Why Should I Cooperate With The UK Serious Fraud Office?

Assessing The Carrot Against The Stick

By Hemma B. Ramrattan[i]

The UK Serious Fraud Office’s ("SFO") guidance on voluntary disclosure and cooperation leaves no room for doubt that the UK Bribery Act of 2010 is designed “to bring about a behavioral change in businesses and create a corporate culture in which no form of corruption is tolerated.”[ii] Now that the dust has settled and the UK Bribery Act is in force, it makes sense to go back to the basics and ask – what is it that the SFO can do for you if you self-report and cooperate with their investigations?

The SFO guidance suggests that maximum “benefit” will be gained through early self referral, ideally before the matter is on the radar of the SFO or Financial Services Authority, and cooperation. But what is that benefit? The question merits an inquiry into the powers and tools the SFO has at its disposal to mitigate the harsh penalties envisaged under the Bribery Act, and an assessment of how the "carrot" measures up to the "stick."

SFO Prosecutor’s Powers and Tools – the Carrot

Firstly, while plea bargaining is (still) a strictly prohibited practice in the UK, prosecutors – including those in the SFO's employ – have always had broad discretion to determine what offence(s) to charge, as well as the power to accept pleas to a lesser offence if they considered such a disposition to be in the public interest. The UK courts, indeed, also have a longstanding practice of recognizing and rewarding a timely guilty plea by reducing the appropriate sentence by as much as one third in optimal circumstances.[iii]

Secondly, defendants may be in a position to offer assistance to the prosecution in serious fraud cases in exchange for cooperation agreements under the Serious Organised Crime and Police Act 2005, designed to provide immunity (ss.71 and 72) or a reduction in sentence (s.73) where the circumstances and nature of the offender’s assistance make such a disposition appropriate.

Thirdly, the Attorney General’s Guidance on the Acceptance of Pleas and the Prosecutor’s Role in the Sentencing Exercise encourages prosecutors to take an active role in the sentencing determination by highlighting for the court any aggravating or mitigating factors or providing a written note containing relevant sentencing guidelines and authorities. This can be a persuasive tool when used to the defendant's benefit.

Fourthly, the Prosecutor may be permitted to enter into plea negotiations with the defendant prior to the investigation being completed and charges being filed. The Attorney General’s (AG’s) Guidelines on Plea Discussions in Cases of Serious of Complex Fraud (2009) provide a framework giving the Prosecutor the broadest powers to date to negotiate settlements in certain serious or complex fraud cases.

The SFO guidance highlights the Agency’s willingness to enter into plea negotiations in accordance with the AG’s Guidelines on Plea Discussions, and, where the offender has self-referred, to agree to a civil settlement which avoids criminal proceedings altogether.[iv] The major benefit from a corporation's decision to voluntary disclose and cooperate is, therefore, the prospect of a civil, rather than a criminal, outcome, which, among other things, avoids the mandatory debarment associated with a bribery conviction.[v]

The related Crown Prosecution Service (CPS) Guidance states that the only incentive the plea negotiation process offers to the defendant should be “the opportunity to have an input into the prosecutors’ selection of charges, the basis of plea and submission on sentence; and to see the case finalized more quickly than it would be.”[vi] A large part of the incentive is the ability to clarify and limit the eventual sentence. The CPS Guidance also indicates that the Prosecutor may have a role in influencing the decision of the Court on the exercise of its powers to make a confiscation order against a convicted defendant who has benefited from the proceeds of his crime.

The Shrinking Carrots, Part I: The Innospec Case

However, these “incentives” must be read in light of three 2010 sentencing decisions in the UK, which have tested the legitimacy of the SFO’s "carrot." Firstly, in the Innospec case,[vii] the Court warned that the SFO has no powers to effect "plea-bargain"-style agreements with companies, and unequivocally stated that the Agency was not to enter into such agreements. The Court took issue, among other things, with the low-level of the penalty, which it found "wholly inadequate to reflect the criminality displayed by Innospec." The judge commented that the use of a civil recovery order for criminal conduct by a company should be extremely rare. Further, the Court derided the SFO's attempt to "agree" to the form of the Innospec press release. The Innospec case, therefore, undermined three important features in the SFO’s basket of incentives: (1) lenient penalties, (2) civil recovery orders in place of criminal sanction, and (3) the opportunity to proactively manage publicity.

The Shrinking Carrots, Part II: The Dougall Case

Secondly, during his sentencing, Robert Dougall, the individual tagged by the SFO as the “first cooperating defendant in a major corruption investigation,” found that the UK courts were not minded to keep the “promises” of leniency made to him by the SFO.[viii] The Prosecutor recommended a suspended sentence for Mr. Dougall as a reward for his extensive assistance, but the presiding judge in the Crown Court considered the case too serious for such a lenient disposal and instead handed down a 12-month jail term.[ix] Recognizing the public interest issues involved in this case, the judge gave Dougall leave to appeal. Dougall, indeed, was successful in reversing the lower court’s decision, but not before the appellate Court delivered some clear warnings to the SFO itself.[x] The Court of Appeal observed that in the UK, a plea agreement between a prosecutor and defendant in which the sentence is agreed or an agreed package is prepared for the court’s acquiescence is flatly contrary to principle and that the prosecutor is permitted to make submissions on the range of possible sentences, but not in support of a particular sentencing outcome. Here, the Court shot down the SFO’s ability to promise specific sentencing outcomes. Indeed, a key message in the AG and CPS Guidelines on Plea Negotiations is that a proposed agreementmust not set out a proposal for a specific sentence.

The Shrinking Carrots, Part III: R. v. BAE Systems PLC

Finally, in R. v. BAE Systems PLC[xi], the Court expressed surprise that BAE received blanket immunity for all offenses committed in the past, whether disclosed or otherwise, in exchange for a plea to an accounting records charge and an ex gratia payment for the benefit of the people of Tanzania. The Court also took issue with the factual basis of the plea agreement, and substituted its own alternative basis for the imposition of sentence. Here, the Court limited the SFO's ability to definitively resolve disputes of fact as part of the plea negotiation process.

These decisions certainly prompted many corporate advisers to pause for thought when advising on the benefits of voluntary disclosure to the SFO.[xii] The core message is that the sentencing decision is one for the court, and that the plea negotiation process can create no expectation as to what that court's ultimate decision will be.

Despite these holdings, the SFO has repeatedly asserted that it remains committed to plea negotiations, and it has advised that in the majority of cases where such negotiations have been used, there has been no judicial pushback.[xiii] Indeed, as recently as July 2011, the SFO boasted that, as the result of a successful plea negotiation, an £11 million civil settlement with MacMillan Publishers Limited was reached, which encompassed admissions that MacMillan attempted to bribe World Bank officials.[xiv]

So much for the carrot, but what about the stick?

One method of evaluating the benefits of cooperation is by contrasting them with the consequences of not cooperating. Here a careful consideration of the potential sanctions, including heavy penalties, debarment, and loss of reputation, must be balanced against the likelihood of being caught and the absence of any other incentives to disclose (such as any affirmative obligations to do so[xv]). The SFO explicitly states that when it learns about the corruption issue from another agency in the UK or elsewhere, or through a whistleblower or a statutory report such as a Suspicious Activity Report, it will “assume in those circumstances that the corporate has chosen not to self-report.”[xvi] In cases where the matter may fall under the jurisdiction of a foreign regulator as well as that of the UK regulator, the SFO has specified that it expects simultaneous disclosure to its offices. So what are the consequences of failing to self report in this manner or cooperate fully? Can an individual like Robert Dougall take comfort that things would have been much worse had he not cooperated?

The clear message the three above-described 2010 pre-Bribery Act cases deliver is that the SFO's joint-submission penalties and fines are too lenient. On one hand, this might mean that agreed-upon settlement figures are largely unreliable. On the other hand, the cases send a signal to corporations that the UK judiciary fully intends to treat fraud and corruption seriously, with larger penalties likely to be forthcoming. Without potential defendants' self-reporting and substantive cooperation, the SFO has no incentive to act leniently; to the contrary, it may well opt to use all the tools at its disposal, including recommendations for debarment, Serious Crime Prevention Orders, Directors Disqualification Orders, andprofessional disciplinary actions. And although the UK government does not have a long history of punishing corporate bribery, the new Act makes the offense easier to prove. In a climate of enhanced multi-jurisdictional cooperation, targeted industry sweeps, incentivized whistleblowers, and increased attention to individual liability, the odds may be stacked against a delinquent company hoping it will not get caught. The message, then, is clear: If you do not cooperate, someone might beat you to it. Maybe the stick is about to get a lot bigger, even if the carrot doesn’t seem so sweet.

[i] Dr. Ramrattan is a UK qualified barrister currently serving as an attorney in the Enforcement Division of the United States Securities and Exchange Commission. Dr. Ramrattan has written this note in her personal capacity. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are, thus, those of the author, and do not necessarily reflect the views of the Commission, the author’s colleagues on the staff of the Commission, or any other U.S. department or agency.

[ii] Serious Fraud Office, Approach of the Serious Fraud Office to Dealing with Overseas Corruption (first issued: 21 July 2009)

[iii] See the Powers of Criminal Courts Sentencing Act 2000, s.152 and Guidance from the Sentencing Guidelines Council on reductions in sentence for guilty pleas.

[iv] The UK has multiple statutory and regulatory enforcement tools. Both the Financial Services and Markets Act 2000 and the Proceeds of Crime Act 2005 provide a range of administrative and civil recovery tools which may be used as alternatives to criminal prosecutions. See Steptoe and Johnson, Recent UK Enforcement Actions Highlight Broad Range of UK Anti-Corruption Laws (August 22, 2011)

[v] The Public Contracts Regulations 2006 (the UK implementation of Article 45 of the EU Public Sector Procurement Directive in 2004 (2004/18/EC) state that a supplier must be excluded if it or its directors have been convicted of the “offence of bribery” i.e., violations of Bribery Act 2010, articles 1, 2 and 6. A criminal conviction under Article 7 of the Bribery Act 2010 (governing failure to prevent a bribery offense) does not result in mandatory debarment.

[vi] Crown Prosecution Service Director’s Guidance to accompany the Attorney General’s Guidance on Plea Discussions in cases of Serious or Complex Fraud (August 6, 2009).

[vii] R. v Innospec Limited [2010] EW Misc 7 (EWCC).

[viii] R. v. Dougall (Southwark Crown Court, April 14, 2010, Bean, J) unreported.

[ix] Dougall signed an agreement with the SFO under s73 of the Serious Organised Crime and Police Act 2005. While the Court agreed that, as a matter of public policy, prosecutors should be able to recommend more lenient sentences in exchange for cooperation, the judge said that this did not justify “a suspended sentence in a case where corruption was systemic and long-term and involved several million pounds in corrupt payments” per Justice Bean at Southwark Crown Court. Ibid.

[x]R. v. Dougall [2010] EWCA Crim 1048 (The Lord Chief Justice, David Clarke J, Lloyd Jones).

[xi]R. v. BAE Systems PLC (Southwark Crown Court, December 21, 2010, Bean, J) unreported.

[xii]Scott observes that the “Crown Court judgment in R. v Innospec Ltd may have disrupted the Serious Fraud Office’s goals of encouraging more companies to self-report overseas corruption and, where appropriate, enter into plea discussions and agreements.” Kerri Scott, Self Reporting Corporate Corruption: Where are we after Innospec? Practical Law Company (April 28, 2010).

[xiii] Gibson Dunn, UK Serious Fraud Office Discusses Details of UK Bribery Act with Gibson Dunn (September 7, 2010).

[xiv]SFO Press Release, Action on MacMillan Publishers Limited (July 22, 2011).

It is worth noting that this settlement was achieved partly because the company approached the SFO with a view to cooperation, even though the World Bank apparently first reported wrongdoing related to the company and the City of London Police had executed a search warrant for the company’s premises in relation to that report three months earlier.

[xv] UK companies may be under an affirmative duty to report corrupt practices as part of their legal obligations to report to the Serious Organized Crime Agency under the Proceeds of Crime Act 2002 to avoid the commission of money laundering offences and related confiscation orders.

[xvi] Supra at n.iii.

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Hemma B. Ramrattan

Hemma B. Ramrattan