The Serious Fraud Office's latest successful use of Section 7 of the Bribery Act 2010 is against a limited company described in the judgment as a "small to medium sized enterprise", in contrast to the only two previous cases which both involved public limited companies. In addition, the case has given rise to the Serious Fraud Office's second deferred prosecution agreement.
In this article we review the case and consider the factors taken into consideration by the Court when accepting the proposed deferred prosecution agreement including the importance and benefits of self-reporting.
The counterparty to the deferred prosecution agreement (DPA) is a UK "small to medium sized enterprise" (SME) which cannot currently be named apparently due to ongoing, related legal proceedings against its former employees. The SME(referred to in the judgment handed down on 11 July 2016 as XYZ Limited (XYZ)) was the subject of an indictment prepared by the Serious Fraud Office (SFO) for (amongst other offences) breaching Section 7 of the Bribery Act 2010 (the Act) in relation to contracts to supply its products to customers in a number of foreign jurisdictions. Sir Brian Leveson who delivered the judgment referred to the application for the DPA as "raising for the first time the problems generated when a modestly resourced SME is demonstrably guilty of serious breaches of the criminal law".
XYZ generates the majority of its revenue from exports to Asian markets. In February 2000, it was acquired by ABC Companies LLC (ABC) which is a US registered corporation.
During the period June 2004 to June 2012, XYZ engaged in a practice of systematic bribery to secure contracts in foreign jurisdictions. XYZ accepts that, prior to 2012, it did not have adequate anti-corruption policies and procedures in place. In late 2011, ABC sought to improve this by implementing its global compliance programme within XYZ. As part of this programme, XYZ became aware of a potential issue and appointed a law firm to undertake an independent internal investigation. The law firm subsequently made a self-report to the SFO on behalf of its client.
In total, of the 74 contracts which were investigated, there is evidence to suggest that 28 were procured as a result of corrupt practices. The scale of the offending was also found to be significant in monetary terms. XYZ was paid a total of £17.24 million during the period 2004-2013 in respect of the implicated contracts, representing 15.81% of the total turnover of XYZ during the same period. The total gross profit from the implicated contracts was also substantial, amounting to £6,553,085, being 20.82% of the total gross profit for the period. The estimated net profit to XYZ arising out of the implicated contracts was approximately £2.5 million.
The SFO and XYZ agreed a DPA for a term of at least 3 years, which was approved by the Court on 8 July 2016. Under the terms of the DPA, XYZ must pay financial penalties totalling £6,553,085, including disgorgement of profits of over £6.2 million and a fine of £352,000. Of the disgorgement of profits, almost £2 million will be contributed by ABC by way of repayment of a significant proportion of dividends innocently received from XYZ.
The DPA also requires XYZ to continue cooperating with the SFO and to review, maintain and report to the SFO on its existing compliance programme.
The judgment provides important and interesting guidance on how the DPA mechanism may be applied in arguably less straightforward circumstances than those of the recent Serious Fraud Office v Standard Bank Plc case ( our analysis of that judgment can be found here). In the case of XYZ, the issue for the Court was to assess whether the terms of the DPA were fair, reasonable and proportionate given the scale of offending and the modest financial position of XYZ.
Insolvency and self-reporting
The initial issue for the Court was whether it was in the interests of justice to impose a financial penalty which would necessarily cause XYZ to become insolvent.
The Court observed that, whilst the scale of offending necessitated strong financial penalties, it was in the public interest to allow XYZ to continue to trade having regard to the interests of employees, shareholders and the local economy. The Court also considered that, from a public policy perspective, forcing an offending company into insolvency may encourage criminal behaviour through a corporate vehicle which can be abandoned as insolvent once financial penalties have been imposed.
The Court referred to XYZ's approach to self-reporting as of great importance. It noted that XYZ had self-reported promptly and co-operated fully. XYZ had also implemented new compliance training programmes, policies and procedures and was considered in its current form to effectively be a different entity to that which committed the offences.
Given the type and extent of offending, even applying a 50% discount for XYZ's self-report and guilty plea (notably a greater discount than Standard Bank received) the Court calculated the applicable penalty to be in the region of £8.2 million. Acknowledging that such a penalty would be "wholly unrealistic for XYZ", the Court agreed that the lower penalty stated in the proposed DPA of £6,553,085 was fair, reasonable and proportionate. This was in light of the conclusion that the interests of justice did not require the SME to be pursued into insolvency and this sum being a total penalty equal to the gross profit obtained by XYZ arising out of the contracts implicated in the criminal activities.
The DPA separates the total penalty into two separate categories; disgorgement of profits of £6,201,085 and a fine of £352,000. The calculation of the level of the fine was carried out with input from XYZ's accountants, and it appears that £352,000 was accepted as a reasonable estimate of the maximum amount that XYZ would be able to provide towards any financial obligations without becoming insolvent. Although the precise terms of the DPA remain, for the time being, confidential, it is likely that the fine will be required to be paid within a much shorter timescale than the disgorgement of profits, which is likely to be required to be paid in instalments across the term of the DPA, potentially with support from ABC.
ABC agreed to contribute £1,953,085 by way of repayment of a significant proportion of the dividends it had received from XYZ. In the judgment, the Court emphasised that there was no legal or contractual obligation on ABC to contribute as it innocently received the dividends, being unaware of XYZ's practices. However, it also stated that where a parent company is not an innocent party, for example where it has established a subsidiary for the purposes of making corrupt payments, this will likely lead to prosecution of the parent company under Section 7 of the Act. Further, the Court commented that in any case a parent company receiving financial benefits arising from the unlawful conduct of a subsidiary (albeit unknown) must understand how this will be perceived. ABC had received £6m in dividends from XYZsince acquiring it in February 2000.
Some key points highlighted by the approach and reasoning of the Court are as follows:
- Further encouragement for prompt self-reporting and co-operation with the SFO. DPAs are designed to encourage organisations to self-report in return for the possibility of a more lenient outcome and avoiding prosecution. The Court referred extensively to XYZ's early admission, cooperation and implementation of new procedures, commenting that "such openness must be rewarded and seen to be worthwhile". These were noted as significant factors in the successful application for a DPA and the relatively modest financial penalty that the SFO was prepared to agree and was accepted by the Court. It is also significant that the SFO and the Court took this stance notwithstanding that XYZ had undertaken its own internal investigation, which is helpful given such an exercise may be necessary on discovery of potential wrongdoing in order to come to a view on next steps, including self-reporting.
- The importance of implementing and maintaining proportionate anti-corruption policies and procedures including for SMEs. XYZ, by its own admission, did not have adequate anti-corruption policies in procedures in place. Having now implemented ABC's comprehensive anti-bribery policies, the Court praised XYZ, commenting that it that was essentially a different entity than that which committed the offences.
- The potential impact on parent companies of the unlawful conduct of their subsidiaries, even if that conduct was unknown and/or the parent has no direct liability under the Actitself.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.