November 2008, Mr Weil, the head of private banking for the world's biggest wealth manager at UBS and its predecessor, was indicted by a US Federal Grand Jury on the charge of conspiracy.

The American authorities had gathered vast amounts of evidence which was revealed in the recently released 11-page indictment as well as in an earlier 110-page report by a special Senate investigating committee.

The indictment refers to unspecified other "co-conspirators, suggesting that the US authorities are poised to make further arrests.

There is speculation that such mounting US pressure on UBS is part of a wider campaign aimed at Switzerland itself. Carl Levin, the US senator whose permanent sub-committee on investigations has been prominent in US attempts to crack down on tax havens, made that clear in remarks after Mr Weil's indictment as follows:

The US authorities want Switzerland to co-operate under the judicial assistance provisions of the double taxation treaties between the two countries and provide client names. Progress has, however, been slower than the US would have liked. For the Swiss, no client names can be provided unless the US authorities can prove such customers committed tax fraud – a crime which in Switzerland justifies the lifting of bank secrecy. Tax evasion, on the other hand, is only a civil offence in Switzerland, and does not qualify for the same treatment. Whatever the reason, the US authorities appear to have become increasingly frustrated that no names have been supplied, amid suggestions of Swiss stonewalling.

On 4^th March, UBS announced that it would not divulge any further names to the US, Mark Branson, finance chief of UBS's wealth management division, said Swiss law prevented UBS from handing over the identities of its customers. Mr Branson stated:

Mr Branson added that the IRS's decision to file a lawsuit to try to extract the names was "neither productive nor proper", furthermore, it was the opinion of UBS that the issue should be resolved through diplomatic discussions between the US and Switzerland.

Carl Levin, chairman of the Senate permanent subcommittee on investigations and a long-standing opponent of tax havens, railed against the Swiss government and accused them of "trying to thwart" the US's efforts. Mr Levin stated that:"the Swiss hold bank secrecy as a national value, the way Americans prize freedom and democracy, They make a living off secrecy; bank secrecy is a cash cow in Switzerland."

Haliburton

In January 2009 Halliburton, a US energy services group, agreed to pay a record $559 million (£394 million) to settle charges that a former subsidiary of the compnay bribed Nigerian officials during a gas deal. The settlement will be split, with $382 million (£269 million) paid to the DoJ and $177 million (£125 million) paid to the Securities and Exchange Commission (SEC).

The biggest payment before the Halliburton settlement was $44 million (£31 million) by another US oil services group, Baker Hughes, in 2007 over improper payments in Kazakhstan.

Such penalties for bribery and corruption offences appear to have been increasing worldwide with German company Siemens agreeing to pay $800 million (£564 million) in a settlement with the US over allegations regarding payments to government officials in several countries to win infrastructure contracts.

Halliburton released a statement which did not specifically say whether it would admit or deny the accusations as part of the final settlement.

UK Developments :

Serious Fraud Office

The UK Government has confirmed that the Serious Fraud Office has the lead role in handling foreign bribery allegations and the SFO has created a special unit to vet such allegations. Where the SFO declines to take on a case under its screening criteria the case may be prosecuted by other agencies.

In England, Wales and Northern Ireland, a prosecution for a statutory bribery offence cannot be instituted without the consent of the Attorney General or Solicitor General. As in all UK proceedings, the prosecutor must give consideration to the public interest in light of the factors set out in the Code for Crown Prosecutors²⁶, once the case has passed the 'evidential sufficiency' test.

Since Richard Alderman took over as Director of the SFO from Robert Wardle on 21 April 2008, the agenda of the SFO has changed. Richard Alderman has stated that the focus of the SFO will be to encourage companies to come forward and admit delinquent behaviour, to educate and to deter. In short, the new Director wants costly prosecutions to be a thing of the past. The BAE/ AL Yamamah contract was a prime example of such a costly investigation even though it never went to court. It is yet to be seen, how the SFO will embrace the proposed new bribery offences.

The SFO has recently extended its powers to recover property obtained by unlawful conduct by making a civil recovery order under the Proceeds of Crime Act 2002. These provisions do not require a specific offence to be established against any particular company or individual, merely that the property sought is the proceeds of unlawful conduct. The SFO made the first civil recovery order against Balfour Beatty. Balfour Beatty was under investigation by the SFO for suspected bribery in the £75million reimagining of Alexandria's lost ancient library in Egypt. Balfour Beatty admitted "payment irregularities" and accepted a penalty of £2.25million, in exchange no charges were brought.

The Anti Corruption Champion

In October 2008, the Secretary of State for Justice, Jack Straw MP, was appointed as the government's anti-corruption champion.

Following his appointment, Jack Straw commented on the UK's progress in its anti corruption efforts in a statement, as follows: "over the last two years, the government has undertaken a concerted programme of action to coordinate and improve the UK's anti corruption systems. The government has invested in police resources which has led to an increase in the number of investigations into allegations of foreign bribery by UK nationals and companies from 4 investigations in 2006 to over 20 this year"²⁷.

When the OECD Phase Two Bis report came out, Jack Straw highlighted that the government would consider the OECD's findings along with the recommendations of the Law Commission.

Balfour Beatty Plc

The first example of the SFO using these new powers came on 5 October 2008 when the SFO made a civil recovery order against Balfour Beatty Plc, an engineering and construction, services and investment business.

Balfour Beatty was under investigation by the SFO for suspected bribery in the £75million reimagining of Alexandria's lost ancient library in Egypt. Balfour Beatty admitted "payment irregularities" and accepted a penalty of £2.25million, in exchange for no charges being brought²⁸.

The Director of the SFO, Richard Alderman, stated at the time:"This is a highly significant development in our efforts to reform British corporate behaviour. We now have a range of enforcement tools at our disposal, and a major factor in determining which of those tools is deployed will be the responsibility demonstrated by the company concerned"²⁹

AON

On 23 December 2008, the Financial Services Authority reached a settlement with Aon Ltd (a risk management, reinsurance and human capital consultancy) for £5.25million. The FSA used it's powers under section 206 of the Financial Services and Markets Act 2000 (the Act) to fine Aon Ltd for it's breach of Principle 3 of the FSA's Principles for Businesses. The breach was Aon ltd's failure to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. According to the FSA's final notice to Aon Ltd:

Aon Ltd agreed to settle at an early stage of the FSA's investigation which allowed the company to qualify for a 30% (Stage 1) discount under the FSA's executive settlement procedures. Without this discount, the company would have been liable for £7.5 million The FSA has expressed on a number of occasions that it will seek to impose higher fines in order to achieve its objective of credible deterrence.

BAE And The Al Yamamah Contracts

After a two year investigation by the SFO, with the Ministry of Defence Police (MDP), the then Attorney-General appeared before the House of Lords on 14^th December 2006 to report the decision of the SFO to discontinue its investigations. He said that, 'it has been necessary to balance the need to maintain the rule of law against the wider public interest³¹'.

Such was the importance of the decision that the Prime Minister justified it by saying:

Saudi Arabia was cited as a source of valuable streams of intelligence on al-Qaeda and other terrorist activity that may represent a threat to UK citizens, at home and abroad and to its Armed Forces. Saudi Arabia also undoubtedly plays a key role in the UK Government's efforts to promote peace and stability in the Middle East.

The Secret Intelligence Service (SIS) has made it clear publicly that it shared the concerns of others in government over the possible consequences for the public interest of the SFO investigation. The Attorney informed the House that the SIS considered that there was a threat to the UK's national security interests from pursuing the Al Yamamah investigation and it had been informed of the threat to curtail co-operation directly. He said neither SIS nor anyone else who was consulted disagreed with the overall assessment that the Saudi threats were real. SIS agreed that, while it did not know whether this threat would be carried out, it had to be taken seriously. On 18 January, before the SFO decision was taken, Lord Goldsmith discussed the matter directly with the chief of SIS. The SIS authorised him to say that it is clear about the importance of the Saudi counterterrorist effort to the UK. Its view is that it would not be possible to replicate the level of counter-terrorism effort that had been achieved with the Saudis on UK/Saudi aspects of the problem if it were necessary to work at one remove, via the USA, for example.

The Attorney-General stated that both he and the Director of the SFO shared the view that the decision taken was compatible with Article 5 of the OECD convention. He said they did not believe that the convention does, or was ever intended to, prevent national authorities from taking decisions on the basis of such fundamental considerations of national and international security.

The central issue to be considered is the extent to which this decision has weakened the UK's role in the worldwide fight against corruption, in the OECD and in developing countries in which the UK promotes good governance principles. Many MPs and commentators considered that the credibility of the SFO had been damaged domestically and that internationally the UK's credibility had been seriously undermined. The OECD's response highlights the view of the international community that the UK is not doing enough to demonstrate its commitment to fighting international corruption.

The Corner House and Campaign Against Arms Trade (CAAT) began a legal challenge to the decision to drop the investigation.

Susan Hawley, corruption expert at the Corner House, stated:

The Divisional Court held that the decision of the SFO was unlawful³³ because of the threat uttered (as it was said) by Prince Bandar to the Prime Minister's Chief of Staff. The courts were bound to consider what steps they must take to preserve the integrity of the criminal justice system. The Divisional Court found that a statutory decision-maker must exercise the powers conferred on him independently without surrendering them to a third party.

The House of Lords overturned the decision of the Divisional Court in July 2008³⁴ on the following two grounds. Firstly, that the Director of the SFO based his adherence to article 5 of the OECD Convention on a belief that it permitted him to take account of threats to human life as a public interest consideration. Secondly, that the Director had given unequivocal evidence that he would have made the same decision even if he had believed that it was incompatible with art 5 of the Convention.

7. UK ANTI CORRUPTION LEGISLATIVE DEVELOPMENTS

The Phase Two Bis Report

The Phase 2 bis Report was published on 16 October 2008 and could not be described as complementary in its evaluation of the UK's anti-bribery track record.

In short, this damning report concludes that the OECD Working Group on Bribery is seriously disappointed and, furthermore, is concerned with the unsatisfactory implementation of the OECD Anti-Bribery Convention. In particular, the report mentions the UK's failure to address deficiencies in its laws on bribery of foreign public officials and corporate liability for foreign bribery as hindrances on investigations. The recommendations of the Working Group from 2003, 2005 and 2007 are all reiterated, that the UK enact new foreign bribery legislation at the earliest possible date. In fact, the report goes so far as to urge the UK to adopt such appropriate legislation as a matter of the highest priority.

With reference to BAE Systems, the report points to systemic deficiencies (including confusion over the application of Article 5 and the requirement of the AG's consent for foreign bribery cases which is a further hurdle for bringing cases) that need to be addressed and recommends that the Serious Fraud Office should, as the actor in the BAE case, be strengthened. The SFO needs to prioritise foreign bribery cases and have sufficient resources to do so.

On the other hand, the Report does acknowledge some positive aspects of the UK fight against bribery including the allocation of significant financial resources and nation-wide jurisdiction to a specialized unit of the City of London Police Department for foreign bribery investigations.

The Report mentions the UK's first two conviction for bribery in September 2008, that of Niels Tobiasen and Ananais Gweinho Tumukunde and the recent anti corruption strategy to improve the UK's law and structures to tackle foreign bribery.

In light of the criticism leveled at the UK in terms of its failures to fight corruption, the Working Group requested that the UK provide quarterly written reports on legislative progress for each Working Group meeting and stated that they would carry out follow-up visits to the UK. The Working Group stressed that failing to enact effective and comprehensive legislation undermines the credibility of the UK's legal framework and potentially triggers the need for due diligence over UK companies by their commercial partners or Multilateral Development Banks.

The Phase 2 Bis report is based on the laws, regulations and other materials supplied by the UK and on information gathered by the evaluation team during its onsite visit to London.

Law Commission Draft Corruption Bill

On 19 November 2008, the Law Commission published its Draft Corruption Bill. The Bill lists the following as primary recommendations:

1. "Bribery has been contrary to the law at least since Magna Carta declared, "We will sell to no man...either justice or right". Most people have an intuitive sense of what "bribery" is. However, it has proved hard to define in law"³⁵. The Bill recommends that the current law on bribery is both out-dated and, at times, unfit for purpose.
2. Proposed repeal of the common law offence of bribery, the whole of the 1889, 1906 and 1916 Acts, and all or part of a number of other statutory provisions.
3. The Bill introduces two new general offences of bribery, and with one specific offence of bribing a foreign public official. In addition, a new corporate offence of negligently failing to prevent bribery by an employee or agent is proposed.
4. The draft bill clarifies the statutory terms and definitions.

The proposed new offences are as follows:

1. A person is guilty of the first general offence of bribery is he directly or indirectly offers, promises or gives an advantage to another, intending it to induce another person to do something improper or to reward someone for behaving improperly.
2. The second general offence concerns conduct: a person will be guilty of bribery if he commits any of the following:
   
   
   • if he requests or accepts an advantage, intending that he, or another, should in consequence behave improperly, defined below,
   • if he requests or accepts an advantage and the request or acceptance itself constitutes improper behaviour, defined below,
   • if he asks for a reward for improper behaviour, defined below, or
   • if he behaves improperly, defined below, in anticipation or in consequence of requesting or accepting an advantage
     
     
3. The offence of bribing a foreign official will be committed if P offers or gives any advantage not legitimately due to a FPO, or to another person with the FPO's assent. P must offer or give the advantage, (a) intending to influence the FPO in his or her capacity as a FPO, and (b) intending to obtain or retain business
4. A company is guilty of the offence of negligently failing to prevent bribery by an employee or agent if it is registered in England and Wales and (1) someone ("A") acting on C's behalf commits bribery; (2) the bribe was in connection with C's business; and (3) someone connected with C, whose functions included preventing bribery being committed by persons like A, negligently failed to prevent the bribery.

The Anti Corruption Bill is due to be introduced in this session of Parliament.

8. CONCLUSION

The fight against international white collar crime is, without doubt, a global fight and there are global efforts ongoing to confront it. UNCAC set out a number of provisions to assist countries to investigate corruption and to recover the proceeds of corruption and, although it has not been ratified by all countries, it is having some effect. The US is pursuing a vigorous prosecution policy for breaches of the FCPA and the UK is promising to introduce anti corruption legislation this year.

In the UK, after the BAE/ AL Yamamah contracts, Lord Goldsmith (the then-Attorney General) attempted to reassure critics that the UK was committed to pursuing corruption by UK companies overseas. He said that 'the clear message is that no company is above the law'.

However, two years later, the OECD publish it's Phase Two Bis report that did not imply that the UK's anti corruption message was clear. Professor Mark Pieth, the Chairman of the Working Group responsible for the report said about the UK authorities:

There is clearly movement from the UK government to address corruption as a serious issue. The UK has given responsibility to the SFO to investigate and prosecute corruption, resources have been allocated to specialist police and the government has appointed an anti-corruption champion to oversee prosecutions. And the law commission has published a draft anti corruption bill.

These measures may appear to be movement in the right direction but there are still a number of issues that the government must address. Among the important questions that the government must ask of the draft bill: does it deal with the funding of political parties or trading in influence?

The author wishes to acknowledge the assistance of Kathryn Arnot Drummond in the preparation of this paper.

Footnotes

21. FCPA Digest of Cases and Review Releases Relating to Bribes to Foreign Officials under the Foreign Corrupt Practices Act of 1977 (as of February 13, 2008), Danforth Newcomb & Philip Urofsky, SHEARMAN & STERLING LLP.

22. http://www.transparency-usa.org/home.htm

23. Shearman & Stirling LLP, FCPA Digest of Cases and Review Releases Relating to Bribes to Foreign Officials under the Foreign Corrupt Practices Act of 1977, Danforth Newcomb.

24. SEC v Baker Hughes Inc. and Roy Fearnley No. H-07-1408 (S.D. Tex 2007)

25. The Wall Street Journal, 12 September, 2008, U.S., Other Nations Step Up Bribery Battle

26.The Code for Crown Prosecutors is a public document, issued by the Director of Public Prosecutions that sets out the general principles Crown Prosecutors should follow when they make decisions on cases. It can be found at: http://www.cps.gov.uk/victims_witnesses/code.html

27. http://www.justice.gov.uk/news/announcement151008a.htm - 15 October 2008

28. SFO Press Release, Balfour Beatty Plc, 6 October 2008

29. Ibid

30. FSA Final Notice to Aon Limited, 23 December 2008.

31. [Official Report, 14/12/06; col. 1715.]

32. CAAT Press release, 19^th December 2006

33. R (on the application of Corner House Research and others) v Director of the Serious Fraud Office [2008] EWHC 714

34. R (on the application of Corner House Research and others) v Director of the Serious Fraud Office [2008] UKHL 60

35. The Law Commission, (LAW COM NO 313), Reforming Bribery, Paragraph 1.1.

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