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Focus: The Rolls-Royce bribery case and its implications in Australia

30 January 2017

In brief: A Deferred Prosecution Agreement in the United Kingdom, which will see the Rolls-Royce company pay more than £500 million to settle charges of foreign bribery, is the most significant UK DPA to date. It is likely to influence the approach and expectations of the Australian Government and law enforcement agencies, which are considering a suite of measures aimed at facilitating a more effective response to corporate crime, particularly those that encourage self-reporting of foreign bribery. Partners Rachel Nicolson (view CV) and Peter Haig (view CV), Senior Associate James Campbell and Lawyer Malak Johnson report.

 
 

How does it affect you?

  • The Rolls-Royce decision highlights the extent to which the availability of Deferred Prosecution Agreements (DPAs) may 'change the equation' for Australian companies considering self-reporting and the level of cooperation to be provided to prosecuting agencies. In approving the DPA, Lord Justice Leveson, President of the Queen's Bench Division, approved a discount of 50 per cent on the financial penalty that would otherwise have been imposed.
  • The decision is also noteworthy in the context of the consultation on the draft AFP and CDPP Best Practice Guideline: Self-reporting of foreign bribery and related offending by corporations. While this DPA was approved notwithstanding the lack of an initial self-report, the level of cooperation with law enforcement agencies was hailed as sufficiently 'extraordinary' to warrant Rolls-Royce's cooperation as being considered akin to a self-report.
  • Finally, the decision is informative in its analysis of public interest factors weighing against prosecution. To date, the public interest factors outlined in the Commonwealth Department of Public Prosecution's Prosecution Policy have been relatively untested in the context of foreign bribery and other corporate crimes. The Rolls-Royce decision provides a concrete reference point, albeit from another jurisdiction, against which to assess whether countervailing public interest factors are sufficient to outweigh the factors that point toward prosecution. 

Introduction

Following a four-year investigation, the UK's Serious Fraud Office (SFO) and Rolls-Royce PLC and Rolls-Royce Energy Systems (together, Rolls-Royce) have entered into a DPA, which was approved by Lord Justice Leveson on 17 January 2017. The DPA, which involves payments of more than £497 million (plus interest), is only the third of its kind in the UK, and is the largest ever enforcement action against a company in the UK for criminal conduct.1 Parallel with this agreement, Rolls-Royce has also reached a DPA with the US Department of Justice (DOJ) and a Leniency Agreement with Brazil's Ministério Público Federal (MPF).2

Lord Justice Leveson's decision to approve the DPA considers in detail the 'countervailing considerations' (including issues relating to self-reporting, the degree of cooperation with law enforcement and reforms to corporate governance and culture) that justified permitting the company to avoid prosecution and the far higher penalties that might have ensued.

Overview of the UK DPA scheme 

DPAs, already a mainstay of criminal procedure in the US, are a relatively new tool in the SFO's armory, having come into effect in February 2014.

DPAs provide a mechanism whereby a company can avoid prosecution for certain financial offences by entering into an agreement on negotiated terms with a prosecutor, in circumstances where the prosecutor considers it to be in the public interest to do so. Under the terms of the DPA, the company agrees to comply with certain conditions, which may include a requirement to pay a financial penalty, disgorge profits, implement a compliance program and/or cooperate in any investigation related to the offence.3 In return, the prosecutor agrees to suspend, and, upon fulfillment of the terms of the DPA, ultimately discontinue, prosecution against the company.4  

In contrast to the US, a critical feature of the DPA scheme in the UK is the requirement that the proposed agreement be subject to court supervision. The court is given two opportunities to review the DPA: once during the agreement's negotiation and once again after its terms have been agreed, to determine whether the DPA is in the interests of justice and its proposed terms are fair, reasonable and proportionate.5 A DPA will only come into force once the court makes a declaration at the final hearing that it meets these criteria.6 Once approved, 'consistent with the principles of open justice,'7 the DPA and the hearings become public, unless publication is prevented by statute or postponed to avoid prejudicing any other legal proceeding.8  

The facts

The indictment, which has been suspended for the term of the DPA, covers five counts of failure to prevent bribery, six counts of conspiracy to corrupt and one count of false accounting, in connection with Rolls-Royce's business operations in China, India, Indonesia, Malaysia, Nigeria, Russia and Thailand between 1989 and 2013.9

The facts of the case, described by Lord Justice Leveson as 'inevitably complex',10 are summarised in the Appendix to the judgment. Rolls-Royce did not dispute that this case involved significant aggravating factors, including that:

  • the conduct displayed elements of careful planning, was persistent and spanned many years, and involved senior Rolls-Royce employees; and
  • the offences were multi-jurisdictional, numerous and involved many of Rolls-Royce's businesses.11

In accordance with the SFO and Crown Prosecutor's DPA Code of Practice, it was therefore accepted by the SFO that, in the absence of strong countervailing public interest factors and the availability of appropriate penalties within the DPA scheme, a prosecution of Rolls-Royce would be appropriate.12

Key findings

Failure to self-report did not preclude a DPA

This case is particularly significant as it is the first UK DPA that did not follow a self-report.13 The SFO commenced its inquiries into Rolls-Royce's operations in 2012 after an internet posting concerning Rolls-Royce's business in China and Indonesia came to its attention.14

Lord Justice Leveson noted that the fact that a prosecutor's investigation was not triggered by a self-report would usually be a factor that weighs heavily against the DPA being in the interests of justice, the Lord Justice observing that incentivising self-reporting is a 'core purpose' of DPAs.15 However, after referring to what counsel for the SFO described as the 'extraordinary cooperation of Rolls-Royce', which included providing information to the SFO that would not otherwise have come to its attention, Lord Justice Leveson accepted that Rolls-Royce's failure to self-report should not be a factor that weighed against a DPA in this instance.16

Cooperation, cooperation and cooperation

Lord Justice Leveson lauded Rolls-Royce's 'extraordinary cooperation', which was clearly the most significant factor weighing against prosecution in this case. The SFO has always been very clear that 'cooperation is a prerequisite for a DPA',17 with SFO Director David Green having previously stated that what the prosecutor expects from companies is threefold: 'cooperation, cooperation and cooperation'.18

However, what constitutes genuine and sufficient cooperation has, to date, remained relatively unclear. Some guidance can be found in speeches from the SFO, which have referred to proactive self-reporting and speedy access to potential witnesses.19 This case has, however, set the bar high as to what constitutes 'full cooperation', with Lord Justice Leveson finding that, following the first inquiry from the SFO, Rolls-Royce 'could not have done more to expose its own misconduct'.20

Rolls-Royce's cooperation included:

  • issuing regular reports to the SFO and DOJ on the findings of its ongoing internal investigation;
  • disclosing all interview memoranda from its internal investigation;
  • delaying, and recording, interviews where requested by the SFO to do so;
  • providing complete digital repositories of more than 100 key employees and all hard copy materials requested by the SFO; and
  • seeking the SFO's permission before winding-up companies that may have been implicated in the SFO's investigation.21

The nature of this cooperation led to the acquisition of, and application of digital review to, more than 30 million documents22 and resulted in the SFO receiving pertinent information that may not otherwise have come to its attention.23 As at December 2016, Rolls-Royce had spent £123,115,643 in connection with its investigation and cooperation with prosecutors.24

Alun Milford, General Counsel for the SFO, has observed that the benefits of DPAs are won by companies 'through a combination of cooperation and reform'.25 As another factor tending towards a DPA as opposed to prosecution in this case, Lord Justice Leveson observed that Rolls-Royce 'could not have done more to address the issues that have now been exposed'.26 The Lord Justice stated that, although the company's criminal behavior the subject of the DPA 'must rightly be condemned, its conduct since 2013 must be commended'.27

Since 2013, Rolls-Royce had incurred costs amounting to more than £15 million implementing a suite of reforms aimed at enhancing its ethics and compliance procedures. These reforms, which were described by Lord Justice Leveson as 'of real significance'28 included:

  • an independent review of its ethics and compliance procedures;
  • improved due diligence in respect of intermediaries;
  • the introduction of regular compulsory training on compliance issues and recruitment of experienced compliance personnel;
  • a significant reorganisation of reporting lines; and
  • the suspension of its relationships with 88 intermediaries and the conduct of disciplinary proceedings in respect of 38 employees.29

In approving the DPA, Lord Justice Leveson also noted that 'Rolls-Royce is no longer the company that once it was',30 and that both the senior management of Rolls-Royce, and those responsible for the company's strategic direction, are different to those responsible for the running of the company during the period in which the impugned conduct occurred.31

Legal professional privilege

As part of its cooperative approach, Rolls-Royce did not filter material provided for potential legal privilege, instead permitting issues of privilege to be identified by digital methods and resolved by independent counsel. Rolls-Royce also disclosed all interview memoranda (on a limited waiver basis) to the SFO, despite its belief that the material was privileged, and therefore capable of resisting an order for disclosure.32

The DPA Code of Practice says that '[t]he Act does not, and [the] DPA Code cannot, alter the law on legal professional privilege',33 and the SFO recognises that 'privilege, when applied appropriately, is an important and fundamental protection'.34 However, the SFO has stated that whilst 'waiver cannot be compelled', it would be an 'obvious sign of cooperation'.35 This is particularly the case in respect of underlying factual material or witness accounts, over which the SFO considers privilege is claimed 'too readily or wrongly'.36

The US Attorney's Manual, published by the DOJ, has a different emphasis, actually disclaiming any interest in having companies waive privilege and emphasising, instead, that its focus is on the full disclosure of facts.37

'Get used to it'

The case is also significant in its demonstration of the increasing international cooperation between regulators. The DOJ cited this case as an example of the strong relationship between the SFO, DOJ and MPF.38  

The SFO has recently described the significant investment it has made in building strong relationships with foreign agencies, involving 'secondments, exchanges of information and coordinated activity'. In response to those commentators who seem to regard this as 'not cricket', Mr Green says 'get used to it'.39 Australian regulators and enforcement agencies have expressed similar sentiments.

This enhanced cooperation between regulators has key implications for corporations:

  • First, regulators are more likely to be alerted to, and obtain admissible evidence of, corporate misconduct.
  • Second, regulators may be able to draw upon the experience and resources of their foreign counterparts, in order to more efficiently and effectively detect, investigate and prosecute corporate crime.
  • Third, the combined jurisdictional reach of regulators is likely to encompass a significantly wider range of conduct.
A sermon for other companies

Lord Justice Leveson concluded the judgment with an open address to other companies that might be considering whether to self-report. The Lord Justice cited his own previous comments in approving the first DPA in the UK (concerning Standard Bank Plc), stating that it 'should not be thought:40

… that, in the hope of getting away with it Standard Bank would have been better served by taking a course which did not involve self report, investigation and provisional agreement to a DPA with the substantial compliance requirements  and financial implications that follow. For my part, I have no doubt that Standard Bank has far better served its shareholders, its customers and its employees (as well as those with whom it deals) by demonstrating its recognition of its serious failings and its determination in the future to adhere to the highest standards of banking. Such an approach can itself go a long way to repairing and, ultimately, enhancing its reputation and, in consequence, its business.

 

To that, the Lord Justice added a further point:41

It may be that there are other companies aware of its [sic] own past conduct similar to that in which Rolls-Royce engaged. They cannot now change that fact, but those companies do have available to them a choice of how they confront it. A responsible company will engage openly in the way Rolls-Royce and [sic] so contribute to an increasing recognition of the vice that bribery and corruption constitutes and provide impetus to preventing businesses from operating that way.

 

The Lord Justice concluded by noting that, while a cynic 'might look at the costs which Rolls-Royce have incurred in their own investigation and wonder whether it would be more sensible to keep quiet in the hope that the conduct does not fall under the eye of authorities', taking such a risk would be misguided.42 In support of this position, which is put emphatically, the Lord Justice cited not just the cost-benefit analysis, but also more fundamental, moral considerations, concluding that to act other than as Rolls-Royce did would constitute a 'total failure to acknowledge the difference between right and wrong'.

Watch this space

The Attorney-General's Department, the Australian Federal Police and Commonwealth Department of Public Prosecutions will be watching these developments in the UK with interest.

DPAs do not currently exist in Australia. Last year, however, the Attorney-General's Department released a public consultation paper calling for comment on their introduction. According to Australia's first Open Government Action Plan, the Government intends to respond to the consultation by mid-2017.

The contemplation of a DPA scheme forms part of the Australian Government's broader consideration of options to facilitate a more effective response to corporate crime. Recent steps have included:

  • a Senate Inquiry into Foreign Bribery, due to report by 30 June 2017;
  • a Senate Inquiry into Criminal, Civil and Administrative Penalties for White Collar Crime, due to report by 28 February 2017;
  • the introduction of new offences for false accounting from 1 March 2016;
  • an AFP and CDPP consultation on the Best Practice Guideline: Self-reporting of foreign bribery and related offending by corporations;
  • a Parliamentary Joint Committee on Corporations and Financial Services inquiry into whistleblower protections in the corporate, public and not-for-profit sectors, due to report by 30 June 2017; and
  • a consultation by the Department of Treasury into changes to corporate sector and tax-related whistleblower laws, with submissions closing 10 February 2017.

Clearly, this flurry of activity has the potential to reshape the calculus facing Australian corporations that come across instances of foreign bribery and other corporate misconduct in their ranks.

Presently, the legal obligations on companies in Australia to self-report are, at best, patchy and difficult to apply.43 Rarely is a company under a legal obligation to self-report potentially criminal conduct done on its behalf. However, the Rolls-Royce DPA highlights that, should Australia go down the UK DPA route, the question of whether self-reporting is legally required may assume a reduced significance.

Footnotes
  1. SFO, news release (17 January 2017) 'SFO completes £497.25m Deferred Prosecution Agreement with Rolls-Royce PLC'
  2. Rolls-Royce press release (16 January 2017).
  3. Crime and Courts Act 2013, Schedule 17, s 1 and 5(3).
  4. Ibid, s 5(2) and 11.
  5. Ibid, s 7 and 8.
  6. Ibid, s 8(3).
  7. SFO v Rolls-Royce PLC and Rolls-Royce Energy Systems Inc (U20170036), per Lord Justice Leveson at [11]. 
  8. Supra n 3, s 8(7).
  9. SFO v Rolls-Royce PLC and Rolls-Royce Energy Systems Inc, op. cit.at [1] and [3]. 
  10. Ibid at [30]. 
  11. Ibid at [35] and [36]. 
  12. Ibid at [36]. 
  13. Both SFO v Standard Bank plc (U20150854) and SFO XYZ Ltd [U20150856] involved DPAs that followed a self-report. 
  14. Supra n 9 at [16] and [21]. 
  15. Ibid at [38]. 
  16. Ibid at [22].
  17. David Green CB QC, Director, speech given on 5 September 2016 at Cambridge Symposium on Economic Crime 2016.
  18. David Green CB QC, Director, speech given on 6 March 2014 at PricewaterhouseCoopers
  19. Stuart Alford QC, SFO Joint Head of Fraud, speech given on 17 November 2014 at the Anti-Corruption in Oil & Gas Conference 2014
  20. Supra n 9 at [38]. 
  21. SFO v Rolls-Royce PLC and Rolls-Royce Energy Systems Inc, op. cit. at [19] and [20]. 
  22. Ibid at [18].
  23. Ibid at [20]. 
  24. Ibid at [39]. 
  25. Alun Milford, General Counsel, speech given on 14 September 2016 at Handelsbatt Conference
  26. Supra n 19 at [47].
  27. SFO v Rolls-Royce PLC and Rolls-Royce Energy Systems Inc, op. cit. at [141]. 
  28. Ibid at [43]. 
  29. Ibid at [43] – [47]. 
  30. Ibid at [62]. 
  31. Ibid at [51]. 
  32. Ibid at [19] and [20]. 
  33. DPA Code, [3.3].
  34. Supra n 20. 
  35. David Green CB QC, Director, speech given on 6 March 2014 at PricewaterhouseCoopers
  36. Supra n 20. 
  37. DOJ US Attorney's Manual 9-28.710 – Attorney-Client and Work Product Protections.
  38. DOJ, Office of Public Affairs, (17 January 2017) 'Rolls-Royce plc Agrees to Pay $170 Million Criminal Penalty to Resolve Foreign Corrupt Practices Act Case'
  39. David Green CB QC, Director, speech given on 5 September 2016 at Cambridge Symposium on Economic Crime 2016.
  40. SFO v Standard Bank plc (30 November 2015) at [66].
  41. SFO v Rolls-Royce PLC and Rolls-Royce Energy Systems Inc, op. cit. at [142]. 
  42. Ibid at [143].
  43. See eg Crimes Act 1900 (NSW) s316.

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