Cutting (out!) the middleman – SFO inquiries highlight dangers of intermediary payments
As 2016 drew to a close, it concluded a year in which the Serious Fraud Office (SFO) has commenced and continued an unprecedented number of inquiries into the ways in which companies find new customers and contracts. Frequently, the practices investigated have involved the dubious use of well-connected middlemen, who are remunerated to land contracts for their paymasters. Often the contracts concerned are awarded by government organisations or other public bodies. Occasionally, there have also been accusations of corruption and payments of illicit funds in return for commercial opportunities.
In November 2016, the FTSE 100 mining giant, Rio Tinto plc became the subject of SFO interest. Emails were uncovered implicating it in illicit payments to an intermediary with connections to a foreign government. Money was allegedly transferred to that individual in order to protect Rio’s interests in an iron ore project in a West African state. The emails in question allegedly showed Rio’s agreement to pay $10.5m to a consultant for his “very unique and irreplaceable services and closeness to the president” of the state concerned. The inquiry, which could have significant ramifications for Rio’s commercial operations, is ongoing and no conclusions have yet been reached regarding the accusations. It has also been suggested that senior management figures within Rio were aware of the arrangements under investigation. Rio denies any wrongdoing.
Likewise, an SFO inquiry into GlaxoSmithKline (“GSK”) is continuing to dog the multinational pharma giant. This case emerged from revelations in 2014 that an overseas subsidiary of GSK had been paying bribes to Chinese doctors and officials to prescribe its medicines to patients. Besides the action in the UK, GSK’s payments sparked investigations in China (where GSK was ultimately forced to make a public apology and pay a £297m fine) and the US (where, without admitting liability, it agreed to pay a $20m civil penalty to the US Securities and Exchange Commission, whose inquiry concluded GSK had violated the FCPA). Aside from highlighting the potential for immersion in several concurrent investigations, the GSK case illustrates the extraterritorial reach of the US Foreign Corrupt Practices Act, a federal statute which has long since applied to bribes paid outside of the USA involving public officials. Similarly, GSK’s actions abroad may also be caught by the UK's Bribery Act 2010. A foreign subsidiary or agent of a UK company can cause the parent company to become liable under the Bribery Act 2010 when the subsidiary or agent commits an act of bribery in the context of performing services for the UK parent.
Yet another high-profile company under the SFO’s spotlight has been Rolls Royce (“RR”). Investigative journalism by the BBC and The Guardian uncovered that RR had paid agents to secure contracts in 12 countries, allegedly using bribes. That triggered a four year SFO investigation into RR’s activities. The conduct spanned three decades, involving RR’s Civil Aerospace and Defence Aerospace businesses and its former Energy business and relating to sales of aero engines, energy systems and related services. It also crossed frontiers; taking place across seven jurisdictions (Indonesia, Thailand, India, Russia, Nigeria, China and Malaysia). Certain allegations suggested that RR had sanctioned payments to a middleman connected to the Indian Government with a view to securing £400m worth of orders for aircraft engine sales. On 23 January 2017, the SFO settled the inquiry by entering into a significant Deferred Prosecution Agreement (DPA) with RR. The agreement covered 12 counts of conspiracy to corrupt, false accounting and failure to prevent bribery. While RR has denied any wrongdoing under the DPA, it has taken the precaution of enhancing its governance policies, specifically focusing on anti-bribery and corruption.
These headline grabbing developments illustrate the huge commercial and reputational damage that can be done where businesses are found or even suspected to have put business expansion before legal compliance, particularly in their use of intermediaries. There are a number of points that we would draw from these cautionary tales:
- the economic importance of the company concerned to its home nation is of no interest to investigating authorities – the heavy penalties are imposed, particularly where the US authorities become involved but also where the UK authorities are starting to levy increasingly larger penalties, will for example impact upon domestic pension funds which hold large volumes of stock. RR is a company of huge strategic importance in the UK, being a domestic manufacturer of sensitive defence equipment and a business held in high regard and affection by the populace as a whole. This has not deterred the authorities from investigating and being prepared to penalise;
- making payments to obtain government contracts is self-defeating and has huge scope to backfire. Aside from criminal laws, under UK and EU public procurement rules, becoming involved in corruption or fraud can lead to mandatory debarment from future tender processes (see for example, Article 52, Directive 2014/24/EC). Likewise, US Law operates systems of suspensions and debarments of contractors who are involved in corruption or bribery (see for example FAR 9.407-2);
- operating abroad is no excuse and will not absolve companies from liability for corrupt actions. Many anti-corruption laws have extraterritorial application. These include the Foreign Corrupt Practices Act and Bribery Act 2010 mentioned above. Likewise, domestic regulators in most jurisdictions are becoming more effective in the fight against corruption. This trend is due in part to pressure from international institutions such as the World Bank and the United Nations, as well as NGOs;
- these cases illustrate the vital importance of having comprehensive training programs in place to ensure that personnel do not violate corruption laws. More is needed, however. Not only must the policies be effectively policed and enforced internally but the company must also flow these down to all members of its group especially to those foreign subsidiaries operating in difficult business environments;
- care is needed regarding a company’s choice of contractors, agents, JV and consortium partners and suppliers. The company must be scrupulous in conducting analysis of its partners’ policies and means of doing business. Be clear about the company’s values and prepared to walk away from relationships where problems are discovered. Make sure that stringent anti-corruption clauses are included in contracts; and
- where problems occur, react quickly by seeking legal advice. A balance must be struck between, on the one hand, the company’s legal and ethical obligations (including obligations to co-operate with the inquiry and the preservation of evidence) and, on the other, the company’s legitimate interests (which may include considerations around the right of the company not to incriminate itself and presenting any legal defence clearly). In cases where the allegations are well-founded, it can assist to self-report to regulators to illustrate the company’s commitment to its values. Other issues to consider include possible conflicts of interest between the company and its officers and employees directly implicated in wrongdoing.
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Focus Antitrust - 25 March 2020
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