As highlighted in this post, there were two firsts in last week’s U.K. Serious Fraud Office enforcement action against Standard Bank Plc (currently known as ICBC Standard Bank Plc): (i) the first use of Section 7 of the Bribery Act (the so-called failure to prevent bribery offense) in a foreign bribery action; and (ii) the first use of a deferred prosecution agreement in the U.K.

This prior post analyzed “what” was resolved (an alleged violation of Sec. 7 of the Bribery Act for failure to prevent bribery).

This post continues the analysis by highlighting “how” the enforcement action was resolved (through a deferred prosecution agreement).

That the U.K’s first DPA was used to resolve a Bribery Act offense is perhaps fitting as U.K. anti-corruption enforcement officials have long expressed a fondness for U.S. alternative resolution vehicles used to resolve alleges instances of FCPA violations. Such fondness was widely seen as a significant driver for the U.K. to adopt DPAs (as highlighted in this prior post, the U.K. rejected NPAs) although DPA’s are authorized to resolve other alleged instances of financial crime as well.

Knowledgeable observers already know that U.K. style DPAs are significantly different than U.S. style DPAs, but in analyzing the U.K.’s first DPA, this fact bears repeating.

Sir Brian Leveson’s Approved Judgment and Preliminary Judgment provide a detailed overview of the U.K’s process for DPAs, including the judicial review aspect of the process, and should be required reading for anyone trying to better understand the DPA process in the U.K.. (This aspect is largely absent in U.S. style NPAs and DPAs – indeed the DOJ has argued on several occasions that the judiciary has no substantive role to play in the DPA process – an issue that is currently before the D.C. Circiut in Fokker Services).

If a nation is to have DPAs, the U.K. model is far more sound than the U.S. model and an initial observation from the U.K.’s first DPA is that it was incredibly refreshing to read a document relevant to an alleged bribery offense drafted by someone other than the prosecuting authority.

The Standard Bank (SB) DPA is similar in many respects to DPAs used to resolve alleged FCPA violations. For starters, the term of the DPA is three years (the typical term of U.S. DPAs tends to be from 18 months to three years).

In the DPA, SB accepted responsibility for the alleged conduct at issue, agreed to on-going cooperation with the SFO and other law enforcement agencies, and agreed to pay the components of the settlement amount. In the DPA, SB also agreed to post-enforcement action compliance reviews and enhancements, including the engagement of PwC to conduct an independent review of the company’s progress.

Similar to U.S. DPAs, the SB DPA also contains a so-called “muzzle clause” in which:

“Standard Bank agrees that it shall not make, and it shall not authorise its present or future lawyers, officers, directors, employees, agents, its parent company, sister companies, subsidiaries or shareholders or any other person authorised to speak on Standard Bank’s behalf to make any public statement contradicting the matters described in the Statement of Facts.”

That the U.K.’s first DPA contains a “muzzle clause” is interesting given that, as discussed in this previous post, Lord Justice Thomas was critical of the SFO’s attempt to insert a “muzzle clause” into the Innospec resolution documents.  Lord Justice Thomas stated: “It would be inconceivable for a prosecutor to approve a press statement to be made by a person convicted of burglary or rape; companies who are guilty of corruption should be treated no differently to others who commit serious crimes.”

Despite the similarities between the SB DPA and U.S. style DPA’s, there are key differences.

For instance, in U.S. DPAs the DOJ claims unilateral power to declare a breach of the agreement (a contractual term many have criticized see here). The SB DPA states, under the heading “Breach of Agreement,” as follows.

“If, during the Term of this Agreement, the SFO believes that Standard Bank has failed to comply with any of the terms of this Agreement, the SFO may make a breach application to the Court. In the event that the Court terminates the Agreement the SFO may make an application for the lifting of the suspension of indictment associated with the DPA and thereby reinstitute criminal proceedings.

In the event that the SFO believes that Standard Bank has failed to comply with any of the terms of this Agreement the SFO agrees to provide Standard Bank with written notice of such alleged failure prior to commencing proceedings resulting from such failure. Standard Bank shall, within 14 days of receiving such notice, have the opportunity to respond to the SFO in writing to explain the nature and circumstances of the failure, as well as the actions Standard Bank has taken to address and remedy the situation. The SFO will consider the explanation in deciding whether to make an application to the Court.”

Another difference, albeit rather minor, concerns the time period to resolve the action. The SFO’s release states that SB’s counsel made the voluntary disclosure in late April 2013. Thus, the time period from start to finish was a relatively swift 2.5 years (at least compared to the typical time frame in the U.S.).

Other interesting aspects of the U.K’s first DPA are as follows.

Regarding SB’s voluntary disclosure and cooperation, Sir Leveson stated:

“Standard Bank immediately reported itself to the authorities and adopted a genuinely proactive approach to the matter […] In this regard, the promptness of the self-report and the extent to which the prosecutor has been involved are to be taken into account […] 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) its own investigation.

Credit must also be given for self-reporting which might otherwise have remained unknown to the prosecutor. […] In this regard, the trigger for the disclosure was incidents that occurred overseas which were reported by Stanbic’s employees to Standard Bank Group. Were it not for the internal escalation and proactive approach of Standard Bank and Standard Bank Group that led to self-disclosure, the conduct at issue may not otherwise have come to the attention of the SFO.

[…]

Standard 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. The Bank has agreed to continue to cooperate fully and truthfully with the SFO and any other agency or authority, domestic or foreign, as directed by the SFO, in any and all matters relating to the conduct which is the subject matter of the present DPA. Suffice to say, this self-reporting and cooperation militates very much in favour of finding that a DPA is likely to be in the interests of justice.”

Regarding “Compensation,” Sir Levenson stated in pertinent part:

“A DPA may impose on an organisation the requirement to compensate victims of the alleged offence and to disgorge profits made from the alleged offence.”

[…]

In the present DPA, Standard Bank would be required to pay the Government of Tanzania the amount of US $6 million plus interest of US $1,153,125. This sum represents the additional fee of 1% of the proceeds of the private placement, paid to EGMA the local partner engaged by Stanbic and very swiftly withdrawn in cash. The fee was paid from the US $600 million capital raised by the placement and the consequence was that the Government of Tanzania received US $6 million less than it would have received but for that payment. The interest figure of US $1,153,125 is calculated by reference to interest paid on the loan and, by the time of repayment, will amount to US $1,153,125.”

That the Government of Tanzania was a victim is speculative and an open to question.

The private placement bond offering SB facilitated was unrated (and thus risky) and represented, according to SB, the first ever benchmark-sized private placement by a sub-Saharan sovereign. According to SB, “the transaction was privately placed with 116 investors with a wide geographic mix of accounts and resulted in the government raising substantial funds for infrastructural investment in a most efficient and cost-effective manner.”

To properly analyze whether the Government of Tanzania was a “victim” of SB’s conduct, two factors would have to be analyzed: (i) did the government have other options in the transaction or was SB the only investment bank willing to facilitate the transaction given its risky nature?; and (ii) if there were other options, what was the fee structure for the other options – more specifically did other investment banks offer to structure the transaction for less than 2.4% of the proceeds (representing the original 1.4% fee plus the additional 1% fee at issue in the enforcement action)? In this regard, it must be noted, as the SEC found in its related enforcement action, that the Government of Tanzania “had been unsuccessful in obtaining a credit rating, making a EuroBond offering unfeasible.”

Regarding disgorgement, Sir Levenson stated:

“The legislation specifically identifies disgorgement of profit as a legitimate requirement of a DPA. […] The provision is clearly underpinned by public policy which properly favours the removal of benefit in such circumstances. In this case, no allowance has been made for the costs incurred by Standard Bank (to such extent as they can be put into money terms) and the proposal is that it should disgorge the fee which Standard Bank and Stanbic received as joint lead managers in relation to this transaction, namely 1.4% or US $8.4 million. Again, there is no suggestion that Standard Bank does not have the means and ability to disgorge this sum.”

The above logic is simplistic – as it often is in many FCPA enforcement actions – and ignores basic causation issues. (See prior posts here, here, here, and here). Moreover, the disgorgement in the SB action follows the oft criticized “no-charged bribery disgorgement” approach often used in the U.S.

Regarding the financial penalty, Sir Levenson stated:

“[F]or offences of bribery, the appropriate figure will normally be the gross profit from the contract obtained, retained or sought as a result of the offending. As has been discussed in regard to appropriate disgorgement of profits, in this case, it has been taken as the total fee retained in respect of the transaction by Standard Bank and Stanbic as the Joint Lead Managers, that is to say, the sum of US $8.4 million. The Sentencing Council Guideline identifies the starting point for a medium level of culpability as 200% of the ‘harm’ i.e. gross profit, with a range of 100% to 300% (cf. a starting point of 300% with a category range of 250-400% for high culpability).

It is then necessary to fix the level by reference to factors which increase and reduce the seriousness of the offending. As regards aggravation, although not an offence of bribery, there were serious failings on the part of Standard Bank in regard to the conduct at issue at a time when the Bank was well aware that further regulatory enforcement measures were in train: these led to a fine by the FCA for failings in internal controls relating to anti-money laundering. Further, in this context, it must be underlined that the predicate offending by Stanbic resulted in substantial harm to the public and, in particular, the loss of US$ 6m. from the money being borrowed by the Government of Tanzania for much needed public infrastructure projects.

On the other side of the coin, the mitigating features include the fact that Standard Bank (a company without previous convictions) volunteered to self-report promptly and both facilitated and fully cooperated with the investigation which the SFO conducted. Further, there is no evidence that the failure to raise concerns about antibribery and corruption risks (as opposed to money laundering concerns which led to the FCA regulatory action) was more widespread within the organisation. Finally, the transaction took place when the Bank was differently owned and, additionally, the business unit that carried it out is no longer owned by Standard Bank.

In the circumstances, I consider it appropriate that the provisional agreement is to take a multiplier of 300% which is the upper end of medium culpability and the starting point of higher culpability. This leads to a figure of US $25.2 million before the court must (following Step 5 of the Sentencing Council Guideline) ‘step back’ and consider the overall effect of its orders such that the combination achieves “removal of all gain, appropriate additional punishment and deterrence”. Bearing in mind, inter alia, the value, worth or available means of the offender and the impact of the financial penalties including on employment of staff, service users, customers and local economy (but not shareholders), the guideline is clear that: “The fine must be substantial enough “to have a real economic impact which will bring home to both management and shareholders the need to operate within the law”.

In assessing the financial penalty, Sir Levenson found comfort as follows.

“Bearing in mind the observations of Thomas LJ in Innospec Ltd [see here for the prior post], a useful check is to be obtained by considering the approach that would have been adopted by the US authorities had the Department of Justice taken the lead in the investigation and pursuit of this wrongdoing. Suffice to say that the American authorities have been concerned with the circumstances and have been conducting an inquiry in connection with possible violations of the Foreign Corrupt Practices Act, 15 USC para. 78dd-1. Noting the co-operation of Standard Bank and Stanbic with them, the Department of Justice has 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. In the circumstances, there is nothing to cast doubt on the extent to which these aspects of the proposed approach are fair, reasonable and proportionate.”

In  conclusion, Sir Levenson stated:

“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, Standard 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 Standard 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. It can also serve to underline the enormous importance which is rightly attached to the culture of compliance with the highest ethical standards that is so essential to banking in this country.”

That SB “far better served its shareholders” and other stakeholders by voluntarily disclosing is of course an opinion.

In this regard, it bears repeating that 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 is likely to be viewed as premature, careless and indeed reckless.

As it turned out – as further explored in yesterday’s post – the conduct at issue in the SB enforcement action involved just one transaction, against the backdrop of SB having various policies and procedures designed to minimize the same conduct giving rising to the enforcement action, and against the further backdrop of – in the words of the judge – “Standard Bank [having] no previous convictions for bribery and corruption nor has it been the subject of any other criminal investigations by the SFO” and “there is no evidence that the failure to raise concerns about anti-bribery and corruption risks … was more widespread within the organization.”

Given these circumstances, an alternative to voluntary disclosure – and an approach that would have likely better served SB’s shareholders – would have been, after a thorough investigation, promptly implementing remedial measures, and effectively revising and enhancing compliance policies and procedures – all internally and without disclosing to the SFO or other law enforcement agencies.