News & what's on - Written by Barry & Richard on Tuesday, March 1, 2016 3:38 - 0 Comments
All that glitters is not gold. Sweett & Smith & Ouzman sentences throw into sharp relief benefit of DPA deals
As we previously reported on 18 December 2015 Sweett Group plc pleaded guilty to an offence under Section 7(1) of the UK Bribery Act 2010 (failing to prevent an associated person bribing another to obtain or retain business for the company).*
Sweett has now been sentenced resulting in a headline penalty of £2.25 million. But focusing on the headline number misses some important underlying principles.
The SFO commenced an investigation into Sweett Group in July 2014 in relation to its activities in the UAE and elsewhere. In the course of the company’s own subsequent investigations, two contracts within the Middle East, unrelated to the original allegations, were identified as suspicious and were duly reported to the SFO in December 2014.
The charge related to a sub-consultancy contract with North Property Management (“NPM”) signed in 2013 through which Sweett Group’s subsidiary in the UAE, Cyril Sweett International Limited (“CSIL”), paid a bribe (in the form of monthly payments under the sub-contract), to secure a contract with Al Ain Ahlia Insurance Company (“AAAI”) to provide project management and cost consultancy services on a hotel construction project. There was no evidence that senior management at Sweett Group were aware of the purpose of the sub-contract prior to it being identified during its own internal investigations.
On 2 December, 2015 Sweett announced to the markets that it admitted the offence. On 9 December 2015 the SFO charged Sweett with the offence and on 18 December Sweett pleaded guilty in the Magistrates Court.
Sentencing the company two months later on 18 February 2016 HHJ Beddoe determined that this was a Category A offence under the sentencing guidelines on the basis that the bribery had occurred over a period of time, there were no systems to avoid bribery at the relevant time and concerns had been raised by KPMG in 2011 and 2014 in respect of weaknesses in the financial controls at CSIL which were not dealt with.
HHJ Beddoe noted that mitigating features included no previous convictions, and since July 2015 Sweett Group had progressively cooperated with the SFO and put its house in order.
No compensation order was made in this case but a confiscation order of £851,152.23 was made.
The confiscation order amount is calculated by reference to the ‘gross profit’ (which has a specific legal definition) deriving from the corrupt contract.
On top of this Sweett was fined.
The fine was calculated under the Sentencing Guidelines which came into effect from 1 October 2014. They stipulate, broadly speaking, that offending be categorized, either A,B or C (with category A being the highest) which in turn gives a range of percentage multipliers by which the ‘gross profit’ is multiplied to calculate the fine.
In determining the fine HHJ Beddoe applied a multiplier of (just under) 250% (at the lowest end of Category A) deeming this appropriate and within the means of the company.
He emphasised that this was appropriate in the context of the sentencing guidelines for corporates which state that “The combination of orders made, compensation, confiscation and fine ought to achieve; the removal of all gain; appropriate additional punishment; and deterrence”.
Applying the multiplier to the ‘gross profit’ generates 2.1 million. Against this, Sweett obtained a 1/3 discount for an early plea in the Magistrates court generating a resultant fine of £1,400,000.
Combined the total penalty added up to £2.25 million.
To put that into perspective, Sweett, an AIM listed company, has a market capitalisation at the time of writing of £14 million.
The penalty is not small beer for Sweett.
In contrast Smith & Ouzman which went to trial and lost (received a multiplier of 300% and no discount for an early guilty plea).
Section 7 failure to prevent bribery convictions do not (and never did) attract mandatory debarment under the UK’s procurement regime. This is important for Sweett which undertakes many public procurement contracts a fact recognized by the UK government when the Bribery Act came into force and which we highlighted at the time.
The CEO of Sweett said:
“Sweett Group’s Middle East legacy issue is closed and this marks an important step in the delivery of the Company’s new strategy.
Over the last year, the Company has been transformed with the appointment of a new leadership team, which has successfully addressed key issues facing the business. The Group has delivered on a number of strategic objectives including the sale of the APAC and India business, resolution of the SFO investigation, withdrawal from the Middle East market and the re-organisation of the business into five regions.
We have strengthened our internal systems, controls and risk procedures, and refined our strategy, focusing on profitability and cash flow. We are excited by the opportunities we see ahead in our core markets the UK, Europe and North America, and we look to the future with confidence.”
The confiscated sum must be paid within 3 months with the fine payable in two instalments, the first by the end of February 2017 and the second by the end of February 2018.
Sweett’s share price jumped nearly over 20% on the news of the sentence.
Opinion & analysis
The first Section 7 Bribery Act conviction marks a milestone for the SFO and should be a wakeup call to UK PLC (and UK Limited).
Sweett has received a significant fine and spent millions in sorting out the problem to close out this legacy issue. It has taken nearly three years to resolve resulting in a 250% multiplier.
The SFO declined to offer Sweett a DPA and so we cannot guess what the terms of that might have been.
But, in the only example of a DPA so far a multiplier of 300% was agreed between the Company and the SFO and subsequently approved by the courts.
This is the same multiplier used in the Smith & Ouzman case – where Smith & Ouzman fought and lost at trial.
In addition, in line with what is envisaged under the DPA Code (which goes beyond the Sentencing Guidelines) a number of ongoing fairly onerous obligations were imposed on Standard Bank under the DPA (which lasts for 3 years) including detailed cooperation provisions going forward and the requirement for a detailed anti-bribery compliance review which will be conducted by PWC.
Speaking in the immediate aftermath of the Standard Bank DPA announcement Ben Morgan, the joint head of corruption at the SFO said:
“Companies and their advisers would do well to reflect on those things that Lord Justice Leveson identifies as having influenced the court’s assessment of the public interests of justice under this head: As the judge says:
“The second feature to which considerable weight must be attached is the fact that [the Bank] immediately reported itself to the authorities and adopted a genuinely proactive approach to the matter…In this case the disclosure was within days of the suspicions coming to the Bank’s attention, and before its solicitors had commenced (let alone completed) their own investigation.”
He goes on to highlight certain features of what happened next – there was an investigation by the Bank’s advisers sanctioned by the SFO; the Bank fully cooperated with the SFO from the earliest possible date by, among other things, providing a summary of first accounts of interviewees, facilitating the interviews of current employees, providing timely and complete responses to requests for information and material and providing access to its document review platform.
We have been saying for some time that we thought the bar on cooperation would be a high one if it is to satisfy the court that a DPA is in the interests of justice, and, in this case at least, that appears to have been right.”
Going forward it will be important to ensure that clearing the hurdles to get a DPA are visibly worth the effort.
This must materialize in a demonstrably lower multiplier (and resultant penalty) than those instances where a company either elects to defend and loses a bribery charge (as in the case of Smith & Ouzman) or where the SFO declines to offer a company the possibility of a DPA (as in Sweett’s case).
All that glitters is not gold
At the moment the benefit of a DPA looks questionable. This is in no-ones interest.
Law enforcement want to encourage companies to “come in” or Self Report (the SFO draws a distinction between this and making disclosures required by law under the UK’s money laundering regime).
Likewise, corporate boards need to see demonstrable benefits in order to Self Report to the SFO.
Companies seeking DPA’s at the moment should argue hard for a better deal. In turn the SFO should be willing to compromise its position with those companies who have chosen to take the DPA path.
If not, then the days of the DPA may be ended before they even began.
Declaration of interest*
The author, Barry Vitou, led a team including Anne-Marie Ottaway from Pinsent Masons LLP who were reinstructed to represent Sweett from late April 2015 (replacing another law firm who were representing Sweett from January 2014 to April 2015).