Draft guideline on fraud, bribery and money laundering offences. Sentencing Council consultation

Transcription

1 Draft guideline on fraud, bribery and money laundering offences Sentencing Council consultation Submission by Transparency International UK (TI-UK) Oct

2 1. Overall Summary Submission by Transparency International UK (TI-UK) 1.1 TI-UK welcomes the introduction of sentencing guidelines covering bribery offences. In December 2011, TI-UK published a policy paper entitled Deterring and Punishing Corporate Bribery which examined UK corporate plea agreements and civil recovery in overseas bribery cases. 1 TI-UK made 23 recommendations in the policy paper, the first being that any settlement, whether by criminal or civil means, should follow five guiding principles. These included the need for judicial scrutiny and effective sentencing. 1.2 TI-UK believes that prosecution should be the norm in overseas bribery cases and that the level of penalties should be sufficiently high to provide an effective deterrent. Overseas bribery has been recognised as a serious criminal offence following the sentencing remarks of the judges in the cases of Mabey & Johnson and Innospec. However, there remains a need to impose commensurate fines both within the UK Courts and in relation to fines imposed by the US Courts which have tended to be much higher. 1.3 TI-UK also responded to the Ministry of Justice (August 2012) consultation on Deferred Prosecution Agreements and stated that while it broadly supported the introduction of DPAs that bribery is a serious crime for which companies and individuals should be prosecuted. TI-UK is also responding to the consultation on the Deferred Prosecution Agreement Code of Practice issued in pursuant to Schedule 17 to the Crime and Courts Act Whilst the DPA Code provides guidance to prosecutors as to underlying principles and procedures to adopt in deciding when to offer a DPA and the subsequent role of the judiciary, the Code is of relevance in commenting upon Section 9 Corporate Offenders of the draft Sentencing Guideline. 1.4 TI-UK has restricted its response to Section 8, which deals with individuals who have been charged with offences under the Bribery Act 2010, and Section Overall, the following key points guide our submission: Bribery sentencing must properly reflect the seriousness of these offences and provide a credible deterrent to future behaviour Sentences imposed on persons to date in connection with overseas bribery cases have been too low When considering harm, a thorough understanding and evaluation of pecuniary advantage should be included, with specific consideration given to any strategic commercial advantages secured through bribery A multiplier should be applied to the harm figure, based on the multipliers used in the US sentencing guidelines A flexible approach to sentencing is capable of fulfilling the objectives of punishment and deterrence if bribery is treated at the top end of serious offending, and this flexibility is important to ensure that corporate decisions are not able to benefit from clear cost/benefit decisions about bribery Separate consideration is required for fines compared to confiscation proceedings. The objective of the fine is punishment and deterrence, confiscation is the disgorgement of any gain

3 2. Responses to consultation questions, Section eight Bribery 2.1 Summary TI-UK supports the general purpose of the sentencing guidelines for individuals charged with offences under the Bribery Act We consider it very important that senior executives and other culpable officials face criminal charges and that sentencing properly reflects the seriousness of these offences. Unfortunately some executives believe that paying bribes is a part of business and, until sentencing provides a real deterrent, they are likely to continue to do so. In doing so, they entrench corrupt business environments, undermine the integrity of institutions and governance of the affected country, frustrate economic growth and, in some cases, directly harm citizens. Often there is a disproportionate negative affect on the poorest communities in the relevant country TI-UK is broadly in support of the factors assessing culpability and harm, and aggravating and mitigating factors, with a few observations listed below. However, we are of the view that sentences imposed on persons to date in connection with overseas bribery cases have been too low. We will be looking to the judiciary to use the guidelines in such a way as to redress this position so that sentences become a real deterrent We hope that the bar will be set high when considering culpability. For example, what is meant by playing a leading role or abuse of position of significant power. The words serious, significant and limited are often used with no definition or examples given. We recognise that, as more cases come to Court, precedence will help to define their meaning; but there is a danger that the bar will remain too low Q44 - Do the factors outlined clearly reflect the levels of culpability? TI-UK broadly agrees with the factors but we believe it would be useful to provide examples in the guidelines. As an example, a director of a major public company may not necessarily have planned bribe paying, but may have condoned it. In that case, he or she may not have received any direct financial benefit other than maintaining his remuneration package. His or her conduct may be caught by the factors a leading role and abuse of position of significant power or trust or responsibility. TI-UK strongly believes that an anti-corruption culture requires strong leadership, but where a senior executive has been prosecuted he must face a severe sentence. 2,2,2 We recommend that the culpability factors are considered further for their relevance to factors relating to the Sec 14 Bribery Act criminal offence for a senior officer of a body corporate to consent or connive with said corporate in relation to bribery offences. While factors such as playing a leading role or involved through coercion are relevant to Sec 14, the guidelines should also provide advice and examples about the degree of culpability of senior officers who may have wilfully ignored the issue A significant proportion of overseas bribery cases involve complex systems of payments using nominees, offshore companies and jurisdictions to hinder transparency. It may be argued by a defendant that the person receiving the bribe set up such a complex concealment financial arrangement and therefore the bribe payer is not highly culpable for that concealment. However, in that case, we would recommend that knowing participation in such a scheme should attract the label of high culpability Q45 - Do you agree with the approach to assessing harm? TI has for many years advocated that corruption undermines both democracy and development and that disproportionate harm is directed towards the poor. We believe that there should be zero tolerance for corruption both at home and in Britain s overseas trade. Much has been written on the harm caused by corruption but perhaps most convincing is the action taken by demonstrators in the Middle East over the Arab Spring The approach to assessing harm in the guidelines differentiates between actual harm caused and the risk of harm, with the latter being treated as less serious. We would like to raise a concern about this distinction. If a pharmaceutical company paid bribes to doctors to prescribe their drugs, 3

4 would this act meet the harm factors described as detrimental effect on individuals? It would be far easier in that case for the sentencing to conclude that there was such a risk rather than to assess the actual harm caused, thus reducing the sentence. It is, to some extent, a matter of chance whether the risk of harm fully materialises and we therefore question whether good fortune should play a role in sentencing Q46 - Do you agree with the aggravating and mitigating factors? It is very unlikely that an individual will have a previous conviction for a bribery offence. However, he may have a history of similar conduct, such as civil and regulatory enforcement actions which should be viewed as an aggravating factor. Such actions could include those against previous companies for whom the defendant was employed in a senior position. The company itself should be considered in the context of whether it had a history of similar conduct, including regulatory breaches There is listed as an aggravating factor steps taken to prevent victims reporting. It is important to encourage and provide support to whistleblowers (as reflected in the Dodd-Frank Act in the US) and as such any attempt to do otherwise should be an aggravating factor The UK must honour its obligations under the OECD Anti-Bribery Convention and the UN Convention against Corruption. Not all bribery cases will breach the OECD Convention, as the convention only covers bribing overseas officials and not private sector to private sector bribery, for example. The UK Government recognises that corruption and bribery are barriers to trade and growth, particularly in emerging economies. Where significant bribes are paid, in contravention of these international conventions, it not only affects the victims but undermines the integrity of the UK. As such, it should be treated as an aggravating factor TI-UK recognises that sentencing only applies to proven charges. However, it is common in corruption cases that, due to their size and complexity, most charges are limited to specific offences within certain time periods. It is important, therefore, that the full extent of the offending is taken into account as an aggravating factor, although credit should be given for full disclosure and cooperation by the defendant One of the listed mitigating factors is Lack of sophistication with little or no prospect of success. The sophisticated nature of the offence / significant planning is a factor gauging culpability; hence any lack of sophistication has already been taken into account and should not be treated as a mitigating factor We are not convinced that a person s good character should be taken as a mitigating factor as a matter of course in bribery. We note that the listed mitigating factors are the same as fraud cases. However, whereas it is not unusual for organised crime to be associated with fraud, most overseas bribery cases are essentially corporate crimes involving executives who may be viewed as pillars of society We have a similar concern in reference to the factor Lapse of time since apprehension where this does not arise from the conduct of the offender. Most of the large bribery cases span periods of time some years back with investigations and prosecutions taking years to resolve. In many cases prosecutors rely on whistleblowers and self-reporting which may result in a DPA or possibly avoid a prosecution. Where the defendant has fully cooperated this has already been taken into account through the mitigating factor Early active cooperation particularly in complex cases Q47 - Views on proposed sentencing levels TI-UK does not have a definitive view on sentencing levels. The evidence is not clear as to whether, for example, enforcement of the US Foreign Corrupt Practices Act and long prison sentences have provided an effective deterrent to relevant corporate bribery. However, sentences of a scale of months up to two years do not appear to provide an effective sanction to bribery. Great strides have been made in the field of good corporate governance and associated compliance procedures. However, there will remain a criminal element of companies and individuals who will flout the anti-bribery laws and conventions and where recourse to the criminal law is necessary. 4

5 2.5.2 In recent years the sentences imposed on individuals for bribery related offences in UK courts have, in the opinion of TI-UK, been low. Some of these sentences may have been reduced because of the provision of assistance to the prosecution and/or by entering an early guilty plea but the eventual prison sentence has often been measured in months rather than years. We accept that any prison sentence will have dire effects on most defendants, but longer sentences would send out a clearer message to business people that bribery is at the top end of criminal offending We note that the starting point in sentencing levels is 7 years custody, whereas the maximum sentence is 10 years. This appears to leave a large margin of 3 additional years for exception cases. Given that the category range provides 3 years for aggravating and mitigating factors it would appear that in reality the maximum sentence has been reduced to 8 years. We consider that the starting point of 7 years is too low and has the effect of reducing sentences throughout the range Most overseas corruption cases are prosecuted by the Serious Fraud Office (SFO) and as such any individual defendants are most likely to be assessed in the culpability range of A or B. Similarly, the harm categories are likely to be 1 or 2 which should give rise to custodial sentences. TI-UK considers it very unlikely that any overseas corruption cases would cause harm as described in category 3 and none that would fit within category 4. We do recognise, however, that the culpability and harm ranges are designed to deal with all nature of bribery cases and not just overseas corruption cases. 3. Responses to consultation questions, Section nine: Corporate offenders 3.1 Summary 3.1 TI-UK is supportive of the proposed framework for calculating a penalty for bribery offences committed by corporate offenders. We consider that it is sufficiently flexible to allow the judiciary to set fines high enough that should act as an effective deterrent. Equally, there is scope to reduce fines having regard to low culpability, less serious cases and mitigating factors. Beyond achieving a proportionate sentence, this flexibility is important to ensure that corporate decisions are not able to benefit from clear cost/benefit decisions regarding whether to bribe or not Q49 - Do you agree with the proposed culpability factors? TI-UK agrees that the list of culpability factors should be non-exhaustive but should be developed in a controlled manner by the Sentencing Council as more bribery cases are tried Whilst we support many of the factors listed, they tend to be at a high level and perhaps do not address some of the common features of overseas corruption cases. For example, it is clear in some major cases that top management at the holding company played a leading role in the bribery. But even in these cases it may be difficult to prosecute the company under Sections 1, 2 or 6 of the Bribery Act because of the difficulties posed by the identification principle i.e. that the controlling mind of the company was culpable of the offence. This may lead a prosecutor to consider the application of a DPA, where the judge and the prosecutor should have regard to the sentencing guidelines on corporate offenders, or possibly proceed with a criminal charge under Section 7 of the Bribery Act TI-UK is in favour of applying criminal sanctions to bribery offences, which clearly label the offences and provide transparency through the criminal courts. If corporations are to be prosecuted, it seems likely that Section 7 will be used by prosecutors. There has been a lot of advice given by the Government, the NGO community and by the private sector on what constitutes adequate procedures capable of providing a defence under Section 7. The draft culpability factors regard a culture of wilful disregard of adequate procedures as high culpability and some effort but insufficient to amount to a defence as lesser culpable. Most listed companies will have in place risk management systems; the issue is one of top level commitment and effective compliance. Whilst any company that has a culture of wilful disregard is clearly highly culpable this test is set very high. A lot of companies will demonstrate that they had made some effort and hence meet the lesser culpability test a bar set far too low In those cases where companies fail to demonstrate, on the balance of probabilities, that top management were committed to anti-bribery processes, TI-UK believes that the company should be held to be highly culpable. We recognise that risk management processes need to be proportionate 5

6 and despite the best efforts of top management that risk management processes might fail or be inadequate. In those cases where companies can demonstrate top management commitment and show an acceptable degree of compliance with best practice but nevertheless bribery takes place and a defence to a Section 7 fails then a lesser culpability factor may be appropriate Q50 - Do you agree with the approach to assessing harm? Companies can only be fined; hence the harm factor is of necessity expressed quantitatively in order to calculate the appropriate fine and possibly compensation and confiscation orders. It is important, therefore, that all aspects of the pecuniary benefits obtained by the defendant corporation are taken into account as well as the losses borne by victims. This is clearly set out in the Court of Appeal judgement R v Peter John Sale 25 July Under that judgement it was noted that Lord Justice Thomas in the Innospec case stated that the financial benefit of the company could have amounted to the contracts themselves, i.e. their full value and not just the profit. However, following a Supreme Court decision in a subsequent case [R v Waya [2012] 3 WLR 1188] it was ruled that confiscation under the POCA had to be proportionate in assessing the benefit to the company We consider that the appropriate figure for harm should be the gross profit from the contract obtained plus any other pecuniary advantages obtained or losses avoided. Gross profit should normally only include directly attributable costs and exclude indirect costs such as overhead cost allocations and management charges. TI-UK recommends that this pecuniary advantage benefit assessment should be comprehensive and thorough, with specific consideration given to any strategic commercial advantages secured through bribery The comprehensive calculation of pecuniary interest should include: the share price impact of the commercial advantage and enhanced enterprise value; the gateway value of a contract secured through bribery for facilitating a broader commercial relationship, such as additional contracts won off the back of the initial bribery; provision of working capital or lower cost of capital associated with contracts or relationships secured through bribe-paying; capital secured that may have allowed for market dominance, including through R&D investment or from mergers & acquisition; and any other advantages derived from free cash flow associated to the bribery gains The use of gross profit as an indicator of harm assumes that the defendant company provides its goods and services at market values i.e. that it does not supply poor quality goods nor does it supply goods for which they is no economic value. Economic harm of this nature also needs to be assessed We do not agree that an alternative measure for offences under Section 7 may be the likely cost avoided by failing to institute adequate procedures. A bribe has taken place and the company is being prosecuted under Section 7. The fine should have regard to the benefit gained by the company, as discussed above, but the pecuniary advantage may also take account of non-compliance cost savings The alternative measure of 10% of the worldwide revenue, derived from the product or business area to which the offending relates, could give rise to a much higher fine and, as such, should provide an incentive to the companies to calculate the actual pecuniary advantage. In fulfilling that objective TI-UK are supportive of the measure. However, we would not want this alternative measure to be used in an unjust way We note that the penalty regime adopted by the Financial Conduct Authority (FCA) uses a range of percentages of relevant revenue from 0% to 20% based on an assessment of the seriousness of the nature of the breach of rules. Looking at the indicators of seriousness it appears to us that prosecutions under Sections 1, 2 and 6 of the Bribery Act are more likely to match the indicators ascribed to the FSA levels 4 and 5, where the penalty would be either 15% or 20% of relevant revenue as the base fine. We question why the fine under criminal law should be less than that imposed under the regulatory regime for regulated companies. We suggest that consideration should 6

7 be given to having a range of percentages of relevant revenue linked to the seriousness of the offence Q51 - Do you agree that a multiplier should be applied to the harm figure? TI-UK believes that the fine should not be restricted to the financial benefit plus any other pecuniary advantage gained by the defendant company as this would not act as a deterrent but merely be a disgorgement of profits. This can actually reinforce bribe paying by allowing companies to establish a cost/benefit analysis to a bribery decision. We have advocated that fines need to be more structured, but with sufficient flexibility for the judiciary to ensure that perpetrators of bribery do not treat any fine as the cost of doing business. Greater certainty of the range of fines likely to be imposed by the Court should facilitate earlier pleas or DPAs. In addition, it makes sense to have some commonality to the US system in order to help to avoid forum shopping. As such TI-UK agrees that a multiplier should be applied to the harm figure and supports the rationale in adopting the multipliers used in the US sentencing guidelines Q52 - Do you agree with the aggravating and mitigating factors? We note that the factors are non-exhaustive, a position with which we agree Given that the harm figure relates solely to monetary amounts, the aggravating factors have to deal with the harm caused to victims, governments, markets and other stakeholders. In overseas corruption cases the harm or risk of harm to ordinary people must be evaluated, whether in terms of economic, environmental or social damage. There may be damaging impacts on democracy, ethnic communities, political stability and the wider economy from a bribe that embeds in power a certain individual or group. The extent of the damage to competing companies can also increase seriousness. These factors may be covered by Substantial harm (whether financial or otherwise) suffered by victims, however, we would include the risk of such harm in addition to whatever harm can be established One factor listed is Corporation or subsidiary set up to commit fraudulent activity with the explanation that a subsidiary could be set up to distance itself from unlawful activity. We recommend that the sentencing guidelines adopt a consistent approach to the FCA s penalty regime, 2 which lists a number of actions taken by management, knowingly or recklessly, to facilitate the regulatory breach or actions taken to conceal their involvement. A similar position could be taken in the sentencing guidelines, for example where senior management or a responsible official was actively involved in setting up a corporate structure in order to distance the company from the criminal misconduct. This would include using associated persons as defined under the Bribery Act Another factor is Fraudulent activity endemic within the corporation, which again could benefit from consistency with the approach of the FCA s penalty regime which lists serious or systemic weaknesses in the firm s procedures. Where a company has been charged under the Bribery Act offences it will focus on particular bribes, however if it can be shown, on the balance of probabilities, that the company failed to pay any attention to ensuring adequate procedures were in place, at a minimum there is a serious risk of similar criminal conduct having taken place We note that one of the mitigating factors is that the corporation cooperated with the investigation, made early admissions and/or voluntarily reported offending. TI-UK would recommend including assisting the prosecution to proceed against individuals and providing assistance to overseas prosecutors within mitigating factors Another mitigating factor is Offending committed under previous director(s) / manager(s) This raises an important point of principle. The corporation is a separate legal entity and does not change its identity just because of a change of directors. However, we accept that in some cases it may be that certain directors or others in a position of authority acted as the controlling mind of the corporation when the offences took place. We would expect the new management to demonstrate that they would not tolerate bribery since the corporation was under their stewardship. Hence, we 2 The FCA penalty regime can be seen at 7

8 would not expect this factor to apply when new management were brought in post the bribery investigation. TI-UK recommends that the fine should not be more lenient just because a corporation bent to pressure and changed its Board. It is should be more likely to apply when a company is purchased and the new owners uncover the offending, for example Q53 - Views on the adjustment of the fine TI-UK notes that the approach taken in this guideline provides the judiciary with a lot of flexibility on sentencing. Most of the factors gauging culpability, harm, seriousness, aggravation and mitigation are judgemental in nature, and it will take case law and precedence to bring a greater level of certainty to what is essentially a framework. We agree that this flexibility is capable of fulfilling the objectives of punishment and deterrence if bribery is treated at the top end of serious offending In recent years some major corporations have faced huge fines, particularly in the US. These guidelines appear to be adopting a similar approach to the US sentencing guidelines, resulting in comparable fines. This seems to be supported by comments by Lord Justice Thomas in the Innospec case We note that one of the stated objectives is removal of any gain in a fair and proportionate way. Under the approach taken in the guidelines, harm is equated to the gross gain obtained by the defendant; hence the fine is proportionate to any gain. However, separate consideration has to be given to confiscation proceedings. TI-UK does not see this as double counting. The objective of the fine is punishment and deterrence, confiscation is the disgorgement of any gain There have been a number of bribery cases, including Innospec, where the fine was reduced due to the company s inability to pay. In such cases it is for the Courts to decide what amount of assets and working capital is required by the company to continue trading, having regard to wider factors such as employment of staff, the market in which the company trades etc. It may be that the company should withdraw from certain markets where the bribery took place Q54 - Should further guidance be given on steps 5 to TI-UK recommends that further guidance is provided on compensation and confiscation orders. We believe that corruption does great harm in developing countries and those victim countries should receive restitution. We believe that this process should involve development agencies, such as DFID and should not be controlled by the convicted corporations. Confiscation orders should disgorge any financial benefit accrued by the company and any wider pecuniary advantages such as gaining market share. We recognise that the terms of such orders are developing in line with emerging case law, however, it would be useful to provide guidance on established principles. 8

9 Annex I Transparency International UK ( the UK national chapter of TI, fights corruption by promoting change in values and attitudes at home and abroad, through programmes that draw on the UK s unique position as a world political and business centre with close links to developing countries. TI-UK: Raises awareness about corruption; Advocates legal and regulatory reform at national and international levels; Designs practical tools for institutions, individuals and companies wishing to combat corruption; and Acts as a leading centre of anti-corruption expertise in the UK. TI-UK s vision is for a world in which corruption is greatly reduced and the UK has zero tolerance for corruption both at home and abroad. Contact: Nick Maxwell Research Manager Transparency International UK E: nick.maxwell@transparency.org.uk T: + 44 (0)