Serious Economic Crime A boardroom guide to prevention and compliance

Transcription

1 Published by White Page Ltd in association with the Serious Fraud Office Serious Economic Crime A boardroom guide to prevention and compliance With contributions from leading advisers and featuring introductions from:

2 20 Voluntary disclosure and the problems of plea bargaining John P Rupp, Partner, Robert Amaee, Counsel, and Alexandra Melia, Associate Covington & Burling LLP Voluntary disclosure can provide enforcement authorities with an appealing alternative to prolonged and costly criminal investigations and prosecutions. The voluntary disclosure regimes that have developed in the US and, more recently, the UK involve the active encouragement of companies by enforcement authorities to report instances of actual or suspected corruption in return at least purportedly for the possibility of receiving a more lenient penalty than they otherwise would have received. The US enforcement authorities responsible for dealing with instances of corruption have long been able to avail themselves of a variety of tools in seeking to resolve cases, including plea agreements and deferred prosecution agreements. In recent years, the UK Serious Fraud Office (SFO) has sought to emulate the US model through the use of civil settlements and plea negotiations, with varying degrees of success. The SFO s adoption of this model has led to some notable successes, including the prosecution of Mabey & Johnson in 2009, which represented the first prosecution of a UK company for foreign bribery since the UK ratified the OECD Anti-Bribery Convention in More recently, however, the SFO s power to resolve corruption cases through the use of plea agreements came under judicial scrutiny in the Innospec case (discussed later in this chapter), which highlighted the difficulties the SFO faces in seeking to encourage self-reporting of actual or suspected corruption. The challenge currently facing the SFO is how to use most effectively the limited tools and decreasing resources at its disposal to fight corruption. Voluntary disclosure The US model The US Foreign Corrupt Practices Act (FCPA) does not require a company to report to enforcement authorities the bribes that it has paid to foreign government officials unless the company is listed on a US exchange and the matter at issue would be material to investors. While once a comparatively rare phenomenon, the number of voluntary disclosures of actual or suspected FCPA violations to US enforcement authorities has increased sharply in recent years. That development has been fuelled by a number of factors, including a substantial increase in FCPA 162 Serious Economic Crime: a boardroom guide to prevention and compliance

3 Covington & Burling Voluntary disclosure and the problems of plea bargaining enforcement actions coupled with higher penalties; an increased risk that FCPA violations will be discovered if they are not reported; and increased US Securities and Exchange Commission (SEC) reporting and certification requirements following enactment of the Sarbanes-Oxley Act in The US enforcement authorities have actively encouraged voluntary disclosure by assuring companies that such action, accompanied by cooperation, can result in more lenient treatment whether through a reduction in penalties or the pursuit of civil rather than criminal penalties than if the authorities were to learn of the violations from other sources (such as enforcement authorities in other countries or a whistleblower). The benefits of voluntary disclosure, however, are not statutorily guaranteed or quantified in advance by the authorities. The approach adopted by the SFO For the past few years, the SFO has worked to cultivate a home-grown version of the voluntary disclosure regime that has become an established part of anti-corruption enforcement in the US. It has sought to promote self-reporting by offering companies that detect bribery and fully engage with UK enforcement authorities the possibility of receiving a civil rather than a criminal penalty as well as the possibility of the SFO investigating the suspected wrongdoing in a discreet way that lessens the impact that otherwise might be felt by the company. The appeal to a company of self-reporting and reaching a negotiated settlement with the SFO has been heightened as a result of the implementation in the UK of Article 45 of the EU Public Sector Procurement Directive This requires contracting authorities in all member states of the European Union to exclude from public contracts any companies that have been convicted of corruption offences. Significantly, these mandatory debarment provisions do not apply to the negotiated civil settlements that may be available to companies that voluntarily disclose. In July 2009, the SFO issued guidance on voluntary disclosure in a document entitled Approach of the Serious Fraud Office to dealing with overseas corruption. The SFO guidance reiterated the benefits of voluntary disclosure. It also clarified the SFO s expectations with regard to co-operation by companies that self-report. According to the SFO guidance, once a self-report is made, the SFO seeks to establish how genuine the reporting company is in its commitment to an anti-bribery culture by assessing its readiness to: co-operate in carrying out any further investigation deemed necessary by the SFO and keep the SFO appraised of pertinent findings undertake remedial measures at the conclusion of any such investigation, such as restitution through civil recovery, retraining of employees, disciplinary action against individuals when deemed to be appropriate and/or external monitoring of the company s compliance efforts behave transparently and in a manner that is consistent with the public interest (for example, by issuing a joint public statement with the SFO discussing the outcome of the investigation) work with the SFO to reach a global settlement with other enforcement authorities that have jurisdiction over the company s behaviour. Companies that are considering making a selfreport should not underestimate the burdens that compliance with those expectations can impose. The costs of both additional investigative steps and any remediation measures that are deemed necessary will be borne by the company. The financial burden of voluntary disclosure must, however, be weighed against the consequences of a failure to make a timely disclosure. Serious Economic Crime: a boardroom guide to prevention and compliance 163

4 Voluntary disclosure and the problems of plea bargaining Covington & Burling The uncertain benefits of voluntary disclosure In deciding which of the range of options available to it should be used, the SFO is required to consider each case on its merits and dispassionately assess whether the criteria for prosecution have been met. It must give careful consideration to whether a particular case is suitable for criminal or civil treatment. While the SFO cannot guarantee a civil outcome when companies voluntarily disclose actual or suspected bribery, its declared aim is to pursue a civil outcome when companies satisfy the criteria discussed above. 1 Any company considering whether to selfreport actual or suspected bribery should consider the case of Mabey & Johnson, which is often held out by the SFO as a model of self-reporting. On August 7, 2009, the engineering group pleaded guilty at Southwark Crown Court to conspiring to corrupt officials in Ghana and Jamaica between 1993 and 2001 and breaching the United Nations sanctions against Iraq. The agents used by Mabey & Johnson were paid a commission to act as the company s representatives in foreign countries. Despite Mabey & Johnson having implemented policies on business ethics and the provision of hospitality, the evidence in the case demonstrated that bribes had been authorised at director level. Mabey & Johnson elected to self-report to the SFO after allegations were made in civil proceedings against former employees and agents. The company also decided to waive privilege over the results of an internal investigation that it had conducted and to share that information with the SFO. That approach was expressly commended by the SFO as demonstrating proper co-operation and Mabey & Johnson was given credit in court for adopting that approach. The waiver of privilege is now, in most cases, expected by the SFO as an indication that a company is fully co-operating. On September 25, 2009, Mabey & Johnson was fined 750,000 for each of the two corruption offences and 2 million for breaching the Iraq sanctions. A confiscation order was also entered totalling 1.1 million in relation to the corruption offences and 618,484 with regard to the UN Iraq Development Fund. Mabey & Johnson was also required to pay reparations of 797,000 to Ghana and Jamaica. The most notable aspect of the case was that the company s self-report did not result in a civil outcome. Any company considering making a voluntary disclosure will no doubt take note of that when deciding whether to self-report, particularly as the confiscation regime and mandatory debarment from competing for public contracts in the EU are triggered by conviction for a corruption offence. There have been several examples of self-reports to the SFO that resulted in a civil outcome. For example, construction company Balfour Beatty self-reported following the discovery of irregular payments to a subsidiary in Egypt. Balfour Beatty ultimately paid a settlement of 2.25 million and contributed toward the SFO s costs. Similarly, following a self-report by AMEC, the SFO decided to pursue civil recovery, having determined that the consultancy group had failed to keep accurate records as it was required to do by Section 221 of the Companies Act Following AMEC s disclosure that it had received irregular payments in respect of a project in which it was a shareholder, a civil recovery order was made for almost 5 million. Based on these cases, the SFO s decision to pursue a civil as opposed to a criminal resolution appears typically to be based on: the speed and openness with which a company makes a voluntary disclosure a company s willingness to co-operate fully a company s willingness to take steps to minimise the risk that irregularities will recur. When the SFO decides on a civil resolution, it typically looks to settle the case by using a variety of measures, including: restitution by way of civil recovery, including the amount of the unlawful property, interest and the SFO s costs 164 Serious Economic Crime: a boardroom guide to prevention and compliance

5 Covington & Burling Voluntary disclosure and the problems of plea bargaining the imposition of an independent monitor proposed by the company and accepted by the SFO a programme of training and other steps designed to achieve a change of culture within the company discussion, when appropriate, about the role of key individuals a public statement agreed by the company and the SFO. 2 Plea bargaining An important element in the growth of the voluntary disclosure regime in the US has been the widespread use of plea negotiation and deferred prosecution agreements to settle corruption cases when companies have voluntarily disclosed instances of wrongdoing to the relevant authorities. The workability of those agreements is, in turn, due in significant part to the willingness of the courts in the US to give considerable deference to the sentencing proposals put forward by the regulatory bodies responsible for policing corruption. 3 In recent years, the SFO has enthusiastically supported the development and use of plea agreements as a tool for resolving corruption cases. The SFO guidance emphasises its willingness to engage in these negotiations in accordance with the Attorney General s Guidelines on plea discussions in cases of serious or complex fraud and, in cases of voluntary disclosure, its willingness to avoid criminal proceedings altogether by agreeing a civil settlement. 4 The SFO s foray into negotiated plea agreements has enjoyed some success: Balfour Beatty In October 2008, Balfour Beatty agreed to a civil settlement of 2.25 million for books and records offences following the SFO s decision to use its civil recovery powers under Part 5 of the Proceeds of Crime Act 2002 in lieu of prosecution. Commenting on the settlement in a press release, the SFO stated: The use of these new powers should be seen as an important example of how the SFO will use the new tools at its disposal to enhance the criminal justice process. Mabey & Johnson In July 2009 Mabey & Johnson pleaded guilty to ten counts of violating UN sanctions applicable to Iraq and was fined 6.6 million. Although the case largely preceded the Attorney General s guidelines, it was the first case in which the substance of the new procedures was followed. AMEC In October 2009, following an investigation into the receipt of irregular payments associated with a project in which AMEC, a consultancy group, was a shareholder, AMEC self-reported to the SFO its failure to keep accurate records, as required by the Companies Act 1985, and agreed to pay a civil recovery order of almost 5 million. Julian Messent In October 2010, Mr Messent, the former chief executive of insurance broker PWS Holdings, entered into a plea agreement with the SFO that was approved by Southwark Crown Court. Pursuant to that agreement, Mr Messent pleaded guilty to paying bribes totalling 1.2 million to Costa Rican officials between 1999 and 2002 and was jailed for 21 months. The Innospec case The legality of plea negotiations was questioned, however, in the Innospec case, which concerned the SFO s efforts to reach a global settlement of concurrent criminal proceedings in the US and the UK. Innospec Ltd a manufacturer of a lead-based fuel additive called tetraethyl lead is a subsidiary of Innospec Inc, a US listed company. Both entities were implicated in a systemic scheme to breach United Nations sanctions in Iraq between 2000 and 2003 and to influence decision makers in Indonesia responsible for awarding public Serious Economic Crime: a boardroom guide to prevention and compliance 165

6 Voluntary disclosure and the problems of plea bargaining Covington & Burling contracts for the purchase of tetraethyl lead between 1999 and Although Innospec reportedly wanted to settle the case, the fines and other penalties that may have been imposed in the US and UK could have exceeded by a significant amount what Innospec was able to pay. Taking into consideration the company s co-operation, the SFO and the US Department of Justice (DOJ) concluded that they should not seek to impose a penalty that would drive Innospec out of business. In March 2010, Innospec entered into a global settlement with the SFO and various regulatory agencies in the US pursuant to which it was agreed the SFO would seek a penalty of no more than the sterling equivalent of US$12.7 million. In effect, the US$40 million that Innospec was able to pay in fines was divided among the SFO, DOJ and SEC. It was also decided that US$6.7 million of the SFO s share would be allocated to a fine or confiscation order to be imposed in the crown court, with the remainder being the subject of a civil settlement. It was on that basis that Innospec pleaded guilty to conspiring with its directors and others to make corrupt payments to Indonesian government officials. In his sentencing remarks, Lord Justice Thomas said he considered the fine of US$12.7 million to be wholly inadequate in relation to the degree of criminality displayed by Innospec. 5 He went on to criticise the scope and content of the agreement reached by the SFO on the grounds that the suggested financial penalties had not been subject to judicial determination in either the UK or the US save the determination inherent in the US Federal District Court s approval of the pertinent plea agreement and that the proposed division of those penalties between the SFO, DOJ and SEC did not accord with the facts of the case. Although he ultimately approved the proposed penalties, Lord Justice Thomas warned that the circumstances of the case were unique and were not to be interpreted as restricting the court s sentencing powers in future cases. He emphasised: the SFO did not have the power to enter into plea arrangements such as the one it had made with Innospec. Lord Justice Thomas stated that no such arrangements should be made again parties could put forward a joint submission on sentencing but should not include a specific sentence or sentence range, save for those set out in the pertinent sentencing guidelines only the court could make the final decision as to the appropriate sentence in a particular case. Self-reporting: the pitfalls and the advantages The Innospec case highlighted the difficulties faced by the SFO in seeking to encourage selfreporting of actual or suspected corruption, while at the same time retaining the confidence of the judiciary and the public that those found guilty of corrupt behaviour will receive appropriate penalties. While taking note of Lord Justice Thomas s comments, the SFO has continued to use plea negotiations as the basis for dealing with what it considers to be suitable corruption cases. Companies that choose to self-report should be aware of the potential risk that any understanding reached with the SFO on penalties may ultimately be disregarded by the courts. There remain, however, good reasons at least in some instances for companies to continue selfreporting actual or suspected instances of corruption to the SFO. Chief among those is the likelihood of crippling penalties being imposed on companies that fail to report wrongdoing voluntarily. Support for that approach was clearly apparent in Lord Justice Thomas s observation that corruption is at the top end of serious corporate offending and that fines for a recalcitrant corporate defendant are likely to be measured in the tens of millions. That sentiment has been echoed by the SFO, which has stated that when information is received from a whistleblower or a suspicious activity report, rather than directly from a company itself, this will be regarded as a negative factor Serious Economic Crime: a boardroom guide to prevention and compliance

7 Covington & Burling Voluntary disclosure and the problems of plea bargaining The development of other enforcement tools The SFO has made it clear that it would like to be given the power to enter into deferred prosecution agreements a tool already utilised by the DOJ in its resolution of corruption cases. Deferred prosecution agreements, as they currently operate in the US, differ from plea agreements because companies that comply with their terms can avoid formal charges in relation to the underlying corrupt conduct. In that respect, companies entering into deferred prosecution agreements are in effect placed on probation for a period, during which time they are expected to co-operate with the DOJ and engage in remediation activities that, typically, are outlined in the terms of the agreement itself. Provision is also often made in deferred prosecution agreements for the payment of a significant fine by the offending company. The difficulty for the SFO is that it does not currently have the statutory power to impose fines or to enter into such an arrangement. Serious Economic Crime: a boardroom guide to prevention and compliance 167

8 Notes and references Serious Economic Crime: Notes and references Chapter 20. Voluntary disclosure and the problems of plea bargaining (1) The exception to that general rule is when a company s directors have personally engaged in corrupt activities, particularly if they have obtained a personal benefit from their actions. In those circumstances, the SFO would probably commence its own criminal investigation, although it would look to the company to co-operate. (2) Approach of the Serious Fraud Office to Dealing with Overseas Corruption at paragraphs 11 and 14. Following the case of Innospec and the comments of Lord Justice Thomas, the SFO has stepped back from issuing joint agreed press releases with companies, but has issued its own press releases based on the agreed facts. Examples of that practice can be seen in the press releases issued following the recent civil recovery orders in the MW Kellogg and DePuy International cases. (3) See SEC v Bank of America (2010). (4) The Attorney General s guidelines do not, and do not purport to, introduce a plea-bargaining regime. Rather, they state that the purpose of plea discussions is merely to narrow the issues in a case with a view to reaching a just outcome at the earliest possible opportunity, which may involve reaching an agreement about acceptable pleas of guilty and preparing a joint submission as to the sentence. Any such decisions are not, however, binding on the courts. (5) See R v lnnospec Ltd sentencing remarks of Lord Justice Thomas, March 26, (6) Approach of the Serious Fraud Office to Dealing with Overseas Corruption at paragraph Serious Economic Crime: a boardroom guide to prevention and compliance

9 Covington & Burling LLP 265 Strand, London WC2R 1BH Tel Web Robert Amaee Counsel Robert Amaee, a lawyer in Covington & Burling s London office, advises companies and individuals on issues arising under the UK Bribery Act, the US Foreign Corrupt Practices Act and various country-specific anticorruption laws. This work includes conducting risk assessments, helping design and strengthen compliance programmes, developing and delivering tailored training programmes, leading internal investigations and, when necessary, interacting with enforcement authorities. Dr Amaee is the former Head of Anti-Corruption and Head of Proceeds of Crime at the UK Serious Fraud Office. He was responsible for the operational delivery of the SFO s anti-corruption cases, from investigation and prosecution to confiscation of criminal assets, and had strategic oversight of and involvement in negotiations that led to civil settlements in the cases of Johnson & Johnson/De Puy, MW Kellogg/KBR and Macmillan Publishers. Dr Amaee represented the SFO on the Attorney General s Working Group on the Prosecutors guidance to the Bribery Act and the OECD Prosecutors Forum, and served as the SFO s Head of International Assistance. Prior to joining the SFO, he practised as a criminal barrister and holds a PhD in medical research. Alexandra Melia Associate amelia@cov.com Alexandra Melia is an Associate in the London office of Covington & Burling. Ms Melia s practice encompasses a wide range of contentious and quasicontentious matters, including internal corporate investigations, litigation before the English courts and arbitral proceedings. She also advises clients on the design, implementation and evaluation of global compliance programmes. John P Rupp Partner jrupp@cov.com During his nearly 40 years at the firm, John Rupp has advised on compliance matters, including assisting companies in revising their compliance policies and procedures, and structuring and undertaking internal investigations involving trade control issues, bribery, money laundering and accounting irregularities. Mr Rupp routinely interacts with senior enforcement officials in multiple jurisdictions on anti-bribery and money laundering matters. He also has written extensively on such issues. Earlier in his career, Mr Rupp spent several years at the US DOJ. More recently, he has chaired several international anti-bribery conferences, has presented extensively at such conferences and has taught courses on anti-bribery and money laundering issues.

10 Published by White Page Ltd in association with the Serious Fraud Office Serious Economic Crime A boardroom guide to prevention and compliance With contributions from leading advisers and featuring introductions from: Published by White Page Ltd in association with the Serious Fraud Office, Serious Economic Crime s primary purpose is to give board-level readers in the UK and international businesses informed commentary on the impact of UK anti-fraud and anti-corruption legislation. As the scope of this legislation continues to expand and interact more with the legislation in other jurisdictions, so the landscape for best-practice compliance and fraud prevention has become increasingly complex. The wealth of expert insights from lawyers, accountants and specialist anti-fraud consultants in this publication s 36 chapters is therefore an invaluable resource. This publication is written as a general guide only. It should not be relied upon as a substitute for specific legal or other professional advice. Professional advice should always be sought before taking any action based on the information provided. Every effort has been made to ensure that the information in this guide is correct at the time of publication. The views expressed in the articles contained in this publication are those of the authors. They do not necessarily reflect the views of the Serious Fraud Office and should not be taken as endorsed by the Serious Fraud Office. The publishers and authors bear no responsibility for any errors or omissions contained herein. To view the book in which this chapter was published, to download ipad and Kindle-compatible editions and/or to order hard-copy versions, please go to Published by White Page Ltd White Page