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Facade Of Enforcement Across The Pond

Laughable

A facade of Foreign Corrupt Practices Act enforcement is when a business organization – often for reasons of risk aversion and efficiency – agrees to resolve an enforcement action in the absence of any judicial scrutiny even though no employee or agent of the company (business organizations obviously can only act through real human beings) was charged. (See here for the article “The Facade of FCPA Enforcement” and here for the article “Measuring the Impact of NPAs and DPAs on FCPA Enforcement.”)

Even more troubling is when employees are charged, put the government to its burden of proof, are acquitted yet the business organization still resolves an enforcement action based on the same underlying conduct.

This 2014 post, published after the United Kingdom formally adopted deferred prosecution agreements, was titled “The U.K. Enters the Facade Era.” As discussed below, recently there was a major facade moment in the U.K.

The United Kingdom Serious Fraud Office recently announced that Dr Cansun Güralp, Andrew Bell, and Natalie Pearce (all former employees Guralp Systems Ltd.) were acquitted of criminal charges based on allegations that they participated in a scheme to make corrupt payments to a South Korean public official.

Notwithstanding these acquittals, the SFO also announced that Guralp Systems (a “relatively small UK registered company which specializes in the development, design manufacture and sale of devices and systems for seismic measurement”) “agreed to pay a total of £2,069,861 for disgorgement of gross profits” and agreed to “accept the charges of conspiracy to make corrupt payments and a failure to prevent bribery by employees” in regards to the same underlying conduct the individuals were acquitted.

In the SFO’s release, Lisa Osofsky (Director of the SFO) stated:

“The Deferred Prosecution Agreement with Güralp Systems Ltd [GSL] ensures that the company will pay the price for the wrongdoing that occurred under its roof.”

But wait a minute and pardon me for being that guy.

What “wrongdoing” occurred at Guralp Systems? After all, the employees were acquitted.

However, as apparent from reading the “Approved Judgment” in the GSL matter, the GSL DPA was rushed because of the individual trials. As stated by Justice William Davis in the “Approved Judgment”:

“In this case, I concluded the private hearing … on October 10, 2019. The hearing was arranged at very short notice, the relevant papers only being delivered 36 hours prior to the hearing. The urgency arose because of the imminent commencement of the trial of Dr. Guralp and the other individual defendants.”

It is clear from reading the “Approved Judgment” as well as the “Statement of Facts” that the GSL DPA was based on the same core conduct alleged in the individual enforcement actions – actions that ended in acquittals. As stated in the “Approved Judgment,” the “draft indictment in the case of GSL charges the company with a like conspiracy and with failing to prevent bribery by employees.” The only three culpable employees mentioned in the enforcement action are Guralp, Bell and Pearce.

As further stated in the “Approved Judgment”

“The draft indictment in relation to GSL contains two counts. The first count charges a conspiracy to make corrupt payments between April 2002 and September 2015. Dr Güralp, Natalie Pearce and Andrew Bell also are charged on that count. The count on which they are about to be tried is in similar terms but without reference to the company as a co-conspirator. The criminal agreement alleged is that GSL (together with the named individuals plus Dr Chi) agreed to make corrupt payments to Dr Chi as an inducement or reward for showing favour to GSL in relation to the affairs of KIGAM. […]

The second count charges failing to prevent bribery by employees. This count covers the period from 1 July 2011, namely the introduction of the Bribery Act 2010, to 15 September 2015. It deals with the failure by GSL to prevent its employees, particularly Natalie Pearce and Andrew Bell, from bribing Dr Chi. This count is of secondary importance and adds little to the first count.”

As stated in the “Approved Judgment,” shortly before the individuals trials, the SFO invited GSL to enter into a deferred prosecution agreement in relation to its alleged criminal conduct” and GSL was “willing to do so.”

Facade aside, the “Approved Judgment” sets forth the following relevant “facts.”

“Dr Chi between 1999 and 2015 held senior positions at the Korea Institute of Geoscience and Mineral Resources (“KIGAM”). In July 1999 he introduced himself via e-mail to Dr Güralp. Dr Chi then was head of the Earthquake Research Centre at KIGAM. GSL already had conducted some business with KIGAM but only on a limited basis. Over the course of the following 3 years Dr Chi developed a relationship with GSL via correspondence both with Dr Güralp and Natalie Pearce.

In June 2002 Dr Chi visited the offices of GSL in this country. Ostensibly this visit was intended to allow Dr Chi to meet technical staff at GSL and to discuss future legitimate dealings between KIGAM and GSL. In fact the visit was used as the opportunity to open discussions on the creation of a corrupt relationship between Dr Chi and GSL. Later in June 2002 a draft agreement was created in which a “technical advice fee, $500” was to apply to orders from the Republic of Korea. In February 2003 Dr Güralp and Dr Chi signed an agreement whereby Dr Chi agreed to provide support and advice to GSL in the seismological market in Korea and to recommend GSL products to those requiring seismology equipment and expertise.

Over the course of the following 12 years GSL made payments to Dr Chi totalling $1,034,931. Between 2003 and 2009 eight separate cash payments totalling $70,451 were made to Dr Chi. Sometimes the cash was handed to Dr Chi when he was visiting the UK offices of GSL. On two occasions Dr Chi asked that someone from GSL should go to Heathrow Airport in order to hand over cash to him there. Between 2005 and 2015 payments were made by bank transfer to an account held by Dr Chi at Bank of America in the United States. There were 31 such payments totalling $964,480.

The nature and extent of Dr Chi’s relationship with GSL was kept secret. Self-evidently payment in cash of so-called advice fees involved secrecy. Dr Chi made it clear to Dr Güralp and Natalie Pearce that they were to be circumspect about the payments when in contact with his colleagues at KIGAM. Dr Chi deleted e-mails which referred to advice fees and to assistance being provided by him to GSL. On one occasion confirmation of payment by GSL of advice fees was achieved by an e-mail which simply stated “yes, done”. Payments to Dr Chi’s United States bank account avoided any scrutiny by the Korean Government of that aspect of his financial affairs.

After the coming into force of the Bribery Act on 1 July 2011 GSL addressed the issue of an anti-bribery and corruption policy with the assistance of an external law firm. This concentrated the minds of those involved in the dealings with Dr Chi. Andrew Bell was responsible for authorising the payments to Dr Chi at this point. He and Natalie Pearce agreed a form of words on invoices raised in relation to advice fees, namely “invoice for technical consultancy on parametric information and product development”. Dr Chi was advised as to this form of words and used it on all invoices submitted thereafter. The words used were deliberately opaque. In an e-mail he sent to Natalie Pearce who had devised the form of words Andrew Bell said “perfect, no-one will ever understand any of that.”

In return for these payments Dr Chi provided assistance to GSL in four areas. First, Dr Chi’s position at KIGAM meant that he was able to recommend GSL’s products to other public and quasi-public companies in the Republic of Korea. GSL would have been able to market its products and expertise without the intervention of Dr Chi. But Dr Chi’s assistance was significant and led to sales which otherwise would not have occurred. As part of the assistance given by Dr Chi, he promoted GSL products during a period between 2006 and 2008 when they were experiencing problems with computer systems. Despite those problems he attested to the reliability of GSL’s systems.

Second, Dr Chi advised GSL on pricing strategy and on public sector procurement practices within the Republic of Korea. For instance, in 2003 he explained to GSL that the overarching public procurement body held records of prices paid on government orders and that as a matter of course would seek a lower price on later contracts. Thus, he artificially increased the list price for GSL as submitted by him to the public procurement body. He also advised GSL that it should not offer a discount to any customer in Korea. Because records were kept of prices and because purchase departments could obtain those records, a discount to one customer would lead to a reduction in the price chargeable by GSL in relation to all customers.

Third, Dr Chi was in a position to influence the technical specifications required of seismic equipment because KIGAM was responsible for issuing certificates for such equipment. The requirements were set so that they corresponded with the specifications of GSL’s equipment. In 2010 another Korean government institution was given the power to issue certificates. Whereas KIGAM only certified GSL’s equipment, the other institution initially certified equipment from other companies. This changed when Dr Chi ensured that the other body with the power to certify agreed that the test results from both institutions should be the same.

Finally, Dr Chi provided GSL with confidential information e.g. a presentation provided by one of GSL’s competitors to KIGAM and details of a rival company’s pricing policy.

In substantial part because of the assistance given by Dr Chi as part of his corrupt relationship with GSL, GSL’s revenue from contracts in the Republic of Korea grew significantly between 2003 and 2015. In the year ending January 2003 revenue barely exceeded £20,000. By 2015 it had increased to an annual figure of over £1.45 million. Although not all of this increase was tainted by the corrupt relationship with Dr Chi, it has been calculated that the total gross profit attributable to corruption over the relevant period is £2,069.861.00.”

Based on these “facts” and prior to the “imminent” individual trials based on the same core conduct, Justice Davis concluded that the GSL DPA “met the interests of justice.”

Nevertheless, Justice Davis did remark that aspects of the DPA were “unusual and/or which are different to any previous DPA approved by [a U.K.] court. As stated by Justice Davis:

“[T]the agreement requires disgorgement of gross profit of £2,069,861.00 but no timetable is set within the agreement. All other DPAs which have been approved by the court either have required almost immediate payment of any financial penalty or have set a clear timetable of payments on defined dates. In this instance GSL’s financial position does not permit such a timetable to be set. Rather, the agreement is that GSL will pay the total due by the fifth anniversary of the date of the agreement. Having been directed to the financial statements relating to GSL made available at the private hearing on 10 October 2019, I am satisfied of two matters. First, a specific timetable is not a practicable option in this case. Second, there is a sensible prospect that, by the end of the term of the agreement, the financial position of GSL will have permitted payment of the disgorgement figure. The profit and loss and the cash flow forecasts for the years 2019 through to 2024 demonstrate a gradually improving picture over the course of that five years. Self-evidently forecasts are just that i.e. the best estimate that can be given based on certain assumptions. I am persuaded that these forecasts are sufficient to justify the lack of any timetable from the DPA.

[T]he agreement acknowledges the possibility that GSL, notwithstanding the forecasts to which I have referred, will not be able to meet the disgorgement figure within the term of the agreement. In those circumstances, it could be that application would be made under Paragraph 10 of Schedule 17 to vary the agreement. It is very unusual for a DPA to be approved on the basis that its terms might not be met. Equally, the circumstances pertaining to GSL are unusual. It also must be recognised that another consequence of GSL failing to meet the terms of the agreement might be that the company will be prosecuted. In those circumstances the agreement fulfils the requirement of fairness and proportionality.

[T]he agreement does not provide for payment of any financial penalty. In the case of Sarclad, the appropriate penalty by reference to the guideline was £8.2 million after discount for plea. The court in that case recognised that such a financial penalty was unrealistic for Sarclad. The interests of justice did not require the company to be pursued into insolvency. The SFO calculated that Sarclad in fact would have available £352,000 to meet a financial penalty. That was the figure identified in the DPA and approved by the court. Here the SFO are satisfied that GSL cannot sensibly meet any penalty over and above the disgorgement sum and the DPA does not provide for any financial penalty. By reference to the guideline and allowing for a 50% discount, the financial penalty in this case ought to be around £3 million. The position here is not different in principle to that which obtained in Sarclad. There is a difference in perception between payment of £352,000 and no payment at all. In reality the distinction is non-existent. Sarclad ought to have paid a penalty of over £8 million but agreed to pay only £352,000. GSL’s notional penalty is barely a third of that which Sarclad ought to have met. The fact that GSL is not to pay any penalty does not set any new precedent. The approach is the same as was taken in the case of Sarclad. The court was satisfied that the overall sum payable in that case was fair, reasonable and proportionate. I reach the same conclusion in this case.”

As to the “failure to prevent bribery offense,” Justice Davis did not elaborate on this aspect of the matter, but the SFO’s “Statement of Facts” state:

“Failure to prevent bribery between 1 July 2011 and 15 September 2015:

“GURALP SYSTEMS LIMITED between the 1st day of July 2011 and the 15th day of September 2015, failed to prevent employees of Guralp Systems Limited from bribing another person, namely Dr Heon-Cheol Chi at the Korea Institute of Geoscience and Mineral Resources, intending to obtain or retain business for Guralp Systems Limited, or to obtain or retain an advantage in the conduct of business for Guralp Systems Limited.”

Prior to 2012, GSL had not adopted any Anti-Bribery and Corruption (“ABC”) policy, did not routinely offer ABC training to its staff, save for the presentation on 18 November 2011 mentioned in paragraph 51, and did not undertake any due diligence of its agents and distributors for the purpose of preventing bribery and corruption.

After the Bribery Act 2010 came into force on 1 July 2011, the new majority shareholder of the parent company of GSL arranged for a law firm to deliver a presentation on the new legislation to GSL. That presentation took place on 18 November 2011. Following the presentation, Andrew Bell (then Finance Director at GSL) was tasked with preparing an ABC policy, which was subsequently agreed by the Board on 27 July 2012. Neither the presentation nor the ABC policy was effective in preventing the arrangement with Dr Chi continuing.

Andrew Bell, in his capacity as Finance Director, continued to authorise GSL’s finance department to make payments to Dr Chi after he had devised GSL’s ABC policy in 2012 and whilst he was caretaker Managing Director at GSL from November 2013.

In May 2012, Natalie Pearce and Andrew Bell agreed the form of words to be used by Dr Chi when raising invoices for the advice fees to GSL. The wording was vague: “Invoice for technical consultancy on parametric information and product development”. Andrew Bell’s reply to Natalie Pearce’s proposed form of words is consistent with them having deliberately chosen vague wording for Dr Chi’s invoices: “Perfect !! No one will ever understand any of that!” Dr Chi subsequently used that wording when submitting all of his invoices to GSL between 30 May 2012 and 20 April 2015.

GSL did not take any action to terminate the arrangement with Dr Chi until 15 September 2015, when the new Executive Chairman, upon becoming aware of the potential issues with the relationship, took prompt action in conjunction with other members of the senior management of GSL to stop any further payments to Dr Chi and to terminate the arrangement with him (this does not include Dr Güralp, Natalie Pearce and Andrew Bell).”

Regarding the individual acquittals, as stated in this article:

“The acquittals … are the latest instance of the SFO failing to secure individual prosecutions following such a settlement, known as a deferred prosecution agreement.

Deferred prosecution agreements allow prosecutors and companies to settle criminal charges without going to trial. In the U.K., such agreements are sealed pending the prosecution of any individuals. Once unsealed, the agreements often contain the names of the individuals alleged to have been involved in the misconduct—even if they managed to clear their names at trial.

[…]

[The individual’s] lawyers, in individual statements, said they were pleased with the trial’s outcome and criticized the SFO’s agreement with the company, pointing to a divergence between the facts agreed to by its new management and the jury’s verdict.

Syedur Rahman, a legal director at law firm Rahman Ravelli who represented Ms. Pearce, said his client’s acquittal raised questions about the integrity of the deferred prosecution agreement process.

As noted in this article:

“Guralp, who founded GSL in 1987 and established the company’s relationship with Chi, told the court that he thought payments to Chi represented fair remuneration for valuable technical advice and assistance.

Bell said he never spoke to Guralp about Chi and that no “red flags” were brought to his attention. Pearce said she did not believe payments were corrupt.”

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