On 8th July Leveson LJ approved an application by the Serious Fraud Office for a Deferred Prosecution Agreement with a company accused of conspiracy to corrupt, conspiracy to bribe and failure to prevent bribery.
The company, which has remained anonymous due to ongoing legal proceedings, is a small to medium sized enterprise (SME) and wholly owned subsidiary of a US corporation, which has also remained anonymous. Identified simply as XYZ Ltd, the company’s revenue was predominantly generated by exports to Asian markets. Between June 2004 and June 2012 a number of its employees and agents were involved in the systematic payment of bribes to secure contracts abroad. Of 74 contracts that were examined by investigators, there was evidence to suggest that 28 of them were secured as the result of bribes.
The case raised the particular difficulties of considering what is the appropriate response to this form of criminality where the offending party is a modestly resourced SME. As His Lordship put it:
At what level of criminality is it necessary simply to allow the SME to become insolvent and to what extent is it appropriate to mitigate the financial penalty, knowing that the SME is only able to make any substantial payment with the support of the substantial company of which the SME is a wholly owned subsidiary?
As this is only the second DPA to be approved by an English court, the preliminary judgment (SFO v XYZ Ltd (U20150856), 24 June 2016) and final judgment (SFO v XYZ Ltd (U20150856), 8 July 2016) of the President of the Queen’s Bench Division contain valuable guidance as to when a DPA will be appropriate and what form it should take.
Regardless of the proposed terms of a DPA, the court must be satisfied that a DPA, as opposed to a criminal prosecution, is in the interests of justice. His Lordship espoused six factors relevant to the consideration of what was in the interests of justice in any given case.
First amongst these was the seriousness of the predicate offences. The more serious the offence, the more likely it is that a prosecution will be in the public interest and, conversely, the less likely it is that a DPA will be in the interests of justice. In this case the criminality was grave, involving systematic bribery over a long period of time, amongst a number of agents and across a number of foreign jurisdictions. This generated a gross profit of around £6.5 million (the net profit was around £2.5 million).
Secondly, the court should give considerable weight to the importance of incentivising the exposure and self-reporting of corporate wrongdoing. In this regard not just the fact of a self-report is significant, but the nature and extent of that self-reporting also. XYZ had, when the wrongdoing came to light in September 2012, instructed a law firm to carry out an independent internal investigation. That investigation resulted in the submission of a written report to the SFO by January 2013. His Lordship noted that the information provided in that self-report was comprehensive. XYZ, through the law firm it instructed, provided oral summaries of first accounts of interviewees, facilitated the interviewing of current employees, and provided timely and complete responses to SFO requests for further information. Such was the completeness of the self-report compiled by XYZ’s lawyers that the independent SFO investigation that followed effectively confirmed the findings of that self-report. All of this, His Lordship concluded, militated in favour of a DPA being in the interests of justice.
Thirdly, the court should consider the history (or otherwise) of similar conduct. Although in this case the criminality with which the court was concerned on this occasion occurred over the course of eight years, it did not have a history of offending or malpractice prior to that.
Fourthly, the attention paid by the offending party to corporate compliance prior to, at the time of, and after the offending is a relevant consideration. XYZ had, by its own admission, an inadequate compliance programme in place at the time that the offending occurred. However, since 2011 a new compliance process was introduced at XYZ, at the instigation of its parent company in the US. Improvements included the implementation of new training programmes, policies and procedures. It was, in fact, this renewed focus on effective compliance that led to the uncovering of the wrongdoing with which the court was concerned.
Fifthly, the court should consider any extent to which the offending entity has changed both in its culture and in relation to relevant personnel. XYZ in its current form is, His Lordship concluded, effectively a different entity to that which existed at the time of the offending behavior. Two senior employees had been dismissed, the relationships with agents who were found to be involved in the wrongdoing were terminated, and the bids for a number of contracts thought to be tainted by the offending behavior were withdrawn.
The final factor the court should consider is the impact of a prosecution on employees and others innocent of any misconduct. XYZ was, the court was told, operating on an economic knife-edge, with the possibility that it would, if prosecuted, fall into insolvency, harming the interests of workers, suppliers and the wider community.
Taking all of these factors into account, His Lordship concluded:
‘[…]there is no doubt that XYZ’s conduct was very serious both in terms of type and scale so that it is not straightforward that a proposed DPA is in principle in the interest of justice. However, it is important to send a clear message, reflecting a policy choice in bringing DPAs into the law of England and Wales, that a company’s shareholders, customers and employees (as well as all those with whom it deals) are far better served by self-reporting and putting in place effective compliance structures. When it does so, that openness must be rewarded and be seen to be worthwhile.’
The terms of the DPA were the disgorgement of just over £6,201,085 of gross profits (almost £2 million of which was to be paid by XYZ’s parent company to account for dividends it received from XYZ, albeit entirely innocently), the payment of a financial penalty of £352,000, continued cooperation with the SFO in relation to all matters arising from the conduct with which this case is concerned, and the review and maintenance of XYZ’s compliance programme. Whilst priority must, under the statutory regime, be given to the payment of compensation, this was not appropriate in this case because it was not possible to positively identify any victims who stood to be compensated.
The court must be satisfied that the terms proposed are fair, reasonable and proportionate. His Lordship concluded:
‘By disgorging or paying by way of financial penalty the total of gross (as opposed to net) profit and by doing so by incurring long term liability to ABC (save for ABC ’s reimbursement of the dividends it received), I believe that the conclusion is fair, reasonable and proportionate. This is not least because it provides an example of the value of self-report and co-operation along with the introduction of appropriate compliance mechanisms, all of which can only improve corporate attitudes to bribery and corruption.’
The reasoning of the court in this case builds upon guidance already set out in the DPA Code of Practice applied by the SFO and the CPS. It demonstrates that the DPA can and, one might expect, will be used by prosecutors and the courts in a range of different types of cases involving different kinds of recalcitrant entities in order to promote wider compliance and cooperation by those entities. Furthermore, the judgment of Leveson LJ provides some clear indicators of the kinds of practical steps that such entities can and should take when they discover criminality in their midst.