On 17 January 2017, the Serious Fraud Office (SFO) confirmed that a Deferred Prosecution Agreement (DPA) had been reached with Rolls-Royce, the British aero-engineering company. Approval was given at a hearing before Sir Brian Leveson QC, President of the Queen’s Bench Division. The agreement will result in the payment of approximately £500 million plus interest under a schedule lasting up to five years, and a payment in respect of the SFO’s costs.
The facts of the case:
A DPA was reached between the SFO and two entities owned by Rolls-Royce Holdings plc in respect of the conduct of Rolls-Royce’s civil aerospace business, which manufactures engines for the large commercial aircraft and corporate jets.
For more information on Deferred Prosecution Agreements, see Practice note, Deferred Prosecution Agreements: overview.
For more information on the SFO see Practice note, Serious Fraud Office (SFO).
Rolls-Royce did not self–report the criminal conduct to the SFO, it was uncovered after former employees posted allegations on social media. Investigation began in 2010. The investigation was conducted and voluntarily disclosed to the SFO by Rolls-Royce.
Sir Brian Leveson described it as revealing “the most serious breaches of the criminal law in the areas of bribery and corruption, some of which implicated senior management and, on the face of it, controlling minds of the company”.
The allegations of corruption were, in summary:
- Agreements to make corrupt payments to agents in connection with the sale of Trent aero-engines for civil aircraft in Indonesia and Thailand between 1989 and 2006.
- Concealment or obfuscation of the use of intermediaries involved in its defence business in India between 2005 and 2009 when the use of intermediaries was restricted.
- An agreement to make a corrupt payment in 2006/7 to recover a list of intermediaries that had been taken by a tax inspector from Rolls-Royce in India.
- An agreement to make corrupt payments to agents in connection with the supply of gas compression equipment in Russia between January 2008 and December 2009.
- Failing to prevent bribery by employees or intermediaries in conducting its energy business in Nigeria and Indonesia between the commencement of the Bribery Act 2010 and May 2013 and July 2013 respectively, with similar failures in relation to its civil business in Indonesia.
- Failure to prevent the provision by Rolls-Royce employees of inducements that constitute bribery in its civil business in China and Malaysia between the commencement of the Bribery Act 2010 and December 2013.
In addition to the UK proceedings, Rolls-Royce has reached a parallel DPA with the US Department of Justice (DOJ) and a leniency agreement with Brazil’s Ministério Público Federal (MPF). The agreements relate to bribery and corruption involving intermediaries in a number of overseas markets.
Under the terms of the DPA with the SFO, Rolls-Royce will pay £497,252,645. In addition, Rolls-Royce has agreed to make payments to the DOJ totalling $169,917,710 and to the MPF totalling $25,579,179.
Lessons for in-house Counsel:
1. Seeking a DPA
A DPA can only officially begin when a designated prosecutor invites any company under investigation to enter into negotiations as an alternative to prosecution. In practice, it is also possible for a company or their legal representative to contact the designated prosecutor to propose entering into negotiations to agree a DPA. However, it remains a matter for prosecutorial discretion.
The SFO have made a number of statements on the circumstances under which they would consider a matter suitable for a DPA.
Rolls-Royce makes it clear that neither the seriousness of the offending nor the seniority of those involved are fatal to a matter being resolved via a DPA.
However, Rolls-Royce also makes it clear that co-operation on the SFO’s terms is critical. Similarly, it seems unlikely that any invitation would be forthcoming if senior managers complicit in the offending remain in post.
2. To report or not to report?
There is some criminal conduct that companies are obliged to report, for example breaches of the Data Protection Act, knowledge or suspicion of money laundering and potentially any issue of concern to an appropriate regulator.
There remains no obligation to report suspected fraud or bribery to the SFO or any other law enforcement agency. Subject to any concerns over suspected money laundering, which should always be referred to the firm’s nominated officer, a company can simply keep concerns quiet and hope nobody else finds out.
However, the Rolls-Royce bribery came to light after former employees posted allegations on social media sites, which were widely shared.
With the proliferation of social media sites, which can be accessed anonymously, opportunities for whistle blowers are increasing, even if they do not wish to approach prosecutors formally.
Although the SFO had consistently encouraged companies that uncover suspected financial crime to self-report, Rolls-Royce demonstrated that self-reporting is not a prerequisite.
Sir Brian Leveson stated that Rolls-Royce could not have done more to expose its own misconduct, and that the work done in connection with its investigation and work with prosecutors in multiple jurisdictions, together with the cost of the intermediary review and the appropriate professional financial advice, as at December 2016, amounted to £123,115,643.
Co-operation means different things to different people. Rolls-Royce suggests three things:
Co-operation must be on the SFO’s terms. Instructing an independent report, and disclosing a final version but claiming Legal Professional Privilege over the working papers will not suffice.
The costs of co-operation must be considered.
There is little prospect of hiding anything. Certainly, employees will need to be made available as witnesses.
4. International issues
In addition to the agreement with the SFO, Rolls-Royce has reached a parallel DPA with the US Department of Justice (DOJ) and a leniency agreement with Brazil’s Ministério Público Federal (MPF). The agreements relate to bribery and corruption involving intermediaries in a number of overseas markets. In addition to the UK DPA, Rolls-Royce has agreed to make payments to the DOJ totalling $169,917,710 and to the MPF totalling $25,579,179.
Although presenting a “done deal” to the court was criticised in R v Innospec, a case settled by a civil recovery order in 2010, it seems the international dealings were conducted with the knowledge of the court.
Seeing parallel UK and US settlements may provide some comfort to companies concerned that an agreement reached in the UK could lead to further investigations in other jurisdictions.
5. Investigation into individuals
SFO cases settled by civil orders generally saw no individual, either senior management or employee, prosecuted. In Rolls-Royce, the SFO were quick to confirm that the DPA agreed with the company was not the end of the matter, and press reports suggest that senior managers are currently under investigation.
6. The punishment
The following terms were declared as in the interests of justice and fair, reasonable and proportionate:
- Past and future co-operation with the relevant authorities in all matters relating to the conduct arising from the circumstances of the draft Indictment.
- Disgorgement of profit on the transactions of £258,170,000.
- Payment of a financial penalty of £239,082,645.
- Payment of the costs incurred by the SFO (£12,960,754).
- At its own expense, completing a compliance programme following the recommendations of the reviews commissioned by Rolls-Royce from Lord Gold (of Gold Associates) on the approach to anti-bribery and corruption compliance.
- That no tax reduction can be sought in relation to any part of the payments in the UK or elsewhere.
Sir Brian Leveson stated that the DPA has to be approached on the basis that it must be broadly comparable to the fine that a court would have imposed on conviction following a guilty plea. Therefore, given the costs of co-operation, and a DPA being based on every instance of offending, rather than that the prosecution can prove, the overall cost of a DPA could exceed that of being found guilty.
However, Sir Brian Leveson pointed out that part of his decision making was whether it was necessary to inflict the adverse consequences on Rolls-Royce that would flow from prosecution.
The company would have to suffer the undeniably adverse publicity that will flow from the DPA, but could of course demonstrate that the new Board and executive team has embraced the need to make essential change and cleared out all the disreputable practices.
The significant difference in punishment between a DPA and a prosecution is therefore twofold:
- A DPA provides an opportunity to publicly demonstrate a change in culture.
- A DPA will not formally bar a company from government and other contracts.
The following points can be taken from the Rolls-Royce DPA:
- A DPA is not contingent on self-reporting.
- A DPA is most unlikely to be forthcoming without the full co-operation with the SFO.
- A DPA will not result in a “soft” punishment. A company should expect a fine, plus having to pay the costs of any investigation, and having to put in place monitoring procedures.
- A DPA is unlikely to end the investigation into the conduct of any individual employees or senior managers.