News Corp. Inquiry Is Following A Typical Path
In July 2011, world-wide media attention focused on News Corporation and its potential Foreign Corrupt Practices Act exposure. See here for a detailed prior post.
Recently, News Corp. has been back in the news. Last week, various news outlets (see here from Reuters for instance) reported that New Corp.’s potential FCPA exposure has escalated as U.S. authorities continue to investigate the company. Among other things, the report noted that “much of the evidence police are examining in the News Corp case was handed over to investigators by the company, who have set up a special clean-up unit in London and hired batteries of lawyers in Britain and the United States, some of whom specialize in FCPA cases.”
Over the weekend, it was reported (see here from the Guardian) that five senior journalists of The Sun (a News Corp. owned paper) were arrested concerning allegations of payments to police officers and others including Ministry of Defense and other military officials – all “foreign officials” under the FCPA. As relevant to the FCPA’s books and records and internal control provisions, reports suggest that company records show many of the intended recipients of the problematic payments being recorded in company records under false names.
The recent News Corp. news and the escalation of the investigation are not surprising. In fact, the inquiry is following a typical path for an FCPA inquiry. In this July 2011 post, I noted (as to “what is likely to happen next”) that News Corp. would cooperate in the investigations and that cooperation in the FCPA context often means conducting an internal, independent review of the conduct at issue and sharing the results, witness statements, key documents, etc. with the enforcement agencies on a near real-time basis. Indeed, the New York Times reports (here) that “those arrested have been presented with receipts, expenses reports, messages and other internal documents during questioning.”
The July 2011 post noted that the gray cloud hanging over News Corp. is likely to last for a couple of years because it is typical for an FCPA enforcement inquiry to begin based on a certain set of limited and discrete facts but that before the enforcement agencies will agree to resolve an FCPA matter, it is typical for the agencies to ask the “where else” question. I noted that News Corp. was likely to conduct a targeted world-wide review of its operations to understand whether the London police payments were isolated or whether other News Corp. employees around the world, or in other business units or divisions, made similar payments to “foreign officials.” The recent developments suggest that this is the case. As I indicated to the Guardian (here), the recent arrests and allegations spread the alleged bribery to a different newspaper, to a different segment of the company, and to other public officials.
In short, the News Corp. FCPA inquiry is following a typical path and the recent news surrounding News Corp. is not surprising nor is it likely to be the last.
Maybe Mabey & Johnson Is Not That Big Of A Deal
It seems that everything that happens in the bribery / corruption space these days is touted as establishing a new trend with wide implications.
Recently the U.K. Serious Fraud Office (“SFO”) announced here that Mabey Engineering (Holdings) Ltd., the parent company of Mabey & Johnson Ltd., forked over approximately £130,000 via a civil order based on the improper conduct of Mabey & Johnson Ltd. See here for the prior post summarizing the Mabey & Johnson Ltd. enforcement action. In the release, SFO Director Richard Alderman said that there are “two key” messages. “First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money.” Second, “shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. […] The SFO intends to use the civil recovery process to pursue investors who have benefited from illegal activity.”
One source said that the Mabey & Johnson development “could have far-reaching implications.” Another called it a “landmark development” and a “further pressure point for companies to put in place preventative measures or else they and their shareholders face the consequences.” Another called it a “concerning development.” Another stated that the SFO is now recovering “tainted dividends from innocent investors.” Another stated that the SFO is beginning “to claw back dividends paid by companies that are convicted on criminal charges.
Time out!
All that occurred with the recent development is that Mabey Engineering (Holdings) Ltd., the parent company of Mabey & Johnson Ltd., paid money in a civil action based on the improper conduct of Mabey & Johnson Ltd.
This is hardly revolutionary. Nearly every FCPA enforcement action involves (query whether it should) the parent company being held accountable often in the context of a DOJ non-prosecution or deferred prosecution agreement or an SEC civil action for the alleged improper conduct of its (sometimes very distant) subsidiary companies.
Much was written about Alderman’s statement that Mabey Engineering (Holdings) Ltd. “was totally unaware of any inappropriate behavior.” However, the same is true in the majority of FCPA enforcement actions in the U.S., there is no allegation, suggestion, or implication that the parent company knew of or authorized the improper conduct at issue. The standard that the U.S. enforcement agencies advance is essentially strict liability.
In this alert, Covington & Burling LLP attorneys Robert Amaee, John Rupp, and Alexandra Melia rightly tempered the brewing storm by laying out reasons why the Mabey & Johnson development “does not set a wide ranging precedent.” The Bribery Act “guys’ (here) nicely set forth the issues as well.
Indeed, in an e-mail statement, Richard Alderman told me as follows.
“The focus of this going forward will be on investors who have the ability to influence management. This will normally be the institutions (or major family shareholders) rather than small retail investors. We are looking to the major shareholders to help ensure that the companies in which they invest have an appropriate anti-corruption culture. In the regular discussions they have with management for example we would expect them to ask if the company is satisfied that it has adequate procedures under the Bribery Act. After all, this sort of dialogue is needed in view of the damage to the share price that can happen if there is a corruption investigation. We are looking to the future with this and are not looking to go back over cases that have been finished.”
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In another U.K. development, the SFO recently announced here that former Innospec executive David Turner pleaded guilty to three counts of consppiracy to corrupt.
The UK Bribery Act: Engagement With Companies And Compliance Effects
Today’s post is from Richard Alderman (Director of the U.K. Serious Fraud Office).
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The UK Bribery Act: Engagement With Companies And Compliance Effects
By Richard Alderman (Director, SFO)
In the months since the UK Bribery Act came into force on July 1st 2011, there is one question that I have probably been asked more than any other: what are we actually doing under the Act at the SFO?
In part, people are asking me this because of recent comments by some observers, suggesting that the SFO will be under intense pressure to go out and secure convictions very quickly under the new legislation – and that this means we’ll be out there hunting for easy targets.
That is a fairly easy claim to deal with. Easy targets are easy to find. We could go out and find half a dozen cases very quickly that we could probably investigate and prosecute through the criminal justice system, possibly by Christmas.
The SFO’s approach: Finding the Difficult Cases
But is this really what most people want to see? In my view, many people would regard the SFO as taking a rather lazy and unreflective approach if we pursued easy ‘quick wins’ rather than the really difficult and more serious cases. Also, I know which type of cases our staff would prefer to investigate – and it is definitely the more challenging ones.
So, what are we doing? The plain answer is that we’re actively looking for cases to take up – but these cases are the difficult ones. For example, we have been examining the activities of a number of foreign companies with a UK business presence who are involved in bribery in other countries.
We have found a number of these. But what we are looking for in particular is evidence that they have undermined ethical UK businesses. If they have not, then although there may be a technical Bribery Act offence, it is not the type of case where I would want to use our scarce resources, or take up the valuable time of UK courts and juries.
So we have seen instances of bribery involving foreign companies where we have decided not to take them forward for a full investigation, because we cannot see that a UK company lost out. Other authorities might choose to take action, but it is not a priority for the SFO.
However, there are other cases where we have found potential damage to UK companies and their employees. It is still early days – but I can confirm that we are looking at some cases to see whether or not to start using our compulsory powers.
I am under no illusions about the difficulty of these cases. Getting the evidence and getting people before a UK jury will be incredibly difficult. Investigations will be complex, and we will need to make full use of international co-operation and the SFO’s own powers. But make no mistake, these cases are a high priority for us.
Compliance Effects
Aside from questions about our approach to actions under the Bribery Act, a further area of interest is in our view of its compliance effects on companies. Experience shows that laws – and especially new laws – have an enforcement effect as well as a compliance effect, and that the latter of these is often larger.
In the specific context of the Bribery Act itself, a particular question that arises is whether the Bribery Act without an adequate procedures defence would have had the same compliance effects as the Act with adequate procedures. In other words, is it the Bribery Act itself – or the adequate procedures defence specifically – that has resulted in its compliance effects?
It is still early days for the Bribery Act – and it is difficult to answer these questions in detail without hard research into what companies are doing internally in response. However, looking at what US corporations are telling us, they have realised that being compliant under the FCPA does not automatically mean that they are Bribery Act compliant.
This is a message that professional services firms have been trying to hammer home with their clients whether in the UK, US or elsewhere for some time now. I believe it is getting through and that corporations are going on to take action in response. The likelihood is that those Boards that are more committed to good corporate governance will take notice, but if companies wish to ignore it then that is ultimately their choice. They should not be surprised though if the SFO takes a close interest in them. They should also not be surprised if they find that other corporations become less willing to do business with them. I believe they will suffer commercially if they do not have an anti-corruption culture.
In this context, we take differing views of compliance by SMEs and large corporates. We are aware that SMEs – unlike their larger counterparts – often lack the time, resources and readily-available, expensive professional advice needed to move quickly into compliance. So we are taking a more consultative approach to compliance by SMEs, and accept that they may take longer to get there.
The Act’s Impact on our Engagement with Companies
This leads neatly into a further theme that is especially relevant to our approach to the Bribery Act, but also touches on our work under other pieces of legislation: our commitment to engaging with companies. In general, we are finding that engagement is a more effective tool with bribery and corruption under the Bribery Act than it has been in the past with fraud.
On reason for this is that, for a successful prosecution under the UK’s previous bribery and corruption legislation, we had to prove that there was a ‘controlling mind’ at Board level behind the activities. Under the new Act, the key question is whether the Board has put effective structures in place to prevent bribery from taking place. If a company has not done this, and has significant operations in the UK, we can prosecute it for bribery and corruption by any of its employees anywhere in the world.
This is a big change. One effect is that prosecution of fraud is now out of line with bribery and corruption, since to prosecute a company for fraud we still need to prove that people at a senior level knew the fraudulent activity was taking place. Another effect is that acquirers who take over a business, and then discover that suspected bribery and corruption has been (and probably still is) taking place in it, are more likely to come forward, self-report and engage with us.
They are encouraged to do this by an awareness that we will take a pragmatic approach, quite possibly by letting them conduct their own internal investigation and then report the findings to us so we can take a balanced view on further action. They know that their demonstration of goodwill in initially disclosing their suspicions to us will be taken into account.
Our Broader Approach to Intelligence and Proactive Engagement
More broadly, we constantly monitor and review intelligence and other information relating to the activities of corporations within our jurisdiction. This comes to us in all sorts of ways – including suspicious activity reports to the UK’s Serious Organised Crime Agency (SOCA) and increasingly from whistle-blowers contacting our new SFO Confidential hotline. We also receive a lot of information from our international partners, from individuals across the world and indeed from picking up press reports.
With every piece of information, we need to assess whether there is something here that justifies SFO action. It’s a vital decision, and so we have a rigorous internal process for it, including making a number of enquiries to test the information before deciding formally whether to launch an investigation. We need to be as sure as possible that there is something there that justifies us in taking on the case.
When we do decide to do something, our approach can take a number of different forms. In some cases we contact the corporation involved, and say we believe they have a problem and would they like to come and see us. Most – but not all – do come in for that discussion, where we encourage them to agree to undertake an internal investigation and present the findings to us in due course. This makes obvious sense for the corporation, and several have agreed to this.
The Downside of Non-Cooperation
Of course, some corporations may not be interested in a discussion with the SFO – in which case we can carry on doing what we need to do. However, this does mean the corporation has passed up its opportunity for the maximum degree of mitigation and flexibility on our part. I regard this as a short-sighted and misguided approach, but of course that’s a matter for them.
In other cases we think that approaching the corporate is not appropriate – perhaps because of the size and systemic nature of the alleged corruption, the involvement of very senior people, or the potential for evidence to be destroyed. In that sort of case we may well decide to proceed quietly with our investigation. So the first that the corporate will know of our interest is likely to be when we arrive at its door with search warrants – the worst possible outcome for any business.
This is why we encourage companies to be rigorous in looking at allegations they receive internally about instances of corruption. Senior management should be asking hard questions about these – and should have a robust risk assessment process in place to provide as much reassurance as possible. If companies do not police themselves in this way, then the possibility that the SFO will need to take action is all the greater.
Whistleblower Developments
Some whistleblower developments on both sides of the Atlantic to pass along.
U.K.
The U.K. Serious Fraud Office recently issued this release to launch “SFO Confidential” – a live on-line resource “for concerned individuals to help expose situations that might deserve a closer look.” Richard Alderman, Director of the SFO, stated as follows. “I want people to come forward and tell us if they think there is fraud or corruption going on in their workplace. Company executives, staff, professional advisors, business associates of various kinds or trade competitors can talk to us in confidence. I have set up a special team to make the SFO readily accessible to whistleblowers, with trained staff sympathetic in dealing with any anxieties people might have about coming forward. I want whistleblowers to feel comfortable about it and use SFO Confidential to help flush out fraud.”
As Bryan Cave attorneys note in this alert, unlike the recently enacted Dodd-Frank Act whistleblower provisions that provide monetary incentives to whistleblowers, “SFO Confidential appeals instead to the individual’s civic duty and/or self interest in preventing fraud and corruption (for example, promising to “level the commercial playingfield” where a competitor is gaining business unfairly through fraud or corruption).”
Perhaps sensing a marketing opportunity, Field Fisher & Waterhouse (here) stated as follows. “The SFO’s implementation of a whistleblowing hotline may worry companies who have experienced corruption issues in the past. The hotline clearly increases the risk of issues being highlighted anonymously by disgruntled employees or competitors. The introduction of the hotline comes 4 months after the date that the Bribery Act 2010 came into force. Under this Act, commercial organisations can be held liable for bribes paid by those acting on their behalf, even if the bribe is paid outside the UK. A business which implements “adequate procedures” to prevent bribery has a complete defence to this kind of charge under the Act. The hotline also comes at a time of increased enforcement by the Serious Fraud Office. During the course of last week the SFO announced two new prosecutions for corruption.”
U.S.
Martin Weinstein and Robert Meyer (Willkie Farr & Gallagher) report here on the recently introduced Whistleblower Improvement Act of 2011 (“H.R. 2483”) (see here). Among other changes the legislation would make to the recently enacted Dodd-Frank whistleblower provisions are the following according to Weinstein and Meyer: “It would revise the award eligibility standards to require whistleblowers who are reporting their employer’s possible violations of federal securities laws to internally report such misconduct prior to reporting to the SEC;” “It would render the whistleblower award discretionary as opposed to mandatory, and eliminates the 10% minimum award requirement;” and “It would mandate that the SEC inform an entity targeted for an investigation initiated by a whistleblower tip before commencing an enforcement action.”
In conclusion, the authors state as follows. “This legislation reflects the recommendations of some practitioners within the antibribery community. In particular, many commentators have advocated that Congress adopt a requirement that whistleblowers internally report misconduct prior to any disclosure to the SEC. Although it remains to be seen whether this legislation will be enacted, the debate as to how to effectively structure and implement a robust whistleblower program is certain to continue. Irrespective of the outcome of this debate, the new SEC whistleblower program likely will put additional pressure on legal and compliance systems to readily identify and respond to possible violations of the securities laws.”
A Dialogue Worth Having
This previous post discussed U.K. plans to introduce U.S.-style corporate plea bargains, including deferred prosecution agreements. Among other things, the post mentioned an October 17th meeting with U.K. prosecutors at Pinset Mason’s London office.
thebriberyact.com summarizes the meeting and nicely frames the issues here and here. The post states as follows. “We think that the need for DPA legislation is obvious. Its absence has often been remarked upon by the Director of the SFO and for very good reason. It is a serious hole in the UK law. Its absence has a chilling effect on the attempts to ensure that ethical attitudes become a permanent feature of corporate life in all companies, be they International, SME or small.”
Others have shared their views on whether the U.K. should adopt U.S. style alternative resolution vehicles and, if so, how.
Thomas Fox at the FCPA Compliance and Ethics Blog (here) believes “that the ability to enter into a DPA is a powerful tool that advances the interests of prosecutors, the judiciary and the public.” Fox states that “the primary reason for both the prosecution and a company which violates the Bribery Act entering into a DPA is certainty.”
Ross Parlane of McGuire Woods writing at The Bribery Library (here) states as follows. “There are a number of benefits to be gained from giving UK prosecutors the power to negotiate DPAs. Certainly the cost and time involved in investigating offences would be significantly reduced, which is good news for the public purse. Further, a well negotiated DPA that gives proper attention to remediation (e.g. through monitoring) as well as to punishment, has the potential to effect a permanent positive change in the culture of an organisation.” Yet Parlane states (and identifies) that “there are a number of tricky issues that need to be resolved before the use of deferred prosecution agreements can be adopted in the the U.K.”
Michael Volkov, writing at thebriberyact.com (here) notes that “for UK policymakers, the balance between judicial review and prosecutorial discretion is one which has to be resolved before any new policy can be enacted.”
Let me contribute to the dialogue by posing this question. Why does a law with an adequate procedures defense require the third option of a deferred prosecution agreement – the first two options being prosecute vs. not prosecute?
If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act. Seems like a reasonable result. In other words, no need for the third option in such a case.
On the other hand, if a corporate does not have adequate procedures (i.e. has no committment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act. Seems like a reasonable result. Does a third option really need to be created for corporates who do not implement adequate procedures?
Because the FCPA does not have an adequate procedures / compliance defense (at least not yet), the same analysis does not apply.
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In other recent U.K. developments, last week the SFO announced (here) that two former Innospec executives were charged. Dennis Kerrison, the former CEO of Innospec Ltd., was charged with “an allegation of conspiracy to corrupt, in that he gave or agreed to give corrupt payments to public officials and other agents of the Government of Indonesia as inducements to secure, or as rewards for having secured, contracts from the Government of Indonesia.” Paul Jennings, the former CEO of Innospec, is accused of “two allegations of conspiracy to corrupt, in that he gave or agreed to give corrupt payments to public officials and other agents of the Governments of Indonesia and Iraq as inducements to secure, or as rewards for having secured, contracts from those Governments.”
Earlier in the week, the SFO also announced (here) that David Turner, a former business unit director of Innospec Ltd., was charged with “alleged offenses of conspiring to make corrupt payments to public officials in Indonesia and Iraq to secure contracts for Innospec Ltd. for the supply of its products.”
Both Jennings (here for the prior post) and Turner (here for the prior post) previously settled SEC FCPA enforcement actions based on the same core set of conduct.
As with the SFO’s recent case against Victor Dahdaleh (see here for the prior post), the recent Innospec related enforcement actions are not Bribery Act enforcement actions.
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Sure, it’s Halloween and all, but the FCPA reform debate (see here) is getting a little silly don’t you think?