Bribery Act & Proceeds of Crime - Written by Barry & Richard on Monday, May 14, 2012 15:15 - 2 Comments
Part 1 – When it goes wrong: penalties for bribery
David is a forensic accountant and partner at Forensic Risk Alliance, a forensic accounting and e-discovery consultancy with offices in UK, US, France and Switzerland. He has been involved with many FCPA and Bribery Act settlements, audits, and compliance assessments. His book, Frequently Asked Questions in Anti-Bribery and Corruption has just been published by John Wiley. He can be contacted on email@example.com.
Much has been written – on this blog and elsewhere – about the steps that need to be taken by companies if they are to operate safely, and – crucially – be seen to operate safely, within the parameters of the various international bribery laws. The dangers of failing to comply have been drilled into directors, and the risks of transgression have been explained endlessly to audit committees…Siemens $1.4 billion, Halliburton $365 million, and so on. But if things have gone wrong, a board will get to the stage where it needs more from its advisors than rhetoric and scare tactics. The legal and forensic accounting team will need to come up with some numbers: If we settle – what is the likely penalty range? If we go to trial – what is the worst case scenario? We are being asked for details about the profitability of contracts – what exactly does this mean? And so on…
To most outside (and many inside) the rarefied environment of white-collar defence practice, the process by which fines and penalties for bribery are determined is a mystery. As a forensic accountant and bribery specialist, experienced in assisting companies with penalty negotiations in both the US and the UK, I have been asked to shed some light on bribery fines and penalties, and in particular to predict how the situation may develop in the UK.
A single article covering all the basics (as I intend to do) would be overly lengthy, therefore I have split the article into two parts:
- This first post reviews the penalties available in the UK, of which the Serious Fraud Office (SFO) has several at its disposal, and reviews how these punishments have been used to date. I also look at the US approach to penalties, because – as in so many bribery-related areas – the US position is likely to foreshadow the future UK position.
- The second post will look at the thorny question of how to assess the gain/benefit/profit made on activities and contracts tainted by bribery. Profitability forms the bedrock on which the entire penalty is based. Needless to say, bribes on highly profitable contracts lead to high fines. I explain why the accountants’ traditional view of profitability is not the same as gain or benefit for the purposes of disgorgement, and how defendants can best present profitability figures to prosecutors.
Penalties in the UK
Where a company has been found guilty in a criminal court, the first step is that a fine is imposed by a judge. Section 11 of the Bribery Act 2010 now introduces a potentially unlimited fine and up to ten years’ imprisonment for individuals who are found guilty of serious offences under Section 1 (bribing), 2 (being bribed) and 6 (bribing a foreign public official) and a similarly unlimited fine for any company or partnership that is convicted of an offence under Section 7 (negligently failing to prevent bribery). In addition, though, a criminal bribery conviction triggers powers to impose:
- Confiscation Orders under Part 2 of the Proceeds of Crime Act 2002 (POCA) or Civil Recovery Orders under Part 5 of POCA.
- The so far little-used (at least in a commercial context) Serious Crime Prevention Orders, which can be used to impose prohibitions designed to protect the public by preventing, restricting or disrupting activities that might involve serious criminal activity; and Financial Reporting Orders, compelling regular financial reporting.
- Debarment from competing for public contracts under the Public Contracts Regulations 2006.
Confiscation Orders and Civil Recovery Orders
Confiscation or disgorgement of the proceeds of crime often forms the largest element of a penalty, and it is normal SFO policy to apply for a Confiscation Order under Part 2 of POCA once a conviction has been obtained, unless there are compelling reasons not to do so. Confiscation is designed to prevent offenders from benefiting from their crime, and this is achieved by making the defendant pay a sum of money representing an amount equivalent to the ‘benefit’ they obtained. A Confiscation Order is not limited to those assets tainted by bribery, although any order is limited to the assets of the defendant. If an individual fails to pay the sum demanded under such an order, they are usually required to serve an additional period on prison in default of payment (with the amount owing remaining ‘live’). Frequently, this default sentence is longer than the original sentence for the predicate offence.
The similar, but separate, Civil Recovery Order under Part 5 of POCA allows the Court to order the return of property that is established to be the proceeds of ‘unlawful conduct’. (These Part 5 claims often cause confusion, and so it is worth stressing that these are stand-alone civil claims, which are heard in the High Court. There is no need to obtain a criminal conviction first. CROs are not subject to criminal court oversight, unlike a DPA.) For a Civil Recovery Order to be made, the claimant agency (in a bribery context this would usually be the SFO) needs only establish, to a lesser standard of proof than ‘beyond reasonable doubt’:
- That criminal activity has taken place; and
- That the funds which it seeks to recover represent the proceeds of such crime.
Civil Recovery Orders can therefore be used in situations where the defendant cannot be brought to trial, or has been acquitted, or there is insufficient evidence to obtain a criminal conviction. This can have clear advantages for all concerned: if the civil proceedings settle (as they usually will), this will mean that the resulting settlement is confidential and will avoid the requirement for due process and Court scrutiny, and will mean that there is no resulting criminal conviction.
The UK experience to date
It is frankly too early to see any meaningful pattern in the penalties that have been agreed to date in the UK for corporate bribery offences. Most of the settlements have indeed been Civil Recovery Orders, which have already become popular with the SFO as a means of disposing of bribery cases without the need for a criminal trial, in a similar way to deferred prosecution agreements in the US. So far in the UK we have seen five key civil settlements and three criminal pleas (Mabey & Johnson, Innospec and BAE):
- Balfour Beatty: a Civil Recovery Order for £2.25m in October 2008;
- Mabey and Johnson: a £6.6m criminal plea agreement, as a combination of fines, confiscation and reparations, in September 2009;
- AMEC: a Civil Recovery Order for £4.95m in October 2009;
- Innospec: a $12.7m UK criminal plea agreement, as part of a US and UK global agreement resulting in the payment of a total of approximately $40m.[i]
- BAE Systems: a £30m (strictly £500,000 plus £29.5m reparation) criminal plea agreement from a $450m combined US/UK settlement.
- MW Kellogg (part of the Halliburton Bonny Island scheme): a Civil Recovery Order for £7m in February 2011, which represented funds that the UK company was due to receive. The SFO recognized that the company took no part in the criminal activity which generated the funds, but rather was used by its parent.[ii]
- Johnson & Johnson/De Puy: a Civil Recovery Order for £4.83m in April 2011, as part of a global resolution. This included a US Deferred Prosecution Agreement with a financial penalty of $21.4m, a civil sanction imposed by the SEC of $48.6m, while the Greek authorities restrained €5.8m.
- Macmillan: an £11.26m Civil Recovery Order in July 2011.
Balfour Beatty and AMEC occurred at a time when the SFO was finding its feet in the bribery field, and when the Bribery Act was just a twinkle in Jack Straw’s eye. My feeling is that if either of these cases were to occur now, the penalties would be higher.
The settlement in the Macmillan case seems to have gone smoothly, and we will see more of these types of resolutions in the future. Macmillan was also a Civil Recovery Order, made by consent, and so did not require judicial intervention. It was not part of a US Deferred Prosecution Agreement where the company had already (effectively) admitted criminal activity, and so it was not possible to criticise the settlement as an obvious case of bribery disposed of quickly and quietly through the civil process. As to how the amount was calculated, though, the SFO press release was vague (and there is nothing else in the public domain which elaborates on this). It merely says:[iii]
“Accordingly it was plain that the Company may have received revenue that had been derived from unlawful conduct. Following an accounting examination and taking an aggressive approach to the revenue received in order to capture all potential unlawful conduct the SFO was in a position to determine the appropriate amount to be recovered. The value of the Order made by the High Court is £11,263,852.28. MPL will also pay the SFO costs of pursuing the order which amount to £27,000.”
A further interesting development in the Mabey and Johnson case was the announcement in January 2012 that M&J’s parent company, Mabey Engineering (Holdings) Ltd, had agreed (in what the SFO described as an “exemplary co-operative resolution”) to surrender £131,201 in a civil recovery action, representing a dividend it had received from M&J as a result of the unlawful contracts. This surely points the way towards similar action against shareholders. Richard Alderman, the Director of the SFO, said:[iv]
“Shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will pursue this approach vigorously”
The UK has not yet seen a bribery case where a judge has had to assess a fine and disgorgement starting from a clean sheet of paper. This is something that defendants would desperately try to avoid, because the UK’s criminal confiscation regime is recognised to be both complex and severe, with little room for any judicial discretion that might soften its effects. The problem from a defendant’s perspective is that the starting point for confiscation under Part 2 of POCA is the defendant’s ‘benefit’ from his, her or its crime. ‘Benefit’ does not equate to profit. Instead, the starting point is revenue, without any allowance for costs. This has, at least, always been the position in the case law to date, as confirmed by the Court of Appeal in 2010 in R v Del Basso. (In Del Basso, a successful park-and-ride business had been set up for visitors to Stansted Airport, but which operated in breach of planning regulations. Eventually, the defendants were convicted and fined for failing to comply with a planning enforcement notice. Additionally, confiscation proceedings under Part 2 of POCA were initiated. It was submitted by the Defence that most of the revenue from the business had been used to fund the local sports club and to pay for the everyday running of the business. The judge found that this was irrelevant, however, and that the key factor to consider was what benefit had in fact been obtained, and not what happened to that benefit after it had been obtained.)
The value of settling
This severe criminal confiscation regime continues to be a major problem for corporates, as once confiscation bites following a criminal plea or conviction, the financial consequences can be far more severe than in the US.
Although designed to achieve similar goals to confiscation, the civil recovery route gives considerable leeway as to the estimate of gain, and the SFO (and therefore the Court approving the agreement) is far more likely to support a gain calculation that starts with the ‘profit’ made by the defendant, thus allowing the deduction of certain direct costs from revenue. Unfortunately, though, the SFO gives no background information as to how the penalties under its recent civil settlements were calculated.
Such settlements have not, however, received unconditional support from the judiciary, which is keen to see criminal convictions for obvious criminality, as opposed to mere civil settlements. Both the Innospec and BAE cases received serious adverse comment, and are unlikely to be useful in gauging the potential level of penalties in future settled cases. (It had been reported, for example, that the SFO had been seeking a fine of up to £500m in the BAE case, if it could make the bribery and corruption charges stick. In the Innospec case, the judge stated that a fine comparable to that imposed in the US ($101.5m) would have been the starting point, in addition to disgorging profits. The judge indicated that if he had not been limited to the penalty set out in the agreement, the fine would have been measured in “the tens of millions”.[v] Recently, the OECD has also criticised the UK’s sanctions for bribery offences, claiming that the UK has been too lenient and too eager to settle bribery allegations with non-criminal civil settlements.
The US approach
The UK has not yet seen the very high fines and penalties applied for (and obtained) by the DOJ and SEC, but I think we will soon see UK penalties move into the high tens if not occasional hundreds of millions of pounds. We have already seen a number of joint US/UK and multi-jurisdictional settlements and plea agreements, and this trend is only going to increase. With such high stakes, it’s vital to understand the factors that guide US settlements.
The first key component of a US penalty is the criminal fine applied for by the DOJ. The US Federal Sentencing Guidelines inform the DOJ’s approach to calculating fines, and under these rules, the starting point is the ‘gain’ made by the defendant. (In those cases where no gain was made, which might be the case where the bribery scheme was unsuccessful, the fine can be driven by the amount of the bribe itself.) I will focus on the definition and calculation of ‘gain’ in Part 2 of this article.
The method for calculating an eventual fine in the Sentencing Guidelines is a complex and multistep process, largely driven by both the gain number and the egregiousness of the offence. The Guidelines first calculate an offence level, which is in turn used to calculate a base fine level. Then a culpability score is calculated, which is used to derive a multiplier which increases that base fine level. (This, however, is ultimately limited to twice the overall gain by virtue of the Alternative Fines Act.) Although there are several subjective elements to the calculation, a guideline fine of between 1.8x and 2.0x the gain is not unusual in the case of a major FCPA violation.
In addition, the SEC is able to levy a civil penalty, which is typically less than the criminal fine, but the SEC’s main weapon (and the second key component of a US penalty) is the ability to force the disgorgement of all the gain made from the bribery scheme. In total, then, the combined penalty can end up several times higher than the entire profit made on the corruptly-obtained contract.
The US prosecutors does not, though, adhere strictly to the Sentencing Guidelines. The US Supreme Court, in the case of US v Booker, held that the Sentencing Guidelines were not binding, but merely advisory. Notwithstanding this, the DOJ does like to have a scientific basis for its fines, and the Guidelines are important because they do not want to set any precedent whereby they deviate from the sentencing guidelines, as this may affect future settlements.[vi] But both the DOJ and SEC still have considerable discretion as to the level of fines, and the DOJ will routinely agree fines significantly below the lower level dictated by the Sentencing Guidelines and companies will be treated very differently depending on their level of cooperation and remediation.
Through a “carrot and stick” philosophy, judges, and therefore the DOJ, are directed to consider three aggravating factors in assessing any fine for bribery:
- Managerial involvement
- Prior criminal history
- Obstruction of justice
….and four mitigating factors:
- Maintenance of an effective program to prevent and detect violations of law
- Self-reporting of the offence
- Full cooperation in the investigation
- Clearly demonstrating recognition of, and affirmative acceptance for, its criminal conduct
In the Siemens settlement, for example, the Sentencing Guidelines gave a fine range of $1.35bn to $2.70bn. The eventual fine agreed with the DOJ was $450m. This is still a huge sum, but because of Siemens’ cooperation and its lengthy and expensive remediation program – involving teams of lawyers and forensic accountants undertaking a worldwide review of operations – the DOJ was more lenient than it might otherwise have been. Other notable settlements coming in below the lower limit suggested by the Sentencing Guidelines include Universal Corporation, where the fine was 30% below; Technip – 25% below; and Snamprogetti – 20% below. Such reductions are fact-specific and are not explained or quantified well in the settlement documents.
Similarly, the SEC is not obliged to seek the maximum penalties set out above in every case, and does not in practice do so. The cases where the SEC is most likely to seek corporate penalties are those where the company and its shareholders directly benefitted.[vii] Again, in most of the settled cases, the SEC does not elaborate on its rationale for selecting the amount of the penalty, but the SEC’s decisions generally depend on seven criteria:
- The gain, and the amount by which the company directly benefitted through reduced expenses or increased revenues as a result of the violation;
- The extent of the company’s cooperation with the Government’s investigation;
- The extent of tolerance of criminal activity and accepting responsibility for misconduct;
- The harm to third parties;
- The extent and quality of the company’s remediation efforts;
- The need to deter the particular type of offence; and
- Ability to pay – the objective is not to bankrupt the defendant, and evidence here by the forensic accountants about the defendant’s cash position now and in the future will carry weight.
One count or multiple counts?
Further, the prosecutors have discretion on how many counts to charge. It is often found that a company which historically has been prepared to bribe to win business has paid not one single bribe, but a number of bribes, often as part of related schemes. Is this one violation, or several? Just how many fines should be applied against the same company?
The answer is bad news for companies, because in cases where there are multiple contracts between a company and consultants making illicit payments, the DOJ will typically want to charge each contract as a separate violation of the FCPA. Indeed, the Government may go so far as suggesting that every single payment is a separate offence (and therefore a separate fine). As always, there are few precedents and most cases arise from negotiated settlements, although there is clear precedent for the DOJ eventually agreeing to treat instalment payments as a single violation of the FCPA.
The ABB Vetco Grey entities,[viii] for example, were each charged with two counts of bribery for bribes relating to seven contracts, but in the Titan case,[ix] the company paid bribes in “several instalments” but was only charged with one count of violating the FCPA. Similarly, the defendants in the DPC (Tianjin)[x] and Syncor Taiwan[xi] cases were only charged with a one-count indictment, despite the fact that payments were made over the course of more than five years.
In summary, though, in both the UK and the US, the profit, gain, benefit, or however it might be defined, is key to the amount of the fine. From the point of view of the defendant, it is crucial to present these figures properly to a prosecutor. Gain and benefit can be very different to what corporate accountants routinely report as ‘profit’, and management reports of ‘profit’ can be far higher than gain or benefit should be assessed at, once all the properly allowable costs are taken into account. I discuss this in Part 2…..