Overview
On November 30, 2015 Lord Justice Leveson approved the UK’s first ever deferred prosecution agreement (DPA).[i] That same case resolved the Serious Fraud Office’s (SFO’s) first case of corporate failure to prevent bribery under the strict liability section 7 offence of the UK Bribery Act. Under the terms of the DPA, in exchange for criminal proceedings being suspended for a period of three years, Standard Bank Plc agreed to pay compensation of US $6 million to the Government of Tanzania; disgorge profits of US $8.4 million; pay a financial penalty of US $16.8 million; co-operate with all relevant authorities in relation to all matters arising out of the conduct; and pay the prosecutor's costs. It also agreed to an independent review of its existing anti-bribery and corruption controls, policies, and procedures.
Whilst there has been much discussion as to the uptick in SFO enforcement and the office’s increased resources through blockbuster funding from the UK government, this alert analyses the judgment, compares it with the US DPA process, and looks at the implications that this resolution may have on future cross-border settlements.
2016 may well see more UK corporate prosecutions. However, the limited incentives for companies to self-report and co-operate in the UK reflected in this case, particularly if the gain is limited to financial penalty discounts of one third, suggests that a rush of corporate settlements may not be forthcoming. Based on this judgment, multi-jurisdictional cases may be more fertile ground for DPA-based settlements.
Background
Standard Bank Plc, which is registered in the UK, and its former sister company, Stanbic Bank Tanzania Limited (Stanbic), proposed to the Government of Tanzania (GoT) to arrange a US $600 million private placement. Initially the proposed fee was 1.4% of the amount raised; however, this was increased to 2.4%, with the 1% increase being provided to a “local partner,” a Tanzanian company called Enterprise Growth Market Advisors Limited (EGMA), for the provision of advice and assistance. Subsequent to the addition of EGMA the proposal proceeded quickly to a contract.
Although this was a joint mandate between Standard Bank and Stanbic, Standard Bank conducted know your customer (KYC) and due diligence checks only on the GoT, and did not carry out their own checks on EGMA, instead relying upon those carried out by Stanbic when opening an account for EGMA. Those latter checks failed to identify that EGMA’s chairman and one of its three shareholders and directors, Mr. Harry Kitilya, was at all relevant times commissioner of the Tanzania Revenue Authority and, as such, a current official of the GoT; or that EGMA’s managing director, Dr. Fratern Mboya, had been CEO of the Tanzanian Capital Markets and Securities Authority between 1995 and 2011.
The fee generated and paid to EGMA in March 2013, US $6 million, was paid by Stanbic into EGMA’s account at the bank, and was swiftly withdrawn in cash over 10 days. Concerns about these withdrawals were escalated within Stanbic, Standard Bank, and the ultimate parent, Standard Bank Group, which was registered in South Africa. These events led to the commencement of an internal investigation. Less than four weeks after concerns were raised internally and long before the investigation was concluded, the company reported the matter to the Serious Fraud Office (SFO) and filed a suspicious activity report with the financial crime authorities in the UK.
Some 16 months later, in July 2014, the completed internal investigation report was sent to the SFO. The SFO also conducted its own investigation and interviews.
What can be gleaned about the entry requirements to obtain a settlement?
As a result of the SFO investigation and the internal investigation report, the SFO was satisfied that there was sufficient evidence to provide a realistic prospect of conviction against Standard Bank under the section 7 of the Bribery Act 2010. This, when combined with the SFO being satisfied that it was in the public interest for a DPA to be reached, meant that the pre-conditions laid out in the Crime and Courts Act 2013, and the code of practice on deferred prosecution agreements, were met, and that DPA negotiations could begin.[ii] This led to criminal proceedings being commenced, with a draft indictment being proffered, charging Standard Bank with the offence of failure by a commercial organization to prevent bribery, then these proceedings were suspended.
The judgment of the court indicated that the public interest in resolving matters by way of DPA was predominantly met by five factors:
- The court’s view of the failure to prevent bribery offence as less serious than a substantive section 1 or section 2 bribery offence
- The early self-report and proactive approach of the Bank, which included a detailed, SFO-sanctioned internal investigation, that included full cooperation and making witnesses available for interview by the SFO
- The lack of similar prior misconduct
- The improvements made in the corporate compliance program
- The fact that the Bank in its current form is a different entity than that which committed the offence
Of particular importance to the court was the very early notification of the issue to the SFO, which occurred in a matter of weeks after concerns had been raised internally, and long before the conclusion of the internal investigation. This early notification, combined with a detailed internal investigation that had been “sanctioned by the SFO” and significant cooperation, including identifying relevant witnesses and disclosing their accounts and documents shown to them, was clearly of significance to the SFO and the Judge when deciding whether to allow Standard Bank to resolve matters by way of a DPA. Although waiver of legal privilege is not mentioned in the judgment, it is clear that potentially privileged documents (such as first accounts by witnesses and the investigation report produced by the law firm) were voluntarily disclosed to the SFO. It appears that such early and active disclosure is favored by the SFO and has clearly been taken into account by the court.
What can be gleaned from the judgment about how key terms in the Bribery Act will be construed?
The judgment construes several key terms of the Bribery Act 2010 as a matter of first impression, including “associated person,” and “intent to secure a business advantage,” and is the first case to address the failure to prevent offence, which can be defeated by a demonstration of “adequate procedures,” It also is noteworthy from a jurisdictional point of view.
As our prior alerts have detailed,[iii] in order to prove the section 7 failure to prevent bribery charge, the SFO needs to show that “a person associated with” the commercial organization had bribed another person. The statute defines an associated person as a person “who performs services for or on behalf of the commercial organization” and can include employees, subsidiaries or agents. In this case Stanbic was seen to be the associated person, even though according to the Judge, it was a “sister company in respect of which Standard Bank had no interest, oversight, control or involvement.” Given, however, that this was a joint mandate between Standard Bank and Stanbic, it appears the Judge viewed the activities carried out by Stanbic, even though they were not performed exclusively for the benefit of Standard Bank but were designed to benefit both parties, as sufficient to quality Stanbic as an associated person in the matter.
The Bribery Act further requires that the associated person must have intended “either to obtain or retain business for the commercial organization, or to obtain or retain an advantage in the conduct of business for the commercial organization.” While Stanbic, as a joint beneficiary of the mandate and not simply an agent, should be presumed to have been seeking business benefits for itself in the first instance, with any intention to benefit Standard Bank being a secondary goal, the court’s support of the SFO’s wide interpretation of this “intent” element is significant for future cases.
What can be gleaned about the “adequate procedures” defense?
The judgment does not shed light what is required for anti-bribery and corruption (ABC) policies or procedures to be “adequate” so that the defense under section 7 of the Bribery Act 2010 can be relied upon, but it includes some interesting commentary. First and foremost, it appears the SFO did not believe that the company had a realistic prospect of relying upon the defense. Further, the SFO alleged that “the applicable policy was unclear” and was not “reinforced effectively” to the Standard Bank deal team, through either communication or training. The training and guidance was also criticized for not sufficiently addressing the facts encountered here, namely where two entities within the Standard Bank Group (Standard Bank Plc and Stanbic) were involved in a transaction, and one of the two entities engaged an introducer or consultant. This approach raises the specter that the SFO will assess the “adequacy” of a company’s procedures, in light of conduct that was not prevented. It also reinforces the position that companies should properly assess their own risks, or if proposing to rely on KYC or due diligence carried out by others, that they do not rely on it blindly.
Extra-territoriality and Jurisdiction
Standard Bank was liable under section 7 due to its being incorporated in the UK. The fact that the conduct of the associated person, Stanbic, was committed in Tanzania, or elsewhere, was irrelevant. There is no statutory requirement for the associated person to either have a close connection with the UK or for any of their activities to take place in the UK. The allegation in this case was that Stanbic promised or gave a financial advantage to EGMA (the 1% fee) without any services being provided in return, intending to induce representatives of the GoT to improperly show favor to Standard Bank and Stanbic. In simple terms the fee was an inducement to those public officials to improperly award the private placement to Standard Bank. It was sufficient that Standard Bank was incorporated in the UK; however even if incorporated elsewhere, a company can still be liable if it “carries on a business or part of a business in any part of the UK.”
What can be gleaned about future UK penalties and likely DPA terms?
Apart from its construction of the Bribery Act, the DPA contains several noteworthy elements, including the element of restitution to the GoT, the calculation of profits, the discount offered, its reliance on the input of the US DoJ in assessing the reasonableness of the fine, and the future cooperation conditions, including in relation to legal privilege.
Under the terms of the DPA, in exchange for criminal proceedings being suspended for a period of three years, Standard Bank Plc agreed to pay compensation of US $6 million to the GoT. This figure represented the 1% fee that was paid to EGMA from the US $600 million capital raised by the placement and which was viewed as monies that the GoT had paid unnecessarily and thus were entitled to have returned to it as the “victim” of this scheme. This position contrasts with the refusal of the US Government to treat a Costa Rican government agency as a victim in the Alcatel-Lucent case[iv]. There, however, it was the specific agency whose officials had concocted the bribery scheme that was denied victim status; while here, the fee was paid to the central government.
The calculation of the profits of US $8.4 million included not only the profits made by Standard Bank but also the profits earned by Stanbic. Standard Bank was obliged to disgorge the entire fee received by both entities (the full 1.4% of US $600 million), even though the 1.4% fee was split evenly, US $4.2 million, between each entity. This suggests that the court viewed Standard Bank as being jointly and severally liable for the full benefits to the joint mandatories, not just its own share.
The financial penalty of US $16.8 million was reached by assessing Standard Bank’s culpability to be at a medium level, then applying the mid-level multiplier of 300% to the gross profit of US $8.4 million, yielding a total of US $25.2 million. From this number Standard Bank received the full one third discount due to its admissions and co-operation.
Notably, in assessing the reasonableness of the proposed financial penalty, the court took into account the US Department of Justice’s observations (requested by the SFO) that the financial penalty of US $16.8 million was comparable to what would have been imposed if the matter had been dealt with in the US. This had been a cross-border case, but the DoJ closed its case as a result of the UK resolution, while the SEC has agreed that, given the disgorgement of profits in the UK, a civil penalty of US $4.2 million, to represent the profit made by Standard Bank, would settle the SEC investigation. It is likely that the outcomes would have been different had the UK not imposed such a significant penalty.
The court approved a condition requiring Standard Bank to continue to cooperate with the SFO and “any other agency or authority, domestic or foreign, and Multilateral Development Banks” and that it shall “disclose all information and material in its possession, custody or control, which is not protected by a valid claim of legal professional privilege” (emphasis added). This is similar to conditions imposed in US DPAs, and further highlights the cross-pollination between the two DPA processes. However, it also bears the hallmarks of the Director of the SFO, David Green, who has repeatedly challenged assertions of privilege claimed by law firms conducting internal investigations, and leaves open the possibility that if in the prosecutor’s view the claim of privilege is “invalid,” the failure to disclose the material could be in breach of the DPA conditions.
What are the implications going forward?
Recent speeches by those within the SFO indicate that their approach of going after corporates and seeking to prosecute the most serious offences will continue unabated, and that DPAs will only really be considered in cases where there is “unequivocal co-operation,” namely that the factors against prosecution clearly outweigh those in favor.
This case provides some welcome clarification not only of the DPA process in the UK but also offers some indication of how terms such as “associated person” and “adequate procedures” (amongst others in the UK Bribery Act) will be interpreted.
Most importantly this case highlights the sheer scale of co-operation and the level of disclosure that is likely to be required under the UK system to be able to benefit from a DPA and to obtain the maximum penalty discount of one third. It also shows the willingness of the UK judiciary to gauge the “reasonableness” of the terms and conditions of a DPA from a multi-jurisdictional perspective. Perhaps more significant for foreign companies is the apparent willingness of the US DoJ and SEC to forgo prosecution for the same conduct against the same person and/or to limit the penalties sought, thus introducing some element of international double jeopardy into the US process.
Practically, however, it remains unclear in the wake of this judgment whether the introduction of DPAs in the UK will provide much of an incentive to companies to self-report and co-operate – especially in light of the limited discounts and the level of cooperation required. This case involved a one-off payment, in one jurisdiction, where there was a clear regulatory obligation to report matters in any event, and limited downstream risk of collateral litigation resulting from the waiver of privilege to the SFO. In a case with numerous bribe allegations, competing jurisdictional claims in the US, UK and other jurisdictions, the risk/benefit analysis will be much more complex. Also unclear, given the multiplicity of factors on which the court relied, are under what circumstances going forward a court will find the public interest element satisfied. For example, had Standard Bank not been restructured and differently owned, following a majority shareholding having been acquired by ICBC, what effect would the absence of this factor have had?
[i] See the Deferred Prosecution Agreement, the Statement of Facts, the preliminary judgment and full judgment.
[ii] See Steptoe Alert “Deferred Prosecution Agreements Now in Force in the UK, Potentially Promoting Self-Reporting and Cross-Border Settlements” http://www.steptoe.com/publications-9396.html
[iii] See Steptoe Alert “International Law Advisory - UK Parliament Passes Anti-Bribery Reform Law” http://www.steptoe.com/publications-6777.html
[iv] See US v. Alcatel-Lucent, S.A., Case No. 10-20907 (S.D. Fla. June 1, 2011) Transcript of Proceedings, and see also Steptoe Alert ““Bribery Is Us”: Court Rejects Costa-Rican SOE’s Attempt to Claim Victim Status in Alcatel-Lucent Bribery Scheme” http://www.steptoe.com/publications-newsletter-300.html#_ftn1