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What Others Are Saying About The Standard Bank Enforcement Action

Several posts this week have gone in-depth regarding various aspects of the U.K.’s recent enforcement action against Standard Bank. This post highlights what others are saying about the enforcement action.

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In this speech [1], Ben Morgan (Joint Head of Bribery and Corruption and the U.K. SFO) stated:

“The implications of [the SB enforcement action] are significant for all sorts of different stakeholders, not least honest businesses wanting to trade legally, and I know that the documents associated with the DPA will be studied closely and become the subject of much analysis and comment. I am going to use this opportunity to share three early thoughts from our perspective at the SFO: The case itself / what we’ve learned about using DPAs / and the significance of the first section 7 charge under the Bribery Act.

First, the case itself. I don’t really want to say much about this at all in terms of the specific facts or parties involved. The conduct in question has been dealt with appropriately, and I have no wish to advertise it any further than that. It is done, and we are busy looking at other comparable cases. But there are a couple of points of general applicability that do bear consideration for a moment. First, the decision of the bank in question to participate in DPA negotiations at all. It is maybe strange for a prosecutor to say – but credit to the parties involved for the way they have dealt with a corruption incident once it has surfaced. The bank, certain of its employees and its advisers (Jones Day and Herbert Smith Freehills) have had the courage to innovate where others will now follow. They have participated in a criminal justice process that arguably has resulted in a better outcome for all involved, including the bank itself but also the people of Tanzania who will have over $7m of their money returned to them, and UK taxpayers. For my part, that process has been an example of what I had hoped would become commonplace: In the right circumstances, it is possible for the SFO to work constructively with responsible companies and advisers who engage genuinely with us. That was certainly the case in this matter.

Lord Justice Leveson has commented in detail on this first use of the DPA legislation. His judgments will be of enormous assistance to the business and legal communities for some time and I will refer to it several times today. But on this point he is very clear:

“I add only this. It is obviously in the interests of justice that the SFO has been able to investigate the circumstances in which a UK registered bank acquiesced in an arrangement (however unwittingly) which had many hallmarks of bribery on a large scale and which both could and should have been prevented. Neither should it be thought that, in the hope of getting away with it, [the bank] would have been better served by taking a course which did not involve self-report, investigation and provisional agreement to a DPA with the substantial compliance requirements and financial implications that follow. For my part, I have no doubt that [the bank] has far better served its shareholders, its customers and its employees (as well as all those with whom it deals) by demonstrating its recognition of its serious failings and its determination in the future to adhere to the highest standards of banking. Such an approach can itself go a long way to repairing and, ultimately, enhancing its reputation and, in consequence, its business.”

[…]

The second general point is just to explain the nature of the suspended indictment, to set the scene. As I have said, the charge is a section 7 Bribery Act offence – the first charged, as it happens – in which the bank has taken responsibility for failing to prevent alleged bribery by persons associated with it in another jurisdiction. Those persons made payments to a local third party, and as Lord Justice Leveson notes in his judgment, the “only inference” is that in doing so they intended the payment to induce government officials to show favour to the commercial proposal the group had, which was to take a mandate to raise funds on behalf of the government. Each case will be specific of course, but we now know that this kind of arrangement is at least conceptually one that the court will consider capable of being dealt with by a DPA. There are lots of other features that were relevant to this particular case, as I will come on to, but I think it is helpful that we have this example. The model of a company appointing local agents is a common one and while there can be good honest reasons for doing so I am certain we will see many more examples where the model has, at the very least, raised a strong inference of corruption. That is capable of creating potential liability for corporates connected to this jurisdiction, and that potential liability is at least capable of being resolved by a Deferred Prosecution Agreement.

[…]

What have we learned about using DPAs? Several important things. Significantly, that the court will quite rightly analyse in detail the first question it has to tackle which is, whatever the proposed terms, is the case generally one that it is likely to be in the interests of justice to resolve by way of a DPA?

From this case, Lord Justice Leveson identifies four relevant features in this respect; the seriousness of the conduct, the way in which the organisation behaved once it became aware of it, any history of previous similar conduct, and, in this case, the extent to which the current corporate entity has changed from the one at the relevant time.

It seems to me that the second of these – the way in which the organisation behaved once it became aware of the conduct – is particularly worth noting at a conference on managing risk, for this reason: it is something that even after the problem has occurred and the harm is done, it is still possible to influence in a positive way. Companies and their advisers would do well to reflect on those things that Lord Justice Leveson identifies as having influenced the court’s assessment of the public interests of justice under this head: As the judge says:

“The second feature to which considerable weight must be attached is the fact that [the Bank] immediately reported itself to the authorities and adopted a genuinely proactive approach to the matter…In this case the disclosure was within days of the suspicions coming to the Bank’s attention, and before its solicitors had commenced (let alone completed) their own investigation.”

He goes on to highlight certain features of what happened next – there was an investigation by the Bank’s advisers sanctioned by the SFO; the Bank fully cooperated with the SFO from the earliest possible date by, among other things, providing a summary of first accounts of interviewees, facilitating the interviews of current employees, providing timely and complete responses to requests for information and material and providing access to its document review platform.

We have been saying for some time that we thought the bar on cooperation would be a high one if it is to satisfy the court that a DPA is in the interests of justice, and, in this case at least, that appears to have been right. As I have previously said, from our position we observe two schools of practice emerging in the corporate and legal markets: those who choose to take that approach and genuinely engage with us; and those who are stuck in the past, either pretending to do so and trying to game the system, or outright rejecting it. In the past, we used to see internal investigations that were kept from us right until the end, and culminated in a “whitewash” document, intended to put the matter to bed before we had even looked at it. I think people have realised they are a waste of money, and we don’t see them so often any more. They are virtually extinct.

These days we are more likely to see investigations led by law firms taking place in parallel with ours. They will litter their correspondence with pledges of cooperation, but in fact seek to hinder, delay and generally disrupt what we are doing: we see these efforts for what they are, too, “pseudo-cooperation”. There is no magic language that can be sprinkled over lawyers’ correspondence that changes our assessment of the substance of the cooperation a company has actually offered. And when it comes to a DPA, that assessment is crucial. We will only invite a company into DPA negotiations if our Director is persuaded that they have offered genuine cooperation. And this is because we have now had confirmed what we thought all along, namely that the court will be asking the same question. We are not prepared to risk compromise to the DPA process or our credibility as a user of it by putting forward cases to the court that are anything less than 100% appropriate.

What will happen then to the so-called “pseudo-cooperation” investigations? They are not yet extinct, but investigations of this nature are on the ‘endangered species’ list. People are starting to understand that they, too, are a waste of money.

Every law firm we deal with tells us their corporate client is going to cooperate fully with our investigation. Only a percentage of them actually do, in our assessment. So, the message for you is, if your instructions to your external lawyers are to cooperate with us, make sure they are really doing that. Others are.

And that means – prompt reporting, scoping and conducting your own investigation in conjunction with us, taking into account our interests in doing so and providing access to the kind of material we need to test the quality of evidence gathered and your own conclusions on it. You should also remember that we will have at the forefront of our mind – and so you should too – the justice of the case as it concerns other parties, in this jurisdiction or others. Hopefully, after all that is said, actually not much of this is news to you.

Finally – what, from the SFO’s perspective is the significance of the first section 7 offence under the Bribery Act. It is twofold – first in relation to identifying the offence itself, and second in relation to adequate procedures.

For me, this case should act as a wake-up call for those of you who are aware of similar situations, in any sector. I think it is quite easy to over-analyse circumstances surrounding the predicate bribery offence that an organisation may have failed to prevent. It is maybe tempting to lend weight to competing theories about what the role of a third party was; what a payment was really for; what the intention of making it was; why there doesn’t seem to be much evidence of work done for the payment and so on.

Something that struck me from this case is how simple it can be to spot corruption. That the underlying arrangements were corrupt was, the judge found, “the only inference”. For my part, I think juries too would find it straightforward to see the corruption in arrangements like the one in this case. The trite line from investigation reports that “there is no evidence to conclude that X took place…” can come across as rather disingenuous where there are very strong inferences that X took place, and those inferences are ones that people objectively assessing a situation might be quite comfortable drawing. So whether you work for a company or are an adviser, if you know about similar conduct, you are on notice that yes – that is what bribery looks like and, yes, if you failed to prevent it that is a criminal offence. It might be worth taking a step back from the layers of analysis and advice, and seeing what’s staring you in the face.

And that leaves us with adequate procedures. Is there a legitimate defence if a section 7 offence has taken place? I expect there will be cases where the defence is actually contested at trial from which we will perhaps all learn more, but again part of me wonders whether this is an area that suffers from too much navel-gazing.

Where the risks and red flags are prevalent, it seems to me no amount of just sticking to a policy is going to be adequate, in the final reckoning. What is really needed is a culture in which people are able to spot what is in front of them, and react to it. The question people exposed to high risk situations need to ask themselves shouldn’t be, “Have I got a policy in place that makes this ok?”, but rather, “Is this, in fact, ok?”.

The observations Lord Justice Leveson makes in his judgment tend to support this. I acknowledge it is not intended to be an exposition on this eagerly anticipated point, and nor in the circumstances could it have been. But it seems to me that the effectiveness of an organisation’s procedures should be judged by how things manifest themselves in a particular transactional context, not in the abstract. The quality of an organisation’s compliance culture isn’t defined by how much money it has spent on trying to implement it, or how earnestly people at the top talk about it, but rather by how people at the coal face actually live it.

So those were my three observations: on the case itself; on the use of DPAs; and on the section 7 offence.

I’d like to close with a final thought. For many reasons the advent of the use of DPA legislation is a positive thing for our justice system, and at this particular moment it is something you will probably continue to hear us talk about and that will receive plenty of coverage – both positive and negative no doubt – from other quarters. The reason we will keep explaining our take on the process is that we want it to work. Parliament created it, and we along with colleagues at the CPS have the responsibility to deliver it. But please don’t mistake our willingness to go down this route on this case for a desire to force a DPA onto every corporate case that we take on. In some, quite specific situations they will be appropriate, and we will always have in mind their possible use, but they are not the answer to everything. It is a high bar, for a DPA to be suitable, and where it is not met we have the appetite, stamina and resources to prosecute in the ordinary way.”

[Commentary. It was strange for Morgan (who prior to joining the SFO worked at various large law firms) to say that SB’s lawyers had the “courage to innovate” by voluntarily disclosing to the SFO.  Let’s call a spade a spade – the lawyers benefited as well from the disclosure and let’s not forget – in the words of the Judge – SB voluntarily disclosed “within days of the suspicions coming to the Bank’s attention, and before its solicitors had commenced (let alone completed) its own investigation.” In the minds of many, SB’s disclosure would not be “innovative”, but rather premature, careless and indeed reckless. Morgan’s speech was also selective in that he failed to address numerous alleged aspects of the overall conduct and circumstances relevant to Sec. 7’s “failure to bribery” offense.]

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Several law firms published client alerts and publications about the SB enforcement action. Many of these were merely descriptive of what happened, but others were more analytical and the below alerts/publications caught my eye.

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In this client alert [2], Eoin O’Shea (Reed Smith) wrote:

“The compensation and disgorgement elements seem reasonable in the circumstances. But I am not so sure about the actual level of penalty. The court found that the culpability in this case was closer to “high culpability” than to “medium culpability” and came to a penalty figure by multiplying the $8.4 million fee to Standard by 300%, yielding $25.2 million. This was reduced by a third to reflect a (notional) guilty plea, yielding $16.8 million.

Of course these are matters where courts have a good deal of discretion. Nevertheless is this case really one of “high” culpability? Payments to government officials are serious offences but the bank wasn’t actually accused of paying anybody. It was only accused of failing to prevent bribery. A failure to prevent wrongdoing by third parties is not a crime of intent, recklessness or even negligence. It involves no proof of mens rea by the accused. Indeed, in this case there was insufficient evidence to prosecute any staff at the bank.

The judgment recognised that the offence is “not a substantive bribery offence” (as stated in the DPA Code) but appears to have given this little weight in considering culpability.

[…]

The issue of whether the company might have had a defence of “adequate procedures” to a section 7 charge was also considered by the court, albeit briefly, when considering culpability. The discussion here is disappointing because it focusses on the specific compliance problems connected to the conduct in Tanzania, rather than whether there was an effective anti-bribery policy or culture across the bank as a whole. I’m not sure this is the right approach. When sentencing an organisation, it is relevant to consider whether the misfeasance was a case of “a few bad apples” or more widespread systemic failings. If the latter, the culpability may be higher than the former.

At one point the judge observed: “Although there were bribery prevention measures in place, these measures did not prevent the suggested predicate offence”. If the adequate procedures defence was actually in issue (in a trial) this would be a dangerous example of begging the question. The question of whether ABAC procedures were, in general, adequate cannot be determined by whether the particular bribes charged have slipped through the net. If it could be, then no commercial organisation would ever be able to invoke the defence.

Given the context of the discussion, it’s likely that the judge did not intend this statement to be any more than an observation on culpability when considering a possible sentence. But it’s the sort of language that invokes sharp intakes of breath among those working in bribery law.”

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This Cordery piece [3] notes:

“As regards the 3-year period of the DPA this is perhaps a little higher than what might be expected. By way of comparison, monitorships were popular in the US, but, seem perhaps to be declining in popularity in the US. In 2014 we understand that only one was put in place in the Avon settlement, and then for only 18 months. The US Department of Justice have given 3-year terms, for example in the HP case, but that would seem to be almost the higher end of what might have been expected.”

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 This Gibson Dunn publication [4] states:

“Key outstanding questions relating to the operation of the regime for DPAs

The application of DPAs in cases requiring proof of mens rea

The offence under section 7 of the Bribery Act 2010 which forms the basis of the Standard Bank DPA is an offence of strict liability, which does not require the prosecutor to establish any mental element on the part of the defendant organisation.  Rather, the offence is established where a person who is shown to be “associated” with the relevant commercial organisation is proven to have committed an act of bribery intending thereby to obtain or retain business or a business advantage for the commercial organisation.  The only relevant mental element is that of the associated person, not that of the defendant organisation.

This is highly significant in the context of the DPA regime, as a prosecutor considering a DPA must be satisfied that the evidential test is met (see above).  In cases unlike those under the section 7 offence requiring proof of mens rea on the part of the defendant corporation, this will require the SFO to be satisfied that the U.K. requirement that the relevant mens rea be attributable to a person representing the “controlling mind” of the company (the “attribution test”) is either met or capable of being met upon further investigation.  Satisfying the attribution test, however, usually requires prosecutors to find a senior corporate executive or board member who can be shown to have had the requisite mens rea.  As SFO Director David Green QC has stated, email communications can often be traced no higher than middle management ranks and rarely implicate senior corporate officials, with the result that companies themselves are often protected from criminal liability for wrongdoing by employees.

This test is plainly more difficult for prosecutors to meet than U.S. respondeat superior principle, which frequently leads to a company being fixed with criminal responsibility for the conduct of low-level employees being imputed to a company as long as that conduct was within the scope of their employment.

In practice, the attribution test may well operate as a natural barrier to the SFO’s ability to extend the reach of the DPA regime beyond the strict liability section 7 offence.  It will be interesting to see whether forthcoming DPAs will extend to offences involving proof of mens rea.  Indeed, an open question is whether the SFO and the courts might consider that the involvement in wrongdoing of the kinds of senior officials necessary to meet the attribution test would militate strongly in favour of prosecuting a corporate entity, rather than offering it the benefit of a DPA.”

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What is also clear is that the SFO is determined to ensure that DPAs are not seen as a form of “soft option” for corporate wrongdoers.  The application of a financial penalty of $16.8 million is among the highest fines imposed in enforcement of UK criminal laws.  It is also the largest fine ever imposed for corruption in the UK.  When set alongside the disgorgement, compensation, costs, co-operation and compliance obligations also imposed on Standard Bank, it is clear that the agreement of a DPA will have serious consequences for the defendant organisation.  Indeed, the overall package of financial obligations (penalty, disgorgement, compensation and costs) is the second highest ever imposed for corruption, trailing only behind the £30.5 million (today equivalent to close to $46 million) imposed on BAE in 2010.”

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There is no allegation of knowing participation in a positive offence of bribery alleged against Standard Bank, or even against any of its employees.  The offence is limited to an allegation of failure to prevent bribery committed by associated persons (namely, its sister company with which it was jointly dealing with the Government of Tanzania, and employees of that sister company), and having inadequate systems to prevent associated persons from committing bribery.

It is notable in this respect that among the inadequacies in Standard Bank’s procedures referred to in the Statement of Facts and in the judgment were its insufficient training of its own employees about their relevant obligations and the absence of necessary procedures when two entities within the Standard Bank group were involved in a transaction and where one such entity engaged a third party consultant to deal with host state government entities.

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The adequate procedures defence

Due to the need … to satisfy the evidential test set out in the DPA Code, as the offence in this case fell under section 7, the SFO and Lord Justice Leveson were required to consider not only whether Standard Bank had failed to prevent the acts of bribery of its subsidiary and the latter’s employees, and whether this had been done with an intent to secure business or a business advantage in Standard Bank’s favour, but also whether Standard Bank would have available to it the “adequate procedures” defence in section 7(2).  In this regard they considered Standard Bank’s existing procedures to prevent the bribery in question.

Standard Bank was found by the SFO not to have adequate measures in place to guard against the risk of potential corrupt practices known to affect this type of business.  It appears from the judgment that the SFO and the Court considered relevant in this respect the following matters:

(i)   “The applicable policy was unclear and was not reinforced effectively to the Standard Bank deal team through communication and/or training.  In particular, Standard Bank’s training did not provide sufficient guidance about relevant obligations and procedures where two entities within the Standard Bank Group were involved in a transaction and the other Standard Bank entity engaged an introducer or a consultant.

(ii)   that Standard Bank relied on SBT, “a sister company in respect of which Standard Bank had no interest, oversight, control or involvement“, to conduct due diligence in relation to EGMA and itself made no enquiry about EGMA or its role in the transaction.  It was relevant in this context that Standard Bank was engaged with SBT as joint lead manager, that the transaction was with the government of a high bribery risk country, and involved receipt by a third party of US $6 million, with only very limited KYC.

(iii)   The KYC carried out by SBT did not involve “enhanced due diligence processes to deal with the presence of any corruption red flags“.  There were also failings in not identifying the presence of politically exposed persons.

(iv)   The absence of an “anti-corruption culture” within Standard Bank with regard to this transaction.

These controls weaknesses appear to have afforded the SFO and the Court significant comfort in confirming that the evidential test for a DPA was met in this case.

For organizations considering the implications of this judgment (which focuses, inevitably, on the specific facts of the Standard Bank case) for the application of the adequate procedures defence generally, the importance of efforts to establish a strong tone from the top and culture of compliance emerges strongly.  The judgment appears to indicate that Companies seeking to establish the defence in section 7(2) will have to tailor their employee training, their due diligence procedures, their manner of collaborating with sister companies and subsidiaries, and their dealings with third parties to the particular risks being faced in their business, taking into account country risk, market risk, counter-party risk and transaction risk.  They will take responsibility for the operation and effectiveness of their own procedures and the assessment of their own risks, and will not rely on due diligence carried out by third parties (even sister companies).  They will treat higher-risk situations with greater caution, and they will be able to point to the broader prophylaxis of a deeply-embedded compliance culture and well-trained employee population.  Moreover, they will ensure measures are in place to confirm that employee training is completed, refreshed and kept-up-to date.  These themes are not new, having been anticipated in the Ministry of Justice’s 2011 Guidance [5] on the adequate procedures.   Sir Brian Leveson’s judgment appears, in our view, to have confirmed the value of that Guidance.

Insight into the level of penalties for offences under section 7 of the Bribery Act 2010

In his judgment, Lord Justice Leveson outlines how the financial penalty which forms part of the Standard Bank DPA was calculated, in application of the relevant Sentencing Council Guideline [6] (the Definitive Guideline on Fraud, Bribery and Money Laundering Offences, in force since October 2014).  That calculation required consideration both of Standard Bank’s culpability in committing the offence and of the harm thereby caused or intended.

As regards culpability, while the corruption of government officials tended towards this case being treated as being in a high category of culpability, Lord Justice Leveson was at pains to emphasise that the specific allegation in this case was a breach of section 7 of the Bribery Act 2010, and as such, a failure to put in place appropriate mechanisms to prevent the bribery in question and “not a substantive bribery offence”.  He noted in particular that the evidence does not reveal that executives or employees of Standard Bank intended or knew of an intention to bribe.  Given Standard Bank’s lead role in the transaction, the uncertainty within the deal team as to the purpose of the payment to EGMA, and the failures of Standard Bank’s bribery prevention measures in a transaction in which bribery risk “should have been anticipated”, Lord Justice Leveson expressed the view that the “correct culpability starting point should either be high culpability, which is later adjusted to the lower or middle part of that category range by the appropriate harm figure multiplier, or medium culpability, which is later adjusted to the higher part of that category range by the appropriate harm figure multiplier”.  He noted that the SFO had opted for the latter view, and that, as the categories are not “watertight compartments” but part of a continuum, he considered this approach reasonable.

As regards harm, Lord Justice Leveson noted that under the Sentencing Council Guideline, the starting point for medium level of culpability is 200% of the ‘harm’ – that is to say, the gross profits, with a range of 100% to 300% (as compared with a starting point of 300% for high culpability, and a  range of 250-400%).  Considering aggravating factors (substantial public harm in Tanzania, serious failures against a background of FCA enforcement measures) and mitigating factors (previous clean record, prompt self-report, full cooperation, the absence of evidence of wider failures within the organisation and the fact that the organisation is now under different ownership), Lord Justice Leveson found a multiplier of 300% (at the upper end of medium culpability) to be appropriate.

The application of the 300% multiplier led to a figure of US $25.2 million.  Under the Sentencing Council Guideline, the Court must “step back” and consider whether the measures imposed satisfactorily achieve “removal of all gain, appropriate additional punishment and deterrence”. Lord Justice Leveson considered Standard Bank’s financial position and found the penalty to be reasonable in that context.

Finally, given that paragraph 5(4) of Schedule 17 to the Act requires a financial penalty agreed under a DPA to be broadly comparable to the fine a court would have imposed on a guilty plea, Standard Bank was entitled to a one-third reduction in fine.  As a result, the fine agreed in the Standard Bank DPA of $16.8 million was found to be reasonable.

Lord Justice Leveson went on to note that the U.S. Department of Justice had “confirmed that the financial penalty is comparable to the penalty that would have been imposed had the matter been dealt with in the United States and has intimated that if the matter is resolved in the UK, it will close its inquiry“, and found that this tends to support the conclusion that the terms of the Standard Bank DPA are fair, reasonable and proportionate.

Key outstanding questions relating to the operation of the section 7 offence

The guidance afforded by this judgment in relation to the approach to sentencing for the section offence and to the adequate procedures defence are very welcome to both industry and the legal profession.  However, a number of important elements of the section 7 offence are not addressed in detail in this judgment, and will remain a source of uncertainty for corporations in considering their exposure under that offence.

Chief among these elements is the notion of “associated persons”.  It is entirely unsurprising that a sister company of Standard Bank appointed jointly with Standard Bank as joint lead managers on the transaction at hand, and employees of that sister company who were part of the deal team in question, should be treated as satisfying the test for an associated person in Section 8 of the Bribery Act 2010.  As such, this case offers little in the way of guidance on the much more difficult questions as to the circumstances in which third parties, such as agents, contractors, service providers, and other representatives of a commercial organisation will be treated as “performing services for or on behalf” of the organisation, so that acts of bribery of those third parties can give rise to liability for the latter.

Similarly, the associated person must be shown to have carried out the acts of bribery in question with the intent to obtain or retain business or an advantage in the course of business for the commercial organisation.  In the case at hand, Lord Justice Leveson inferred the relevant intent from the absence of any services having been provided by the recipient of the bribe, EGMA, and from the fact that the involvement of a local partner and the fee (i.e., the bribe) were only disclosed to Standard Bank sometime after it had been proposed to the Government of Tanzania.

Imponderables remain (inevitably going unaddressed in this judgment due to the co-incidence of interest of Standard Bank and SBT in the transaction with the Government of Tanzania) as to how such intent is to be established, and how (or indeed if) prosecutors are to distinguish between an associated person’s bribery intended to feather his own nest from bribery intended to benefit his principal, the commercial organisation.”

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This publication [7]by FieldFisher states:

“It is unsurprising that today’s DPA involves a section 7 offence as it is the only corporate offence not requiring satisfaction of the identification principle. The identification principle determines whether the offender was a directing mind and will of the company, a notoriously hard test for a prosecutor to prove, and often a practical bar to corporate convictions. A section 7 offence (of failing to prevent bribery) dispenses with this requirement and therefore provides a more attractive avenue by which to achieve a realistic prospect of conviction in accordance with the full code test for prosecutions as set out in the DPA Code of Practice.”