27 Jan 2017

Rolls-Royce: Deferred Prosecution Agreement No. 3

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On 17 January the Serious Fraud Office ("SFO") announced that it had entered into a deferred prosecution agreement ("DPA") with Rolls-Royce PLC. The DPA followed a four-year investigation into widespread bribery and corruption; 12 counts of conspiracy to corrupt, false accounting and failure to prevent bribery (involving activities in China, India, Indonesia, Malaysia, Nigeria, Russia and Thailand) covering three decades. These included agreements to make corrupt payments to agents relating to the sale of Trent aero engines, the concealment or obfuscation of the use of intermediaries in defiance of state restrictions, and failing to prevent bribery in certain jurisdictions following commencement of the Bribery Act 2010 (the "Act").

The UK settlement, which sits alongside similar agreements with the US Department of Justice and Brazilian Ministerio Publico Federal, will see Rolls-Royce pay a £497.25 million (plus interest) fine on top of the SFO's costs of £13 million. Including the US and Brazil, the global penalty comes to approximately £671 million.

While financial penalties invariably grab the headlines, and £671 million is (at least in isolation) a significant sum, the devil is almost always in the detail. Take a closer look at the DPA, and the circumstances which led to the agreement, and there are a number of important take-home messages.

Bribery Act 2010: before and after

It is worth noting that most of Rolls-Royce's misconduct took place before the Act came into force in 2011. Indeed, some of the conspiracies began as far back as 1989, running through to the mid/late-2000s. Five of the twelve counts involved a failure to prevent bribery contrary to section 7 of the Act (the corporate offence), while seven centred on conspiracy (a common law offence). Proof, if proof were needed, that bribery was an offence long before Parliamentary draftsmen put pen to paper on the Act.

Self-reporting & Co-operation

Intended as an incentive for companies to self-report misconduct, DPAs became available to prosecutors in the UK in February 2014. Make a clean breast of things, it is said, and if the courts are satisfied that it is in the interests of justice to do so you may avoid prosecution, with all the time and expense it entails. Of course, you will not be able to avoid publication of your wrongdoing, and what is released into the public domain may be profoundly embarrassing. Nevertheless, the prospect of discounted financial penalties and the lack of a criminal conviction should appeal.

The Rolls-Royce DPA is the third such agreement since February 2014, joining ICBC Standard Bank (November 2015) and XYZ Limited (July 2016). There is, however, a crucial difference between Rolls-Royce and its fellow DPA recipients. While ICBC Standard Bank and XYZ Limited self-reported their misdeeds, Rolls-Royce did not. The SFO actually uncovered the corruption.

So what are we to make of this? For starters, it tends to disprove the suggestion that a company must self-report to have any chance of obtaining a DPA. Of course, owning up to misconduct is never going to harm a corporate's prospects of avoiding prosecution, and the Crown Court judgments in Standard Bank and XYZ confirmed that the early self-reports were critical in how the cases were resolved. It would seem, however, that self-reporting is not a condition precedent.

If self-reporting is not determinative, what is? Co-operation. Indeed, senior counsel for the SFO labelled Rolls-Royce's co-operation with the prosecutor as "extraordinary". This included waiving legal professional privilege (on a limited basis) in respect of all of its internal investigation materials, deferring interviews until the SFO had first completed its own meetings with personnel, providing all materials requested by the SFO voluntarily, and consulting the SFO before winding up companies that may have been implicated in the SFO's investigation.

Discounts

The Deferred Prosecution Agreement Code ("DPA Code") provides that financial penalties imposed in a DPA "must provide for a discount equivalent to that which would be afforded by an early guilty plea…" Under the Sentencing Guidelines for bribery, this discount stands at 33%.

While Standard Bank, which submitted an early self-report and co-operated with the authorities, received the standard 33% discount under the terms of its DPA, Rolls-Royce saw half of its financial penalty slashed. As it did in the case of XYZ, which also saw its fine halved, the Court held that the company's co-operation represented significant additional mitigation and that this should be recognised.

Why the discrepancy? The key perhaps lies in speeches which Sir Brian Leveson (the presiding judge in all three DPAs thus far) and David Green, Director of the SFO, gave last summer. Sir Brian said in June 2016 that, in his personal view, companies entering into DPAs following a self-report should receive much more than a 33% discount. Mr. Green echoed this sentiment, noting concern that the incentives for companies to self-report and seek DPAs were inadequate.

The fact that Rolls-Royce received a 50% discount in the absence of a self-report, however, has led some commentators to ask whether companies which come forward should receive even higher reductions. In the US, for example, self-reporting entities may benefit from a discount up to and including 100% (not including profit disgorgement), and we have seen calls for the UK to follow suit. It remains to be seen whether prosecutors and the Courts are prepared to do so. What is clear, however, is that the DPA carrot needs to be an appetising prospect.

DPA conditions: ongoing compliance

Consistent with the Standard Bank and XYZ DPAs, Rolls-Royce also agreed to implement an anti-bribery and corruption compliance programme. As readers may know, Lord Gold was retained by the company four years ago to conduct an independent review of its systems. Recommendations arising from this review will be scoped out and implemented over the coming months. The compliance programme will form an integral part of Rolls-Royce's ongoing obligations to co-operate with the SFO, with Lord Gold and his team due to be engaged for at least the next two years at the company's expense.

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