Rolls-Royce - cooperation not confession unlocks DPA
This was first published on counter-fraud.com and will be in Fraud Intelligence, February/March 2017
The Serious Fraud Office has entered into a significant Deferred Prosecution Agreement (DPA) with Rolls-Royce PLC. Approved in principle by Sir Brian Leveson QC on 16 January 2017.
This is the third DPA entered into by the SFO and the first which sees them take a coordinated approach with international prosecutors: Rolls-Royce has also entered into a DPA with the US Department of Justice (DoJ), costing the company $170m (£141m), and a leniency agreement with Brazil's Ministerio Public Federal (MPF) resulting in a further fine of $26m (£21.5m).
Alexandra Underwood of Fieldfisher LLP considers the judgment; she has serious concerns.
The swiftness with which the Court approved the DPA in this case was unprecedented. The procedure followed by the SFO appeared to diverge from the process set out in the legislation (Schedule 17 of the Crime and Courts Act 2013 ("the 2013 Act")) and the associated Guidance on DPAs. By way of reminder the correct procedure is:
- Prosecutor offers a DPA
- Agreement in principle to use a DPA;
- Preliminary hearing for the Court to decide whether it considers that the proposed DPA is "likely" to be in the interests of justice and its proposed terms are fair, reasonable and proportionate (Paragraph 7, the 2013 Act);
- Negotiation of terms;
- Final hearing after the prosecutor and the accused have agreed the terms of a DPA, for the Court to declare whether it considers (a) that the DPA is in the interests of justice, and (b) the terms of the DPA are fair, reasonable and proportionate (Paragraph 8, of the 2013 Act); and finally...
- Publication of the DPA
In this case, the SFO diverted from the statutory procedure in the following ways:
- The Judgment leaves some doubt as to whether the SFO made the offer of the DPA on its own terms. It appears that the SFO asked Rolls-Royce to identify conduct which might be capable of resolution by a DPA prior to any invitation to enter into DPA negotiations being made. It seems that Rolls-Royce may have written its own invitation to avoid prosecution.
- The Court's declaration under Paragraph 7 of the 2013 Act that a DPA would, in principle, be in the interest of justice was given just one day before the final hearing to approve the precise terms of the DPA under Paragraph 8. One is left with the impression that the Court was invited to rubber stamp the deal done by the SFO. It is concerning that the Court was not afforded an opportunity to consider, at an earlier stage, whether the DPA was, in principle, in the interests of justice.
- The terms of the DPA were published by the press before the Court gave its final judgment under Paragraph 8.
There has been a clear disregard for the Court's role in the DPA process in this case.
DPA available for serious wrongdoing
The indictment, which has been suspended for the term of the DPA, identifies conduct which stands at the most serious end of the scale. The Judge refers to the offending as "egregious criminality over decades". It covers 12 counts of conspiracy to corrupt, false accounting and failure to prevent bribery. The conduct spans three decades and involves Rolls-Royce's Civil Aerospace and Defence Aerospace businesses and its former Energy business and relates to the sale of aero engines, energy systems and related services. The conduct covered by the UK DPA took place across seven jurisdictions: Indonesia, Thailand, India, Russia, Nigeria, China and Malaysia.
In the case of such serious offending, the SFO were prepared nevertheless to agree to and the Judge gave his seal of approval to, a DPA. It seems that the reason for their approach was that it would not be in the public interest to prosecute. And why would it not be in the public interest to prosecute serious criminal activity? The answer appears to be that Rolls-Royce's size and reputation as a bastion of British engineering were simply too great. Put simply, it would not be in the interest of the British public to prosecute and damage the brand.
Of particular note was the importance that the Court placed on the risk to Rolls-Royce's future prosperity if it were prosecuted. The Judge noted that "It is well known that many countries operate public sector procurement rules which would debar participation following conviction." The Judge went on to accept evidence that 15% of the Rolls-Royce's order book would be put at risk of mandatory debarment and a further 15% would be at risk of discretionary debarment if Rolls Royce were convicted of a corruption offence. This was clearly a strong factor which swayed the Judge in his assessment of the "interests of justice" in approving the DPA.
The death of Self-Reporting
Rolls-Royce secured a DPA in circumstances where they did not proactively self-report the wrongdoing in question. The company admitted that the senior management team had been aware of allegations of bribery since 2010. However, no internal investigation into the allegations was launched at the time and no report was made to the SFO.
In the past, the SFO has been at pains to emphasise the importance of self-reporting. In its previous DPAs with Standard Bank and XYZ Ltd. the SFO attached great weight to the fact that the Defendants in those cases had come forward to report their own wrongdoing. The impression was given that self-reporting was a pre-condition to a DPA.
The Rolls-Royce DPA, however, dispels that myth with one fell swoop. Rolls-Royce did not come forward of its own volition. The SFO was tipped off about wrongdoing at the company by a whistleblower who, frustrated by previous attempts to engage the interest of the prosecutor and the company directly, started a blog outlining his concerns. On the back of information in the blog, the SFO launched an investigation and invited Rolls-Royce to comment.
By the time the SFO approached the company, Rolls-Royce was under new management and engaged in the investigation on a proactive and comprehensive basis. It is certainly true that Rolls-Royce went to extraordinary lengths to cooperate with the prosecutor. However, the fact that it did not begin to investigate the corruption of which it was aware until the SFO came knocking is significant.
The SFO has, perhaps inadvertently, undermined all of its hard work by demonstrating that if you wait until you are caught, and then start to cooperate, all the advantages of a DPA remain open to you. You may still avoid prosecution and obtain a 50% discount on a fine. It is difficult to see what incentive remains for a company to self-report wrongdoing before the SFO becomes aware of it.
While a failure to self-report is clearly not fatal to a company being offered a DPA, certain factors at play in the Rolls-Royce case allowed Sir Leveson to overcome this shortcoming The most important of which was Rolls-Royce's cooperation with the prosecutor once it had been caught.
Rolls-Royce is commended in Sir Leveson's judgment, and also by Sir Edward Gamier QC acting for the SFO, for its "extraordinary cooperation", which included a comprehensive internal investigation, the results of which were made available to the SFO, disclosure of un-reviewed documents, access to witnesses not interviewed by the company and a waiver of any claim for legal professional privilege on a limited basis. The judgment records that the cooperation by Rolls-Royce brought to light conduct which otherwise may not have been exposed.
Size of the discount
It is notable that, in addition to unlocking access to a DPA, the "extraordinary cooperation" secured Rolls-Royce a discount of 50% on the potential penalty. The DPA guidelines provide for a discount of one third, but a further discount of 16.7% was approved by Sir Leveson specifically to account for the cooperation of the company. It is difficult to follow the logic of the deal in this regard. Nevertheless a discount in excess of one third makes a DPA more attractive than an early guilty plea and is to be welcomed.
In view of the discount of in excess of one third that was also approved in the XYZ Ltd. DPA in 2016, expectations of businesses may be raised by these developments.
Ditch the Board
The Judge and the SFO were also heavily influenced by the fact that the conduct complained of concerned former senior management no longer at the company. Rolls-Royce adequately demonstrated that the new senior management were not responsible for running the company during the relevant period and the company was now committed to instigating wholesale changes to its strategic direction, including implementing a new compliance regime. Further, the company agreed as a condition of the DPA to cooperate fully in assisting the SFO with the prosecution of its former employees.
Once again the SFO's approach is to create a divide between the interests of a company and its shareholders on the one hand and senior executives accused of improper behaviour on the other. The company can avoid prosecution and obtain a significant discount on its fine but it must first shed itself of the corrupt management team. In order to obtain a DPA the company must agree to a statement of facts which sets out the wrongdoing in detail. This should be a salutary lesson to any board member tempted to break the rules in the misguided belief that they are doing so for the benefit of the company. At the end of the day, it may well be in the company's interest to hang its directors out to dry.
Once a DPA has been agreed, the senior executive accused of wrongdoing is in an invidious position. Without the support of the company, he must defend himself against prosecution in circumstances where the company and the prosecutor have already agreed to a statement of facts about the allegations made against him. There is a serious risk that the prosecution of the individual will be prejudiced by this state of affairs.
Happily ever after?
We have not heard the end of this story. The detailed statement of facts in this case gives rise to the potential for follow up action in other jurisdictions and from third parties referred to (although not named) in the document. It is clear that the SFO intend to go after third party intermediaries and the senior executives they hold responsible for the wrongdoing.