The dawn of the DPA: practical learning points for compliance professionals and in-house lawyers

Written on 9 Feb 2016

The recent Deferred Prosecution Agreement between the Serious Fraud Office and Standard Bank is a ground-breaking development in corporate criminal law. The court judgment that approved the DPA is also a significant addition to the body of guidance available about the corporate offence of failing to prevent bribery contained in section 7 of the Bribery Act 2010.

In this article, we review the changing anti-bribery and corruption (ABC) landscape now that DPAs have become a prominent feature and suggest five significant learning points of practical relevance for those with corporate ABC responsibilities.

Deferred Prosecution
Agreements: a quick re-cap  

DPAs are a product of the Crime and Courts Act 2013 and have
been available to UK prosecuting authorities since February 2014.  In essence, a DPA allows a corporate body to
avoid prosecution for various fraud and dishonesty based offences (including
offences under the Bribery Act 2010) in exchange for agreeing to certain
conditions, including financial penalties.

The process for agreeing a DPA begins when a prosecutor
(such as the Serious Fraud Office) makes a proposal to a corporate under
investigation to negotiate a DPA as an alternative to prosecution.  This is not an offer of settlement and there
is no guarantee that a DPA will be agreed or will be accepted by the court. 

Although a DPA will not contain a formal admission of guilt,
the corporation will have to agree to a statement of facts relating to the
offence.  Crucially, if a DPA is not
agreed, the statement of facts can be used as evidence against the corporate if
a prosecution ensues.  This information
(and any other information provided to the SFO) can also be used to implicate individuals
within the business who may then face separate prosecution.  Agreeing to negotiate a DPA is, therefore, a
potentially high risk strategy. 

Standard Bank

The background to the Standard Bank case will be familiar to
many, but it is worth re-capping on the key facts as they add useful context to
the five practical points we explore below:

  • The SFO launched an investigation into Standard
    (a UK business) following a self-report after it uncovered suspicious payments
    made by its Tanzanian sister company, Stanbic.
  • Standard and Stanbic had been jointly instructed
    by the Tanzanian government to raise $600m of sovereign debt.
  • Stanbic involved a local partner, EGMA, on the
    deal.
  • There was little evidence that EGMA provided any
    services to justify the $6 million fee it was paid (which was immediately
    withdrawn in cash and not traced).
  • Limited KYC was carried out by Stanbic on EGMA
    and no due diligence was carried out by Standard.
  • The head of the Tanzanian revenue authority was
    EGMA’s chairman and also a shareholder.

On 30 November 2015, the DPA between Standard and the SFO
was formally approved by the court.  In
summary, Standard agreed to pay a penalty of $16.8m, compensate the Tanzanian government
to the tune of $7m, disgorge profits of $8.4m, pay the SFO’s costs, enter into
a review and monitorship programme and cooperate with the SFO and other
authorities in the future.  As well as
settling its criminal liability in the UK, Standard also settled with the US
Securities and Exchange Commission, with the SEC taking a cut of the penalty
payment imposed by the DPA.

Five practical points

1. Further
guidance on the “adequate procedures” defence under the Bribery Act
2010

In order for a company to defend
section 7 liability under the Bribery Act, it must establish that it had
adequate procedures in place to prevent bribery.  Following the Standard judgment, we now have
the benefit of hearing what the court had to say about Standard’s ABC policy:

  • Standard’s ABC policy was not deemed to be
    sufficiently clear, did not cover the scenario in question (where the bank was
    dealing with a sister company who had introduced a third party to a deal) and
    had not been effectively communicated to those on the Tanzanian deal.  It therefore appears that if an ABC policy
    does not specifically address the illegal activity in question, this may be a
    barrier to establishing an adequate procedures defence.  This highlights the importance of
    comprehensive and tailor-made ABC policies that address the specific bribery
    risks faced by a business, and which are effectively communicated to those most
    exposed to bribery risk. 
  • Enhanced KYC needs to be carried on intermediaries
    operating in high risk jurisdictions. Relying on associated persons to carry
    out due diligence is not sufficient. 
    Standard failed to carry out its own KYC and relied on Stanbic.    
  • Procedures should be in place to identify politically
    exposed persons (PEPs) involved in a
    deal.  Standard’s ABC procedures failed
    to identify that the Chairman of EGMA was a PEP.

2. Further
guidance on who an “associated persons” is

A company can be liable under
section 7 for failing to prevent bribery carried out by a person associated
with the company, when the bribe in question was intended to benefit the
company.  Following Standard, we now know
that: 

  • A sister company can be an associated person,
    despite the fact that there is typically no ownership or control exercised over
    a sister. 
  • The intention element of section 7 is capable of
    very wide interpretation, so that, even when the primary intention behind a
    corrupt payment is to further the interests of the associated person, the court
    may find a secondary purpose in furthering the interests of the company under
    investigation (especially when the associated person is within the same group
    of companies, as with Standard and Stanbic).
     

So businesses should appreciate that
their bribery risk profile extends beyond direct parents and subsidiaries and
potentially encompasses the activities of the entire group.   

3. What is the test for the active bribery element of section 7?

Although section 7 is a failure
to prevent offence, there must be actual active bribery in order to establish
corporate liability.  The difficulty
faced by many people working in a compliance role is when does mere suspicion of bribery turn into section
7 liability and self-reporting considerations? 
The judge in Standard identified the following as amounting to evidence
enabling Standard to conclude that bribery was the only inference in the
circumstances:

  • Lack of evidence of services provided.
  • A very high fee.
  • The fact that
    the payment appeared to facilitate the deal going ahead.
  • The lack of due diligence carried out.

The courts appear to be prepared
to find active bribery for the purposes of section 7 based on fairly
circumstantial evidence.  Given this
relatively low threshold, this may result in compliance departments undertaking
more investigations and considering self-reporting more frequently based on the
suspicion of corruption rather than concrete evidence.   

4. Penalties
and DPA terms: the court’s approach

The Standard DPA and judgment is
a useful indication of how the SFO and court will approach financial penalties
in a DPA:

  • The penalty may include a restitutionary
    element.  In the Standard case, this
    involved repaying the bribe to the government of Tanzania.
  • A company may be liable for profits made by its
    associate person; Standard had to pay back not only its profits from the deal,
    but also Stanbic’s.
  • Standard’s penalty payment of $16.8m was
    calculated by applying a multiplier of 300% to the gross profit from the deal
    (300% is the multiplier used in cases where there is found to be “medium
    level” culpability).  Standard then
    received a one-third discount because of its self-reporting and co-operation.

This approach confirms what has long been suspected: that a
DPA is unlikely to result in a significant saving compared to a successful
prosecution.  It will be interesting to
compare the level of penalty and other sanctions imposed on Sweett Group PLC, which
has been convicted of a section 7 bribery offence and which will be sentenced
on 12 February 2016.  

5. Should
corporations self-report?

In our view, the Standard case is unlikely to result in a
dramatic increase in the number of corporations self-reporting and then seeking
to negotiate a DPA.  This is primarily
due to the level of cooperation and transparency required by the SFO, which is
extremely onerous and is likely to include:

  • Full access to internal investigation reports
    (including waiver of any privilege in those reports).
  • Full access to interview notes and transcripts.
  • Full access to documents via a shared review
    platform.
  • Requiring that internal investigation to focus
    on the conduct of individuals involved with a view to bringing separate
    prosecutions against those individuals.

There were a number of fact-specific reasons why
self-reporting and negotiating a DPA made sense for Standard. However, it is,
we believe, relatively unlikely that those facts will be replicated in many other
instances of serious corporate wrongdoing. 
What is certain is that the decision to self-report should not be taken
lightly and will require careful consideration and discussion with legal
experts.  

Osborne Clarke’s Business Crime team advise businesses and
business people on all issues which involve interaction with criminal or
regulatory enforcement agencies in the UK and internationally.  If your ABC policy could do with a re-fresh
in light of the points made above, please do not hesitate to contact an expert.