On July 11, 2016, the President of the Queen’s Bench accorded final approval to the second Deferred Prosecution Agreement (DPA) entered into by the Serious Fraud Office of the UK (SFO). Through this short post, we seek to examine the DPA, what such approval of the DPA means and its significance for UK owned/based companies in India (Indco) that are subject to the provisions of the UK Bribery Act, 2010 (UKBA).
Deferred Prosecution Agreements and Some Historical Context
A DPA is essentially an agreement between a prosecutor and an organisation that is accused of a white-collar offence whereby the prosecution is suspended for a defined period of time, subject to the accused meeting stipulated conditions. These conditions are accused-specific, and may include payments of penalties, disgorgement or co-operation with the investigation or a combination of all of these. In the event of a failure by the accused to meet with such conditions, the prosecution resumes.
In the UK, DPAs were introduced in February 2014 with the principle that each DPA would have to pass judicial scrutiny to ensure agreements are in the interests of justice and that the proposed terms are fair, reasonable and proportionate.
The first DPA, approved in November 2015, involved Standard Bank which was indicted for failing to prevent bribery, contrary to Section 7 of UKBA. Under the DPA, Standard Bank agreed to pay a fine of USD 25.2 million and a further USD 7 million in compensation to the government of Tanzania.
The Second DPA
This DPA relates to a company (XYZ) whose identity has not been disclosed due to certain on-going litigation. The subject matter of the DPA essentially concerns the conduct of XYZ’s employees across 2004-2012 and their involvement in the systematic bribing (or efforts thereto) towards securing contracts in foreign jurisdictions (Impugned Conduct).
The internal investigation conducted by a law firm retained by XYZ and subsequently by the SFO, revealed that out of 74 contracts examined, the procurement of 28 was found to be as a result of such systematic bribing activities. As such, the terms of the DPA included disgorgement of gross profits of GBP 6.2 million and payment of a financial penalty of GBP 352,000.
The DPA also required XYZ to fully co-operate with the SFO and undertake a review of its existing internal controls, policies and procedures regarding compliance with UKBA. Interestingly, the Impugned Conduct came to the fore in the course of the acquisition of XYZ by ABC, a US based corporation. Pursuant to the implementation of a global compliance programme post acquisition, this Impugned Conduct surfaced, ultimately leading to self-disclosures to the SFO by XYZ.
Implications for Indcos
Significance of pre-acquisition due diligence: For Indcos, it is imperative to conduct a thorough due diligence of the target entity to identify its practices and compliance standards. This diligence should, at the very minimum, include a review of third party commissions, contracts with governments or state owned enterprises, sales and licensing expenses, and an assessment of the compliance culture at the target. Comprehensive, anti-bribery due diligence may have led ABC to identify the conduct at XYZ prior to making the investment and could have saved ABC a significant sum, which it had to contribute in disgorgement.
Importance of an Effective Response Action: One of the key considerations behind ratification of the DPA by the court was the swift action that was taken by XYZ upon discovery of the Impugned Conduct. Immediately upon such discovery, XYZ retained a law firm to conduct an independent internal investigation and subsequently, made relevant disclosures to the SFO.
The court in its order acknowledged that XYZ, through its law firm, identified the Impugned Conduct by way of self-reporting and the “SFO’s independent investigation effectively confirmed what was stated” in the self-report by XYZ’s law firm. Accordingly, this underscores the importance of retaining an independent agency to conduct an investigation as soon as a company, which is governed by the UKBA, notices potentially violative conduct. More importantly, such investigation should be comprehensive enough so as to demonstrate that the conduct in question could not have been more extensive than disclosed, if at all, and, specifically, in the context of an acquisition, the acquirer had not benefitted from the alleged conduct.
Prior Conduct: Interestingly, 24 of the 28 contracts that were the result of Impugned Conduct were concluded before the UKBA came into effect in 2010. For these contracts, XYZ was charged under the offence of conspiracy to corrupt under relevant UK legislations prior to the UKBA. This is of significance because despite the UKBA being regarded as ground-breaking by a number of commentators, the SFO and the court have applied the same rigour and standard in evaluating conduct prior to the enforcement of UKBA in 2010. This is especially relevant for companies conducting internal investigations because there may not be a significant distinction in how conduct pre- and post-UKBA is evaluated for the purposes of self-disclosure.
Overall, this DPA is a significant order that marks increasing use of deferred prosecution agreements by the SFO. It also reveals the manner in which culpability and conduct of an organisation is evaluated by the courts in determining the adequacy of financial penalties and disgorgement. As mentioned above, this is a significant development since this is the second DPA that the SFO has entered into and, as such, sheds immense light on the factors that are taken into account by the court in determining whether a DPA is “fair, reasonable and proportionate”. In addition, the DPA very clearly sets forth the conduct that is regarded by the court as a mitigating circumstance in deciding disgorgement and financial penalty. Altogether, it underscores the importance that the SFO attaches to the DPA as an instrument in its fight against corruption.