UK: Failure To Prevent Bribery: The First s7 Sentence

This article looks at the first court sentence for failure to prevent bribery under the Bribery Act 2010.

The Bribery Act 2010 has been in force for over four years. For much of that time, businesses have waited for clarification of the s7 offence of failure to prevent bribery. Finally, near the end of 2015, the first DPA was agreed. Now we have the first sentence from a Crown Court for the s7 offence.

Bribery Act 2010 – s7 offence

As a reminder of the offence under s7 Bribery Act, a "relevant commercial organisation" commits an offence if a person associated with it bribes another person intending to get or keep business, or an advantage in the conduct of business for the organisation.

What is a Relevant Commercial Organisation?

A Relevant Commercial Organisation is:

• any body corporate or partnership that is formed under the laws of any part of the UK and carries on a business (wherever that business is); and
• any body corporate or partnership, wherever formed, that carries on a business, or part of a business, in the UK.

What is an Associated Person?

An Associated Person of a Relevant Commercial Organisation is a person who performs services for or on behalf of the relevant organisation. It does not matter in what capacity it does so – employees are presumed to be Associated Persons, and agents and other intermediaries, subsidiaries or other contracting parties may be Associated Persons depending on the circumstances.

What is bribing?

Bribing is acting in a way that would constitute an offence under either s1 (bribing another person) or s6 (bribing a foreign public official), critically leaving out of account whether the action is within the territorial scope of the Bribery Act.

So this means that an overseas agent, which is not itself within the jurisdiction of the Bribery Act, can cause its principal to breach s7 even though there is no breach of s1 or s6 that can be prosecuted.

Breach of s7 – defences and sanctions

The Bribery Act requires the Secretary of State (in this case the Ministry of Justice) to publish guidance on "adequate procedures". If Relevant Commercial Organisations put adequate procedures in place to prevent their Associated Persons from bribing, then they will have a defence against prosecution for the s7 offence.

Where the offence is committed, it is committed only by the organisation and not additionally by any individual within it, and is punishable with a fine.

The prosecution authorities will decide whether to take action depending on whether the case meets the prosecution guidelines, that is that:

• there is a realistic prospect of conviction; and
• if there is a realistic prospect of conviction, it is in the public interest to prosecute.

Criminal Court or DPA?

Under powers granted to various enforcement agencies, including the Serious Fraud Office (SFO) under the Crime and Courts Act, an agency may consider it appropriate to enter into a deferred prosecution agreement (DPA) instead of proceeding directly to a prosecution. DPAs are possible for certain offences committed by corporates only. The s7 offence is one of them.

Our alert on SFO Agrees First DPA discussed SFO's action against Standard Bank plc (Standard Bank), and why it considered a DPA appropriate in that case.

The Sweett Group case

Sweett Group plc (Sweett) is an independent provider of professional services for the construction and management of building and infrastructure projects. As a UK company, Sweett is a Relevant Commercial Organisation for the purposes of the Bribery Act.

SFO announced in July 2014 that it had opened an investigation into Sweett in relation to its activities in the United Arab Emirates and elsewhere.

On 9 December 2015, SFO announced it had charged the company. SFO alleged that between 1 December 2012 and 1 December 2015 Sweett failed to prevent the bribing of Khaled Al Badie by an Associated Person, Cyril Sweett International Limited (CSIL). The bribing was intended to obtain or retain business, and/or an advantage in the conduct of business, for Sweett, namely securing and retaining a contract with Al Ain Ahlia Insurance Company (AAAIC) for project management and cost consulting services in relation to the building of a hotel in Dubai, contrary to s7(1) Bribery Act.

On 18 December 2015, Sweett pleaded guilty to the charge, and a breach of s7(1)(b) Bribery Act.

On 19 February 2016, Martin Beddoe, HHJ, handed down judgment at Southwark Crown Court. He ordered Sweett to pay £2.25 million, comprising £1.4 million in fine and £851,152.23 in confiscation. Additionally, SFO was awarded costs of £95,031.97.

Facts

CSIL was a Cypriot company which was a wholly owned subsidiary of Sweett. It was described by the judge as independent of Sweett in name only, and effectively operated as a division or department of Sweett.

Khaled Al Badie is a prominent officer of both the Al Badie Group (ABG) and AAAIC, a company controlled by the Al Badie family. CSIL and ABG had an established relationship and CSIL had secured several contracts with ABG.

The relevant contract, worth £1.6 million to CSIL, was awarded by AAAIC for provision of project management and other services in relation to the Rotana project involving construction of a hotel in Dubai. Khaled Al Badie signed the contract on behalf of AAAIC and, on the same day, CSIL signed a contract with North Property Management Limited (NPML) for hospitality services by NPML in relation to the AAAIC contract, for which NPML would be paid monthly instalments of 40% of the contract price. Khaled Al Badie is the beneficial owner of NPML, and no other person connected with AAAIC appeared aware of this contract.

During 2014, Sweett became aware of concerns around the contract and SFO began an investigation into suspicions of corrupt practice by CSIL in relation to the Rotana project. In December 2014 Sweett self-reported the relevant contracts on the basis they might be the subject of suspicion, but it did not admit the payments to NPML were bribes. Subsequently, in July 2015, Sweett's lawyers acknowledged to SFO that there had not been in place adequate procedures to prevent Associated Persons undertaking unlawful conduct.

Eventually, after taking various advice, Sweett considered selling CSIL with the existing contracts with AAAIC and NPML in place in a management buyout, but then decided instead to close all operations in the Middle East and North Africa.

Sweett's lawyers informed SFO of this and then:

• in September 2015 Sweett dismissed the CSIL executive officers connected to the NPML contract;
• in November 2015 Sweett repudiated the NPML contract and told SFO it would plead guilty to breach of s7; and
• finally, Sweett terminated all its contracts with ABG and closed down its operations in the region.

Evidence

The court pointed to correspondence between senior CSIL staff that suggested at least some of them were well aware of what was happening. But, while Sweett itself appeared to know of the NPML contract, there was no suggestion any person at Sweett was made aware of its true nature. Sweett did not have in place the necessary systems to put it on notice of what was proposed or to deal with it once payments started to be made under it.

In 2010 Sweett had become aware of serious concerns in the way CSIL was operating and KPMG had been instructed to carry out an audit of the group's financial controls. KPMG reported with clear recommendations for change in both 2011 and 2014.

The court also found evidence that representatives of Sweett tried to get a letter from AAAIC suggesting the NPML agreement had a legitimate purpose – but that the purpose was a locally legal "finder's" fee, and not the purpose actually stated in the contract. Worse, it also appeared the company considered creating an escrow account with a Middle Eastern bank in which to hold payments under the NPML contract, until the SFO problem had "gone away".

What the judge said

The judge heard mitigating evidence that:

• the parent company was in ignorance of the operations of a "gangrenous limb" of the company; and
• a firm of solicitors gave "bad advice".

He gave short shrift to both arguments. On the first, he said the whole point of s7 is to impose a duty on those running companies to supervise them properly and that rogue elements can operate only if there is not proper supervision. On the second, he said there was no evidence of the bad advice, but that in any case it is up to companies to make their own decisions.

The judge stated the contract with NPML was a fiction, and was merely a mechanism to provide funding for Khaled Al Badie to secure and maintain the AAAIC contract to CSIL. There was no evidence of any tendering process for the AAAIC contract.

In the judge's opinion, Sweett was trying to hedge its bets. Khaled Al Badie was withholding payments under the AAAIC and other contracts with CSIL against the sums owed to NPML. If the SFO issue went away, the outstanding payments could be made and Sweett then hoped to avoid litigation in the Middle East. The judge also noted that the decision to close down operations was not an act of humility, but rather the only sensible commercial decision, not least as the relevant operations had been operating at a loss.

The sentence

The judge did not discuss the reasons for the case proceeding to court rather than taking the DPA route. He passed down the following sentence, following the steps set out in the Sentencing Council Guidelines on Fraud, Bribery and Money Laundering Offences:

• compensation: there was no issue as to compensation;
• confiscation: a confiscation order for £851,152.23, the agreed amount of benefit. He said the amount was to be paid within three months of the judgment date;
• determining the offence category: in calculating the amount of the fine, the judge agreed the case fell within Category A (high culpability). Examples in the Sentencing Council Guidelines of these include where offending occurs over a sustained period of time or where there has been wilful disregard of commission of offences with no effort to put effective systems in place. He noted the offending clearly took place over a sustained period of time and there appeared to have been no real effort to put in place systems to avoid what happened with NPML , and KPMG's concerns were wilfully ignored. He noted the NPML payment was so obviously a bribe, so clearly bribery was considered acceptable by at least some CSIL management. The payments to NPML went on for 18 months and there was then the deliberate attempt to mislead SFO by trying to produce evidence the payments were a finder's fee;
• harm: the harm should be calculated on the basis of the gross profit on the contract, using the maximum starting point of 300%. The judge concluded, given that there were no previous convictions, cooperation with SFO did improve and Sweett has slowly taken steps to improve since mid-2015, he would apply the lowest multiplier available, which was 250%;
• adjustment: the judge saw no reason to adjust the amount of the fine other than to apply the required discount of one-third for a guilty plea. He was unpersuaded that the company might have difficulty in paying; and
• final amount: accordingly, the fine was set at £1.4 million. Sweett is to pay half of within one year and the other half within two years of judgement.

Standard Bank – compare and contrast

What can firms take from the Sweett and Standard Bank cases?

"Associated Persons"

Key to the s7 offence is the failure to prevent an Associated Person bribing to get or keep business or an advantage in the business for the Relevant Commercial Organisation.

In the Standard Bank case, the Relevant Commercial Organisation in question was joint arranger of the deal in relation to which bribes were paid. Although the actual bribe was paid by its non-UK affiliate under an agreement entered into only between that affiliate and a third party, the benefits to the Standard Bank UK entity were clear.

In the Sweett case, it is interesting that all parties seemed to agree CSIL was an Associated Person of Sweett's.

The Ministry of Justice Guidance on adequate procedures addresses the issue of whether a subsidiary is an Associated Person of its parent. It says that the mere existence of the corporate link is not enough.

"Even if it can properly be said that an agent, a subsidiary, or another person acting for a member of a joint venture, was performing services for the organisation, an offence will be committed only if that agent, subsidiary or person intended to obtain or retain business or an advantage in the conduct of business for the organisation.

The fact that an organisation benefits indirectly from a bribe is very unlikely, in itself, to amount to proof of the specific intention required by the offence. Without proof of the required intention, liability will not accrue through simple corporate ownership or investment, or through the payment of dividends or provision of loans by a subsidiary to its parent.

So, for example, a bribe on behalf of a subsidiary by one of its employees or agents will not automatically involve liability on the part of its parent company, or any other subsidiaries of the parent company, if it cannot be shown the employee or agent intended to obtain or retain business or a business advantage for the parent company or other subsidiaries. This is so even though the parent company or subsidiaries may benefit indirectly from the bribe.

By the same token, liability for a parent company could arise where a subsidiary is the "person" which pays a bribe which it intends will result in the parent company obtaining or retaining business or vice versa.

The question of adequacy of bribery prevention procedures will depend in the final analysis on the facts of each case, including matters such as the level of control over the activities of the associated person and the degree of risk that requires mitigation."

The judge's key point here, which presumably was not contested by Sweett, was that the corporate set up was such that CSIL was a separate entity in name only. As it effectively operated as a division of the UK entity, this made it an Associated Person for Bribery Act purposes.

Adequate procedures

In the Standard Bank case, the judge noted SFO considered there was no realistic prospect of raising this defence. Although the bank did have some procedures, the applicable policy was unclear and was not reinforced effectively to the bank deal team through communication and/or training. In particular, training did not provide sufficient guidance about relevant obligations and procedures where two entities within the Standard Bank Group were involved in a transaction and the other group entity engaged an introducer or a consultant.

The Sweett case, however, does not disclose there were any policies and procedures at all, for example on due diligence of agents and transactions, and appropriate communication and training to key individuals.

Dealing with SFO

SFO went on record, several times, as saying one of the reasons it agreed to take the DPA route with Standard Bank was because of the early self-reports it and its lawyers made to it, and the full cooperation it received from the outset. The judge commented the bank would not have been better served by taking a course which did not involve self report, investigation and provisional agreement to a DPA with the substantial compliance requirements and financial implications that follow.

The fine

That said, institutions may be unconvinced of the benefits of a DPA. The Sweett fine involved, essentially, disgorgement of profits and a fine based on a multiplier of 250%. The Standard Bank fine involved compensation, disgorgement of profit, a fine based on a multiplier of 300% and the expense of commissioning an independent review.

What next?

The Sweett case enables us to draw some interesting parallels with the Standard Bank case. But industry still awaits what it really wanted – confirmation on what procedures would be considered adequate for an organisation not to be prosecuted if an Associated Person bribed on its behalf.

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