Fraud Bulletin. Issue 9, October 2015

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1 Welcome to Pinsent Masons Corporate Crime and Investigations team bulletin. In this issue we consider: Failure to prevent bribery first corporate settlement announced Modern Slavery Act 2016 increased transparency And more.? Alun Milford reflects on the SFO s relationship with business Green underlines the SFO s vital characteristics Proper co-operation an update And a view from the US DPA s only for the rich and powerful? Court of Appeal issues stark warning to regulatory offenders All change for the Bribery Act? Not any more Failure to prevent bribery first corporate settlement announced On 25 September 2015, the Scottish authorities announced the first concluded enforcement action (in the form of a civil settlement) for a contravention of the Bribery Act 2010, s.7 corporate failure to prevent bribery by a third party. The settlement related to a classic case of hospitality, under an incentive scheme, being misused. This is the third concluded bribery civil settlement in Scotland following a corporate self-report. The Scottish system is akin to that operated by the SFO before deferred prosecution agreements were introduced. It is clear that the Scottish system is encouraging self-reports and that the settlements are being progressed in a reasonable timescale. The announcement from the Crown Office and Procurator Fiscal Service was as follows: The Civil Recovery Unit has today recovered 212,800 under an agreed civil settlement with a Glenrothes based company which accepted that it had benefited from unlawful conduct by a third party. However, an independent installer of Brand-Rex products offered his company s travel tickets to an employee of one of his customers. This went beyond the intended terms of the scheme, as this customer was an end user of Brand-Rex products, rather than an installer or distributor. The individual who ultimately received the tickets was in a position to influence decisions as to which company they purchased cabling from. Personnel from this company and individuals connected to them used these tickets for foreign holidays in 2012 and Brand-Rex became aware of this issue through an internal review and launched an extensive investigation conducted by external solicitors and forensic accountants. As a consequences of the investigation, Brand Rex made a self-report to Crown Office and accepted that they failed to prevent this when they should have done, accepting responsibility for a contravention of Section 7 of the Bribery Act Under the self-reporting initiative, the case was deemed suitable for civil recovery settlement, rather than criminal prosecution. The settlement has been based on the gross profit of the company related to the misuse of the Brand Breaks scheme. Continued on next page> Brand-Rex Limited is a developer of cabling solutions for network infrastructure and industrial applications, and employs over 300 staff based mainly in Glenrothes. In June 2015, solicitors acting on behalf of Brand-Rex contacted the Crown Office to disclose an instance of failing to prevent bribery by a third party associated with the company. Between 2008 and 2012 Brand- Rex operated an incentive scheme known as Brand Breaks for UK distributors and installers. In return for meeting or exceeding sales targets, installers and distributors were eligible for varying degrees of rewards, including foreign holidays. The Brand Breaks scheme was not in itself unlawful.

2 <Continued from previous page The company has taken steps to implement new policies and training to ensure that no unlawful conduct will take place in the future. Linda Hamilton, Head of the Civil Recovery Unit, said: Bribery and corruption can distort business and harm legitimate economic development. Companies are responsible for ensuring that they do not allow their employees or contractors to secure any commercial advantage through bribery. In appropriate circumstances such as this, where companies accept that they have failed to prevent bribery and take steps to ensure that it will not occur again, the self-reporting initiative allows for a civil settlement rather than criminal proceedings. I would urge any companies who uncover any instances of bribery to notify the Crown Office as soon as possible. The money recovered under the self-reporting initiative will be transferred to the Scottish Government to be reinvested back into Scottish communities. Modern Slavery Act 2016 increased transparency The Modern Slavery Act 2015 ( the 2015 Act ), which received Royal Assent in March 2015, is designed to provide the tools to tackle slavery and human trafficking offences, enhance support for victims and introduce an Independent Anti-Slavery Commissioner. Of particular significance for businesses is the introduction of the requirement from October 2015 for commercial organisations with a turnover of 36million or more to produce an annual slavery and human trafficking statement, setting out the steps they have taken to ensure their business and supply chains are slavery free. We have produced a guide to the requirements which can be accessed here. We have also produced a guide comparing the requirements of the 2015 Act with those of the Reports on Payments to Governments Regulations 2014, which can be accessed here. Alun Milford reflects on the SFO s relationship with business Alun Milford, general counsel of the SFO, continued this theme when he spoke at the recent 33rd Cambridge Economic Crime Symposium. Agreeing that the use of secretive offshore companies can create an environment where money laundering can take hold, he went on to say that the same can be said of bribery: The same secrecy they offer helps shield from view who stands to benefit from payments made. And he recommended that: Those running businesses should want to be fully sighted on any proposed relationships. Reflecting on the SFO s work over the year, and in particular its relationship with the business community, Mr Milford confirmed that: the SFO are investigators and prosecutors and will not give advice. That is for others in considering the adequacy of procedures (in relation to the Adequate procedures defence), what matters is not form but substance : We are quite unconcerned by kitemarks on company notepaper, the page count or weight of the compliance policy manual or the size of the legal or compliance teams when compared to the size of the sales force intermediaries and agents are a classic red flag, particularly if they are based in a country which allows the concealment of beneficial ownership facilitation payments will not be tolerated: If you cannot do the business without committing crime, find business opportunities elsewhere as others do if you do lose out on business to a bribe-paying company, report that to the SFO who may be able to investigate. None of this is new. The SFO has been on these themes for some time now. That fact alone demonstrates their unwavering determination to root out corruption at the highest level. And more.? David Cameron has announced plans to examine whether there is a case for insisting that any non-uk company wishing to bid on a contract with the UK Government should also publicly state who really owns it. The announcement came as part of the UK Government s plans to stop foreign fraudsters and corrupt officials using anonymous shell companies to hide dirty money by buying up luxury properties in the capital and to persuade them that there is no place for dirty money in Britain. By using the Government s buying power in this way, David Cameron hopes to encourage greater corporate transparency throughout the world.

3 Green underlines the SFO s vital characteristics At the same symposium, David Green, Director of the SFO, took the opportunity to emphasise, again, the unique qualities of the SFO, which are key to its success. The SFO has, he said, three vital characteristics : The Roskill model multi-skilled teams of investigators, accountants, prosecutors, experts and counsel, each assigned to that case from the outset, with an overall case controller. Priority the SFO has the investigation and prosecution of the most serious and complex instances of fraud and bribery as its sole priority. It is not concerned, and so its resources are not diluted, by the need to focus on other matters too. This also encourages the development of expertise. Independence the SFO s current caseload includes household names such as Tesco and Barclays, which have considerable influence and can wield real power. Visible and demonstrable independence of the investigator and prosecutor are crucial if there is to be any credibility in our anti corruption policies. We have reported before on attempts by politicians to bring the work of the SFO within the realms of other government agencies. That David Green feels the need, again, to set out such matters shows that the struggle for control is not over yet. Continued uncertainty over the SFO s future is unhelpful and creates instability. It is time the matter was put to bed once and for all and the SFO allowed to do its job. Proper co-operation an update We reported last time on a speech given by Ben Morgan, joint head of Bribery and Corruption at the SFO, when he sought to clarify what he considered amounted to proper cooperation. Mr Morgan stated that: Where suspicions of corrupt activity arise, we do not require you to carry out internal investigations; investigation is our job. And while we do understand that up to a point you will need to do some work to look into allegations of bribery, we find internal investigations that trample over the crime scene to be unhelpful. Our stance is to ask for genuine cooperation with our investigation, not duplication of it. We don t expect you to keep us in the dark while you carry out extensive private investigations and some months or even years later present us with a package of your findings. If there is suspected criminal conduct, that is our job and there are some important issues around access to, and integrity of, evidence (especially regarding witness accounts) and we expect those to be respected in the same way they would be in any other criminal investigation. We expect you to engage with us early, and to work with us as we investigate, not to rush ahead and, whether intentionally or not, complicate the work we need to do. This is, we appreciate, to some extent a departure from the way things used to be and the way certain practices have built up in other jurisdictions, but we make no apology for that. Our job is to investigate possible criminal offences and we take a very dim view of anything anyone does that makes that job more difficult than it needs to be. Some commentators took this as an indicator that the SFO were anti-internal investigation not a view adopted by us. We have always taken the stance that companies must be given the opportunity to conduct their own investigation. David Green, Director of the SFO, has now sought to clarify the SFO s position on this. In a recent speech, he said that it was a misconception that the SFO are opposed to companies carrying out their own internal investigations, acknowledging that companies will want to inquire into suspected wrongdoing themselves, with their own advisers. What they should not do, however, is churn up the crime scene. This should go without saying. Evidence (all of it) must be preserved and proper records of all steps taken kept. The internal investigation should help, not hinder a prosecutor. In short, if an internal investigation is required, it should be carried out by people who know what they are doing.

4 And a view from the US The US Department of Justice recently (9th September) directed its prosecutors to focus their efforts on holding to account the individuals responsible for illegal corporate activity. Highlighting the fact that: One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing. Such accountability is important for several reasons: it deters future illegal activity, it incentivizes changes in corporate behavior, it ensures that the proper parties are held responsible for their actions, and it promotes the public s confidence in our justice system. The memorandum also acknowledged that so doing, however, was fraught with difficulty, particularly in large organisations with a complex structure, where those in charge can hide behind the corporate shield safe in the knowledge that nothing can be effectively pinned on them. The memo, issued by deputy DA Sally Quillan Yates, sets out six key steps to be taken in any investigation of corporate misconduct: in order to qualify for any cooperation credit, corporations must disclose all relevant facts relating to the individuals responsible for the misconduct they cannot pick and chose which facts to disclose. The organisation must identify all individuals involved in or responsible for the misconduct at issue, regardless of their position, status or seniority, and fully disclose all facts relating to that misconduct criminal and civil corporate investigations should focus on individuals from the inception of the investigation criminal and civil attorneys handling corporate investigations should be in routine communication with one another except in extraordinary circumstances or approved departmental policy, culpable individuals will not be released from civil or criminal liability when resolving a matter with a corporation Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should document any declinations as to individuals in such cases if a decision is made at the conclusion of the investigation not to bring civil claims or criminal charges against the individuals who committed the misconduct, the reasons for that determination must be recorded and approved by the United States Attorney or Assistant Attorney General whose office handled the investigation, or their designees civil attorneys should consistently focus on individuals as well as the company and evaluate whether to take action against an individual based on considerations beyond that individual s ability to pay. Executives in the UK should take note in this instance this is already the attitude of the SFO. David Green, director of the SFO has already said that: Where a company receives a DPA, individuals will still be prosecuted if the evidence is available and it is in the public interest to do so. Whilst perhaps not quite as direct as Sally Quillan Yates memo, it would be unwise to think that individual accountability is anything other than a similar priority here. Indeed if a company wishes to benefit from a DPA rather than prosecution among the factors, published back in February 2014 in the DPA Code of Practice, to be considered by a prosecutor when weighing up the public interest for granting one is the following: It must be remembered that when P [a company] self-reports it will have been incriminated by individuals. It will ordinarily be appropriate that those individuals be investigated and where appropriate prosecuted. P [The company] must ensure in its provision of material as part of the self-report that it does not withhold material that would jeopardise an effective investigation and where appropriate prosecution of those individuals. If in any doubt about the SFO s commitment to this approach just look to the successful prosecutions of the Innospec four in 2012, two years after the company pleaded guilty. DPA s only for the rich and powerful? Recent press commentary has suggested that Deferred Prosecution Agreements may be bought by rich and powerful companies backed by teams of lawyers. David Green, Director of the SFO has sought to scorch these rumours, however, by pointing to the fact that a judge must give permission for DPA negotiations to progress, and must certify later that the DPA is in the interests of justice. Furthermore, he said that: A DPA is designed to avoid, in appropriate circumstances, the collateral damage to the pensioners, shareholders, employees and others that can flow from the prosecution of a corporate. It is not the default preferred outcome for every case, but is most likely to be suitable for a company that has self-reported wrongdoing, cooperated with an investigation and made necessary amendments to its governance. Where a company receives a DPA, individuals will still be prosecuted if the evidence is available and it is in the public interest to do so. The SFO have made it clear they will not be intimidated into negotiating a DPA and it would be foolhardy to believe otherwise.

5 Court of Appeal issues stark warning to regulatory offenders The trend for harsher sentences for regulatory offences continues with a decision of the Court of Appeal in England highlighting that companies with large turnovers that repeatedly commit regulatory offences could face a substantial increase in fines. In R v Thames Water Utilities Limited, the Court of Appeal held that fines had to deliver the appropriate message to directors and shareholders of the offending company. In particular, it would be ordinarily appropriate to treat previous convictions as an aggravating factor, allowing a substantial increase in the level of fines so that they materially impact on the finances of the company as a whole. The Court expressly approved fines equal to 100% of a company s net profit for the worst offences, even if that led to a fine in the 100s of millions. Although R v Thames Water Utilities Limited concerned an environmental offence, the judgment is likely to have repercussions throughout the regulatory sphere as it is consistent with comments made by judges in recent health and safety cases and there are a number of similarities between the existing sentencing guidelines for environmental offences and the sentencing guidelines (definitive or proposed) for other regulatory offences, including health and safety offences, fraud, money laundering and bribery in England & Wales (these sentencing guidelines do not apply in Scotland). In particular, the guidelines require courts to assess the culpability of the offending company when deciding the sentence to be imposed: repeat offences are likely to increase the culpability of a company for the purposes of sentencing. All change for the Bribery Act? Not any more On 9th September Byron Davis MP asked the Secretary of State for Justice what progress he has made on Action 36 of the UK Anti- Corruption Plan; and when he expects corporate criminal liability to be introduced. On 28th September, Andrew Selous, Minister in the Department of Justice, gave the following written answer: The UK has corporate criminal liability and commercial organisations can be, and are, prosecuted for wrongdoing. The UK Anti-Corruption Plan tasked the Ministry of Justice to examine the case for a new offence of a corporate failure to prevent economic crime and the rules on establishing corporate criminal liability more widely. Ministers have decided not to carry out further work at this stage as there have been no prosecutions under the model Bribery Act offence and there is little evidence of corporate economic wrongdoing going unpunished. This will come as a disappointment to David Green and others, who have long campaigned for a change in the law, as we have noted previously. The assertion that there is little evidence of corporate economic wrongdoing going unpunished will also no doubt cause a few raised eyebrows. The SFO have yet to comment on this development but the government s u-turn on the issue (in their pre-election manifesto the Conservative party set out their commitment on this to criminalise companies failure to stop economic crime) will be hard to swallow. Barry Vitou Partner, Litigation & Regulatory E: barry.vitou@pinsentmasons.com T: +44 (0) Tom Stocker Partner, Litigation & Regulatory E: tom.stocker@pinsentmasons.com T: +44 (0) This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word partner, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use Pinsent Masons to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate businesses for regulatory or other reasons. Reference to Pinsent Masons is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. Pinsent Masons LLP 2015.