The definitive guide to Corporate Self Reporting

Ed. Note-today is the now know as Veteran’s Day. It was previously known as Armistice Day. In the UK it is known as Remembrance Day. Whatever moniker it might take, I thought today we should honor all the fallen from World War I. Below is a photo courtesy of Mike Brown of over 800,000 poppy’s around the Tower of London in honor the British war dead from that conflict. Continuing today’s British theme, today’s post is a report of an article found on thebriberyact.com website on issues related to self-disclosure under the UK Bribery Act. I asked the Bribery Act.com guys, Barry Vitou and Richard Kovalevsky Q.C. if I  could repost it in its entirety, which they graciously allowed me to do. The podcast of my recent interview with Barry Vitou on the current state of the Serious Fraud Office and Bribery Act enforcement actions and related issues on the FCPA Compliance and Ethics Report, is available by clicking here. 

 

We have aggregated below the SFO guidance on Self Reporting (available on its website on a number of pages) and importantly recent comments from the Director about it.  If you are considering Self Reporting as an option we strongly advise you consider the following and obtain independent legal counsel.  We would be delighted to talk to you if you have any questions.  Self Reporting is a big step and should not, in our view, be undertaken without advice.

Will my company be prosecuted if it Self Reports?

Whether or not the SFO will prosecute a corporate body in a given case will be governed by the Full Code Test in the Code for Crown Prosecutors, the joint prosecution Guidance on Corporate Prosecutions and, where relevant, the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010.

If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. The fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the Guidance on Corporate Prosecutions. That Guidance explains that, for a self-report to be taken into consideration as a public interest factor tending against prosecution, it must form part of a “genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice”. Self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts.

In appropriate cases the SFO may use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution; see the Attorney General’s guidance to prosecuting bodies on their asset recovery powers under the Proceeds of Crime Act 2002. If the SFO uses its powers under proceeds of crime legislation, it will publish its reasons, the details of the illegal conduct and the details of the disposal.

In cases where the SFO does not prosecute a self-reporting corporate body, the SFO reserves the right (i) to prosecute it for any unreported violations of the law; and (ii) lawfully to provide information on the reported violation to other bodies (such as foreign police forces).

This statement of policy has immediate effect. It supersedes any statement of policy or practice on self-reporting previously made by or on behalf of the SFO.

Self-reporting process. How does a corporate Self Report?

The SFO’s restatement of policy on corporate self reporting explains that, in determining whether or not to prosecute, the fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the Guidance on Corporate Prosecutions.

According to the guidance, for a self-report to be taken into account as a public interest factor tending against prosecution it must form part of a genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice, involving self-reporting and remedial actions, including the compensation of victims. The guidance also explains that, in considering whether a self-reporting corporate body has been genuinely proactive, prosecutors will consider whether it has provided sufficient information, including making witnesses available and disclosing the details of any internal investigation, about the operation of the corporate body in its entirety.

Prosecutors will also be mindful that a failure to report the wrongdoing within a reasonable time of the offending coming to light is a public interest factor in favour of a prosecution. It should be borne in mind that the SFO may have information about wrongdoing from sources other than the corporate body’s own self-report. The timing of any self-report is therefore very important. A failure to report properly and fully the true extent of the wrongdoing a further public interest factor in favour of a prosecution.

The following is an outline of the process to be adopted by corporate bodies and/or their advisers when self-reporting to the Serious Fraud Office.

Initial contact, and all subsequent communication, must be made through the SFO’s Intelligence Unit (confidential@sfo.gsi.gov.uk). The Intelligence Unit is the only business area within the SFO authorised to handle self-reports.

Hard copy reports setting out the nature and scope of any internal investigation must be provided to the SFO’s Intelligence Unit as part of the self-reporting process.

All supporting evidence including, but not limited to emails, banking evidence and witness accounts, must be provided to the SFO’s Intelligence Unit as part of the self-reporting process.

Further supporting evidence may be provided during the course of any ongoing internal investigation.

As stated within the SFO’s revised policy, self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts.

Apart from the information provided above, the SFO will not advise companies or their advisers on the format required for self-reports. Nor will the SFO give any advice on the likely outcome of a self-report until the completion of that process.  For further information visit our Q&A section.

FAQ

The Serious Fraud Office has reviewed its policy on…corporate self-reporting.

1. Why are revisions being published?
2. Following his appointment, the Director of the SFO decided to review SFO policies and take forward recommendations made by the OECD Working Group on Bribery. The revisions have been published to:

restate the SFO’s primary role as an investigator and prosecutor of serious and/or complex fraud, including corruption;

ensure there is consistency with the approach of other prosecuting bodies; and

take forward certain OECD recommendations.

The SFO’s primary role is to investigate and prosecute. The revised policies make it clear that there will be no presumption in favour of civil settlements in any circumstances.

1. Is this a shift in the SFO’s position?
2. The new approach restates the SFO’s primary purpose.

Around the time when the Bribery Act 2010 came into force, joint guidance was issued by the Director of Public Prosecutions and the Director of the SFO, and separate guidance was published by the Ministry of Justice. Save for one change, that guidance continues to apply. The only change is that the reference in the joint prosecution guidance to the SFO’s former policy on self-reporting has been removed.

Any decision to prosecute unlawful activity will be governed by the Full Code Test in the Code for Crown Prosecutors and the applicable joint prosecution guidance.

1. What about companies that have already acted on the old guidance?
2. Each case will be reviewed and assessed according to its own circumstances. If there has been reliance on a previous statement of policy or practice the SFO will consider such reliance in the context of the Full Code Test. If before the publication of the revised policy statements the SFO entered into an agreement with a corporate body based on an earlier SFO statement of policy or practice, and the corporate body has fully complied with the terms of that agreement, then the previous statement of policy or practice will continue to apply
3. Why is there a revised approach to self-reporting?
4. As explained above, the revisions have been made to:

• restate the SFO’s primary role as an investigator and prosecutor of serious and/or complex fraud, including corruption;
• ensure there is consistency with the approach of other prosecuting bodies; and
• take forward certain OECD recommendations.

The revised statement of policy explains in clear terms that that any decision to prosecute unlawful activity will be governed by the Full Code Test in the Code for Crown Prosecutors and the applicable joint prosecution guidance.

The revised statement of policy is not limited to allegations involving overseas bribery and corruption.

If the requirements of the Full Code Test are not established, the SFO may consider civil recovery as an alternative to a prosecution.

1. Will the SFO communicate with corporate bodies about their past or future conduct?
2. The SFO encourages corporate self-reporting, and will always listen to what a corporate body has to say about its past conduct; but the SFO offers no guarantee that a prosecution will not follow any such report.

The SFO is primarily an investigator and prosecutor of serious and/or complex fraud, including corruption. It is not the role of the SFO to provide corporate bodies with advice on their future conduct.

What the Director of the SFO says

Director of the SFO, David Green QC CB Quoted at Pinsent Masons annual regulatory conference on Self Reporting on 24 October 2013. He said:

“I recently attended a private gathering of general counsel from a number of major multi-national corporations. I spoke on the subject of corporate self-reporting of instances of suspected criminality, including bribery and corruption.

There was then a Q&A session, during which 2 attendees indicated that the advice they were receiving from their external lawyers was that such matters should NOT be reported to the SFO, because “the SFO was not as helpful as it used to be”. There followed a vote on the issue, which was firmly in favour of self-reporting. Well they would, wouldn’t they.

I became DSFO in April 2012.

It is now a year since I changed the published SFO guidance on self-reporting by corporates.

The guidance I inherited contained an implied presumption that self-reported misconduct would be dealt with by civil settlement rather than prosecution.

I took the view that no prosecutor should appear to offer such a guarantee in advance. As a prosecutor, you can never anticipate what set of facts and conduct might be next in through the door.

I took the guidance back to the historic position agreed with the Director of Public Prosecutions: that we would apply the full code test for crown prosecutors to self-reported criminality. In other words, we ask (after our own investigation): is there sufficient evidence to prosecute, and if so, is a prosecution in the public interest?

The SFO’s message is carefully expressed and nuanced. Assume the evidential sufficiency test is passed. If a company made a genuine self-report to us (that is, told us something we did not already know and did so in an open- handed, unspun way), in circumstances where they were willing to cooperate in a full investigation and to take steps to prevent recurrence, then in those circumstances it is difficult to see that the public interest would require a prosecution of the corporate.

Some parts of the blogosphere seem to have difficulty with this, writing that it means self-reporters will be prosecuted. It means no such thing.

Some corporate lawyers complain that the new approach (actually, the principled, established approach) creates “uncertainty”. I disagree: and I think that when they say “certainty” it is code for “guarantee”.

For the avoidance of doubt, the SFO continues to receive self-reports, and I anticipate the numbers will only rise as Deferred Prosecution Agreements (DPAs) bed in next year.

So why should a company self-report instances of suspected criminal misconduct to the SFO?

(i)                A self-report at the very least mitigates the chances of a corporate being prosecuted.  It opens up the possibility of civil recovery or a DPA.

(ii)             There is the moral and reputational imperative: it is the right thing to do and it demonstrates that the corporate is serious about behaving ethically.

(iii)           If the corporate chooses to bury the misconduct rather than self-report, the risk of discovery is unquantifiable. There are so many potential channels leading to exposure: whistle-blowers; disgruntled counterparties; cheated competing companies; other Criminal Justice agencies in the UK; overseas agencies in communication with SFO; and the SFO’s own developing intelligence capability, to name but a few.

(iv)           If criminality is buried and then discovered by any of the above routes, the penalty paid by the corporate in terms of shareholder outrage, counterparty and competitor distrust, reputational damage, regulatory action and possible prosecution, is surely disproportionate.

(v)             Last but not least, burying such information is likely to involve criminal offences related to money laundering under sections 327-9 of the Proceeds of Crime Act.

There are, I suggest, very powerful arguments in favour of self-reporting.

Once the decision to self-report has been made by the corporate, then the question of timing arises. Common sense suggests that an initial report of suspected criminality should be made to the SFO as soon as it is discovered. This surely protects the company against the SFO finding out by other means whilst the company investigates further. The corporate can then investigate in depth and report back to the SFO. The SFO will   carry out its own assessment with possible use of S2A powers (in the case of bribery), and, if justified, the opening of a criminal investigation and the exercise of S2 powers.”

The Engineer’s Thumb and How to Bribe

We conclude our week of Sherlock Holmes inspired themes with one of the few cases in which Holmes fails to bring the criminals to justice, The Adventure of the Engineer’s Thumb. In this adventure a young engineer, Victor Hatherley, arrives at Dr. Watson’s surgery with a gruesome injury, a severed thumb. He relates his tale to Watson, who then takes him to see Holmes. Hatherley was hired to inspect a hydraulic press by one Lysander Stark, who claims that it is used to compress fuller’s earth into bricks. However when Hatherley goes to Stark’s country residence to inspect the machine he discovers that it is actually a printing press used to create counterfeit money. He tries to flee and in the process, Hatherley is forced to jump from a second story window, in the process getting his thumb severed by Stark’s cleaver. Hatherley, Watson and Holmes arrive at the Stark residence as the house is on fire, and the perpetrators have fled.

Once again using the Holmes tale as a contrast I refer to the recently released white paper, published by Transparency International UK (TI-UK), entitled “How to Bribe: A typology of Bribe-Paying and How to Stop It”. It was created by TI-UK, lawyers from the London firm of Pinsent Masons and thebriberyact.com, with principal author Julia Muravska and editors Robert Barrington and Barry Vitou. Just as Stark hid the true purpose of his hydraulic press, the title of this work does not convey its true use in how to stop bribes and bribery schemes by identifying them.

 Barry Vitou, partner in Pinsent Masons and co-founder of thebriberyact.com, states in the forward that “This handbook is perfect for General Counsel, Chief Compliance Officers and anyone in any company responsible for anti-bribery compliance from the Board of Directors, down. The purpose is to show how people pay bribes in practice. The examples are based on realistic experiences or real cases. Many bribery cases receive little attention. Often the focus is on the international examples in far away places where, it is sometimes said, you have to ‘pay the man’ to get business done. The impression given is that it would never happen at home. Yet it does. While the first two sections focus on the how, why and when bribes are sometimes paid in a short final section the handbook covers some examples of more prosaic bribery, at home. Who said it could never happen here? Transparency International deserve credit, once again, for putting together a document designed to be practical and helpful for those keen to avoid falling into the trap of bribery.” The white paper has three main sections.

Section I: What is a Bribe?

In this section, the authors review what constitutes a bribe. Recognizing that cash will always be king, they also take a look at excessive gifts, entertainment and travel, charitable donations and political contributions, favors to family members or friends and even the Foreign Corrupt Practices Act (FCPA) exempted facilitation payments. I particularly found the discussion of facilitation payments interesting in light of the recent claims that Archer Daniels Midland Company (ADM) in the Ukraine and Wal-Mart in Mexico were essentially making facilitation payments.

The authors end this section with the following guidance about the specific types of bribe and how to spot them.

Section 2: How Bribes are Paid?

In this section, the white paper lays out a variety of different bribery schemes. Of course they include agents, distributors, intermediaries, introducers, sub-contractors, representatives and the like. But they also detail schemes that the compliance practitioner should acquaint his or herself on. These bribery schemes include false or inflated invoicing or products, offshore payment arrangements and off-balance sheet payments, joint ventures, training, per diems and expense reimbursement arrangements, rebates and discounts and employment agreements. Once again, the authors end this section with the guidance on how to spot and stop each of the bribery schemes they detail.

Section 3: Bribery On Your Doorstep

In this section, the authors cite to cases and examples that were derived from real cases and illustrate how bribes can be paid within the UK. They note that even though “bribery is illegal across the board in the UK, experience shows that bribery also happens in the UK” and cite several reports. The first was by TI-UK and it showed that 5% of citizens polled in the UK said they had paid a bribe at least once in the past twelve months. Further, a recent survey of the construction sector found that more than a third of the industry professionals polled stated that they had been offered a bribe or incentive on at least one occasion. Lastly, the white paper notes that the first three prosecutions under the UK Bribery Act were for bribes paid in the UK. So the authors conclude “It is fair to say that in common with many other countries, UK public officials are susceptible to bribery. Public officials are almost all, universally, paid less than their peers may be paid in the private sector but in many cases in their hands rests the power to make decisions which have huge financial consequences for others. All the ingredients for paying a bribe exist. Likewise, bribes may be paid in the private sector, and there is increasingly a grey area between public and private sector as government services are contracted out.” In this section, some of the examples are inflated invoices, bribes to local planning departments, excessive expenses for training, and even an example of bribes paid to police.

Suggested Reading

Although neither this blog nor the books I have published on anti-corruption compliance made their list, there is an excellent resource list at the end of the white paper for additional reading and research on the subject. It ranges from government guidance’s to David Lawler’s excellent text “Frequently Asked Questions in Anti-Bribery and Corruption”.  Their list is an excellent resource in and of itself.

So we finish our Sherlock Holmes themed blogs. I hope that you have enjoyed the stories and tie-ins as much as I have enjoyed revisiting them this past week.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

Good Bye To Peter O’Toole and the SFO Prosecution of Victor Dahdahleh

This past weekend Peter O’Toole died. He was one of the foremost actors of his generation, garnering eight Oscar nominations. He also starred in one of my favorite movies of all-time-Lawrence of Arabia. Last week, before O’Toole passed away, the UK Serious Fraud Office’s prosecution of Victor Dahdahleh also died when the SFO notified the Court that it did not believe a guilty verdict was possible due to some very odd in trial machinations. As you might expect, thebriberyact.com guys, Barry Vitou and Richard Kovalevsky QC, wrote about it in their blog, thebriberyact.com. Rather than summarize their thoughts, I asked them if I could re-post their original piece, which they graciously allowed me to do.

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Key question for SFO after Dahdaleh collapse

The collapse of the SFO case against Dahdahleh represents a low point in a bad year for the SFO.

The continuing fall out from the botched Tchenguiz investigation (where the SFO is being sued), finding lost SFO documents relating to the BAE Systems investigation in a Cannabis warehouse in East London and now this all put the SFO in the headlines on the front page, again, for all the wrong reasons.

The new Director is doing his best to fix the SFO.  The question some in Whitehall will be asking now is: can it ever be fixed?

The Dahdahleh case was a high profile prosecution and there will be a post mortem.

Two key pieces to the puzzle

The SFO in its Press Release identified two key points.

First, a key witness, who had already pleaded guilty, changed his tune.

In the words of the SFO: “Bruce Hall pleaded guilty and gave evidence for the prosecution. The account he gave in court differed markedly from the witness statement he had provided to the SFO.”

If you bring cases to trial there is always a risk that witnesses can change their story or crumble under cross examination.

You win some.  You lose some.

David Green has repeatedly made the point that because of the very nature of its work there will always be the risk of losing cases.

That is all part and parcel of the rough and tumble of litigation.

Though the SFO badly needs some more of the ‘You win some’ and less of ‘You lose some’.

Reliance on information obtained from third parties

Second, press reports say that reliance was placed on information received from Akin Gump a law firm representing Alba which in turn is involved in a ‘hotly contested’ civil law suit against Mr. Dahdahleh.

The SFO said in its Press Release yesterday that “Two key witnesses from the USA were unwilling to attend trial in the UK and face cross-examination. That impacts on the fairness of the trial as well as the prospects of conviction.”

In its more detailed statement to the Court the SFO said:

“Secondly, we have the unwillingness of two witnesses to face cross-examination. That impacts both on the fairness of the trial as well as the prospects of conviction.

Since last Thursday, yet further contact has taken place with Akin Gump, the lawyers for Aluminium Bahrain, or “Alba”, to secure the attendance of these two American witnesses, Mark MacDougall and Randy Teslik who are both partners in that firm. As you will see from the correspondence, they have attempted to place limits on the extent to which they can be cross-examined.  The Serious Fraud Office does not believe it would be appropriate to attempt to persuade the court to agree to such limits nor, given your comments last week, that they should appear via video-link.

The Defence have raised issues questioning Akins Gump’s role in the provision of assistance to the Serious Fraud Office both as to what their motives may have been in the dissemination of material and assistance as to witnesses who could provide relevant information, this in the context, as accepted by the defence, of the Serious Fraud Office acting in good faith. The attendance of the two American witnesses would have allowed this aspect of the case to be ventilated before the jury. Their refusal to attend creates a situation where it is clear that the trial process cannot remedy the position and we accept unfairness now exists for the Defence.

In seeking to secure the attendance of these two witnesses – who have previously attended court on every other occasion when their attendance has been required – the Serious Fraud Office has taken every available step, including a direct telephone conversation between the Director of the Serious Fraud Office and the chair of Akin Gump.

Not every unfairness necessarily leads to trials being discontinued, particularly where there is other evidence and taking into account the public interest in pursuing serious crime. After careful consideration of all of the circumstances of the case the Serious Fraud Office has concluded that there is no longer a realistic prospect of conviction in this case and accordingly we offer no evidence.”

The SFO will always need to rely on evidence from others in order to bring cases and those parties may have a variety of motives for supplying it to them.  The fact here is that questions over those motives led to the collapse of the case.

The question for the SFO is did it take reasonable steps to prevent the possibility of the collapse happening in this case.

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While I do not pretend to understand the nuances of British criminal trial procedure, I have some experience trying cases and you always have to expect the unexpected. Even if that means a key witness becomes adverse to your position or indeed his or her prior position in negotiating a plea agreement. That is the reason you have the prior statements memorialized so that they can be used against the interest of the witness, if required. The actions of the law firm Akin, Gump would seem to be more problematic. In the UK, there appears to much criticism of the SFO for using materials developed by Akin, Gump. While, I do not find that conduct troubling, if you are going to rely on a third party for any evidence, you had better be assured that they will show up at trial to prove up such evidence. If it turns out that Akin, Gump went back on its word and did not provide the testimony that it agreed to, that is another story. Lastly, for all those who criticize prosecutors who lose cases, I only have one thing to say, “If you have never lost a case, you have never been to the courthouse.”

So good-bye to Peter O’Toole, good-bye to the SFO prosecution of Victor Dahdahleh but as Barry Vitou reminded me, assured it is not good-bye to the SFO, although I bet it is looking forward to the new year a bit more than most of us.

Reports Just In: Invasions from Mars and the UK Bribery Act

On this day 75 years ago Orson Welles caused a nationwide panic with his broadcast of “War of the Worlds” – a realistic radio dramatization of a Martian invasion of Earth. The show began on Sunday, October 30, at 8 pm. A voice announced: “The Columbia Broadcasting System and its affiliated stations present Orson Welles and the Mercury Theater on the air in ‘War of the Worlds’ by H.G. Wells.” Welles introduced his radio play with a spoken introduction, followed by an announcer reading a weather report. Then, seemingly abandoning the storyline, the announcer took listeners to “the Meridian Room in the Hotel Park Plaza in downtown New York, where you will be entertained by the music of Ramon Raquello and his orchestra.” Then the scare began when a very excited announcer broke in to report that “Professor Farrell of the Mount Jennings Observatory” had detected explosions on the planet Mars. Then the dance music came back on, followed by another interruption in which listeners were informed that a large meteor had crashed into a farmer’s field in Grover’s Mills, New Jersey. The panic was on when as many as a million radio listeners believed that a real Martian invasion was underway.

Fortunately for us Americans, Welles’ show was just that – a dramatized radio show. Just as fortunately for us Americans, and indeed the rest of the world, when it comes to the UK Bribery Act we have thebriberyact.com guys, Barry Vitou and Richard Kovalevsky QC, who continually communicate to us through the shroud of our common language to bring clarity and insight to the UK Bribery Act. Once again proving that they are a prolific duo, they have posted four articles over the past few days which merit discussion.

1.      What’s On Your Mind?

In the first post I want to bring your attention to, entitled “SFO to target UK PLC in corporate crackdown – it’s still all about the money”, the lads discuss some of the issues that the Serious Fraud Office (SFO) must deal with in the enforcement of the Bribery Act. First and foremost is the way in which corporate liability is determined in the UK. “Broadly speaking in the UK the prosecutor needs to finger someone very senior in the Company for criminal liability to be attributed to the corporate.” Further, “the UK position is the opposite of the Respondeat Superior principle in the US” as the “‘directing mind’ principle has to be satisfied.” They go on to note that “evidence to prove the directing mind principle is often hard to find. The SFO Director has (somewhat cynically!) feigned his ‘surprise’ on a number of occasions that the email chain runs out before you get to the main board.” For their recommendation you should read the rest of the article.

2.      Watch This Space

In another post entitled “Corporate prosecutions under the Bribery Act. Racing certainty or outsider? Watch this space” they cite to a talk that SFO Director David Green recently gave at the Pinsent Masons regulatory conference where he said:

“To those who are impatient for the first prosecution under the Bribery Act:-

We still have cases under the old legislation under investigation and awaiting trial.

 The new Act is not retrospective, and covers conduct after 1/7/2011.

Comparisons with the US are misleading. Prosecutions under the FCPA of 1977 did not hit their stride until well into this century.

The DoJ has only last November published detailed guidance on the act, based on the action taken under it thus far.

We have charged our first offences under our Bribery Act. There will be more. We have cases under development.

The SFO will bring the right cases at the time that is right for us.

More generally, the SFO currently has some 13 cases involving 34 defendants (2 of which are corporates) in the court system awaiting their trial. 8 of these trial are listed after April 2014.”

From this, the guys emphasize that now is the time to prepare and get your compliance program into shape as “it would be a mistake to do nothing.” And of course, “Watch this space.”

3.      To Self Report or Not Self Report, that is the Question

A further post, entitled “YES, YES, YES, YEEES, YEEEEES, YEEEEESSSSS. But. SFO Director repeats benefits of Self Reporting. Again”, has SFO Director Green once again extoling the virtues of self-disclosure but he emphasized, “The SFO’s message is carefully expressed and nuanced. Assume the evidential sufficiency test is passed. If a company made a genuine self-report to us (that is, told us something we did not already know and did so in an open- handed, unspun way), in circumstances where they were willing to cooperate in a full investigation and to take steps to prevent recurrence, then in those circumstances it is difficult to see that the public interest would require a prosecution of the corporate.” He then went on to list reasons why a company should self-report. They include:

• A self-report at the very least mitigates the chances of a corporate being prosecuted.  It opens up the possibility of civil recovery or a DPA.
• There is the moral and reputational imperative: it is the right thing to do and it demonstrates that the corporate is serious about behaving ethically.
• If the corporate chooses to bury the misconduct rather than self-report, the risk of discovery is unquantifiable. There are so many potential channels leading to exposure: whistle-blowers; disgruntled counterparties; cheated competing companies; other Criminal Justice agencies in the UK; overseas agencies in communication with SFO; and the SFO’s own developing intelligence capability, to name but a few.
• If criminality is buried and then discovered by any of the above routes, the penalty paid by the corporate in terms of shareholder outrage, counterparty and competitor distrust, reputational damage, regulatory action and possible prosecution, is surely disproportionate.
• Last but not least, burying such information is likely to involve criminal offences related to money laundering under sections 327-9 of the Proceeds of Crime Act.

The guys made clear their thoughts on the matter when they wrote, “where a corporate comes in and tells the SFO about something that they do not know; where the disclosure of the issue to the SFO is not ‘spun’; where genuine and comprehensive action is taken to remedy the problem; and, where there is a serious commitment going forward to ensure no repeat *then* it is very *unlikely* that the Public Interest test would be satisfied and so it is *unlikely* that there would be a prosecution.”

4.      Do the Right Thing

And finally, in a post entitled “A purchaser worries about liabilities after buying a business with limited information up front”, the guys were asked a question by a reader which read, “Will my company and my Board of Directors likely be prosecuted if they buy another company which has problems after doing limited due diligence?” If you have ever met the guys or heard them speak, you know that practical advice is their raison d’etre. They said, “The key is that you do what you can and that you do the right thing post-closing. This means that in cases where you have had limited opportunity to do due diligence up front you should make sure that post-closing proper diligence is done. You should be doing this sort of thing anyway as you integrate the new Company into your own business. However, it will be important to specifically include anti-bribery in that process and an independent work stream post-closing to look at compliance (or lack of it) needs to be undertaken. If as part of this you uncover a problem it is important that this is dealt with in the appropriate way, namely properly investigated, fixed, cleaned up and remediated.” “You should ensure that if money laundering reporting obligations are triggered the appropriate reports are made to the authorities. They end by noting, “in our view the chances of the Purchaser itself being prosecuted for the sins of the target if the purchaser ‘does the right thing’ post-closing should be slim.”

Unlike Orson Welles, who gave America a fictitious report of an invasion from Mars, thebriberyact.com guys continue to shine a light on all things Bribery Act related. Their latest reports from the UK clearly indicate that the SFO is picking up steam and moving forward. You do not have to be afraid, but you do have to be very prepared.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

BREAKING: In the small print: Huge shake up in UK bribery enforcement, US style whistleblowing & UK False Claims Act

Ed. Note-there have been some recent developments in the UK regarding the Bribery Act. TheBriberyAct.com guys, Barry Vitou and Richard Kovalevsky QC recently wrote about them. I asked if I could re-post their blog post, which they graciously allowed me to do as they continue to ‘Shine A Light’ on all things Bribery Act related…

Buried in the small print and missed by many in the hullabaloo surrounding the launch of the new UKNational Crime Agency (a rebranded roll up of existing crime law enforcement in the UK) are proposals to significantly overhaul the UK approach to dealing with bribery and corruption announced by the UK Home Secretary Theresa May (pictured).

Buried in the press release issued by the UK Home Office was the throwaway line:

“New arrangements for reporting and investigating corruption”

Structure for investigating bribery

In the more detailed strategy paper there is more detail:

“…Bribery and corruption are tools of serious and organised crime. We intend to introduce new systems for reporting corruption and the NCA will lead and coordinate work to investigate corruption in the UK. The Home Office will now coordinate domestic policy in this area.

…Recent research suggests that one in twenty people from the UK have paid a bribe in the last twelve months. This is a higher recorded rate than before.

…The current response to bribery and corruption needs to be improved at both the policy and operational level. Policy on bribery and corruption is currently split across Whitehall and, while good areas of work exist, there is no single Department that is responsible. The Home Office will now take a new lead role in coordinating all domestic bribery and corruption policy, working with the Cabinet Office and DFID to align this with work on corruption overseas. This allocation of responsibilities is consistent with Home Office work on tackling corruption in the police in conjunction with the College of Policing, Her Majesty’s Inspectorate of Constabulary and the Independent Police Complaints Commission (IPCC).

…Blockages in routine intelligence sharing between agencies, fragmentation of the operational response and the lack of an effective reporting mechanism for suspicions of bribery and corruption have all hampered the fight against corruption.

 …The NCA will lead on the assessment of bribery and corruption by organised crime and produce regular reporting on this theme.

 …The NCA will also support investigations into corruption affecting law enforcement agencies and others, for example prisons, where staff are at higher risk of corruption given their proximity to criminals. They will do this through intelligence, threat assessments and, where required, operational support.

...The Economic Crime Command (ECC) in the NCA will oversee the law enforcement response to bribery and corruption more broadly. Where organised criminals are involved, the NCA may either take action itself or coordinate other agencies to ensure that a proportionate operational response is in place. The NCA will work closely with other law enforcement partners including:

• the Serious Fraud Office, which remains the lead agency for investigating large and complex cases of corporate bribery and corruption, and enforcing the Bribery Act in respect of overseas corruption by British businesses;

• the City of London Police, which investigates cases of domestic bribery and corruption and its Anti-Corruption Unit, funded by DFID, which investigates UK citizens and companies involved in bribery or corruption in DFID-funded developing countries; and

• the Proceeds of Corruption Unit in the Metropolitan Police Service, which investigates corrupt politically-exposed persons (individuals who have been entrusted with a prominent public position or are a close relative of such a person) who have laundered proceeds of corruption into the UK.”

A new reporting mechanism

“…We believe that there are strong benefits in creating a new single reporting mechanism and will examine the best way to do this and agree a way forward….”

“…BIS, the Ministry of Justice and the Home Office will consider the case for incentivising whistle blowing, including the provision of financial incentives to support whistle blowing in cases of fraud, bribery and corruption. As part of this work we will examine what lessons can be drawn from the successful ‘Qui Tam’provisions in the US where individuals who whistle-blow and work with prosecutors and law enforcement can receive a share of financial penalties levied against a company guilty of fraud against the government bribery or corruption in DFID-funded developing countries…” [our emphasis]

Opinion

These are bold and ambitious plans among the small print of a new approach to attacking crime in the UK, lost in the blizzard of press on a Whitehall government shakeup which also took place on Monday and the launch of the third attempt to create an FBI in the UK.

Son of Dodd Frank whistle blowing, a UK version of the false claims act and increased focus on bribery and corruption.

You know where you heard it first.

Everything is up for grabs.  Some will continue to argue this is all jaw jaw and no war.

They may have to eat their words…

Lunch with the FCPA Compliance and Ethics Blog – UK Edition with Barry Vitou

A couple of weeks ago I had the opportunity to enjoy a day of fabulously sunny weather in London and, more importantly, have lunch with Barry Vitou, one of the two founding partners of the Blogsite, thebriberyact.com. So I am able to present the next installment of Lunch with the FCPA Compliance and Ethics Blog. Just as sometimes my inspiration, Lunch with the FT, travels to the US to interview a noteworthy person, this edition comes from the UK. Over a lovely entrée of some grilled white fish whose name in French I could neither understand nor repeat, we chatted about all things Bribery Act, Foreign Corrupt Practices Act (FCPA) and generally anti-corruption and anti-bribery.

For those of you who do not know him, Barry, together with Richard Kovalevsky QC, founded thebriberyact.com site after, in 2009, they began to follow the legislative meanderings for the UK Bribery Act and decided to start a website to highlight the legislation and bring commentary and analysis to the new law. As I have previously stated, “If you only have one resource for all things UK Bribery Act related, you could not find a better site. Barry Vitou and Richard Kovalevsky have put together that rarest of all blog sites, one that covers an entire subject in-depth, with both practical insight and analysis. Their interviews of the relevant players allow all compliance practitioners to develop insight into what the top UK regulatory officials are thinking about on the Bribery Act.”

Barry has practiced law for nearly 20 years and is a partner at the firm of Pinsent Masons LLP. At Pinsent Masons, he heads the firm’s corporate crime team specializing in corporate risk and cross border corporate crime issues. As Barry puts it, he helps companies with ‘tape at the top’, prevention  advice as well as offering ‘the ambulance at the bottom’ when accidents happen.  Barry’s busy.

While the topics we discussed at lunch were wide-ranging, one of the issues I was most interested in was Barry’s take on the GlaxoSmithKline PLC (GSK) corruption investigation in China. As my readers will recall, I believe that the GSK matter will be a true game-changer in compliance because of the entry of China onto the international stage for the prosecution of western companies for corruption and bribery in China. With typical British reserve Barry explained to me that he did not view the situation was as unexpected or draconian as I have opined. While neither of us could discern the true motives behind the Chinese government’s aggressive pursuit of GSK, Barry believed that the issue of corruption in China has been present and indeed well known for some period of time. So he was not surprised an issue did arise.

However, from his perspective what was perhaps different was the very public way that investigation has played out. Particularly, when GSK publicly tried to distance itself from its Chinese operations (read: rogue employees); the Chinese government simply upped the ante by announcing its investigation had found evidence that the alleged bribery involved was coordinated by the GSK management and was not simply the work of rogue employees.  In this war of words it’s too early to know what went on.  But, one thing is for sure. Unlike the US anti-corruption regulators the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) or UK Serious Fraud Office (SFO), none of which will comment about ongoing investigations, the Chinese government has no such compunction. Indeed there is certainly no jury panel to prejudice in China. But the point is that there is no way to win in any such battle. True or not.  Damage is done.

We also talked about the ongoing JP Morgan hiring program which is under FCPA scrutiny now. Once again we turned to the more general point that this matter may have mushroomed outside the original area of concern regarding the hiring of Chinese government officials sons and daughters in China to a wider review across Asia. Here I have to credit Barry with one of the great lines of British compliance understatement. He said that when any program comes under such intense scrutiny, you may well find other “imperfections” in your compliance process. But his take was not simply on this understated way of looking at things but to the larger point that the key question is what actions did you take when you found such imperfections? Barry went on to explain that when he lectures, trains or meets with companies one of the things that he tries to get across is that regulators on both sides of the Atlantic will measure you in large part on your response so it is far better to begin remediation as soon as you can do so rather than to wait.

We also talked about the SFO and where it might be in any Bribery Act investigation and prosecutions. He believes a key is that the SFO is reverting to type and will focus on prosecution of Serious Fraud. Barry opined that the SFO has several open, high profile investigation ongoing. Further, although the SFO Director, David Green, would certainly like to bring a high profile prosecution, he would not rush to do so out of expedience. Barry also said that it was his opinion that non-English companies which come to London to be listed on the London Exchange will certainly have to follow UK law if they wish to avail themselves of the benefits of UK registration.

Unfortunately our lunch had to end as Barry had to return to his office. But the meal, company, conversation and weather were all first rate. Until my next installment of Lunch with the FCPA Compliance and Ethics Blog, bon appetite.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

An open letter from SFO Director David Green on facilitation payments that you don’t know about

Ed. Note-today I post an article that was on thebriberyact.com site yesterday. The entire post was too rich to summarize so with the kind permission of thebriberyact.com guys, I post today in its entirety.

From our deck chairs we thought we’d share this with you.  An open letter from David Green, Director of the SFO, in connection with facilitation payments.  Surprisingly, we are not aware of it having received much (if any) publicity and from our deckchairs in the sun, we thought we’d change that fact…

“Enforcement of the United Kingdom’s Bribery Act – Facilitation Payments

To Whom It May Concern

The United Kingdom’s Bribery Act 2010 provides in clear terms that it is a crime for any individual or company with a UK presence to bribe a public official. This includes “facilitation payments” – money or goods given to a public official to perform, or speed up the performance of, an existing duty.

Facilitation payments are illegal under the Bribery Act 2010 regardless of their size or frequency.

This absolute prohibition is consistent with the United Nations Convention against Corruption, which similarly does not allow any exception for the use of facilitation payments. It is also consistent with the policy of Organisation for Economic Co-operation and Development (OECD), which in 2009 agreed to prohibit or discourage the making of such payments.

The Serious Fraud Office is the lead agency for the enforcement of the Bribery Act 2010. Individuals and companies that use facilitation payments in the course of their business are at risk of criminal prosecution in the UK.

The Serious Fraud Office is working with colleagues in the Foreign and Commonwealth Office (FCO) and other UK Government departments to disseminate this message. If a UK individual or company is asked to make a facilitation payment in the course of doing business overseas, they are actively encouraged to inform the FCO via the local embassy, high commission or consulate. A report will then be sent to the Serious Fraud Office.

The Serious Fraud Office will decide on the best course of action. This may involve communicating the information to a law enforcement agency in the country where the request was made, so that appropriate measures can be taken against the relevant public official.

The UK Government and the Serious Fraud Office are committed to stamping out bribery and upholding the rule of law. The Serious Fraud Office stands ready to take effective action against the use of facilitation payments, regardless of where they are requested.

[David Green] Signature

David Green CB QC

Director of the Serious Fraud Office

6th December 2012″

Opinion

David Green revised the SFO position on facilitation payments relatively  early on in his tenure with the retraction of the earlier guidance put out by his pre-decessor Director, Richard Alderman.  The new guidance was, broadly speaking, a restatement of the Joint Prosecution Guidance when it comes to the Bribery Act jointly penned by the CPS and the SFO.

More recently David Green has spoken about the focus on facilitation payments.  In particular at a US dinner which we reported here Mr. Green emphasised his point again – leading at least one person who attended to privately express their disappointment that the Bribery Act and SFO focus might target what they perceived as the lesser evil of facilitation payments in contrast to big ticket bribery to win contracts. No doubt a sentiment shared by others.

In some ways Mr. Green’s open letter adds nothing new. For example, we have written before about what happens if business report demands for bribes to their local embassy, for example here.

Opinion

Whatever.

The various pronouncements of Mr. Green make it clear that the SFO position on facilitation payments has hardened significantly. Given the focus of the SFO on serious fraud then a few one off payments are unlikely to interest it.

But there is a big BUT. Businesses should beware. The SFO will aggregate facilitation payments made and so if, for example, a business is frequently put under pressure to pay them and does so it is at real risk of investigation and prosecution by the SFO.

We would not be at all surprised if the SFO bring prosecutions in connection with paying facilitation payments.

This may be depressing news for some. But, on the bright side – we have helped clients succesfully resist payment of facilitation payments in challenging (and others might have considered hopeless) situations!

Bon chance.

Justin Rose and Barry Vitou-Two Winning Brits

Ed. Note-Yesterday, Justin Rose won the US Open, making him the first Englishman to win the Open since Tony Jacklin in 1970. So a big tip of the golf cap to Mr. Rose. In the field of anti-bribery and anti-corruption, the English are somewhat ahead of their golfing wins at the US Open. Barry Vitou, who together with Richard Kovalevsky QC, helps to shine a light on the UK Bribery Act, posted a piece on his recent remarks at the St. Petersburg International Law Forum. I asked Barry if I could repost his remarks on my site, which he graciously allowed me to do so.

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Last week Barry attended and presented on a (large) at the St. Petersburg International Law Forum about corruption.

The St. Petersburg International Legal Forum is now an established premier fixture on the legal map in Russia.

There were various slots on corruption.  Ever topical on Wednesday the Russian media (this link is worth clicking through to see the raid) was full of the story about the arrest of the Russian CEO of Societe General Russia on suspicion of bribery (USD$1.5 million to allegedly favourably  alter the terms of a loan in Moscow).

At the Forum Barry presented on International developments (a quick run down on the continuing trend for anti-bribery law creation and enforcement), the UK Bribery Act (coming soon…eventually) and the practical aspects of compliance in a Russian context.

What do I mean by in a Russian context?

Russia’s capitalist economy is barely twenty years old.  You can’t make an omelette without scrambling some eggs and it’s fair to say a large number of eggs have been scrambled in Russia.

But you can’t fail to be inspired, as your walk around the streets of Moscow and St. Petersburg, by the progress which has been made in those twenty years.

It’s not perfect.  There’s still a long way to go.  But whichever way you look at it strides have been taken.

Back to the ‘Russian context’:

For Russian business on the one hand UK Bribery Act and FCPA seem distant.

Yes, there is long arm jurisdiction under both.  But in reality, non-Russian law enforcement will (in most cases) find it hard to enforce.  Getting evidence will be tough (probably even tougher than usual) and Russia’s constitution forbids the extradition of a Russian national to another country.

There is little or no chance of Russians being extradited in orange jumpsuits to face the music in the US.

And yet.

On the other hand, there are three compelling reasons why, in practice, Russians care a lot about anti-bribery and why, whenever we present there we do so to packed houses.

First, Russians don’t like corruption.  Contrary to popular belief Russians do not like having to bribe traffic cops, kindergarden teachers to get their kids in, the planning department to get the permits to refurbish their apartment or anything else for that matter.

No-one would be happier than Joe Blogski or John Doeski if corruption in Russia was a thing of the past.  It isn’t yet (but then corruption is alive and well in the West too).

Second, many Russian businesses want to operate on an international stage. This ranges from setting up shop in London or New York to Russian businesses doing IPO’s on the NYSE, NASDAQ or London Stock Exchange and everything in between.

But perhaps the most compelling of each of the three reasons at the moment is not a general desire to stamp out corruption, the threat of law enforcement or the lofty aspiration of setting up outside Russia.

Instead it is the more prosaic reality that many Russian businesses count western companies as their customers.  Increasingly those Western customers are seeking to impose their own (developing and in some cases ill thought out) anti-corruption compliance on Russian businesses (mindful of the problems third parties in risky places – and Russia is a risky place – can cause).

So Russian businesses, the Russian government and Russian citizens are very interested in anti-corruption.

After explaining that in Russia it was broadly impossible to fire someone suspected of bribery (they would need to be convicted by a criminal court) and that the only two reasons to sack someone were, basically, 1. if they were drunk at work or 2. seriously late, Anton Smirnov of Lovells said a journey of 1000 steps starts with just one step.

The chairman of the panel, the very smart Alevtina Kamelkova Russian & CIS General Counsel of Alcatel Lucent said it would be really helpful if CEO’s of Russian groups demonstrated tone from the top and participated in anti-corruption panels like those running at the Forum.

That would be good too.

But in our view Russia should not beat itself up and likewise the West should not beat Russia up, over its present stage of development.

In world terms the Russian economy is a baby.

Non-Russian labor laws are hardly perfect – but we’ve come across plenty of others with similar flaws from the UK to Asia and beyond when dealing with international internal investigations.

We would like to see some CEO’s of Western businesses taking the time to demonstrate real tone from the top and talk about anti-corruption on similar panels.  Imagine the message that would be sent if the CEO of a Fortune 500 (not under FCPA investigation) took the time…

We agree that every journey starts with just one step. Russia has begun its journey.

SFO & the Bribery Act: Sector sweeps, facilitation payments & London listed companies

Ed. Note-today we post an article which was up on the site, thebriberyact.com. It discusses some recent remarks by SFO Director David Green. We are thankful to our colleagues Barry Vitou and Richard Kovalevsky QC for allowing us to post it. As always, the guys continue to ‘Shine a Light’.

News reaches us of a private small round table session put together by Transparency International and attended by some from the US FCPA white collar community (we understand Mark Mendelsohn attended) and our very own David Green CB QC, Director of the Serious Fraud Office.

Here’s the skinny based on our source.

The headline message promulgated by David Green will be not be news to those who have been following Mr. Green’s hard hitting public pronouncements in the UK (or reading this website) though as ever, it’s always important to be able to read between the lines.

The clue’s in the name

Mr. Green emphasized that the SFO is reverting to type and will focus on prosecution of Serious Fraud.

The advisory and guidance role of the SFO, something Mr. Green’s predecessor branched out into, was shuttered on the (not so) new Director’s arrival at the SFO over a year ago.  We understand that this was something that some hapless souls learnt the hard way when they stumbled into the SFO looking for some help!

Nevertheless, while we understand the rationale we think it’s a shame the SFO is no longer extending the olive branch of advice and guidance.

It seemed to us that there was something to be gained from a channel of communication between corporations and the SFO outside of the usual dynamic of prosecutor and prosecuted.  The DoJ engage in something along these lines with their Opinion Release procedure (which to be fair the SFO has never offered).  However, we digress…

Facilitation payment Guidance tossed in the garbage

Mr. Green also publicized his junking of the facilitation payment guidance and the presumption against prosecution for Self Reporting companies.

It’s fair to say that many have, in our view, misconstrued this to mean that Civil Recovery Orders are off the table and that we are now back to ‘cat and mouse’ and the binary decision of whether to prosecute or not.  This is silly, in particular when one of the first things Mr. Green did on arrival at the SFO was to approve a civil recovery order in respect of Oxford University Press.

Listen carefully.  Mr Green says that a true Self Report (namely a corporate telling the SFO something that it does not already know or would not find out about, but for the Self Report) will weigh very heavily in the balance when weighing the public interest about whether or not to prosecute.

In our view Civil Recovery Orders (which Oxford University Press should demonstrate anyway) are not dead and buried – though that does not fit the narrative of those whose marketing relies on scaring potential customers.

As we recently reported the publication of the guidance around Civil Recovery Orders was not for nothing.  Cue, Civil Recovery Orders still very firmly on the menu – but only in the right circumstances.

In a hurry but not going to rush

At the US meeting Mr. Green signaled a desire to bring headline cases and as soon as possible.  The truth is that this is not just a desire but a political reality.  Mr. Green is on a 4 year contract at the SFO and is already a quarter of the way through his tenure.

An extra credit line from Whitehall of nearly £4 million last year to deal with LIBOR (and no doubt the same again this year) means that, like it or not (and regardless of what might be said publicly), the political paymasters will be looking for some crowd pleasing banker bashing headline prosecutions in short order.

This will be easier said than done in a legal system where, unlike the US, there is (thank goodness at least for the forseeable future) NO concept of Respondent Superior.

Sweeps

In other news we understand Mr. Green conveyed that he is attracted to sector sweeps with customs duties (in other words what many would understand to be facilitation payments) a possible area of attention.

Frankly sector sweeps MUST be the way to go in any sensible SFO strategy.  Otherwise known as ‘pulling the thread’ the chances are that a corruption investigation will open new lines of enquiry.  As to the issue of facilitation payments, they are a thorny topic but under UK law they are illegal.

London listed? Mind your backs…

Finally we understand David Green explained, broadly speaking, that companies listed in London in his view fall under the regulatory purview of the Serious Fraud Office.  Given the importance of the London markets to the UK economy this is hardly a surprise.

While, some may express consternation by this given the Ministry of Justice guidance (which said that broadly speaking a London listing on its own would not be enough to trigger the jurisdiction of the Bribery Act) we know that privately it has ALWAYS been the SFO view that there WILL almost ALWAYS be additional connections with the UK which give it jurisdiction.  Ultimately this will be a question for the courts if and when it is tested.

The proof of the pudding

Of course the proof of the pudding will be in the eating.  Something David Green QC is only too well aware of.  Expect Mr. Green to act.

The SFO story has now moved on.  Today the real question in the wake of the numerous recently kicked off investigations is:

Has the SFO bitten off more than it can chew?

The answer remains the same, the proof of the pudding will be in the eating.

Any Special Effects Left for ENRC?

Ray Harryhausen died yesterday. For my money, he was the greatest special effects artist of the 20^th century. I absolutely loved his stop motion animation. He began his career working under Willis O’Brien on the original King Kong. However he went on to surpass O’Brien by developing what the New York Times said was the process Harryhausen called “Dynamation. It involved photographing a miniature — of a dinosaur, say — against a rear-projection screen through a partly masked pane of glass. The masked portion would then be re-exposed to insert foreground elements from the live footage. The effect was to make the creature appear to move in the midst of live action. It could now be seen walking behind a live tree, or be viewed in the middle distance over the shoulder of a live actor — effects difficult to achieve before.” If you want to see real special effects, check out the Jason and his crew sword fighting against the raised-from-the-dead skeletons in Jason and the Argonauts.

We saw some very different ‘special effects’ for the UK listed company Eurasian Natural Resources Corp (ENRC) in the month of April. As reported in the UK Telegraph, the title of the April 30 piece says it all – “ENRC’s annual report is full of laughs – for all the wrong reasons”, reporter Alistair Osborne says that the worldwide mining conglomerate’s value “has been disappearing down the mineshaft.” While all of the company’s economic metrics were headed downward, the company’s chairman, Mehmet Dalman declared “The primary focus for 2013 will be to maximise shareholder value through the implementation of our strategic priorities.” Unfortunately, Chairman Dalman wrote this statement before he resigned as company chairman.

What was it that led to this resignation? It may be something related to an announcement by the UK Serious Fraud Office (SFO) that it “has launched a criminal investigation into Eurasian Natural Resources Corporation (ENRC) amid allegations of fraud, bribery and corruption”. In an article, entitled “SFO launches criminal investigation into ENRC”, it states the “SFO has confirmed that it has taken over an internal investigation by the mining giant into allegations made by a whistleblower relating to its operations in Africa and Kazakhstan.”

According to an article in the Financial Times (FT), entitled “ENRC looks to dig itself out of a hole”, some of these allegations in Africa related to claims that the company became involved in deals in the Congo and with transactions involving its President, Joseph Kabila. One of these transactions involved the purchase of mining rights in a project “outside the town of Kolwezi, which had been confiscated by the Congo government from the Toronto-listed miner First Quantum.” After legal action by the Canadian company, ENRC “settled with its rival for $1.25 bn.” The allegations of bribery and corruption in Kazakhstan relate to allegations of fraudulent payments at ENRC’s Kazakhstan unit Sokolovsko-Sarbai, known as SSGPO.

Unfortunately, ENRC seems to be stumbling over itself as it has investigated these whistleblower allegations. The first stumble was when ENRC dismissed its lead internal investigator, Alex Gaft. This individual dismissal came after ENRC dismissed the US law firm Dechert, which had headed up the external investigations of these allegations. This dismissal came after Dechert presented a preliminary report to the SFO, which the FT said “raised concerns over payments totalling at least $100m over four years.”

According to the FT,  Dechert received a Section 2a notice, immediately after being terminated, “and just weeks before a second report into ENRC’s business practices in Africa was due to be handed to the SFO, say people familiar with the investigation. The SFO uses Section 2a notices specifically to demand information at a pre-investigation stage when it suspects overseas bribery and corruption, its website says. Sending out such a notice to the law firm signalled that the SFO felt it could no longer depend on the information provided by the company alone. The SFO now has the job of investigating the African operations of ENRC, which recently hired ex-attorney general Lord Goldsmith as a legal adviser.”

To top off all of the above dismissals of investigators and investigating law firms, the ENRC representative who was overseeing the internal investigation was none other than Chairman Dalman, the same person who resigned his position last week. Now the SFO has taken over the investigation, which according to the FT means that it can “use its full criminal powers such as arrests, dawn raids and demands for documents.”

Thebriberyact.com guys have been telling us that the SFO is still out there and SFO enforcement cases are moving forward. When you have a lead internal investigator dismissed, external counsel let go and your own chairman heading an investigation all leave a public company within 30 days, it is bound to get the attention of regulators. I wonder if the Department of Justice may have noticed?

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013