The Serious Fraud Office has its second deferred prosecution agreement approved

The Serious Fraud Office (SFO) has announced the approval of its second deferred prosecution agreement (DPA). This was entered into with an SME over its commission of the corporate offence of failure to prevent bribery under Section 7 of the Bribery Act 2010. The SME cannot be named, and is referred to as "XYZ", due to related and ongoing criminal proceedings against individuals. This latest DPA sheds further light, for companies and their advisers, on how the courts and the SFO are likely to approach DPAs in the future.

The wrongdoing

XYZ is a wholly owned subsidiary of an US registered corporation (“ABC”), which historically has generated most of its revenue from exports to Asian markets.

Between 2004 and 2012, XYZ was involved in multiple counts of bribery, used to secure contracts in overseas jurisdictions. In total, 28 contracts were found to have been won as a result of bribes offered by intermediary agents acting on behalf of XYZ.

In late 2011, ABC implemented a new global compliance programme which covered XYZ's operations. Shortly after this, in late August 2012, the suspected bribery was discovered. By 4 September 2012, XYZ had instructed their legal advisers to conduct an initial internal investigation into the suspicions. One month later, the law firm advising XYZ alerted the SFO, without naming their client, that their client may be making a self-report. On 31 January 2013, a formal written self-report was submitted to the SFO.

The SFO launched its own investigation into the bribery allegations in April 2013. Over two years later, in August 2015, the SFO invited XYZ to negotiate potential terms for entering a DPA. On 8 July 2016, Lord Justice Leveson approved the terms of the DPA.

The DPA

The DPA will last for up to 4.5 years, but it could come to an end after 2.5 years if the financial terms are fully met. If the terms of the DPA are fully complied with the prosecution against XYZ will be discontinued.

The principal terms of the DPA are as follows:

1. Disgorgement of gross profits of £6,201,085 (of which £1,953,085 will be contributed by ABC, being the repayment by ABC of a significant proportion of dividends that it had received innocently from XYZ).
2. Payment of a financial penalty of £352,000 (taken as a global figure in addition to the disgorgement, this represents the entirety of the gross profits from the implicated contracts: £6,553,085).
3. Full cooperation with the SFO.
4. Review and maintenance of the organisation’s existing compliance programme.

This DPA did not require XYZ to pay any compensation (because of the impossibility of identifying victims), nor are XYZ required to pay the SFO's costs (because of XYZ's financial position and the desire to prevent XYZ's insolvency).

The penalty

By reference to the Sentencing Council Guidelines, the starting point for the financial penalty was to apply a multiplier of 300% to the gross profits received from the implicated contracts. This multiplier was decided by the seriousness of the crime and took into consideration factors such as the sustained period of time for which the crime continued. The court then took into account mitigating features, including a lack of previous relevant convictions and XYZ’s full cooperation and assistance throughout the process. The court also applied a discount of 50% which Lord Justice Leveson commented could be “appropriate to encourage others how to conduct themselves when confronting criminality as XYZ has".

However, the court’s decision as to the amount to be paid as a financial penalty (£352,000) was in the end decided by what XYZ could actually afford to pay without becoming insolvent. This demonstrates the wide discretion that the court has under DPA Code of Practice and the Sentencing Council Guidelines, as well as the court’s willingness to use it.

Anonymity

A distinguishing factor of XYZ’s DPA is that it is the first to coincide with the prosecution of individuals, two of whom have been charged and are awaiting trial. This has allowed XYZ a temporary anonymity which, if it were to become the norm for DPA proceedings, would certainly be attractive to companies wanting to avoid a drawn out process in the public eye, in favour of one short burst of negative publicity when the prosecution of the individuals is complete.

The parent company’s involvement

Another notable aspect of this DPA is the involvement of XYZ’s parent company. As an SME with relatively limited financial means, XYZ would not have been able to comply with the £6.5 million financial order. Instead, the US parent company, ABC, which had no knowledge of the alleged wrongdoing, agreed to return approximately £2 million it innocently received in dividends and also to provide XYZ with a long term loan. The court approved this pragmatic approach to solving the financial issue in order to make a DPA possible. The court commended ABC (who could legally have remained absent from the proceedings) for taking a proactive role in supporting their subsidiary.

The Director of the SFO, David Green CB QC, expressed reservation at the prospect of forcing an SME who had actively cooperated well with the investigation into insolvency, recognising the importance of ABC’s decision to intervene.

This demonstrates the opportunities parent companies have to consciously participate in SFO investigations of their subsidiaries in order to secure a DPA which is only possible through meaningful cooperation. Likewise, SMEs should consider calling upon their holding company to assist in any SFO investigations they may be subject to in order to maximise the possibility of obtaining a DPA.

Practical recommendations: how to secure a DPA

1. Ensure company has adequate procedures in place

This may avoid the need to go through the whole process at all. Burges Salmon can assist you in designing and implementing these procedures.

2. Self-report early on, after a preliminary internal investigation

An important practical point to take from XYZ is that a company will often need to conduct an initial internal investigation before being able to self-report to the SFO. This should not be a lengthy investigation. It should be just enough to determine whether there is credible intelligence indicating that corrupt activity has taken place in or on behalf of the business. From the cases, it seems that such an internal investigation should not last longer than 1-2 months.

3. Proactive improvement of procedures

If a financial crime is uncovered, the company should carry out a full compliance review in order to identify weaknesses in the existing procedures in order to ensure that they are robust and adequate. In light of XYZ, a company should not be afraid to seek the assistance of its parent company, as well as external legal counsel, in order to review, revise and stress test the adequacy of its procedures.

4. Continued cooperation

Once a self-report has been made, every effort should be made to assist and cooperate with the SFO. This cooperation must include balancing the need to preserve legal professional privilege, where applicable, against making primary, non-privileged materials and appropriately legally advised personnel available to the SFO to assist it with its investigation. Any attempt to deliberately hide wrongdoing from the SFO, "spin" the findings of the preliminary investigation, or in any other way mislead the SFO, will make a DPA a virtual impossibility.