Corporates in the firing line

March 2016 | SPOTLIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

The SFO has had a good start to the year. Its four-year bribery investigation into Smith & Ouzman concluded in January when the printing company was ordered to pay a financial penalty of £2.2m comprising a £1,316,799 fine, a confiscation order of £881,158 and £25,000 towards the prosecution’s costs. The company had been convicted, together with two directors, of corruption under the Prevention of Corruption Act 1906 but corporate sentencing was delayed for over a year while confiscation issues were resolved. This was the first time a corporate has been convicted of corruption by a jury.

Just a week later, the Court of Appeal ruled in the SFO’s favour confirming that bribing foreign officials was illegal before the extraterritoriality provisions of the Anti-Terrorism, Crime and Security Act 2001 came into force on 14 February 2002. The SFO had appealed a ruling in the ongoing case R vs. AIL, GH and RH that the Prevention of Corruption Act 1906, which it relies upon to prosecute pre-Bribery Act 2010 offences, did not apply to foreign officials prior to 2002. However, the importance of the point means that it may well go to the Supreme Court this year if leave is granted.

Next month, Sweett Group plc will be sentenced having admitted an offence of failure to prevent bribery under s7 of the Bribery Act in respect of conduct in the Middle East. This was the first s7 guilty plea that the SFO has secured and came shortly after another first – the approval on 30 November 2015 of a Deferred Prosecution Agreement (DPA) with ICBC Standard Bank plc in relation to that bank’s conduct in Tanzania.

Funding crisis

The SFO’s continued success against corporates will, in part, depend on funding issues. David Green QC, the director of the SFO, has spoken in the past about the arrangement the SFO has with HM Treasury for extra funding for so-called blockbuster cases. In 2014-2015, with a budget of £35.2m, the SFO asked for an additional £26.5m to cover significant investigations and to settle liabilities. The SFO budget for 2015-2016 was reduced to £33.8m and in January 2016, the Solicitor General informed the House of Commons that the SFO sought a cash advance of £15.5m to meet “an urgent cash requirement” until parliament approves the full £21.1m requested by the SFO as extra funding for this financial year. Transparency International cited effective resourcing of the SFO as a key requirement for the UK to maintain its improved ranking from 14th to 10th in its Corruption Index 2015.

Assuming it receives the funding it needs, the SFO’s focus on corporate offending will continue, and with its recent achievements under its belt, it is likely to grow in confidence. We can expect more corporate investigations, prosecutions and DPAs in 2016. In a speech in September 2015, Mr Green said that there would be at least two DPAs by the end of 2015. With only one concluded there may well be another DPA imminently and it has been widely reported that it will be with Sarclad, a technology supplier to the metal industry.

Cooperation is king

Cooperation will continue to be key for corporates who are under investigation by the SFO, and this is all the more important for those looking to agree a DPA. Stuart Alford QC, joint head of fraud at the SFO has said that cooperation will likely include “self-reporting, speedy access to potential witnesses (prior to them being interviewed within an internal investigation) and broad, less restrictive consideration of material for privilege”.

Companies that conduct their own internal investigations should be alive to the issues that can arise when interviewing employees. The SFO has said that the decision of the company whether to share the notes of any fact-finding interviews will be a factor to be carefully considered in assessing cooperation and it has hinted that a limited waiver of privilege over the entire product of an internal investigation will be expected in the future. Alford has said “we certainly wouldn’t hold against a party any decision to properly claim privilege; but what better way to demonstrate ‘cooperation’ than by an open and frank view of privilege claims”. However, this will be difficult for companies who are the subject of multi-jurisdictional investigations as the limited waiver concept is not recognised in some other jurisdictions, notably the US. Companies that wish to cooperate may not always be able to agree a limited waiver if they are being investigated overseas, as the material may become discloseable or discoverable in follow-on actions.

Going after unexplained wealth

The UK’s Anti-Bribery summit will take place in May and could see the approval of a proposal for unexplained wealth orders which would allow UK officials to question individuals in relation to ‘unexplained wealth’ and to instigate asset recovery proceedings against such assets where necessary. The proposed orders could be made even where there is no substantial proof that the property in question is connected to crime and without the need for a prosecution in the UK. If approved, this will have an impact on companies where assets are being held and hidden for beneficial owners.

Extraction Industries Transparency Initiative

Following the UK’s admission to the Extraction Industries Transparency Initiative (EITI) in October 2014, the government will release its first report by April 2016. EITI is a global initiative set up to tackle corruption in the extractive industries (oil, gas and mining). After the UK publishes its report it will then have a further 12 months to become fully EITI compliant. The UK implemented the EU Accounting Directive at the start of last year, requiring extractives companies to report on payments made to governments and the release of its report will have a further regulatory impact on UK companies operating in these sectors.

US style corporate prosecutions

Mr Green favours so-called ‘US style’ powers to punish big businesses instead of the current law, which requires the attribution of guilty knowledge to the directing mind of a company before the corporate can be prosecuted. Having persuaded the government to examine the case for a new corporate offence of failure to prevent economic crime, akin to the section 7 offence, he was dealt a blow at the end of last year when this proposal and the examination of the case for changing corporate attribution was shelved. However, with the Anti-Bribery summit taking place, there are likely to be renewed calls for the subject to be reopened. An easier route to corporate attribution will mean more companies being prosecuted for substantive offences committed by their employees or agents, and if the s7 failure to prevent offence is eventually extended to other types of economic crime, there will be another way to prosecute them, on the basis of what they did not do.

2016 is likely to see an invigorated SFO that has grown in confidence, not least given the re-appointment of David Green as director for a further two years until 20 April 2018. Their approach to cooperation and the more strident approach to privilege is bound to be an issue that is tested in the near future. The summit in May will put anti-corruption initiatives in the UK firmly in the spotlight and may help Green’s cause for further funding. Mr Green remains concerned that without a change to corporate liability, DPAs in the UK will never enter the mainstream. But looking at the evidence of the SFO’s recent successes and the corporate investigations and prosecutions they are currently involved in, there seems to be no inability on their part to investigate and prosecute companies where the company itself appears to be to blame. There is certainly no impediment to prosecuting the individuals who might have been involved, focusing on individuals is now a priority for the Department of Justice, the effects of which, inevitably, will also be felt by company executives here.

Jo Rickards is a partner at Kingsley Napley. She can be contacted on +44 (0)207 3693 848 or by email: jrickards@kingsleynapley.co.uk.

Jo Rickards

Kingsley Napley