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The U.K.’s Second DPA Is Much Different Than Its First

SFO

Deferred prosecution agreements (not to mention non-prosecution agreements) are problematic across various points on a spectrum.

As U.S. use of such agreements has demonstrated (see here), alternative resolution agreements allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence (“under prosecution”) while at the same time, because of the “carrots” and “sticks” relevant to resolving corporate criminal liability, facilitate the “over-prosecution” of business conduct in instances in which it is an open question whether a legal violation actually occurred.

In December 2015 (see this prior post as well as several posts embedded therein), the U.K. Serious Fraud Office announced its first DPA against Standard Bank. Given the alleged facts against Standard Bank itself, it seemingly fell on the “over-prosecution” side of the spectrum.

Earlier this week, the SFO announced its second DPA against an unnamed company apparently in the steel industry (according to the SFO, due to ongoing legal proceedings the name of the company and its U.S. parent company were not disclosed). Given the alleged facts, the enforcement action seemingly falls on the “under prosecution” side of the spectrum.

The enforcement action is notable not just because it is the second instance of a DPA being used in the U.K. to resolve alleged corporate criminal conduct, but also because the enforcement action is believed to be just the third so-called “failure to prevent bribery” action under the U.K. Bribery Act involving foreign bribery (with Standard Bank and Sweet Group being the other two). Compared to U.S. use of DPAs, the U.K. model requires early judicial involvement and Sir Brian Leveson, the judge who approved the first U.K. DPA against Standard Bank, was also the judge in this second instance.

This post provides a comprehensive summary of the enforcement action documents released yesterday by the SFO (see here) beginning with “what” was resolved and then “why” it was resolved via a DPA.

In terms of “what” was resolved, the Redacted Approved Judgment, under the heading “The Facts” states:

“XYZ is an SME [small to medium sized enterprise] which, historically, generated the majority of its revenue from exports to Asian markets. Following its acquisition in February 2000, it has been a wholly owned subsidiary of ABC Companies LLC (“ABC”) which is a US registered corporation.

During the period June 2004 to June 2012, XYZ, through a small but important group of its employees and agents, was involved in the systematic offer and/or payment of bribes to secure contracts in foreign jurisdictions. In total, of 74 contracts which were ultimately examined, 28 are said to be “implicated”, that is to say there is specific evidence to suggest that each contract was procured as a result of the offer and/or payment of bribes. It is these which form the subject-matter of the present application.

The way in which these offences were committed was for intermediary agents within a particular jurisdiction to offer or to place bribes with those thought to exert influence or control over the awarding of contracts; this was done on behalf of XYZ’s employees and ultimately the company. It is significant that these were payments which were not part of agency agreements which provided for agents’ remuneration on the basis of commission expressed as a percentage of the contract value in each case. Rather, correspondence shows the payment also of what is described as “fixed commission”, “special commission” and “additional commission”. It is also important to emphasise that there is no direct evidence of any illegal agreement between the agents concerned and the purported recipients of bribes. However, given the context and correspondences between XYZ employees and agents, this DPA preliminary application proceeds on the basis that the various terms used represent euphemisms for bribes. Furthermore, the correspondence further shows that it is the agents who instigated the offer and/or payment of bribes.

Summarising the position, taken together, in the period 2004-2013, a total of £17.24 million was paid to XYZ on the 28 implicated contracts on which bribes were offered. This sum represented 15.81% of the total turnover of XYZ in the period (being £109 million). The total gross profit from the implicated contracts amounted to £6,553,085 out of a total gross profit of £31.4 million (i.e. 20.82%). XYZ estimates a net profit of approximately £2.5 million in respect of the implicated contracts.

It is also appropriate to say something of the involvement of ABC in the business of XYZ which, effectively, on acquisition it rescued. ABC provided support for annual budgeting, marketing and product development while also providing long-term strategic planning, supply chain and global sourcing resources. In 2007, a group-wide health and safety programme was rolled out which remains in place. ABC has also provided services in relation to cost-saving measures, a compliance manual, a code of conduct with online training together with management consultancy along with support in comprehensive environmental health and safety (EHS), corporate HR and internal audit. XYZ paid ABC a total of £2.3 million in management fees over this period. During the period following the February 2000 acquisition, ABC received dividend payments totalling some £6 million. In the circumstances, ABC have agreed to divest a significant proportion of these dividends in the sum of £1,953,085.”

Based on the above, “a potential draft indictment” was drafted setting forth the following offenses:

“Count 1 Statement of Offence Conspiracy to corrupt, contrary to section 1 of the Criminal Law Act 1977

Particulars of Offence XYZ Limited, between the 1st day of June 2004 and the 1st day of July 2011 conspired with [named] and other XYZ agents corruptly to give, agree to give or offer gifts or payments, to other agents, as inducements to secure, or as rewards for having secured, contracts for XYZ Limited, contrary to section 1 of the Prevention of Corruption Act 1906.

Count 2

Statement of Offence Conspiracy to bribe, contrary to section 1 of the Criminal Law Act 1977

Particulars of Offence

XYZ Limited, between the 1st day of July 2011 and the 13th day of June 2012 conspired with [named and] other XYZ agents to offer, promise or give a financial or other advantage, to other persons as inducements to secure, or rewards for having secured, contracts for XYZ Limited, contrary to section 1 of the Bribery Act 2010.

Count 3

Statement of Offence Failure to prevent bribery, contrary to section 7 of the Bribery Act 2010

Particulars of Offence XYZ Limited, between the 1st day of July 2011 and 13th day of June 2012, through its employees or agents, bribed other persons, intending to obtain or retain business for XYZ Limited or to obtain or retain an advantage in the conduct of business for XYZ Limited.”

Under the heading “Investigation,” the Redacted Approved Judgment states:

“By its own admission, prior to 2012, XYZ did not have adequate compliance provisions in place. In order to address this problem, in late 2011, ABC sought to improve matters in its subsidiary by implementing its global compliance programme (in respect of which it should be noted that ABC has invested £3 million to date) within XYZ. It was within the context of this compliance programme that, at the end of August 2012, concerns came to light about the way in which a number of contracts had been secured. XYZ took immediate action: on 4 September 2012, it retained a law firm to undertake an independent internal investigation. Its focus was contracts post-dating 1 January 2006.

While investigating and with the consent of its client, on 2 October 2012, the law firm orally informed the SFO that an as yet unidentified client might be making a selfreport to the SFO. On 13 November 2012, the lawyers met with the SFO and confirmed that XYZ would be making a written self-report following the conclusion of the internal investigation. It was agreed that the written self-report would be submitted to the SFO by 31 January 2013. In the meantime, the law firm was in the process of:

i) collecting, processing and searching over 90GB of electronic data consisting of .pst files from the company server, images of laptop hard drives, and USE/external memory drives;

ii) reviewing over 27,000 electronic records;

iii) collecting and reviewing hard copy documents, including personal notebooks, agency files, contract files, invoices and shipping files; and

iv) conducting 13 interviews of four XYZ employees.

The law firm delivered the self-report to the SFO on the agreed date. It was 39 pages in length and set out details of the evidence identified in relation to 16 implicated contracts. Thereafter, between 26 April 2013 and 14 January 2016, with the full cooperation of XYZ, the SFO conducted its own investigation. Further, through the law firm, XYZ made continuing efforts to investigate and supplement the self-report and, in particular, expanded the scope of the investigation to include contracts before 1 January 2006.

So it was that, in June 2013, the Director of the SFO accepted the case for criminal investigation pursuant to s. 1(3) of the Criminal Justice Act 1987. Following the service of a notice to XYZ issued under s. 2 of that Act, for personal email caches, XYZ submitted a further report providing further information about five additional implicated contracts. A further analysis of material obtained from XYZ’s auditors revealed a large number of references to “fixed commission” on invoices in relation to contracts that had not been identified in the reports. Evidence relating to the agent and other suspects was also seized during searches at the agent’s UK address. The SFO also itself conducted ten interviews under caution, one outside the jurisdiction, and ten interviews under s. 2 with former and current XYZ employees and auditors.

On 27 November 2014, the law firm produced a third self-report on XYZ’s behalf which contained details of 32 contracts which had not previously been identified, seven of those being implicated. This brought the total of contracts to be investigated on suspicion of being obtained as a result of corrupt payments to 74, of which 28 were implicated.

At this stage, it should be noted that the 28 implicated contracts straddle the coming into force of the Bribery Act 2010 (“the 2010 Act”) on 1 July 2011. 24 pre-date and four post-date the 2010 Act, although in relation to two such contracts the agreement to make improper payments would have been concluded prior to 1 July 2011. With this legal complexity in mind and on the basis of the investigation set out above, the Director of the SFO was satisfied that there was sufficient evidence to provide a realistic prospect of conviction against XYZ, in relation to the pre-2010 Act conduct, for an offence of conspiracy to corrupt and, in relation to post-2010 Act conduct, for conspiracy to bribe contrary to s. 1 of the Criminal Law Act 1977 along with an offence of failure to prevent bribery contrary to s. 7 of the 2010 Act. This conclusion was reached in accordance with the full code test set out in the Code for Crown Prosecutors and, therefore, para. 1.2.i(a) of the DPA Code of Practice.”

Under the U.K.’s DPA regime, a judge must access whether the DPA (as opposed to prosecution) is in the “interest of justice.” At the outset, Judge Levenson noted that the proposed DPA was much different than the previous DPA he approved in the Standard Bank action. Judge Levenson stated:

“In one sense, SFO v Standard Bank represented a comparatively straightforward application of the principles and process. This application raises for the first time the problems generated when a modestly resourced small to medium sized enterprise (“SME”) is demonstrably guilty of serious breaches of the criminal law. At what level of criminality is it necessary simply to allow the SME to become insolvent and to what extent is it appropriate to mitigate the financial penalty, knowing that the SME is only able to make any substantial payment with the support of the substantial company of which the SME is a wholly owned subsidiary? On the one hand, allowing the SME to continue to trade (assuming necessary compliance has been put in place) is in the public interest but, on the other hand, nothing must be done to encourage the pursuit of criminal behaviour through a corporate vehicle which can be abandoned as insolvent if necessary.”

In assessing whether the DPA was “in the interest of justice,” Judge Leveson set forth the following factors:

i) the seriousness of the predicate offence or offences;

ii) the importance of incentivising the exposure and self-reporting of corporate wrongdoing;

iii) the history (or otherwise) of similar conduct;

iv) the attention paid to corporate compliance prior to, at the time of and
subsequent to the offending;

v) the extent to which the entity has changed both in its culture and in relation to
relevant personnel;

vi) the impact of prosecution on employees and others innocent of any
misconduct.

Regarding the first factor, Judge Leveson stated:

“There is no doubt that XYZ’s conduct was grave. Not only does the criminality which XYZ potentially faces include failure to prevent bribery in respect of the post-2010 Act conduct, more seriously, it also encompasses conspiracy to corrupt and bribe reflecting substantive offences of bribery.

Moreover, this conspiracy involved a course of systematic conduct over eight years. It implicates seven agents in as many jurisdictions, generated some £6.5 million of gross profit (£2.5 million net) and caused detriment to other potential competitors. It was, therefore, part of XYZ’s established business conduct. These are factors in favour of prosecution and against entering into a DPA (see DPA Code 2.8.1(i)). In terms of gravity, it is of an entirely different order to that considered in SFO v Standard Bank which concerned failure to prevent a single (albeit very substantial) incident of bribery by a sister company in the same corporate family.

There is, however, another side to consider. Although the conduct was endemic and implicated 7 out of the 33 agents with which XYZ dealt, the correspondence shows the great majority of the bribes were offered at the instigation of the agents, albeit with the agreement of XYZ’s employees. Correspondingly, there is no evidence of agents being pressured into giving bribes on behalf of XYZ, thereby putting them at risk of (often very severe) penal consequences in their home countries. Nor, finally, did the bribing mechanism represent anything particularly sophisticated or redolent of a corporate cover-up: the conduct was there for all to see.”

Regarding the second factor, Judge Leveson stated:

“The second feature to which very considerable weight must be attached, reflecting a core purpose of the creation of DPAs being to incentivise the exposure (and selfreporting) of corporate wrongdoing, is the timeframe and sequence of events leading up to XYZ’s self-report to the SFO and the manner in which it adopted a genuinely proactive approach to the wrongdoing it uncovered: see para. 2.8.2(i) of the DPA Code of Practice and Joint Prosecution Guidance to the Bribery Act 2010 (page 7). In that regard, the promptness of the self-report and the extent to which the prosecutor has been involved are to be taken into account: see para. 2.9.2 of the DPA Code of Practice.

In that context it is also important to underline that, had it not been for the self-report, the offending might otherwise have remained unknown to the prosecutor: see para. 2.8.2(i) of the DPA Code of Practice. In that regard, the conduct had lasted eight years without being detected. There is no suggestion of a whistle-blower or any other mechanism whereby the matter might have come to the attention of the authorities.

Furthermore, the weight given to an organisation’s self-report depends on the totality of the information that an organisation provides to the prosecutor: see para. 2.9.1 of the DPA Code of Practice. Specifically, the organisation must ensure in its provision of material as part of the self-report that it does not withhold anything that would jeopardise an effective investigation and, where appropriate, prosecute individuals involved. In that regard, XYZ provided comprehensive information in its initial selfreport, which was the result of an extensive investigation by the law firm. The SFO’s independent investigation effectively confirmed what was stated in that report. XYZ through the law firm subsequently identified further relevant information, as has been set out above, and submitted further reports. The 28 implicated contracts were all identified by internal investigation and the cache of probative emails was volunteered to the SFO on request. 27. Finally in relation to this point, co-operation includes identifying relevant witnesses, disclosing their accounts and the documents shown to them: see para. 2.8.2(i) of the DPA Code of Practice. Where practicable it will involve making witnesses available for interview when requested. In that regard, XYZ provided oral summaries of first accounts of interviewees, facilitated the interview of current employees, and provided timely and complete responses to requests for information and material, save for those subject to a proper claim of legal professional privilege. Taken together, XYZ’s timely self-reporting and full and genuine cooperation militates very much in favour of finding that a DPA is likely to be in the interest of justice.”

Regarding the third factor, Judge Leveson stated:

“The third feature relevant to the interests of justice test concerns the extent of any history of similar conduct involving prior criminal, civil and regulatory enforcement actions against the organisation: see para. 2.8.2 (ii) of the DPA Code of Practice. In that respect, although the conduct at issue was over a period of eight years, XYZ does not have a history of bribery and corruption before that nor has it been the subject of any criminal investigation by the SFO or any other agency, either within the UK or internationally. Further, there is no evidence that the offending is more extensive than that which has been disclosed to the authorities.”

Regarding the fourth factor, Judge Leveson stated:

“The fourth factor refers to the weight which must be given to any corporate compliance programme in place at the time of the offence, at the time of reporting, and any improvement that has occurred (para. 2.8.2 (iii) of the DPA Code of Practice). In that regard, although by its own admission XYZ’s compliance programme was inadequate during the period of the conduct at issue, a new compliance process was put in place from late 2011, prior to the self-report, including the implementation of new training programmes, policies and procedures: it was this programme that led to the discovery of the issues that, in turn, led to the self-report.

It should be noted at this stage that this change in compliance that ultimately led to the self-report was a consequence of the benefit that XYZ derived from ABC’s global compliance programme. A critical fact to which I shall return when discussing the terms of the proposed DPA is that there is no question in this case of the parent company knowingly making profit from its subsidiary’s criminality; neither is there any suggestion (let alone evidence) that ABC should have known about what was going on or behaved otherwise than with complete propriety when it was discovered.”

Regarding the fifth factor, Judge Leveson stated:

“The position of ABC takes me to the fifth and very important factor. It is clear that XYZ in its current form is effectively a different entity from that which committed the offence. This weighs in favour of a proposed DPA being in the interests of justice: see para. 2.8.2 (v) of the DPA Code of Practice. In the period since XYZ identified the misconduct, two senior employees have been dismissed. Relationships with the seven suspect agents were terminated and bids for two suspect potential contracts were withdrawn. At the conclusion of the SFO’s investigation, none of XYZ’s current employees, or Directors, faces criminal charges. As such, XYZ is a culturally different company to that which committed the offences subject to the present DPA application.”

Regarding the sixth factor, Judge Leveson stated:

“The context of the present position of XYZ takes me to the final, sixth, factor which is that account should be taken as to whether a prosecution and conviction is likely to have disproportionate non-penal legal consequences for an organisation or is likely to have collateral effects on the public or the organisation’s employees: see para. 2.8.2 (vi) and (vii) of the DPA Code of Practice. In that regard, quite apart from the fact that prosecuting and convicting XYZ would inevitably lead to significant legal costs and financial penalty at an unfavourable time in the global steel industry, counsel for XYZ has explained that, even without the potentially detrimental effect of a prosecution, the company is currently operating on an ‘economic knife-edge’. In addition, conviction would mean that XYZ would be debarred from participating in public contract procedures in the UK under Regulation 57(1) of the Public Contract Regulations (SI 2015/102) and throughout the EU under Article 57(1) of Directive 2014/23/EU on the award of concession contracts. Taken together, XYZ would risk becoming insolvent (even assuming that such an outcome was not inevitable), harming the interest of workers, suppliers, and the wider community.

Putting these features together, there is no doubt that XYZ’s conduct was very serious both in terms of type and scale so that it is not straightforward that a proposed DPA is in principle in the interest of justice. However, it is important to send a clear message, reflecting a policy choice in bringing DPAs into the law of England and Wales, that a company’s shareholders, customers and employees (as well as all those with whom it deals) are far better served by self-reporting and putting in place effective compliance structures. When it does so, that openness must be rewarded and be seen to be worthwhile.

Furthermore, there is no question but that XYZ spiralled into criminality as a result of the conduct of a small number of senior executives bending to the will of agents. It is also clear that the parent company, ABC, was not only entirely ignorant of what was going on but, as soon as the new compliance programme started to reveal a problem, immediately disclosed it. This last point is of particular significance for if a company is set up to provide an impecunious vehicle through which corrupt payments might be made, the fact that it is liable to face such sanction that it is wound up is a critically important deterrent. It is in those circumstances that investigation of the ultimate owner in relation to an offence under s. 7 of the 2010 Act is inevitable. This case is the very reverse of that situation. Therefore, subject to the proposed overall terms being fair, reasonable and proportionate (which requires taking fully into account the financial circumstances of XYZ), I am satisfied that it is likely to be in the interests of justice that XYZ’s conduct be resolved through the mechanism of a DPA.”

The pertinent conditions of the DPA (a term of at least 3 years and up to a period of 5 years) were as follows:

i) Disgorgement of gross profits of £6,201,085 (of which £1,953,085 will be contributed by ABC being the repayment by ABC of a significant proportion of dividends that it had received from XYZ, albeit entirely innocently);

ii) Payment of a financial penalty of £352,000 being a reasonable estimate of the unencumbered balance of cash available following a review by the SFO of XYZ’s cash flow projections over three years;

iii) Past and future cooperation with the SFO (as further described) in all matters relating to the conduct arising out of the circumstances of the draft indictment; and

iv) Review and maintenance of the organisation’s existing compliance programme …”.

Regarding disgorgement, Judge Leveson stated:

“[Disgorgement] is clearly underpinned by public policy which properly favours the removal of benefit in such circumstances. XYZ made a total gross profit as a result of the 28 implicated contracts of £6,553,085 (and a net profit of £2.5 million). However, as identified above, XYZ has limited means and ability to pay such a sum such that the maximum amount it would be able to provide towards paying any financial obligation imposed without becoming insolvent is estimated to be £352,000.

In this context, XYZ’s parent company, ABC, has offered to provide the necessary financial support should a DPA be agreed. In the initial DPA, disgorgement of profits in the sum of £3.3 million was proposed along with a financial penalty of £1.3 million, making a total financial commitment of £4.6 million. It is important to point out that ABC had offered this support, effectively by way of a long term loan, notwithstanding that no contractual obligation requires ABC to do so; furthermore, it must be underlined that no legal obligation attaches to an innocent parent company which requires it to contribute towards a financial penalty imposed upon one of its subsidiaries for criminal conduct by the subsidiary. Ultimately, of course, the subsidiary can be prosecuted and, if unable to pay an appropriate penalty, wound up.

On the other hand, a parent company receiving financial benefits arising from the unlawful conduct of a subsidiary (albeit unknown) must understand how this will be perceived. In that respect, ABC has received £6 million in dividends from XYZ since acquiring it in February 2000. To its credit, when I raised the matter with counsel for XYZ, as to whether an appropriate proportion should properly be reflected in the terms of any DPA, the proposition was accepted. Thus, XYZ and ABC have jointly agreed that ABC will also return £1,953,085 for XYZ to pay towards disgorgement, which brings the total sum to be disgorged to £6,201,085 which is the total gross profit less the sum of £352,000 available over the period from XYZ’s resources. When combined with the proposed financial penalty, the total properly addresses the ‘removal of gain’ objective, removes any concerns over the extent to which the dividend paid by XYZ to ABC may have been tainted by XYZ’s unlawful conduct and further demonstrates ABC ’s continuing commitment to the DPA process and its support of XYZ.

The proposed DPA further provides for the disgorgement sum to be paid by way of instalments over five years. Payment in that way reflects XYZ’s means and ability to pay and is of obvious benefit in maximising the amount of profit disgorged. This part of the agreement could hardly be improved and is undeniably fair, reasonable, and proportionate: its size will also impact on the financial payment.”

Regarding the financial penalty, Judge Leveson stated:

“Dealing first with culpability (Step 3 of the Guideline), a relevant characteristic that militates in favour of placing an offence in the category of high culpability is that the corporation at issue played a leading role in organised, planned, unlawful activity. In that regard, the evidence against XYZ reveals that approving the offering of bribes was an accepted way of doing business for the company over the relevant time period and knowledge of such conduct was held, and authorised, namely by senior executives who represented its controlling mind.

A second characteristic of high culpability is that the offending was committed over a sustained period of time. That is undeniably the case in respect of XYZ’s conduct. In the extensive period 2004 to 2012, the company was involved in systematically agreeing to offer bribes through agents. Neither can the incidents in this period be considered isolated. During the period at issue, at least 28 contracts were secured after XYZ had agreed to offer a bribe through an agent.

With regard to the offence alleged under s. 7 of the 2010 Act offence, a third high culpability characteristic is a culture of wilful disregard of commission of offences by employees or agents with no effort to put effective systems in place. In that regard, before 2012, there was no attempt on the part of XYZ to put effective systems in place and there was a wilful disregard as to the need to do so, evidenced by the seniority of those involved. The culture prior to 2012 may justifiably be characterised as wilful disregard as to the commission of offences by employees or agents with no effort to put effective systems in place.

For these reasons, the correct culpability starting point is, as the SFO submitted, high.

Turning to harm, for offences of bribery, the appropriate figure will normally be the gross profit from the contracts obtained, retained or sought as a result of the offending. As has been discussed with regard to appropriate disgorgement of profits, in this case, this amounts to £6,553,085. The Sentencing Council Guideline identifies the starting point for a high level of culpability as 300% of the ‘harm’ i.e. gross profit, with a range of 250% to 400%.

It is then necessary to fix the level by reference to factors which increase and reduce the seriousness of the offending. As regards aggravation, the corrupt activity was endemic within XYZ. The 28 implicated contracts accounted for almost 16% (£17.2 million) of total sales between 2004 and 2012. Further, attempts were made to conceal the misconduct. The term “fixed commission” was used to conceal the nature of offers to agents. Finally, the offence was committed across borders and jurisdictions. The 28 contracts involved bribes that XYZ agreed to offer through agents based in Asia and other places.

On the other side of the coin, the mitigating features include the fact that XYZ has no previous relevant convictions nor has it been subject of any relevant previous civil or regulatory action successfully taken against it. Further, XYZ has cooperated fully with the SFO’s investigation, making early admissions voluntarily and reporting the offending to the SFO, and has assisted throughout with the SFO investigation. Finally, it should be noted that offending was committed under a previous management team and immediate remedial steps were taken by XYZ to replace the relevant senior management team and to terminate agreements with six agents identified as being involved in the offering of improper payments; this caused a loss of income as a consequence of two contracts worth £1.7 million being cancelled.

In these circumstances, the parties submitted that the appropriate harm multiplier is 250%. This is at the lower end of the high culpability range and, on a strict application of the Guideline, is lower than can be expected in the light of the serious aggravating factors. The question, however, is academic because, given the amount disgorged, whatever multiplier is chosen and however substantial the discounts, the result is a figure which XYZ simply cannot pay and which would result in its insolvency.

Thus, even taking a multiplier of 250%, the starting point for a financial penalty is just under £16.4 million. According to the guideline, by Step 5, it is then necessary to ‘step back’ and consider the overall effect of its orders such that the combination achieves “removal of all gain, appropriate additional punishment and deterrence”. Having reached a conclusion as to the appropriate financial penalty based on the guideline, para. 5(4) of Schedule 17 of the 2013 Act mandates that the financial penalty must be broadly comparable to the fine that a court would have imposed for the alleged offence following a guilty plea: this is Step 7 in the guideline and follows the exercise of ‘stepping back’. Although that will be the ordinary course, given that the financial penalty in this case will be substantially limited by ability to pay, it is in the interests of justice to apply the relevant discounts (Step 7) before ‘stepping back’ (Step 5).

Looking to the discount following a guilty plea, it is necessary to take into account the appropriate reduction in accordance with s. 144 of the Criminal Justice Act 2003 and the relevant guideline (issued by the Sentencing Guidelines Council). In particular, under s. 144(1)(a) and (b) of the Act, a court must take into account the stage in the proceedings the offender indicated his intention to plead guilty and the circumstances in which the indication was given. Given the self-report and admission, under the guideline, a full reduction of one third is justified and appropriate. In addition, given that the admissions are far in advance of the first reasonable opportunity having been charged and brought before the court, that discount can be increased as representing additional mitigation. In the circumstances, a discount of 50% could be appropriate not least to encourage others how to conduct themselves when confronting criminality as XYZ has. On the face of it, that reduces the figure to £8.2 million.

It is now necessary to step back and consider all the circumstances both in accordance with Step 5 of the guideline and generic sentencing practice. There is no doubt that the value, worth and available means of XYZ fall to be considered together with the  impact of the financial penalties including on employment of staff, service users, customers and local economy (but not shareholders). In addition, the full financial impact of this offending on XYZ is relevant. This is also clear from ss. 142 and 164 of the Criminal Justice Act 2003 (“2003 Act”) which deals with the need to have regard to the principles of sentencing, the seriousness of the offence and, when imposing a fine, the means of the offender.

Thus, although gross profit is an appropriate starting point when initially calculating the fine, it cannot be the only denominator when stepping back. All the financial circumstances must be taken into account, including profitability: see section 164(4) of the 2003 Act and SFO v Standard Bank, at [54], importing the approach of the Court of Appeal in the environmental offending context in R v Thames Water Utilities Ltd [2015] EWCA Crim 960, at [40i]. Furthermore, although not a feature which can or should be taken into account as a mitigating factor to reduce the sums that it is otherwise appropriate to pay, it is relevant (as a measure of the commitment to improve and the extent of co-operation) that XYZ(with the financial assistance of ABC by way of further loan) has spent some £3.8 million in fees arising from the responsible steps it has taken through its own investigation, self-reporting, cooperating with the SFO and completing what might be described as a thorough ‘selfcleansing’ process.

Quite apart from these fees, it is appropriate to have regard to the sum which XYZ is prepared to disgorge and the agreed fact (following proper investigation by the SFO) that only some £352,000 is potentially available to XYZ to provide towards any financial obligation, the balance being provided through support from ABC. Taking into account the sum to be disgorged of £6,201,085, a financial penalty of £352,000 leads, as I have said, to a total which equates to the gross profit on the implicated contracts. These sums could have been calculated differently, for example by reducing the disgorgement by £1 million and increasing the financial penalty by a similar amount.

In the event, I am quite content that the £352,000 represents the sum which SFO accountants accept is a reasonable estimate of the sum that will be available to XYZ without help from ABC and it is appropriate to express the figures in this way albeit that the fine looks extremely modest: the sums must be taken together. As with disgorgement, payment by instalments does no more than reflect means and ability to pay and the arrangement is also fair, reasonable and proportionate.”

In conclusion, Judge Leveson stated:

“It might be thought that the outcome of this case has been only to remove from XYZ the gross profits which flow from its criminality and that little can be achieved by way of deterrence by not imposing a much more substantial penalty for such egregious criminality. In this case, which can be considered exceptional, the critical question was whether XYZ should be forced into insolvency bearing in mind the self-reports, the sterling assistance provided by ABC (whose conduct has been exemplary in these very difficult circumstances and which should be seen by its customers, shareholders and employees as revealing the highest standards of corporate integrity), the compliance mechanisms now put in place and the fact that all those facing prosecution no longer work for XYZ and that the company is operating effectively and in the public good.

Once it was decided that it was in the public interest that XYZ should not be forced into insolvency, what was fair, reasonable and proportionate fell to be considered in the context of the work put into the company to ensure that it was viable and operated in accordance with the law, the expense incurred and whether sufficient financial assistance could be sought to ensure that the criminality had not led to profit. By disgorging or paying by way of financial penalty the total of gross (as opposed to net) profit and by doing so by incurring long term liability to ABC (save for ABC ’s reimbursement of the dividends it received), I believe that the conclusion is fair, reasonable and proportionate. This is not least because it provides an example of the value of self-report and co-operation along with the introduction of appropriate compliance mechanisms, all of which can only improve corporate attitudes to bribery and corruption.

Before parting from this case, it is worth adding that nothing I have said should be taken as indicating that the courts take anything other than a stern view of this type of offending. Individuals who are involved in wholesale corporate corruption and bribery can expect severe punishment and, absent exceptional circumstances such as obtain in this case, corporations set up or operated in that way are unlikely to survive. Analysis of the guideline underlines the likely approach of the court when prosecutions follow with punishment and deterrence being at the forefront of the sentencing decision.

[T]he particularised judgment may not be reported until the conclusion of criminal proceedings. In order to assist the development of DPAs and for the purpose of revealing the approach of the court in circumstances such as obtain in this case, I approve this redacted extract for publication. When the criminal proceedings are ended, it should be replaced with the full judgment which identifies the facts forming the background to this agreement in far greater detail.”

Elsewhere in concluding remarks, Judge Leveson stated:

“ABC was entirely ignorant of what had been happening at XYZ and its conduct when it had intimation of the facts has been beyond reproach. Its behaviour and its support for XYZ have been important features in allowing the case to be resolved in the way in which it has. Furthermore, I repeat from the preliminary judgment (at [45]): “… it is important to send a clear message, reflecting a policy choice in bringing DPAs into the law of England and Wales, that a company’s shareholders, customers and employees (as well as all those with whom it deals) are far better served by self-reporting and putting in place effective compliance structures. When it does so, that openness must be rewarded and be seen to be worthwhile.”

Having said that, however, any evidence that a parent company has set up a subsidiary as a vehicle through which corrupt payment may be made so that the company can be abandoned in the event that the payment comes to light is likely to lead to prosecution of the parent company under s. 7(1) of the Bribery Act 2010. The onus will then pass to the parent company to establish the defence under s. 7(2) of having in place adequate procedures designed to prevent associated persons from undertaking bribery. A preexisting plan to behave corruptly through the subsidiary would obviously be treated as a seriously aggravating feature.”

In this release, SFO Director David Green stated:

“This case raised the issue about how the interests of justice are served in circumstances where the company accused of criminality has limited financial means with which to fulfill the terms of a DPA but demonstrates exemplary co-operation. The decision as to whether to force a company into insolvency must be balanced with the level and nature of co-operation and this case provides a clear example to corporates. The judgment sets out the considerations in detail and endorses the approach we took. As with the first DPA with Standard Bank, the judgment provides clear and helpful guidance.”

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