Self referral, co-operation and a balance of mitigating factors were thought to be essential ingredients before a DPA could be considered by a prosecutor. It seems only one existed in this case yet the UK’s largest DPA to date followed.
On Tuesday 17 January 2017 at Southwark Crown Court (sitting at the Royal Courts of Justice), a packed courtroom heard the approval of the third, and by far the largest and most significant Deferred Prosecution Agreement (“DPA”) as the third anniversary of the implementation of the DPA regime approaches on 24 February 2017. In total, the global settlement reached by Rolls-Royce Plc (“Rolls-Royce”) with the SFO, the US Department ofJustice and the Brazilian authorities, will see them pay some £671m, of which the lion’s share, £497.25m they will pay as a result of the UK DPA.
This signals an end to an investigation spanning over three years (the Director of the SFO opened an investigation into Rolls-Royce in September 2013).
It is an important moment in the life of DPA’s (and arguably, therefore, that of the SFO) not least because dissimilarly to the first two DPA’s involving Standard Bank and XYZ (the latter company cannot be named for legal reasons), this investigation did not result from a corporate self-report. Instead it came about when material was released into the public domain by whistleblowers.
What was said to be of critical importance here, as the SFO emphasised on several occasions during the hearing, was the ‘beyond exemplary’ manner in which Rolls-Royce co-operated with the investigation. This was a fact upon which the Court was able to place considerable weight in concluding that it was in the public interest to dispose of the case without an immediate prosecution of the company. This was notwithstanding the commission of criminal acts which, as David Green CB QC summarised, represented: “…conduct spanning seven countries, three decades and three sectors of its business.” Notwithstanding these comments there were some unusual characteristics to the “beyond exemplary” co-operation, not least the public announcement by the SFO that it was expanding its criminal investigation against the company only last May.
The draft indictment consisted of 12 counts in total, with bribery-related counts, both pre and post Bribery Act 2010:
- 6 counts of conspiracy to corrupt in Indonesia, Thailand, India and Russia;
- 1 count of false accounting in India; and
- 5 counts of failure to prevent bribery in Indonesia, Nigeria, China and Malaysia.
In broad terms the indictment reflected systemic corruption involving the use of third party intermediaries/consultants to make corrupt payments to public officials in order to ensure that Rolls-Royce won certain lucrative public contracts, with a combined gross profit margin of some £250m.
The level of co-operation, as revealed in some detail in the judgment and its appendices, is likely to set the benchmark for companies looking to act co-operatively with the Prosecutor in the future.
Terms of the DPA
The DPA will last for five years, with the indictment suspended on condition of Rolls-Royce’s compliance with the terms of the DPA, after which the proceedings will be discontinued. If the requirements of the DPA are met then there is an option, upon written confirmation of that fact by the SFO, for the period to be reduced to four years.
In the usual way, Rolls-Royce are not, by virtue of the DPA, protected against prosecution against “…any present or former officer, employee or agent or against Rolls-Royce or RRESI for conduct not disclosed by them prior to the date of the agreement (or any future criminal conduct).”
The requirements of the DPA were as follows:
- Past and future co-operation with the relevant authorities (as further described) in all matters relating to the conduct arising out of the circumstances of the draft Indictment;
- Disgorgement of profit on the transactions of £258,170,000;
- Payment of a financial penalty (calculated in accordance with the relevant Sentencing Guidelines, the details of which are set out in a useful schedule appended to the judgment) of £239,082,645;
- Payment of the costs incurred by the SFO (put at £12,960,754);
- At its own expense, completing a compliance programme following the recommendations of the reviews already conducted by an external firm.
It was also acknowledged that no tax reductions were to be sought by Rolls-Royce in relation to the payments (ii), (iii) and (iv) above in the UK or elsewhere.
In addition to this financial penalty, the DPA reached with the US Department of Justice requires Rolls-Royce to make a payment of US $169,917,710 whilst the leniency agreement with the Brazilian authorities requires a payment of US $25,579,645.
1) Co-operation (Co-operation, Co-operation…)
This DPA once again highlights the significance that both the SFO (consistent with the many public statements from the Director) and the Court places on co-operation by suspect companies that wish to benefit from a DPA rather than face prosecution. In paragraph 21 of his judgment, Leveson LJ explained that the extent of the company’s co-operation is:
“…highly material both to the interests of justice and the assessment of the balance between prosecution and DPA and also to the appropriate discount to allow from the financial penalty imposed.”
The SFO stated that Rolls-Royce provided “genuine” co-operation at the very early stage and of a very high standard. With the assistance of external lawyers the company reviewed over 250 relationships it had with intermediaries, agents, advisers and consultants, and it closely analysed over 120 of those relationships. Leveson LJ details in his judgment, the extent of the company’s assistance, stating that it disclosed all interview memoranda (under a limited waiver of legal professional privilege), voluntarily providing all material requested by the SFO and consulting the SFO in respect of, amongst other things, developments in media coverage.
All of these factors led to the Court’s conclusion that the company:
“…could not have done more to expose its own misconduct, limited neither by time, jurisdiction or area of business.”
As with XYZ, in light of the gravity of the offences involved (see below), it is absolutely clear that anything short of the extraordinary level of commitment provided by Rolls-Royce would not have saved them from prosecution.
Of course, this very co-operation and supply of material by the company, including the waiving of any legitimate claims to privilege may be important to the SFO and the construction of the case against any individual. It will be interesting to see what challenges might arise to this evidence.
2) Aggravating Features
The eight aggravating features identified in Leveson LJ’s judgment are as follows:
- The conduct involved offences relating to the bribery of foreign public officials, commercial bribery and the false accounting of payments to intermediaries;
- The offences were multi-jurisdictional, numerous and spread across Rolls-Royce’s defence aerospace, civil aerospace and energy businesses;
- The offences have caused and/or will cause substantial harm to the integrity/confidence of markets;
- The offending was persistent and spanned a period of years from 1989 until 2013;
- The offending involved substantial funds being made available to fund bribe payments;
- The conduct displayed elements of careful planning;
- The conduct related to the award of large value contracts which, taken together, ultimately earned over £250 million of gross profit (although care must be used in relation to this term which is based on calculations reached by accountants instructed by the SFO and Rolls-Royce and agreed by the parties and does not necessarily reflect the way in which the accounting profession would approach gross profit for reporting standards);
- The conduct involved senior (on the face of it, very senior) Rolls-Royce employees.
3) Company Structure and the Impact of Prosecution
The Court acknowledged that Rolls-Royce is a global company and that it is “…considered to be…of central importance to the United Kingdom, with a reputation in the field of engineering second to none”, operating in over 50 jurisdictions and employing some 50,000 people.
During the hearing, Leveson LJ stated that the effects of the law relating to DPA’s was to allow for a constructive approach to be taken in encouraging higher degrees of compliance and improving business ethics, rather than tearing companies down. This approach was plainly calculated to give encouragement to other companies to come forward when misconduct is uncovered.
The Court sought to focus on the fundamental change of culture and personnel in the company, stressing that no current member of the board at Rolls-Royce was involved in any of the misconduct.
In identifying the suitability of a DPA in the circumstances, the SFO highlighted the collateral damage, and disproportionate consequences, that a conviction following a successful prosecution would have had upon innocent employees, pensioners and shareholders. Leveson LJ listed additional repercussions to third party interests including the adverse effect to the UK defence industry, financial effects on the supply chain, impairment of competition in highly concentrated markets, a potentially significant fall in share price and consequential redundancies.
4) Corporate Compliance
Leveson LJ considered, in great detail, the steps taken by the company to enhance its ethics and compliance procedures. The disciplinary proceedings taken by the company in respect of 38 employees was highlighted in addition to the internal investigations and suspension of work with 88 intermediaries.
Up to December 2016, the steps taken (excluding the intermediary review and disciplinary proceedings) are said to have cost Rolls-Royce £15,175,331.46, with the review still ongoing. This does not include the significant sum of £137,000,000 which Rolls-Royce is said to have spent on advisers and compliance measures during the investigation.
Whilst, as previously observed by Fulcrum, the first UK DPA involving Standard Bank set the standard for the level of co-operation on the part of companies who wished to ‘benefit’ from a DPA, the Rolls-Royce DPA is significant in several key ways:
- It demonstrates that both the SFO and the courts are prepared to entertain DPA’s even where there has not been a ‘full self report’, but only in circumstances in which a company has, once misconduct is identified, co-operated fully with the authorities from that point onwards. It is plain in this case that the SFO and the Courts recognised the need to demonstrate some benefit other than suspended criminal proceedings to such open co-operation. This manifested itself in an additional discount to the financial penalty over and above credit for an acceptance of liability in place of conviction.
- It indicates a general willingness of the Court to take a ‘constructive’ approach to the sentencing of corporates, balancing the importance of punishing the company with the collateral damage to employees, shareholders, and others.
- It highlights that a willingness to take a proactive approach to self-cleansing, identifying and dispensing with rogue employees and inadequate leaders, and investing heavily in its compliance function is likely to find favour with the Court.
- The scale of this financial penalty demonstrates that, whether within the DPA regime or whether applied to sentencing exercised after a conviction, the relevant Sentencing Guidelines will dictate very substantial, US-style, financial penalties against corporates, particularly those who operate with handsome profit margins.
- It is interesting that the DPA did not include the imposition of a Monitorship. The US authorities have great faith in independent monitoring arrangements and they have been used to good effect for many years. They provide a route by which an external professional can help police the company’s compliance during the deferral period. It is perhaps a shame that the UK courts seem resistant to such arrangements.
Given the scale of corruption alleged in this case, the pervasive nature of those allegations across the business and the extensive period over which that corruption is said to have taken place, some commentators, including Transparency International, have questioned whether the interests of justice have truly been meet by this resolution. It is a fair question.
However, the decision to engage with the authorities at an early stage, and to self-report in particular, remains a complex calculation. There is a necessary loss of control that follows such an approach which companies will ignore at their peril. Taking early advice and making informed decisions remains essential. Some may speculate as to whether at the stage that Rolls-Royce setout on their path of co-operation they had full visibility of where the path would take them and just how much it would come to cost.