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BAE … Inside the SFO

Several prior posts (here [1]) have been devoted to the BAE case, both the U.K. – Serious Fraud Office component (and challenges to the plea agreement) and the DOJ’s bribery, yet no bribery allegations and charges.

This post returns to the SFO component of the BAE matter.

Widespread allegations that BAE was involved in bribery and corruption on a grand and global scale are detailed in Black Money – a PBS Frontline documentary from April 2009 (here [2]).

In 2004 the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward.

However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its investigation of BAE, at least as to non-Saudi issues, including whether the company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case.

The SFO Director stated in late January 2010 that “BAE is clearly a very important case” and that “it is very important that we get it right.”

In late January 2010, the SFO issued a release (here [3]) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.”

Then, in early February 2010, the SFO announced (here [4]) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicated a few days earlier in connection with bribe payments in “certain Eastern and Central European government” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.” The SFO release notes that BAE will pay a £30 million penalty “comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.”

Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also notes that “[t]his decision brings to an end the SFO’s investigations into BAE’s defense contracts.”

In the face of widespread criticism, the SFO defended its handling of the BAE matter and noted that “the public interest lay in drawing a line under the whole investigation.”

Documents filed in connection with the SFO-BAE plea agreement challenge shed additional light on the SFO’s abrupt end to the BAE investigation.

In the SFO’s “Grounds for Contesting the Claim” (here [5]) the SFO details the history of its investigation.

Highlights include:

“From the beginning of March 2009, the SFO had been involved in plea discussions with BAE. The position of the SFO was that it would be satisfied with pleas to charges in respect to some, but not necessarily all, the strands of its investigation.”

By September 30, 2009 (“the SFO imposed deadline”) no agreement had been reached and “discussions in England were discontinued.” “By that time, it was known that plea discussions between the DOJ and BAE in the U.S. had also failed to produce any agreement.”

“In late January – early February 2010 there was a material change in circumstances. First on January 29, the DOJ contacted the SFO and indicated that a plea agreement with BAE was imminent. The agreement involved BAE entering pleas of guilty with respect of offenses in connection to the investigations concerning Eastern Europe and Saudi Arabia and a payment of $400 million.”

The SFO “received advice from counsel that the Eastern Europe aspect of the proposed U.S. agreement was highly likely to have the effect of preventing prosecution for the offenses under consideration in respect of the Eastern European investigation in England, on the basis of the application of the principle of double jeopardy. This represented an additional, potentially serious difficulty in respect of the evidential test. Additionally, the [SFO] re-assessed the effect of the agreement on public interest considerations. He concluded that it was not in the public interest to pursue BAE in England in respect of matters to which the company was to plead guilty in the U.S.”

[Note – BAE pleaded guilty in the U.S. to “conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its Foreign Corrupt Practices Act compliance program, and to violate the Arms Export Control Act, and International Traffic in Arms Regulations.” It is difficult to see how this plea would raise double jeopardy issues for a corruption / bribery offense.]

“On February 4, 2010 […] BAE indicated that it was prepared to plead guilty […] in respect of the Tanzanian transaction, and pay a sum of £30 million. The [SFO] concluded than an agreement on such a basis was in the public interest.”

“…a serious evidential difficulty had been identified in respect of potential corruption charges, namely the difficulty of proving the involvement of a ‘controlling mind’ in the offending. In the absence of a plea agreement, this raised the prospect that the [SFO], having gained no admission of criminal liability or any financial payment, would (a) nevertheless be forced to conclude that there was no realistic prospect of conviction in respect of corruption offenses or (b) end up prosecuting a weak and vulnerable case.”

[Note – the above assertion would seem to differ significantly from the assertions of former SFO prosecutors Robert Wardle and Helen Garlick made in the above referenced Black Money documentary]

“By virtue of Article 45 of the European Union Public Sector Procurement Directive 2004, a conviction for an offense of corruption would have had the effect of debarring BAE for tendering for public contracts in the EU. This could have been a disproportionate outcome, having regard to the fact that the relevant conduct took place many years ago and the company had taken substantial steps to transform itself as an organization since then.”

“The plea agreements in England and the US were entered into on February 5, 2010 and brought to an end the investigation of BAE.”

Thus, over the course of six days, the multi-year investigation of BAE was swiftly resolved and, as in the U.S., a driving force behind the ultimate charges was to avoid application of the European Union debarment provisions.

So why did the SFO abruptly drop the criminal charges against Count Mensdorff?

The short answer is that BAE would not agree to the SFO plea (as watered down as it was) without the SFO agreeing to drop the charges against Count Mensdorff.

The SFO notes that a “particular problem arose in Count Mensdorff’s case which led to him being charged sooner than had initially evisaged.”

“Count Mendsdorff is an Austrian citizen. As of January 2010, he was in the United Kingdom on police bail. In discussions with the SFO, the Austrian authorities made clear that, as a matter of Austrian law, if he returned to Austria there would be no jurisdiction to extradite Count Mensdorff in respect of the offense which the SFO was considering charging, namely conspiracy to corrupt.”

The “SFO concluded that, in the absence of effective extradition arrangements, there was a strong likelihood that, if not charged on January 29th, Count Mensdorff would go to Austria and not re-enter the jurisdiction to face criminal proceedings.”

The SFO “decided that the appropriate course of action was to charge Count Mensdorff on January 29th, ensuring that he then became subject to court bail conditions sufficient to ensure he remained within, or came back to, the jurisdiction. Count Mensdorff was duly charged.”

“As it transpired, on February 4th, during plea discussions, BAE requested an undertaking from the SFO that in any future prosecutions (to which BAE was not a party) the prosecution could not allege that the company was guilty of corruption. The [SFO] concluded that without such an undertaking, a plea agreement could not be achieved. The [SFO] received advice from counsel to the effect that in a prosecution of Count Mensdorff, or any of the individuals under investigation in connection with the Eastern European transactions, it would not be possible to proceed without making an allegation of corruption against BAE. In short, the SFO concluded that Count Mensdorff could not be prosecuted consistent with the terms of the undertaking sought. In the circumstances, the [SFO] took the view that it was in the public interest to give the undertaking to BAE, thereby enabling the plea agreement to be achieved, and, consequently, to withdraw the charge against Count Mensdroff.”

In a recent April 20th Financial Times article, the SFO said “we do not accept that we acted hastily – these were considered negotiations and were not rushed decisions.”

The same article noted that because the SFO dropped the charges against Count Mensdroff, he is able to “claim his legal costs from taxpayer funds.” According to the article, Mensdorff, who assets include a castle, has made such a claim.