United States: SFO And Rolls-Royce Agree To Half Billion Pound DPA

Last Updated: February 1 2017
Article by Kevin Roberts, Duncan Grieve and Tola Adeseye

Just over a year after the approval of the first ever Deferred Prosecution Agreement (DPA), Southwark Crown Court on 17 January 2017 approved a DPA proposed by the Serious Fraud Office (SFO) with UK leading engineering group, Rolls-Royce. A 12-count indictment against the company was produced, which included offences of conspiracy to corrupt, false accounting and failure to prevent bribery. Rolls-Royce has agreed to pay penalties amounting to £497.2 million, representing the largest British fine ever imposed on a company for criminal conduct.

Background

DPAs have been available for use by the SFO since February 2014, following their introduction in the Crime and Courts Act 2013 (the "2013 Act"). The SFO made its first application for approval of a DPA in November 2015, settling an offence of failing to prevent bribery with ICBC Standard Bank. Subsequently, in July 2016, the SFO received approval for its second DPA with an unnamed UK enterprise referred to in proceedings as "XYZ Ltd". As explained in our alert on the ICBC Standard Bank DPA, DPAs allow for the suspension of prosecutorial action against a company for a fixed period of time where the defendant company agrees to comply with conditions set by the prosecutor.

The Offence

The hefty financial penalties received by Rolls-Royce are a result of its accepting responsibility for numerous multijurisdictional offences between 1989 and 2013.

The company's civil aviation branch was found to have committed offences in Indonesia, Malaysia, China and Thailand. In Indonesia, a $2.25 million cash bribe and a Rolls-Royce Silver Spirit car were given to an intermediary to facilitate Rolls-Royce's securing of contracts to provide engines to Indonesian airline Garuda. Civil aviation was also found to have paid agents in Thailand to secure similar contracts with Thai Airways. In China, a £5 million cash credit line was provided to China Eastern Airlines in exchange for aircraft engine purchases. Illicit credit lines were also provided to Air Asia employees in Malaysia to ensure Rolls-Royce became a preferred products and services provider to the airline.

The company's defence aviation business was also implicated, as it used prohibited intermediaries in India to secure defence contracts, recording payments as payments to "general consultancy services". This false accounting offence was compounded with a conspiracy to corrupt offence in the same country, as Rolls-Royce paid to retrieve a list of the prohibited intermediaries it used, which the Indian tax authorities had obtained.

Rolls-Royce's energy business committed further offences in Russia, Nigeria and Indonesia. These included agreements to make corrupt payments to agents in connection with the supply of gas compression equipment in Russia, and the bribery of a rival bidder and public officials in Indonesia and Nigeria, respectively.

As well as the offences detailed in the SFO indictment, Rolls-Royce has also been investigated for bribery and corruption by the U.S. Department of Justice and Brazil's Ministério Público, reportedly agreeing to settlements with both. Rolls-Royce will pay the U.S. almost $170 million after admitting bribery to the tune of $35 million, paid to foreign officials in various countries between 2000 and 2013, in violation of the U.S. Foreign Corrupt Practices Act. Rolls-Royce in fact agreed to pay a criminal penalty of $195 million under its U.S. DPA, however the fine it received from the Brazilian authorities was deducted from U.S. penalty, due to an overlap of the conduct subject to punishment. The $25 million penalty the company will pay to Brazil related to a conspiracy to bribe officials in Brazil between 2005 and 2008. Authorities in Brazil have become much more active in this area since the introduction of the Brazilian Clean Companies Act (CCA) in 20141 – powerful legislation which assists in the prosecution of such offences

Court Approval

There is no longer a question whether the judiciary is willing to support DPAs, as it has now approved three in just over 13 months. However, Lord Justice Leveson, who approved the first two DPA applications before the same court, stressed the importance of understanding situations where DPAs will be deemed to be appropriate. At the Rolls-Royce application hearing, the judge commented that the public must not be under the impression that an offending company is being treated too favourably when it agrees to a DPA.

Despite the presence of aggravating factors such as the widespread nature of the criminal conduct, the involvement of senior Rolls-Royce employees in the corruption and the substantial amount of illicit funds paid, this latest DPA received court approval. In determining the DPA to be both "in the interests of justice" and "fair, reasonable and proportionate, as required under the 2013 Act, the judge highlighted the factors which overrode the aforementioned aggravating features. 

Much weight was placed on the incidence of self-reporting; the need to incentivise such being described by the judge as a "core purpose" of DPAs. Rolls-Royce's full and extensive cooperation was also remarked on, particularly its limited waiver of privilege over internal investigation memoranda. The judge was keen to emphasise that the exercise of such privilege has been known to seriously hamper prosecuting bodies in their investigations into misconduct, and commended the defendant company for its cooperative waiver.

The steps Rolls-Royce subsequently took to enhance its ethics and compliance procedures were likewise noted. Mention was given to the appointment of a corporate compliance expert by Rolls-Royce to conduct an independent review of its procedures and to monitor its compliance programme going forward. The overhaul of the company's senior management was also given significance. The judge stated his satisfaction that the current senior management is entirely different from those responsible for the running of the company during the period of corrupt behavior.

The negative impact of prosecution on employees and other innocent individuals, as well as the additional expenditure of SFO time and money if full prosecution were to occur, were also regarded factors.

Although the agreement represents the largest ever SFO issued penalty, it must appreciated that Rolls-Royce in fact received a 50% discount on the fine that could have been levied against it as a reward for its early cooperation. Counsel for the SFO at the application hearing stated that fine reductions for DPAs would be generally similar to sentence reductions afforded to defendants that enter guilty pleas at the first opportunity, which currently stands at one-third.

DPA Conditions

The terms of the agreed upon DPA include the following:

  1. Payment of a financial penalty of £239 million;
  2. Disgorgement of profit made on the transactions of £258 million;
  3. Payment of the costs incurred by the SFO (which amounted to £12,960,754);
  4. At its own expense, completing a compliance programme following recommendations of the reviews commissioned by Rolls-Royce (from the aforementioned corporate compliance expert) of the approach to anti-bribery and corruption compliance; and
  5. Cooperation with the relevant authorities in all matters relating to the offence.

Key Takeaways

  • DPAs may be deemed appropriate even in cases where widespread corruption has been discovered. The financial penalties imposed will, however, reflect the severity of the conduct and the profits received from the unlawful activity.
  • Self-reporting and cooperation with authorities are consistently given great weight in determining whether a DPA is in the interest of justice and fair, reasonable and proportionate. The manner and extent of a company's cooperation may also be crucial to the approval of a proposed DPA.
  • The SFO continues to table DPAs which the court deems appropriate. This third approval might be seen to demonstrate a clear willingness of the judiciary to support the use of DPAs.
  • Companies hoping to agree on a DPA may consider commissioning an independent review of existing anti-bribery and corruption controls, policies and procedures at the earliest opportunity as credit may be given for this report – and the commencement or completion of a review is in any case likely to be included in any eventual agreement.
  • The Rolls-Royce case is another example of cross-border cooperation between prosecutorial bodies. This is fast becoming the norm for large corruption cases.

Footnote

1. The key features of the CCA are covered in our December 2013 alert.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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Authors
Kevin Roberts
Duncan Grieve
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