This post goes across the pond to check in on three U.K. developments.
First, a recent Serious Fraud Office (“SFO”) pre-Bribery Act enforcement action against Smith & Ouzman Ltd. and related individuals, second recent speeches by SFO officials, and third the start of criminal trials against various former top-level executives of News Corp.’s News of the World publication.
SFO Flexes Its Pre-Bribery Act Muscle
The U.K. Bribery Act went live on July 1, 2011 and its provisions are forward looking only (this is the most obvious reason why there has yet been a FCPA-like Bribery Act enforcement). However, the SFO recently flexed its muscles in an enforcement action concerning conduct pre-dating the Bribery Act.
Last week, the SFO announced that “Smith & Ouzman Limited [a U.K. based printing company specialising in security documents such as ballot papers], two of its directors, an employee and one agent have been charged by the Serious Fraud Office with offences of corruptly agreeing to make payments totaling nearly half a million pounds, contrary to section 1 Prevention of Corruption Act 1906.”
According to the SFO release:
“The individuals, all British nationals, are:
Chris Smith – the former Chairman of Smith and Ouzman Limited
Nick Smith – the Sales and Marketing Director of Smith and Ouzman Limited
Tim Forrester – the International Sales Manager for Smith and Ouzman Limited
Abdirahman Omar – an agent for Smith and Ouzman Limited
The alleged offences are said to have taken place between November 2006 and December 2010 and relate to transactions in Mauritania, Ghana, Somaliland and Kenya.”
SFO Director David Green On Self-Reporting
This October 2012 post highlighted an SFO release detailing “revised policies” concerning, among other things, corporate self-reporting.
Last week, SFO Director released this statement concerning self-reporting.
“It is now a year since I changed the published SFO guidance on self-reporting by corporates. The guidance I inherited contained an implied presumption that self-reported misconduct would be dealt with by civil settlement rather than prosecution. I took the view that no prosecutor should appear to offer such a guarantee in advance. As a prosecutor, you can never anticipate what set of facts and conduct might be next in through the door. I took the guidance back to the historic position agreed with the Director of Public Prosecutions: that we would apply the full code test for crown prosecutors to self-reported criminality. In other words, we ask (after our own investigation): is there sufficient evidence to prosecute, and if so, is a prosecution in the public interest? The SFO’s message is carefully expressed and nuanced. Assume the evidential sufficiency test is passed. If a company made a genuine self-report to us (that is, told us something we did not already know and did so in an open- handed, unspun way), in circumstances where they were willing to cooperate in a full investigation and to take steps to prevent recurrence, then in those circumstances it is difficult to see that the public interest would require a prosecution of the corporate. Some parts of the blogosphere seem to have difficulty with this, writing that it means self-reporters will be prosecuted. It means no such thing.”
As to Green’s comment about the blogosphere, the prior post stated. “For the most part, although much ink is likely to be spilled by FCPA Inc. / Bribery Act Inc. in the coming days, the SFO’s “revised policies” are a yawner.”
Back to Green’s statement.
“Some corporate lawyers complain that the new approach (actually, the principled, established approach) creates “uncertainty”. I disagree: and I think that when they say “certainty” it is code for “guarantee”. For the avoidance of doubt, the SFO continues to receive self-reports, and I anticipate the numbers will only rise as Deferred Prosecution Agreements (DPAs) bed in next year. So why should a company self-report instances of suspected criminal misconduct to the SFO?
(i) A self-report at the very least mitigates the chances of a corporate being prosecuted. It opens up the possibility of civil recovery or a DPA; (ii) There is the moral and reputational imperative: it is the right thing to do and it demonstrates that the corporate is serious about behaving ethically; (iii) If the corporate chooses to bury the misconduct rather than self-report, the risk of discovery is unquantifiable. There are so many potential channels leading to exposure: whistle-blowers; disgruntled counterparties; cheated competing companies; other Criminal Justice agencies in the UK; overseas agencies in communication with SFO; and the SFO’s own developing intelligence capability, to name but a few;(iv) If criminality is buried and then discovered by any of the above routes, the penalty paid by the corporate in terms of shareholder outrage, counterparty and competitor distrust, reputational damage, regulatory action and possible prosecution, is surely disproportionate; (v) Last but not least, burying such information is likely to involve criminal offences related to money laundering under sections 327-9 of the Proceeds of Crime Act.
There are, I suggest, very powerful arguments in favour of self-reporting. Once the decision to self-report has been made by the corporate, then the question of timing arises. Common sense suggests that an initial report of suspected criminality should be made to the SFO as soon as it is discovered. This surely protects the company against the SFO finding out by other means whilst the company investigates further. The corporate can then investigate in depth and report back to the SFO. The SFO will carry out its own assessment with possible use of S2A powers (in the case of bribery), and, if justified, the opening of a criminal investigation and the exercise of S2 powers. One argument I have heard against self-reporting is that the SFO does not prosecute corporates, because it is said to be too difficult in our jurisdiction. Certainly I am used to unfavourable comparisons being made of the SFO with US prosecutors in this area of activity. The reason is simple: a US prosecutor uses the respondeat superior principle: a corporate is vicariously liable for the acts of its managers and employees.”
There is another simple reason for the disparity between U.S. and U.K. “prosecutions” for bribery and corruption offenses. Simply put, the U.S. has the option of a non-prosecution or deferred prosecution agreement. At present, the U.K. does not have these options, although it is close to utilizing DPAs. As even the OECD has observed (see here) “it seems quite clear that [NPAs and DPAs] is one of the reasons for the impressive FCPA enforcement record in the U.S.” I’ve long viewed the U.K.’s desire to use DPAs as a public relations tactic to catch up in the enforcement competition game (see here).
Back to Green’s statement.
“In English law, the test for corporate criminal liability requires proof that the “controlling mind” of the company (ie, board level senior management) was complicit in the relevant criminality. Absent emails, or a cooperating witness, that is never an easy thing to show. An answer to this would be to extend the principle contained in S7 of the Bribery Act 2010, which creates the corporate offence of a company failing to prevent bribery by its employees, with a statutory defence of adequate procedures. The reach of the section could easily be extended to cover not just bribery but acts of fraud by employees.
I have heard objections to such a change:- (a) That this would be punishing mere corporate negligence (to which I say, it would be about improving bad corporate culture). (b) That prosecution of the corporate adds nothing to the prosecution of the guilty individuals (I am not proposing that a corporate should face prosecution in every case- far from it. But there will be cases where it is right and just that failure to prevent certain types of conduct should result in the corporate being marked with a criminal conviction). (c) That it would simply punish the shareholders (shareholders, particularly large institutional shareholders, should be vigilant about where they invest and how the corporate in which they invest behaves).
I would argue that prosecution of a corporate would be appropriate where, for example, the company profited from fraud by its employees; where a particular illegal practice was common and tolerated in a particular sector; where deterrence was needed in a sector; or where a company has brought in a compliance regime but senior management had failed to ensure enforcement of that regime. Such a change would also cure a problem inherent in the DPA regime. If prosecution of a corporate is currently difficult, why should a corporate agree to enter a DPA at all? DPA’s represent a very useful addition to the prosecutors’ toolbox for use in appropriate circumstances. They avoid the collateral damage caused by a full blown prosecution of a corporate. They are not a panacea. But the problem I have highlighted (which admittedly will not necessarily arise in every case) needs to be addressed. I think it comes to this: if the public interest demands more corporate prosecutions, then this change would help make that happen.”
In a separate speech before the World Bribery and Corruption Compliance Forum in London, Alun Milford (General Counsel of the SFO) touched upon many of the same issues Green discussed.
Among other things, Milford talked about the “Bribery Act industry” and I took note of Milford’s following statement given my often expressed view that an FCPA compliance defense can better incentivize corporate conduct and further advance the objectives of the FCPA. Milford stated that “the Bribery Act [which contains an adequate procedures defense] has led to a significant amount of work in developing stronger, more ethical corporate cultures.”
Former News Corp. Exec Trials
In July 2011, worldwide media attention was focused on News Corp (see here).
The conduct at issue had many prongs, including various privacy issues. One prong concerned allegations that News Corp’s News of the World publication paid up to five U.K. police officers to obtain information that better allowed it to write juicy stories. Thus began News Corp.’s FCPA-like scrutiny and since then the original point of inquiry has – as is typical – expanded to include other conduct.
As to the alleged U.K. payments at issue, focus turned to the old “who knew what and when did they know it” question. Several individuals associated with News of the World were criminally charged, including for conduct implicating the alleged bribery prong of News Corp’s scrutiny.
Two individual charged were Rebekah Brooks, the former editor of News of the World and Andy Coulson, another former News of the World editor. The criminal trial of these individuals, along with others, began this week in London.
What happens in these trials concerning the bribery offenses will not determine the outcome of any potential News Corp. FCPA enforcement action. But you can bet that the DOJ and SEC will be interested in the ultimate outcome. In short, if there is a judicial finding that Brooks and/or Coulson or other high-level executives in London authorized or otherwise knew of the alleged improper payments, this will likely be a factor in how the DOJ and SEC ultimately resolve any potential enforcement action and how News Corp.’s overall culpability score may be calculated under the advisory Sentencing Guidelines.