Anti-corruptionBriberyWhite collar crime

UK’s Serious Fraud Office secures second deferred prosecution agreement – this time with the UK Subsidiary of US Corporate

Lord Justice Leveson has approved the Serious Fraud Office’s (“SFO’s”) second application for a Deferred Prosecution Agreement (“DPA”). The Agreement is with a company which cannot be named because of continuing related legal proceedings. The first DPA was with ICBC Standard Bank in December 2015. Further agreements under the DPA system have been keenly awaited, and this second DPA sends a strong message to UK Plc and international companies that the DPA model is here to stay.

The DPA involved a small to medium sized (“SME”) UK company and allegations of overseas bribery in a number of countries with bribes paid through third parties in Asia. The agreement encompasses financial orders totalling £6.5m, and continuing co-operation by way of an annual report to the SFO on third party intermediary transactions, and the company’s anti-bribery controls, policies and procedures. Charges laid under both pre Bribery Act and Bribery Act law have been suspended and will be discontinued within 5 years as long as the company is compliant with the DPA.

The judgment is interesting to companies from all sectors, including financial services, in a number of respects:

  • The SME company is of limited means and the question of sentencing and the potential consequence of a company insolvency is addressed. SFO Director David Green has stated, “This case raised the issue about how the interests of justice are served in circumstances where the company accused of criminality has limited financial means with which to fulfil the terms of a DPA but demonstrates exemplary co-operation.” The fine was lower than the recommended guideline amount because of the risk of insolvency.
  • The bribery was discovered as a result of the SME’s US parent company implementing a global compliance programme.
  • The fine will be paid by the UK company but £2m of the disgorgement payment will be met by the US parent which is not accused of any misconduct, as a repayment of a significant proportion of the dividends that it received from the SME over the indictment period.
  • The judgment gives useful commentary on the meaning of co-operation, including the company providing comprehensive information on the initial self-report, and oral summaries of first accounts of interviewees. It also facilitated interviews, and responded promptly and completely to SFO requests for information.

UK and international corporates will follow this decision with interest. The entity and the amount involved may be modest, in this case but the guidance on several important DPA issues given by Lord Justice Leveson is crucial to any company which has any jurisdictional nexus with the UK, discovers it is affected by criminal conduct, and considers availing itself of the UK self-reporting regime.

Louise Delahunty, a partner in our White Collar Crime & Regulatory Defense practice, can provide more information if you need it.


Beyond the Bribery Act

A recent petition heard in the Scottish Court of Session Outer House has highlighted the wide-ranging implications of the Bribery Act 2010 in the UK beyond the criminal offences of the Act itself.

The petition was brought by the former Chief Executive of a company, Mr Gray, who participated in a corrupt arrangement with an employee of a customer. Following an investigation, Mr Gray was dismissed for gross misconduct, although the dismissal was later suspended. Mr Gray brought the petition in the Scottish Court alleging unfair prejudicial conduct on a number of related issues including the conduct of the investigations into the bribery arrangement and the disciplinary proceedings against him.

Section One of the Bribery Act 2010 sets down the offence of bribing another person where one person gives a financial advantage to another intending to bring about an improper performance of a function by that other person. In this case, Mr Gray facilitated a financial advantage for the employee of a customer with the intention that the employee would direct more business to Mr Gray’s company. This violated the expectation that the customer’s business would be placed impartially by the employee and was therefore improper performance of his function. Whether or not Mr Gray was aware that this arrangement constituted a criminal offence under the Bribery Act was not relevant to the Court’s decision; only that he was at least complicit in its approval and creation.

Although the Court upheld three of his eight claims of unfair prejudice, a crucial issue related to a “Bad Leaver” clause in the company’s Articles of Association and the level of relief available to Mr Gray under s.996 of the Companies Act 2006 given his key role in the bribery. The clause provided that where a shareholder’s employment is terminated due to the board finding he has committed an act of gross misconduct, there will be a compulsory sale of his shares at an undervalue. The Court was tasked with determining whether Mr Gray’s shares should be sold at an undervalue as required by the “Bad Leaver” clause or whether the unfair prejudicial conduct suffered by Mr Gray should relieve him of the provision.

S.996 affords the Courts a wide discretion in determining the appropriate relief for unfair prejudicial conduct. Lord Tyre also cited a number of key principles which expand upon this general power:

  • Fairness includes the avoidance of unjust enrichment (established here);
  • The conduct of the petitioner may affect the relief which the court thinks fit to grant; and
  • The terms of a contractual agreement fairly entered into by shareholders are a relevant consideration when deciding upon relief (established here).

With these principles in mind the Court acknowledged that whilst the board had not actually dismissed Mr Gray for gross misconduct, there had clearly been a corrupt arrangement. The Court also held that such bribery would amount to gross misconduct and therefore Mr Gray’s conduct would trigger the “Bad Leaver” clause despite the fact that the board had not actually established gross misconduct itself. The Court therefore held that the proper approach in the circumstances was to ensure that Mr Gray was not put in a better position than he would have been had there been no unfairly prejudicial conduct. The Court held that Mr Gray was a Bad Leaver, despite there being no such determination from the board, and the compulsory purchase was ordered.

The Court’s broad application of the discretion afforded to it by s.996 is a clear affirmation of the Court’s refusal to reward a claimant who does not come to the Court with clean hands. As the Court found that Mr Gray was guilty of gross misconduct, refusing to grant Mr Gray relief from the unfairly prejudicial conduct suffered clearly demonstrates that the Court will exercise its discretion to the fullest extent to avoid the unjust enrichment of a party. In addition, by upholding the “Bad Leaver” clause even when unfairly prejudicial conduct has been established this case also affirms the Court’s reluctance to interfere in a freely negotiated contractual arrangement. Mr Gray was well aware of the implications of the “Bad Leaver” clause and by participating in bribery, he must bear the consequences of his actions as contractually agreed.

Although the criminal offences set down in the Bribery Act 2010 should act as a sufficient deterrent to individuals minded to participate in bribery, it is clear from this case that there may also be far wider commercial implications for those subject to “Bad Leaver” clauses.

Asset recovery

Backwards Tracing takes a step forward

The Privy Council recently extended the availability of ‘tracing’ in a novel way to increase the options available to states seeking to recover stolen property.

Before this decision a state could only trace property that had been altered, say by sale or transfer, into the proceeds of that alteration if those proceeds did not exist prior to the move. The process of tracing required the state to show what had happened to the property and to identify its proceeds and their recipient. This formed the basis of a claim against the recipient of the proceeds on the basis that those proceeds represented the original property. There was no tracing claim where the proceeds were already in the hands of the recipient.

The Privy Council’s extension of this principle means that where there is a ‘coordinated scheme’, property can be traced into proceeds that were in the hands of the defendant before the property was altered.

This is an extremely useful tool for states that are subject to sophisticated corruption or frauds designed to thwart recovery. We consider the claim in more detail here.


CooleyAR’s summer holiday

The team will be taking August to recuperate after a furious few months blogging and will return in the Autumn.

However, before we pack our bags it is worth reflecting on David Cameron’s recent speech in Singapore where he addressed the threat posed by corruption worldwide. We were particularly interested in his comments on how the UK should respond to corrupt foreign companies laundering money through the UK – a topic we touched on last week. Mr Cameron announced that the Land Registry has been instructed to public data on foreign companies holding land and a consultation is taking place on expanding beneficial ownership rules to foreign companies who own property or contract with the UK Government. These are very positive steps and we will report back once these various consultations are released.

The speech is available in full here, and the relevant passage is below:

“Now with £122 billion of property in England and Wales owned by offshore companies we know that some high-value properties – particularly in London – are being bought by people overseas through anonymous shell companies, some of them with plundered or laundered cash. Just last week, there were allegations of links between a former Kazakh secret police chief and a London property portfolio worth nearly £150 million.

I’m determined that the UK must not become a safe haven for corrupt money from around the world. We need to stop corrupt officials or organised criminals using anonymous shell companies to invest their ill-gotten gains in London property, without being tracked down.

People like convicted Nigerian fraudster James Ibori, who owned property in St John’s Wood, Hampstead, Regent’s Park, Dorset all paid for with money stolen from some of the world’s poorest people. So we have got to find ways to make property ownership by foreign companies much more transparent.

There may be a number of ways we can do this, for example extending what we currently ask of UK companies to foreign companies too. And we will consult on the best way forward.

But as a first step, I have asked the Land Registry to publish this autumn data on which foreign companies own which land and property titles in England and Wales. This will apply to around 100,000 titles held on the Land Register and will show for the first time the full set of titles owned by foreign companies.

And we will also look carefully at the case for insisting that any non-UK company wishing to bid on a contract with the UK government should also publically state who really owns it using the government’s buying power as a if you like, battering ram for greater corporate transparency around the world.

So let me be clear. The vast majority of foreign-owned businesses that invest in property in the UK are entirely legitimate and proper, and have nothing at all to hide. They are welcome in Britain. Indeed I want more of them. We want one of the most open country in the world for investment. And I want Britain to be that country.

But I want to ensure that all this money is clean money. There is no place for dirty money in Britain. Indeed, there should be no place for dirty money anywhere. That is my message to foreign fraudsters: London is not a place to stash your dodgy cash”


A proposal to extend beneficial ownership rules to UK land-holding foreign companies

A report published today by Global Witness, alleging that an individual with ties to a former Kazakh public official owns large swathes of London, follows much recent interest in the issue of public officials owning property in the UK via secretive corporate structures that conceal their interest.

Earlier this month, an Early Day Motion (EDM) was filed at the House of Commons in support of the motion that the Land Registry should record the beneficial owners of foreign companies holding land in the UK. The EDM was triggered by the recent screening of From Russia with Cash on Channel 4, which alleged that significant sums of illicit funds from Russia were being invested in the UK property market while estate agents turned a blind eye. While EDMs often have little chance of being debated, they are frequently used as a means of raising the profile of certain issues among the media and the public.

The proposal to extend beneficial ownership rules to foreign companies was proposed in Transparency International UK’s publication Corruption on your Doorstep, which analysed data from the Land Registry and Metropolitan Police Proceeds of Corruption Unit to identify over 35,000 properties in London owned by off-shore companies and found that over 75% of suspects in grand corruption cases had used such structures to conceal their ownership of property.

At the recent Annual General Meeting of the All Party Parliamentary Group (APPG) on Anti-Corruption, the proposal to extend corporate transparency rules to foreign companies owning property in the UK was identified as a potential priority for the APPG to pursue during this Parliament.

Given the willingness of David Cameron to take a decisive lead on beneficial ownership (see our review of the legislation here), the opportunity to close an obvious loophole may be quite attractive to the Government and it will demonstrate a sincere commitment to addressing corruption and money laundering in the UK.


What states should know about unjust enrichment

We close out our series of tip-sheets on the causes of actions available to states who have been victims of bribery and corruption with a note on unjust enrichment. This is an interesting claim that sets the bar a little lower than some of the previous claims we have reviewed. There is no need to provide evidence of the underlying bribery or corruption – it is only necessary to prove that the defendant has been enriched at the expense of the state under one of four unjust factors. We also consider what does not need to be proved as well as the available defences and remedies. Our tip-sheet on unjust enrichment is available here.


What states should know about the contractual consequences of bribery

This week’s tip-sheet concerns the remedies available to states where they are party to a contract procured through bribery. We discuss the pros and cons of rescission and termination as well as the reasons why a state may choose to re-negotiate contracts that have been affected by bribery. We also consider the risk of waiver that can occur when a decision to terminate or rescind is not taken quickly enough. Our tip-sheet is available here.