UK: SFO Secures Sixth DPA

On 20 December 2019 reporting restrictions were lifted in respect of a Deferred Prosecution Agreement ("DPA") agreed between the Serious Fraud Office (“SFO”) and Guralp Systems Ltd ("GSL"). Under the DPA, which was approved in October 2019, GSL agreed to disgorge relevant profit of £2,069,861 in relation to charges of conspiracy to make corrupt payments and failure to prevent bribery by its employees, both in respect of South Korean business. Three GSL personnel, who were also charged with conspiracy to make corrupt payments, were subsequently acquitted in December. GSL also agreed to continue to cooperate with the SFO and to maintain and keep its (already enhanced) Anti-Bribery and Corruption (“ABC”) procedures under review.

Following the introduction of DPAs in the UK in 2014 and the conclusion of the first DPA with the SFO in November 2015, the GSL DPA is the sixth DPA and reiterates the importance placed by the SFO on the use of DPAs in tackling financial crime. In this briefing, we provide an overview of the GSL DPA.

DPAs

By way of background, and as set out in our briefing from 2016 in relation to the UK's second DPA, DPAs provide a means, in appropriate cases, of resolving offending by corporate entities for fraud, bribery and economic crime. Under a DPA, a company agrees to certain conditions which might include a financial penalty, compensation to victims, disgorgement of profits, payment of any reasonable costs of the prosecution in relation to the alleged offence or the DPA itself, cooperation in any investigation related to the alleged offence, and measures to prevent future offending. The company and the SFO will also agree a public statement of facts setting out the company's wrongdoing. In return, and provided the conditions of the DPA are met, the company will not face prosecution. DPAs are public, and must be applied for and approved by a court before coming into effect. A court will approve a DPA which it considers to be in the interests of justice, and which has fair, reasonable and proportionate terms.

SFO v Guralp Systems Limited and facts

On 22 October, Mr Justice William Davis in Southwark Crown Court approved a DPA agreed between the SFO and GSL which was under reporting restrictions until 20 December 2019, due to the related criminal trial of three GSL personnel. GSL is a relatively small UK business specializing in the development and production of equipment/systems used on land and under water for seismic measurement (which, for example, can be used in earthquake detection). GSL’s systems are used throughout the world including by public bodies.

The DPA related to counts against GSL of conspiracy to make corrupt payments (contrary to s1, Criminal Law Act 1977) and failure to prevent bribery by GSL employees (contrary to s7, Bribery Act 2010).

Three personnel at GSL, including its founding director, were also indicted with conspiracy to make corrupt payments. Prior to the publication of the DPA, all three were acquitted. Once the criminal proceedings against the individuals were concluded, the DPA was released. The statement of facts and judgment published with the DPA set out that, during the period 2002-2015, GSL, through the offices of the individuals who were prosecuted, developed a relationship with an individual called Dr Chi, who over that period held various positions at the government funded, Korea Institute of Geoscience and Mineral Resources (“KIGAM”), and pursuant to which Dr Chi agreed to provide support and advice to GSL in the seismological market in the Republic of Korea and to recommend GSL’s services. In return, Dr Chi received over $1 million of payments over 12 years including payments to Dr Chi’s US bank account and cash payments totalling over $70,000.

Specifically, the judgment set out that Dr Chi (who was separately tried and convicted in the US in 2017 for money laundering relating to the payments he had received from GSL and another company) was in a position to assist GSL inappropriately, by virtue of his position at KIGAM, by:

• recommending GSL’s products to public and quasi-public companies in the Republic of Korea, leading to sales which would not otherwise have taken place – for example Dr Chi attested to the reliability of GSL’s systems during a period when GSL was experiencing computer problems;
• advising GSL on pricing strategy and public sector procurement in country and, for example, artificially increased the GSL list price he submitted to the public procurement body;
• influencing the technical specifications required by another institution in Korea to favour GSL’s equipment;
• providing GSL with confidential information, ie a competitor’s presentation to KIGAM and another’s pricing policy.

GSL and the SFO agreed that the increase in annual revenue from GSL’s contracts with the Republic of Korea (which rose from £20,000 pa in 2002/03 to £1.45m in 2015) indicated that a total of over £2 million of gross profit was attributable to the corruption.

Terms of the DPA, public interest and commentary

The terms of the DPA (which will remain in place until October 2024) require GSL to:

• cooperate fully and truthfully with the SFO until such time as the investigations and prosecutions conclude (which they have now done);
• disgorge £2,069,861 of gross profit;
• report evidence or allegations of fraud by itself, its officers, directors, employees or agents to the SFO; and
• review and report annually on its current ABC programme and its implementation.

The DPA included no provision in respect of financial penalty or the SFO’s costs. Davis J’s opinion was that it was fair, reasonable and proportionate, given the precarious financial position of GSL (to which his attention had been drawn, including by way of GSL’s financial statements), not only for the financial orders made to be limited to the one for disgorgement, but also that GSL be afforded 5 years (with no set timetable) to pay. Whilst Davis J concluded that there was a reasonable prospect that payment of the disgorgement amount would be made by the end of the DPA’s term, he also recognised the possibility that GSL might not be able to do so and the consequential possibilities that there might need to be an application to vary the terms of the DPA or even that failure to meet its terms might result in the prosecution of GSL being pursued. However, Davis J did flag that, by reference to the relevant Sentencing Council Guideline for Corporates, and allowing for a 50% discount (the maximum penalty discount for previous DPAs), an appropriate financial penalty in this case would have been around £3 million, had GSL been able to pay it.

When addressing the interests of justice in approving the DPA rather than GSL being prosecuted, Davis J highlighted a number of countervailing factors. In favour of prosecution, these included:

• the alleged, sustained and planned criminality of certain of GSL’s senior officers and employees in making payments in excess of $1 million over a period exceeding a decade to an official of a Korean governmental agency;
• that the accepted profit resulting from the alleged conduct (of in excess of £2 million) was substantial, particularly for a relatively small company;
• that GSL did nothing effective by way of implementing ABC prevention procedures when the Bribery Act came into force in 2011; and
• an assumed adverse impact of GSL’s alleged conduct on its competitors.

Factors in favour of approving the DPA, rather than prosecuting GSL (which, had a conviction followed, Davis J recognised might be likely to result in GSL being put out of business (given its financial circumstances and the probable risk of being debarred from public procurement overseas) included:

• that GSL reported the activity in the UK (and in the US) and cooperated with the SFO, providing much of the material upon which the SFO relied;
• that those responsible for GSL’s alleged conduct were no longer running/involved in the company;
• that GSL had not previously or otherwise engaged in criminal conduct;
• that GSL had taken substantial steps to improve its compliance culture including terminating distributors, on a “safety first” basis, including in the absence of clear evidence of criminality; and
• that if GSL were to go out of business, the innocent workforce at GSL would suffer and the withdrawal of GSL’s relatively unusual services from the market would be likely to have a detrimental effect.

Davis J concluded that the factors in favour of approving the DPA outweighed those militating towards immediate prosecution. This DPA once again highlights the key importance that reporting, cooperation and remediation (both in terms of personnel and ABC policies/procedures) will have as regards promulgating circumstances which are susceptible to agreeing and obtaining judicial approval for the DPA. This case which is a further example of a DPA which has not led to convictions of any individuals also emphasises the flexibility of the DPA process: in particular, given the fact that Davis J was persuaded by the positive mitigation that GSL was able to put forward to agree with not imposing any financial penalty at all (as opposed to disgorgement of profit, payable over a 5 year period rather than immediately) which might have forced GSL out of business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.