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U.K. Sentencing Guidelines For Organizations: Implications For Violators Of The U.K. Anti-Bribery Regime

By on February 25, 2014 in BAE, Fine / Penalty Issues, Guest Posts, Innospec, Mabey Johnson, Sentencing Guidelines, Serious Fraud Office, United Kingdom

Today’s post is from Karlos Seeger, Matthew Getz and Robin Lööf (all from the London office of Debevoise & Plimpton).

As regular readers of FCPA Professor will no doubt be aware, the UK legislative regime in relation to bribery and corruption, foreign as well as domestic, has changed dramatically in recent years, both in terms of substance and procedure.  These changes are particularly important for commercial organisations and, what is more, are all linked.  To re-cap:

  • The Bribery Act 2010 (“the Bribery Act”) did away with the patch-work of late 19th and early 20th century statutes which until recently, with some amendments and complemented by the common law, constituted the UK’s substantive anti-bribery laws.  It criminalises active and passive bribery both in the private and public sectors, and also creates a new, specific “FCPA offence” of bribing a foreign public official.  The most revolutionary aspect of the Bribery Act, however, is that in relation to activities on or after 1 July 2011, organisations will be held criminally liable for failing to prevent bribery by their employees, or other persons associated with them, unless they can prove that they had an effective compliance programme in place (the so-called “corporate offence”).
  • The Crime and Courts Act 2013 introduced Deferred Prosecution Agreements (“DPAs”) into UK law.  Previously, although plea agreements were possible and covered by specific guidance, attempts by prosecutors and defendants to present courts with agreed sentences had been deprecated by the judiciary on the basis that for an English prosecutor to agree on a sentence with a defendant would be contrary to “the constitutional principle that … the imposition of a sentence is a matter for the judiciary.” (Lord Justice Thomas [since appointed Lord Chief Justice] in R v Innospec Limited; see below)  DPAs will make this possible and will be available to organisations suspected of, inter alia, offences under the Bribery Act.  DPAs come into force on 24 February 2014.
  • On 31 January 2014, the Sentencing Council, the independent body responsible for developing guidelines for courts in England & Wales to use when passing sentence, issued a definitive guideline for sentencing organisations convicted of, inter alia, offences under the Bribery Act (“the Guideline”).  The Guideline will also constitute the basis for calculating the financial penalties levied under a DPA.

In this post, we look first at previous English practice in relation to sentencing for organisations convicted of bribery offences.  We then describe the new Guideline, draw comparisons with US practice, and attempt to assess what changes, if any, it will bring for organisations convicted of bribery.  Finally, we seek to predict how the Guideline will be used to calculate the financial penalties due under a DPA, with particular focus on the corporate offence.

Analysis of the Current State of the Law

Unlike in the US where the application of the principle of respondeat superior makes organisations vicariously liable for many criminal acts of their employees, English prosecutors seeking to hold organisations responsible for most criminal offences, including bribery, have had to prove that some part of the organisation’s “directing mind” – a director or senior executive, was involved in the wrongdoing.  As a result, few prosecutions have been brought and there are, consequently, very few examples of criminal fines imposed on organisations guilty of foreign corruption.  In addition, as a likely consequence of the uncertainty surrounding agreements between prosecutors and offending organisations, particularly as regards sentencing, a number of instances of corporate foreign corruption were dealt with civilly with Civil Recovery Orders which can be agreed between the investigating body and the corporate concerned.  With the introduction of DPAs, however, similar certainty of outcome can now be achieved through the criminal process which should reduce the need to resort to civil procedures to deal with criminal behaviour.

The Existing Case Law

In September 2009, engineering company Mabey & Johnson Ltd was sentenced for having sought to influence decision makers in relation to the award of public contracts in Ghana, Jamaica, and Iraq.  The company had paid some £832,000 in bribes in return for contracts worth approximately £44 million.  It was agreed between the Serious Fraud Office (“SFO”) and the company that there was a maximum of £4.65 million (ca. $7.4 million) available for confiscation and/or fines.  On its guilty pleas, the company was sentenced to pay confiscation of £1.1 million, and fines of £3.5 million.  The company also committed to paying reparations to the three countries concerned of, in total, £1,415,000.  There was a joint submission by the SFO and the company that the £4.65 million maximum was the most the company could afford to pay and still stay in business.  His Honour Judge Rivlin QC endorsed this sum, stating that he found it “realistic and just”.

In March 2010, Innospec Ltd was sentenced by Lord Justice Thomas (since appointed Lord Chief Justice) in respect of “systematic and large-scale corruption of senior Government officials” in Indonesia.  Innospec manufactured a fuel additive (TEL) which had been banned in most countries on environmental grounds and in order to preserve one of the few remaining markets for TEL, it had paid an estimated $8 million in bribes in order, as Thomas LJ found, to “block legislative moves to ban or enforce the ban of TEL on environmental grounds in Indonesia.”  As part of a global settlement between the company, on the one hand, and the SFO, as well as the US DoJ, SEC, and OFAC, on the other, a figured had been arrived at which represented the maximum the company could afford to pay and stay in business.  Before Thomas LJ, it was submitted that there was only $12.7 million available for confiscation and/or fines in the UK if the company was to survive.  This represented roughly one third of the global settlement sum.  Thomas LJ noted that the benefit from this campaign may have been as high as $160 million and that the US Federal Sentencing Guidelines indicated a sentencing range in respect of the company’s offending in Iraq (“no more serious than the Indonesian corruption”) would have been between $101.5 and $203 million.  In terms of what the appropriate UK fine would have been, Thomas LJ confined himself to indicating that it “would have been measured in the tens of millions.”  However, “with considerable reluctance”, Thomas LJ ordered that the sterling equivalent of $12.7 million be paid as a fine.  His Lordship explained his decision: “in all the circumstances and given the protracted period of time in which the agreement had been hammered out, I do not think it would have been fair to impose a penalty greater than that.”  Importantly, Thomas LJ made it clear that “the circumstances of this case are unique.  There will be no reason for any such limitation in any other case and the court will not consider itself in any way restricted in its powers by any such agreement.”  In fact, in His Lordship’s view, the division of the global sum between the UK and the US was not “one which on the facts of the case accorded with principle.” 

Finally, in December 2010, as part of a global settlement with the SFO and the US DoJ, BAE Systems plc pleaded guilty to a failure to keep adequate accounting records in relation to a contract worth $39.97 million for the provision of a radar system to Tanzania.  BAE accepted that there was a high probability that part of $12.4 million paid to a local adviser, Mr. Vithlani, had been used to favour BAE in the contract negotiations.

An agreement between the SFO and BAE was presented to the court under which BAE undertook to pay £30m to Tanzania, less any financial orders imposed by the court.  In his sentencing remarks, Mr. Justice Bean made no reference to this agreement.  His Lordship did however state that he was “astonished” at the SFO’s approach to the evidence and, in particular, branded the SFO’s preparedness to accept that Mr. Vithlani was simply a well-paid lobbyist as “naïve in the extreme”.  Whilst refusing to accept this interpretation of the evidence, Mr. Justice Bean pointed out that “I … cannot sentence for an offence which the prosecution has chosen not to charge.  There is no charge of conspiracy to corrupt …”  Noting that there were no relevant sentencing precedents for the offence charged, Mr. Justice Bean fined BAE £500,000.

Assessment of the Existing Case Law

Two things are noteworthy from the above sentences:

First, the recognised lack of precedent for UK sentences in foreign bribery cases.  In only one of the cases (Mabey & Johnson) did the sentencing judge indicate that the sentence passed was appropriate.  Having no doubt carefully studied the “success” of the approach in that case, the lawyers involved in Innospec approached the sentencing exercise in a structurally very similar manner only to be faced with the ire of one of the most senior judges in the country.  Disapproving of every aspect of the situation in which the sentencing court found itself, Thomas LJ made it very clear that the result in Innospec was in no way to be seen as a precedent for the future.

Second, the comparison with the US is instructive.  In Innospec, US prosecutors obtained $26.7 million compared to the SFO’s $12.7 million.  As far as BAE is concerned, however, in March 2010, prior to being fined £500,000 in the UK, BAE had agreed a settlement with the US DoJ including a $400 million criminal fine in respect of virtually identical conduct as that charged in the UK, albeit in a different jurisdiction.

This disparity in relation to BAE led to criticisms of the UK sentencing regime for organisations.  Notably, the UK Labour party included it in its Policy Review on Serious Fraud and White Collar Crime as an example of the apparent comparative laxity of the UK regime.  However, in the most authoritative ruling on these matters we have, Lord Justice Thomas’s sentencing of Innospec Ltd, there is the following statement of principle: “there is every reason for states to adopt a uniform approach to financial penalties for corruption of foreign government officials so that the penalties in each country do not discriminate either favourably or unfavourably against a company in a particular state.”

In any event, whatever the theoretical position might be under existing English case law, from 1 October 2014, courts will sentence organisations convicted of bribery offences under the Guideline which puts in place a sentencing system which should feel familiar to US lawyers.

The New Guideline:  Background and Context

Offences under the Bribery Act are covered by the new DPA regime.  This is seen as particularly significant in relation to the corporate offence which, with its lower evidential threshold for conviction, is expected to make prosecutions of organisations for bribery offences easier and therefore, potentially, more common.  The Act introducing DPAs provides that the financial penalty agreed under a DPA “must be broadly comparable to” the fine the organisation would have received had it pleaded guilty and been convicted.  However, as is apparent from the review of the authorities above, there is not much by way of guidance in this regard, in case law or otherwise.

Recognising this lack of guidance which risked introducing unnecessary but critical additional uncertainty into initial DPA negotiations, the Sentencing Council, which had been working on it for years, expedited its work on sentencing guidelines for corporates convicted of fraud, bribery, and money laundering.

The Basic Fine Calculation

The basic principle of the Guideline for calculating the fine is that the “[a]mount obtained or intended to be obtained (or loss avoided or intended to be avoided)” from the offence (the “harm figure”) is multiplied by a figure based on the corporate offender’s culpability (the “harm figure multiplier”).

For bribery offences, the harm figure “will normally be the gross profit from the contract obtained, retained or sought as a result of the offending.”  For the corporate offence, an alternative measure is suggested, namely “the likely cost avoided by failing to put in place appropriate measures to prevent bribery.”

Culpability is assessed with reference to the offender’s “role and motivation” in the offence(s) and categorised as “high”, “medium”, or “lesser”, depending on the characteristics and circumstances of the offending.  Characteristics indicating high culpability include the corruption of governmental or law enforcement officials, and factors indicating lesser culpability include the existence of some, but insufficient, bribery prevention measures.

Each culpability level has both a starting point for the harm figure multiplier (100% for lesser, 200% for medium, and 300% for high culpability) and a range: 20-150% for lesser, 100-300% for medium, and 250-400% for high.  The presence of aggravating and mitigating factors (of which the Guideline provides non-exhaustive lists) will determine where within the relevant range a defendant organisation falls.  Listed factors increasing seriousness, and thus raising the harm figure multiplier, include corporate structures set up to commit offences and cross-border offending.  Mitigating factors that lower the harm figure multiplier include co-operation with the investigation, self-reporting and early admissions.

Having applied the relevant multiplier to the harm figure, a sentencing court would have to take into account further factors such as discounts due on account of guilty pleas (up to one third, according to the current guidance), particularly valuable co-operation, and the consequences on third parties of the proposed totality of the financial orders.  The court could then adjust as appropriate.

In setting out this basis for the calculation of fines, the Sentencing Council acknowledged having considered Chapter 8 of the US Federal Sentencing Guidelines.  US lawyers will recognise in the harm figure the UK equivalent of the “base fine” in §8C2.4, and in the harm figure multiplier the equivalent of the “culpability score” multipliers pursuant to §§8C2.5 to 8C2.8.

The Guideline – What Likely Changes in Practice?

Although a highly hypothetical exercise, it may be illustrative to seek to predict what fines would be imposed under the Guideline on the facts of some of the cases discussed above.

On the facts of Mabey & Johnson, the following can be deduced:

  • The contracts obtained as a result of the offending were said to be worth some £44 million.  Included in that figure was the £2.56 million Iraqi contract for which the “gross margin” was said to be approximately £700,000.  If the same rate of gross profit to contract value (approximately 27%) is applied to the totality of the offending, the harm figure would be approximately £12 million.
  • In terms of culpability, the company’s accepted behaviour included the organised and planned corruption of government officials over a sustained period of time.  Therefore the culpability level under the Guideline would likely be deemed “high”, establishing the range for the harm figure multiplier of 250-400%.
  • In terms of the appropriate harm figure multiplier within that range, account would have to be taken of the many facts presented to the court and not disputed which, under the Guideline, would constitute factors increasing seriousness: The company had set up the “Ghana Development Fund” in order to make corrupt payments; fraudulent activity could be said to have been endemic within the company; the revelations caused considerable political fall-out in both Ghana and Jamaica; the offences were committed across borders in that many of the payments were made to officials while they were in the UK.  In terms of factors reducing seriousness, the main one would be that the offending was committed under the previous management.  Taken together, a harm figure towards the top end of the range would be likely.

If the harm figure multiplier chosen had been, say, 350%, the starting point for the appropriate fine for offending like that in Mabey & Johnson would be £42 million.  Even if a court had found that a reduction of the maximum of one third for the company’s guilty plea was due, as well as some further reduction on account of its co-operation, on the facts in Mabey & Johnson, the resulting fine of £20-25 million would be many times higher than the fine (£3.5) the court found “realistic and just”.

Taking the facts of Innospec and applying them to the Guideline the result is staggering: If it a court had found that the benefit to the company was indeed $160 million, and that the conduct was as serious as in Mabey & Johnson, the resulting fine under the Guideline could very well be upwards of £190 million; considerably more than the “tens of millions” Thomas LJ indicated would have been appropriate, and even higher than the top of the US range in that case.  Even so, however, it needs to be borne in mind that in both Mabey & Johnson and Innospec the sentencing courts took into account the fact that if higher fines had been imposed, the companies concerned would have been made bankrupt to the detriment of current employees and other third parties.  Such considerations along with the resulting adjustments remain possible under the Guideline.

Likely Approach to Financial Penalties Under a DPA – Focus on the Corporate Offence

A UK-based organisation faced with evidence of bribes paid by, for example, one of its agents after 1 July 2011 will have some difficult decisions to make.  On the assumption that it reports this evidence to the SFO, it would risk being charged with the corporate offence.  If charged the organisation could seek to rely on the defence, created by the Bribery Act, of adequate procedures to prevent bribery and even if those procedures are ultimately found insufficient to shield the organisation from liability, their presence would still be an indicator of “lesser” culpability for the purposes of the Guideline.  However, having run an unsuccessful defence on the merits, the organisation would not benefit from the substantial reduction in fines it would have been due had it pleaded guilty.

Assuming, however, that the organisation indicated a willingness to admit to not having adequate anti-bribery procedures in place, and entered into negotiations with the SFO to conclude a DPA, how would the Guideline be used to calculate the financial penalty?

The assessment of the organisation’s culpability would not be affected by being conducted in the context of the negotiation of a DPA.  However, the presence of some, albeit insufficient, anti-bribery procedures would be an indicator of “lesser” culpability.  Further, the very fact that the organisation was considered for a DPA would imply that a number of factors tending to lower the reference fine under the Guideline were present:

First, among the mitigating factors lowering the harm figure multiplier is co-operation with the investigation, the making of early admissions and/or voluntary self-reporting.  Under the DPA Code of Practice (published on 14 February 2014), pro-active and early co-operation with the authorities is one of the public interest factors weighing in favour of entering into a DPA (and against a full prosecution) in the first place.  There will therefore be a strong mitigating factor already assumed.  Consequently, absent extraordinary circumstances, the tops of the ranges for the harm figure multiplier ought not to be applied in the context of DPAs.

Second, as already mentioned, the final figure could be adjusted with reference not only to the totality of the various financial orders, but also on account of the nature and extent of the organisation’s overall assistance to the authorities and admissions of offending.  Applying the Sentencing Council overarching guideline on reductions in sentence for guilty pleas, an organisation that co-operates with the authorities and is convicted on its guilty plea can expect a reduction of a third.  In Innospec, Thomas LJ held that the company was entitled to a reduction in sentence of “well in excess of 50%” on account of its guilty plea and cooperation with the authorities.  Following this logic, organisations negotiating a DPA might be able to persuade prosecutors (and the courts) that a further “DPA discount” should apply on account of the substantial cost savings their co-operation has entailed, and the good faith they have shown.

All in all, it is not unreasonable to assume that an organisation facing charges under the corporate offence could benefit from a reduction of any financial penalties of between 50-75% under a DPA compared to the fine it would face if it lost a trial on the adequacy of its anti-bribery programme.  Add to that the legal costs avoided and the greater ability to manage the outcome and we entertain some doubt whether many conscientious organisations that discover bribery in its business would risk a trial.

Conclusion

No organisation has yet been prosecuted under the new corporate offence in the Bribery Act but the SFO has publicly indicated that several organisations are being investigated in circumstances where – the SFO hopes – such prosecutions may well result.  If that were to happen, the first applications of the Guideline may take place sooner rather than later.

The director of the SFO, David Green QC, is a vocal advocate of extending the principle of the corporate offence in the Bribery Act to other corporate offending such as fraud and market manipulation.  The government is understood to be consulting internally on such a reform.  If enacted, prosecutions and convictions of organisations can be expected to cease to be a curiosity and potentially become as common as in the US and under the Guideline, the resulting fines could well equal those in the US.

Here’s To You Mr. Alderman

By on April 20, 2012 in BAE, FCPA Inc., Serious Fraud Office, U.K. Bribery Act, United Kingdom

I remember the day well.  In July 2010, an e-mail appears in my inbox from the U.K. Serious Fraud Office in which I am told that Richard Alderman (Director of the SFO), a reader of FCPA Professor, would like to have a discussion with me about anti-corruption issues.  FCPA Professor was then 1 year old and learning of readers the caliber of Mr. Alderman … well, let’s just say that was awesome.  Since then, I’ve had the pleasure to visit the SFO’s offices in London and continue the dialogue with Alderman, including through his contributions to this website.

In “A Conversation with Richard Alderman” (here), Alderman responded to approximately thirty detailed questions I submitted covering a broad range of topics and he:  (i) compares and contrasts the SFO’s role with the DOJ’s role in enforcing the Foreign Corrupt Practices Act, including the more active and independent role U.K. courts have in reviewing SFO charging decisions; (ii) talks about voluntary disclosure, and the role of non-prosecution and deferred prosecution agreements; (iii) discusses reputational harm, debarment, and reparations; and (iv) talks specifically about the Bribery Act.

In this follow-up after BAE’s settlement, Alderman responsed to six pointed questions I submitted concerning the BAE case and his responses address the following topics. (i) how the U.K. law on double jeopardy significantly affected the SFO’s investigation of BAE and how the “current system [in the U.K.] for dealing with parallel criminal investigations conducted in a number of different countries does not work effectively and needs change;” (ii) whether the U.K. government was faithful to its OECD obligations in its handling of the BAE matter; (iii) criticism of the SFO-BAE plea agreement by the U.K. sentencing judge; and (iv) “shortcomings” in the U.K. system and how Alderman would like a system that “is far more transparent […] that commands public confidence, together with a much stronger role for the judiciary.”

In this guest post, Mr. Alderman discusses engagement with companies and compliance effects in the aftermath of the Bribery Act.

Active engagement was a hallmark of Alderman’s tenure at the SFO – and his willingness to engage with me on topics we occassionaly sparred has been one of the highlights of my young academic career.

So on this, your last day at the SFO, here’s to you Mr. Alderman.

What’s next for Alderman?  He told me in a recent e-mail (published with his permission) the following – all the more reason for me to tip my hat to him.

“When I leave here at the end of this week I shall not be going through the revolving door into some well paid job in a legal firm. Nor will I be taking on anything that will bring me into any contact with the SFO. My successor needs to get on with the job himself. What I shall be looking for instead are opportunities to work on anti-corruption initiatives that make a real difference in other countries. This will not be by way of a job or a consultancy. There are very many interesting people in this area that I admire very much and who do so much to fight corruption and the damage it causes. I shall obtain real satisfaction if I can find ways of helping them as I move on.”

Where Should The Money Go?

By on March 26, 2012 in BAE, Disgorgement, FCPA Reform, Private Right of Action, SEC, Serious Fraud Office, Tanzania, United Kingdom, Victims

It is a thorny question with no easy answer.  Where should the money go when a company resolves an FCPA enforcement action?  It was addressed last year in connection with the Alcatel-Lucent enforcement action.  (See here, and here for prior posts).  Two recent events raise the issue again.

*****

Earlier this month, it was announced (here) that the U.K. “Serious Fraud Office, the Government of Tanzania, BAE Systems and the Department for International Development (DFID) … signed a Memorandum of Understanding enabling the payment of £29.5 million [$47 million USD] plus accrued interest to be paid by BAE Systems for educational projects in Tanzania.”  As noted in the release, “textbooks will be purchased for all 16,000 primary schools in the country and as a result 8.3 million children will benefit” in subjects such as Kiswahli, English, Maths and Science.  The release further notes that funds will also be used to “provide all 175,000 primary school teachers with teachers’ guides, syllabi and syllabi guides to help improve their teaching skills” as well as the purchase of desks.  In the release, SFO Director Richard Alderman stated as follows.  “This agreement is a first for the SFO which piloted it through the UK legal system. It provides a satisfactory outcome for all concerned but most of all for the Tanzanian people and I am personally delighted that SFO staff were able to achieve this.”

In this release, BAE stated as follows.  “We are glad to finally be able to make the payment to the Government of Tanzania and bring this matter to a close. We are grateful to DFID for their work in agreeing the Memorandum of Understanding with the Government of Tanzania.”  The BAE release states that the “payment follows the settlement agreed between BAE Systems and the SFO.”  For a prior post on the settlement, see here.

To be sure, BAE’s payment to Tanzania, and the role of the SFO in brokering the payment, feels good.  What is not to like about children receiving textbooks?

However, the feel good nature of this most recent BAE development should not mask the significant problems with the BAE enforcement action (on both sides of the Atlantic).  As noted in this prior post, even the U.K. judge who accepted the SFO-BAE plea agreement called it “loosely and hastily drafted” and said the fine he levied reflected that he couldn’t “sentence for an offense which the prosecution failed to charge.”

And let’s not forgot how this story began.  In 2004, the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward.  However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its  investigation of BAE, at least as to non-Saudi issues, including whether the  company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case.  In late January 2010, the SFO issued a release (here) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” Then, in early February 2010, the SFO announced (here) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicted a few days earlier in connection with bribe payments in “certain Eastern and Central European countries” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.”  Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also noted that “[t]his decision brings to an end the SFO’s investigations into BAE’s defense contracts.”  For more on “BAE – Inside the SFO”, see this prior post.

In any event, at least some children in Tanzania received some textbooks from BAE as a result.

*****

As previously highlighted on the FCPA Blog (here), Socio-Economic Rights and Accountability Project (“SERAP”) (a non-governmental civil society organization in Nigeria) recently wrote a letter (here) to SEC Enforcement Division Director Robert Khuzami (with a copy to Assistant Attorney General Lanny Breuer and Deputy Chief, Fraud Section Charles Duross)  regarding “FCPA civil penalty and disgorgement proceeds that companies agree to pay to resolve US Foreign Corrupt Practices Act investigations.”  As the letter notes, “currently such proceeds, once paid, are retained by the U.S. government.”

In summary, the SERAP letter requests “that the Enforcement Division establish a case-by-case policy or process that would enable foreign governmental entities that have been victims of corruptly-procured contracts to apply for, subject to appropriate anti-corruption safeguards, some or all of the civil penalty and disgorgement proceeds that would eventually be paid by companies alleged to have violated the U.S. Foreign Corrupt Practices Act.”  SERAP also suggests that “civil society groups in the home country, or U.S. non-profit organizations serving that country, be eligible within a short time-period to apply for such proceeds as well, or instead, for use for ‘public benefits projects’ in the affected foreign country, again subject to anti-corruption safeguards.”

The SERAP letter notes, among other things, as follows.  “… Many citizens in a country where such bribery has occurred might consider FCPA civil penalties and disgorgement payments imposed by the US, and then kept by the US, as in fact representing funds that rightfully ‘belong’ to the victim.”

Stating that “corruptly procured contracts ‘cost’ the victim at least 10 percent extra” the SERAP letter says that “this figure ought to be a presumed measure of possible funds available for third-party application in the context of a civil FCPA settlement, particularly since the Enforcement Division typically settles an investigation before extensive evidence of damages, as opposed to liability, is placed in the public realm.”

The specific SERAP proposal is as follows.  “…[A]fter, and ony after, public notice of an FCPA settlement agreement, the victim foreign government entity and any applicant NGO would have 60 days to file a request that the Enforcement Division pay some or all of the agreed payment proceeds to or for the benefit of the victim government entity or to a home country-based or US based NGO that would present a proposal [to] spend the proceeds for public purposes (e.g. on public health programs) in the country of the victim entity.  Thereafter, the Enforcement Division would have 60 days to act upon the request, favorably or not in its discretion; in this context the Enforcement Division should provide a brief statement of its reasons for its decisions.  In reaching its decisions the Enforcement Division would have the inherent authority to consult with Executive Branch agencies of the US government.

The SERAP letter raises some interesting issues regarding alleged victims of FCPA enforcement actions.  The SERAP letter also raises some interesting questions, including the following.

If the SEC would be required to relinquish a certain portion of money recovered in an FCPA enforcement action, what impact would this have on FCPA enforcement?  Would the SEC be less aggressive in bringing enforcement actions or perhaps more aggressive because more enforcement actions would be needed to sustain the current FCPA “revenue stream”?  For instance, 10% of SEC FCPA “revenue” in 2011 was approximately $15 million, in 2010 approximately $53 million.

The SERAP proposal appears to assume that all FCPA enforcement actions involve foreign government procurement.  This is not the case.  Approximately 50% of recent  FCPA enforcement actions (i.e. in the past five years) do not involve foreign government procurement, but rather issues relating to foreign taxes, customs duties, or foreign licenses, permits, certifications and the like.  Is the victim analysis the same in these FCPA enforcement actions compared to foreign government procurement enforcement actions?

Are individuals or organizations located in the country giving rise to the FCPA enforcement action really the most direct victims of the conduct at issue?  In the procurement context, what about a competitor who may have lost out on the foreign business because it was unwilling to make an improper payment?  With victim issues attracting new attention, should an FCPA private right of action receive new attention?

Last, but certainly not least, companies settling SEC FCPA enforcement actions are allowed to settle without admitting or denying the SEC’s allegations.  Even the SEC itself has stated that this settlement device often leads to settlements that “do not necessarily reflect the triumph of one party’s position over the other.”  Given this dynamic, would SERAP’s proposal lead to undeserved “windfalls” for civil society organizations?  [In this prior post, I asked the same question as to Dodd-Frank Act whistleblowers.]

The Final Act In The BAE Circus?

By on May 26, 2011 in BAE, Congressional Activity, Count Alfons Mensdorff-Pouilly, Debarment, FCPA Related Charges, Saudi Arabia, State Department

Last week, the State Department announced (here) that “BAE Systems plc of the United Kingdom (BAES), including its businesses, units, subsidiaries, and operating divisions and their assignees and successors, except BAE Systems, Inc. and its subsidiaries, entered into a civil settlement with the Department of State for alleged violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).” The release states that “under the four-year term of the Consent Agreement, BAES will pay in fines and in remedial compliance measures an aggregate civil penalty of $79 million, the largest civil penalty in Department history.”

The State Department action follows the March 1, 2010 guilty plea of BAE Systems plc. (see here for the prior post). BAE pleaded guilty to “conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its FCPA compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations.” In that DOJ enforcement action, BAE Systems plc agreed to pay a $400 million criminal fine.

I previously called (here) the BAE “bribery, yet no bribery” enforcement action one that contributes to the “facade of FCPA enforcement” (see here) and was asked several questions about the enforcement action by former Senator Arlen Specter (see here).

Like the DOJ enforcement action, the State Department action specifically notes that BAE Systems, Inc. was not involved in the conduct giving rise to the enforcement actions. BAE Systems Inc. is “the U.S.-based segment of BAE Systems plc” and “is responsible for relationships with the U.S. Government…”. (See here).

The State Department action involved BAE Systems plc entering into a consent decree (see here for the relevant documents) “to settle 2,591 violations of the AECA and ITAR in connection with the unauthorized brokering of U.S. defense articles and services, failure to register as a broker, failure to file annual broker reports, causing unauthorized brokering, failure to report the payment of fees or commissions, and failure to maintain records involving ITAR-controlled transactions.”

Certain of the improper conduct identified in the State Department documents relate to the lease and lease/sale of Gripen aircraft to the Ministries of Defence in the Czech Republic and Hungary – conduct also at issue in the DOJ’s prosecution of BAE (see here for the criminal information).

The State Department documents also relate to BAE’s use of advisers for defense transactions and proposed defense transactions involving U.S. defense articles and services without obtaining authorization from the State Department.

One of the advisors identified is Alfons Mensdorff-Pouilly. As noted in this previous post, the U.K. Serious Fraud Office (“SFO”) originally charged Alfons Mensdorff-Pouilly with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” Within days, the SFO dropped the charges. As noted in this previous post, the SFO explained that BAE would not agree to the SFO plea (watered down as it was) without the SFO agreeing to drop the charges against Count Mensdorff.

As to debarment, the State Department consent agreement states (at page 20) that the State “Department has determined to impose a statutory debarment of BAE Systems plc pursuant to section 127 of the ITAR [see here], based on the criminal charges [in the previous DOJ enforcement action].

Yet, the next sentence of the consent decree states as follows. “However, based on the foregoing and additional information provided by Respondent, and request for reinstatement by BAE Systems plc, the Assistant Secretary of State for Political-Military Affairs has determined under Section 38(g)(4) of the AECA [see here] that Respondent has taken appropriate steps to address the causes of the violations and to mitigate law enforcement concerns. Accordingly, BAE Systems plc shall be reinstated.”

The consent decree did however “place under a policy of denial” BAE Systems CS&S International, Red Diamond Trading Ltd. and Poseidon Trading Investments Ltd. Per the consent decree, this means that there will be “an initial presumption of denial during the case-by-case review of all licenses and other authorizations” involving these subsidiaries even though the consent decree states that “Transaction Exceptions” may be granted by the State Department. Furthermore, the consent decree states that all licenses, agreements, and other authorizations involving these subsidiaries previously issued “are not affected and are not revoked.”

The most recent annual report on BAE’s website states as follows regarding CS&S International. “The operating group’s CS&S International business predominantly acts as prime contractor for the UK government-to government defence agreement with Saudi Arabia and has a major in-country presence. Its main activities include operational capability support to both the Royal Saudi Air Force and Royal Saudi Naval Force and, more recently, the commencement of supply of 72 Typhoon aircraft.” Neither Red Diamond Trading Ltd. nor Poseidon Trading Investments Ltd. are mentioned in the 190 page annual report.

According to this U.K. Guardian article “BAE’s Secret Money Machine,” “in February 1998 Red Diamond Trading Ltd was anonymously incorporated in the British Virgin Islands and was used to channel payments all over the world, via Red Diamond accounts in London, Switzerland and New York.” As to Poseidon Trading, the same article states as follows. “BAE set up a second front company, purely to handle the Saudi commission payments for al-Yamamah. Poseidon Trading Investments Ltd was incorporated in the British Virgin Islands on June 25 1999.”

The DOJ’s criminal information contains various allegations regarding Saudi Arabia – without specifically mentioning the al-Yamamah contract. For more on the al-Yamamah contract see here -a PBS Frontline documentary titled Black Money.

The State Department’s recent $79 million enforcement action against BAE is in addition to the DOJ’s $400 million enforcement action against BAE from 2010. However, as Dru Stevenson (Professor of Law, South Texas College of Law) and Nick Wagoner (a law student at South Texas College of Law) explored in this recent post, in the 365 days that followed the 2010 DOJ enforcement action, BAE was awarded U.S. contracts in excess of $58 billion dollars.

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Speaking of debarment (or lack thereof) Senator Al Franken continues to lead on this issue. Earlier this month, during a Senate Judiciary Committee hearing, Franken questioned Attorney General Eric Holder why, over the past three years, hundreds of billions of dollars have been awarded to defense contractors who have previously been convicted of fraud. See here for the video. Senator Franken similarly questioned Assistant Attorney General Lanny Breuer during a January Senate Judiciary Committee hearing. See here for the video.

In connection with the Senate’s November 2010 hearing “Examining Enforcement of the Foreign Corrupt Practices Act” the DOJ was asked whether it favored “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery.” See here for the prior post including the DOJ’s response.

Uneven Justice: A Critical Look at FCPA Enforcement

By on May 23, 2011 in BAE, Debarment, FCPA Reform, Guest Posts, Individual Enforcement Action, Voluntary Disclosure

The week starts with a guest post from Michael Volkov.

Volkov (here) is a partner at Mayer Brown LLP. His practice focuses on white collar defenses, FCPA enforcement and compliance, and litigation. The views expressed in this article are his own and do not represent those of his law firm, Mayer Brown LLP. He can be reached at mvolkov@mayerbrown.com.

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UNEVEN JUSTICE: A CRITICAL LOOK AT FCPA ENFORCEMENT

By Michael Volkov

The United States is a nation of laws: badly written and randomly enforced. ~Frank Zappa

Much has been written about the overall fairness of the Justice Department’s and the Securities and Exchange Commission’s aggressive FCPA enforcement program. Some have argued that DOJ and SEC have engaged in uneven justice: corporations plead to non-FCPA offenses, pay big fines, and continue business as usual. Others argue that DOJ has failed to prosecute individual executives and officers, or to ensure that corporations are debarred or suspended from continuing to sell to the federal government.

As a former federal prosecutor with nearly 20 years experience in the criminal justice system, I can assure you that some of the criticisms are accurate but some completely miss the mark. Last year, the Senate Judiciary Committee examined the controversy surrounding FCPA enforcement, and this year the House Judiciary Committee is planning to look at the issue.

DOJ is proud of its enforcement program. And rightly so – they have resuscitated a program which was dormant for years which now collects over one half of all criminal fines imposed each year in the United States. That is an impressive record.

Aside from the fundamental deficiencies inherent in DOJ’s voluntary disclosure process, DOJ claims that it gives adequate credit for corporate compliance programs, early cooperation and full disclosure. In response some suggest that plea agreements which are designed to protect companies from debarment and include pleas to non-FCPA charges are unfair. Part of that point is correct; the other part is flat out wrong.

Our criminal justice system operates day-to-day based on plea agreements. In the federal system, over 90 percent of federal cases are resolved through plea agreements. As part of that process, charge-bargaining is a critical component. DOJ’s decision to permit corporations, or typically country-specific subsidiaries to plead guilty to a non-FCPA offense, is in keeping with this long tradition. The underlying conduct as described in the plea agreement is known to all – the company engaged in systematic and widespread bribery. Nothing more, nothing less. To extrapolate from such a plea that DOJ is not enforcing the law is misguided and ignores the realities of the plea bargaining process.

On the other hand, DOJ’s willingness to forego debarment and/or suspension is certainly an issue that needs to be examined. As Professor Koehler testified at the Senate Judiciary Committee, BAE was awarded a government contract on the same day it plead guilty to a non-FCPA offense but paid a criminal fine over $400 million. That is certainly uneven justice, and Senators and policymakers should have taken note of this ironic enforcement twist.

Senator Specter and others have criticized the Justice Department for failing to include individual corporate executives and officers in its enforcement actions. The Justice Department’s Antitrust Division has a much better record on this score – corporations and individuals are prosecuted in criminal antitrust cases with equal vigor and results. Why has DOJ shied away from linking corporate cooperation to requiring cooperation against individual executives and officers at the offending company?

If the goal of DOJ’s enforcement program is corporate compliance, then the enforcement program needs to be recalibrated. Deterrence is an admirable objective and will certainly increase compliance, but DOJ has more tools available to it to encourage and promote cooperation. DOJ’s antitrust amnesty/leniency is an example of a program which has been incredibly successful on the enforcement and the compliance ends. While there are certainly problems with the application of a cartel-focused (multi-actor) model to FCPA cases, there are lessons which can be learned from the amnesty/leniency program.

We all aspire to equal justice and we all admire the image of justice that is blind as the hallmark of our judicial system. But right now what is needed is for justice to listen so that it operates with fairness and equal justice for all.

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