On January 17, 2017, the U.K.’s Serious Fraud Office announced that it had entered into a significant Deferred Prosecution Agreement (DPA) with Rolls-Royce PLC following its approval by Sir Brian Leveson. The agreement followed an extensive investigation of alleged bribery involving the company’s operations in a number of different countries. The full text of the deferred prosecution agreement can be found here. In the following guest post, Mark Sutton and Karen Boto of the Clyde & Co law firm take a look at the agreement and examine the agreement’s D&O insurance implications. I would like to thank Mark and Karen for their willingness to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Mark and Karen’s guest post.
Earlier this month Lord Justice Leveson approved the UK’s third, and biggest, deferred prosecution agreement (“DPA“) in the UK.
This followed the largest ever single investigation into bribery and corruption carried out by the Serious Fraud Office (“SFO“), which spanned a five year period.
Rolls Royce Plc has agreed to pay £671m in penalties to the UK, USA and Brazilian authorities regarding allegations that it paid bribes to secure contracts all over the world between 1989 – 2013.
Rolls Royce’s conduct came to the attention of the SFO in early 2012 when internet postings raised concerns regarding its business operations in China and Indonesia regarding its supply of aviation jet engines. The SFO approached Rolls Royce for further information.
Rolls Royce subsequently commenced an internal investigation (including 229 former employees, and a review of 250 intermediary relationships) identifying serious, systemic issues in multiple jurisdictions.
As a result, the SFO commenced its largest investigation to date, with concurrent investigations in the US and Brazil.
Over 30 million documents, interview memoranda and reports on the investigation were voluntarily disclosed by Rolls Royce. In an effort to demonstrate its full cooperation, Rolls Royce did not seek to claim any privilege in its documents. This included a written report concerning misconduct Rolls Royce had known about since 2010, which (under different leadership) it had decided not to report.
The draft indictment that followed identified some 12 counts of bribery and corruption spanning 7 countries over a 24 year period. The charges fell into three broad categories: conspiracy to corrupt, false accounting and failure to prevent bribery.
On 17 January 2017, Rolls Royce and the SFO sought approval from the Court to enter into a negotiated settlement of above allegations in place of a lengthy prosecution.
The Court was required to consider two questions before sanctioning the DPA: was it in the interests of justice; and were the terms of the DPA fair, reasonable and proportionate?
The interests of justice
The DPA process recognises that there is a balance to be struck between pursuing criminal prosecutions and freeing up the SFO’s time and resources by settling appropriate cases.
The starting point must be that a company which commits serious crimes should be prosecuted. This case involved multiple and serious aggravating factors tending towards a prosecution, including: (i) payments of bribes to foreign public officials; (ii) the substantial harm caused to the market; (iii) elements of careful planning; and(vi) the involvement of senior employees.
On balance, however, the Court concluded that there were countervailing “public interest factors” sufficient for a DPA to be in the interests of justice, including:
- whilst Rolls Royce did not “self-report”, it was commended for having “committed to a course of full and extraordinary cooperation” and voluntarily providing pertinent information; and
- there had been significant changes within the organisation. For example, a wholesale review of compliance procedures was conducted by an independent expert and their findings implemented, disciplinary proceedings were brought against numerous employees, and the composition Board had changed in its entirety.
The Court ultimately found that a prosecution of Rolls Royce would have a severe adverse impact upon innocent parties, including employees, suppliers and customers, in addition to serious repercussions for the UK defence industry and innocent shareholders (including pensioners).
For these reasons, the Court was satisfied that a DPA was in the interests of justice.
The financial penalty
The Court first considered the benefit to Rolls Royce arising from the wrongdoing and arrived at a “disgorgement” figure of £258 million. This included not just the gross profit, but a complex calculation intended to encompass all benefits obtained by Rolls Royce as a result of its corrupt conduct.
It was not however possible, due to the factual complexity of the allegations, for the SFO to identify any additional amount of compensation for victims. This element was set at nil.
Next, the Court considered the harm caused and the company’s culpability. Rolls Royce’s culpability was classed as “high” for all but one charge. This resulted in “harm multipliers” of 250-400% being applied to the financial gain intended to be derived from the conduct. The harm figure arrived at was £478 million.
A generous discount of 50% was then applied (a departure from the Sentencing Guidelines that envisage a 33% discount). This was deemed just and proportionate to reflect Rolls Royce co-operation, thereby reducing the overall harm penalty to £239 million. This resulted in a total financial penalty of £497 million, plus interest.
Rolls Royce was also required to pay the SFO’s costs of the investigation amounting to £12.9 million.
In parallel, financial orders are being imposed on Rolls Royce by the authorities in the US and Brazil of approximately USD 196m (£155 million). The total financial penalty due to the 3 authorities therefore amounts to a staggering £671 million.
It is reported that Rolls Royce’s own costs throughout this entire process stood in the region of £123 million, and will doubtless continue to increase with the ongoing compliance and the possible future prosecutions of individuals.
Comparisons to other DPAs
DPAs are designed to encourage businesses to report wrongdoing in the hope of more lenient treatment.
Whilst the facts of the only other two approved DPAs in the UK (Standard Bank and XYZ Ltd) differ significantly from each other, both cases did involve prompt self-reporting which Lord Justice Leveson had previously identified as being a critical, if not the key, pre-requisite for a DPA (on the basis that the SFO was not likely to ever learn of the offending otherwise).
Interestingly, that was not the case with Rolls Royce. As set out above, the investigation was not triggered by a self-report. However, the degree of cooperation was so high that Lord Justice Leveson could not distinguish between Rolls Royce’s assistance and that of a party who had self-reported from the outset.
It was also acknowledged that the criminal conduct covered by this DPA, was far more extensive and systemic than in the previous two DPAs, constituting “some of the most serious breaches of criminal law in the areas of bribery and corruption“, with numerous aggravating factors existing.
Indeed, Lord Justice Leveson himself concluded that:
“My reaction when first considering these papers was that if Rolls-Royce were not to be prosecuted in the context of such egregious criminality over decades, involving countries around the world, making truly vast corrupt payments and, consequentially, even greater profits, then it was difficult to see when any company would be prosecuted….“
Nevertheless, despite openly struggling to imagine a situation more apt for criminal prosecution, the strong countervailing public interest factors, and the availability of appropriate penalties within the DPA scheme, led Lord Justice Leveson to find that a DPA was appropriate in the circumstances.
Lord Justice Leveson was, however, keen to emphasise that in approving this DPA, the conduct of Rolls Royce would not escape sanction. It was against this background that the financial penalty was set. Although the final figure is clearly one of the largest corporate fines ever imposed, Rolls Royce may have got off lightly for the following reasons.
- True gross profit earned from the misconduct is likely to be higher than the £258 million disgorgement figure because the corruption involved acts prior to the implementation of the Bribery Act on 1 July 2011, which did not fall to be disgorged.
- More effort could have perhaps been made to identify victims to compensate as a result of the corruption (such as in Standard Bank).
- A discount at 50% may have been too lenient in circumstances where Rolls Royce did not self actually admit its misconduct voluntarily in the first instance (unlike XYZ Ltd). This may have the opposite (of Lord Justice Leveson’s intended) effect of incentivising businesses to report misconduct if they can obtain a 50% discount without doing so.
This judgment provides further guidance as to how DPAs will be used in future in the UK. It reinforces the message that a large reward will typically attach to genuine co-operation by a corporate.
Despite this victory for the SFO, critics are already questioning whether the Court was right to approve the DPA, rather than insisting on a prosecution.
Leaving aside the fact that Rolls Royce did not self-report, questions have been raised over whether the SFO really has the ability to pursue large corporate corruption cases and whether Rolls Royce was simply too large and too powerful to prosecute.
If the individuals involved in the systemic corruption are subsequently pursued this may seek to persuade the dissenters that the interests of justice have been served. Although the perpetrators were not named in the Rolls Royce DPA, Lord Justice Leveson confirmed that some of the corruption involved the “senior management and, on the face of it, controlling minds of the company“.
There is a strong hint that the individuals concerned will be pursued in an attempt to hold them accountable. It seems clear that this is certainly not the end of the story for the Rolls Royce saga.
Implications for Insurers
Most of the substantive terms of a DPA, which typically include financial penalties, disgorgement of assets and requirements to make changes to an existing compliance programme, are unlikely to impact Insurers. It is not possible for companies to seek an indemnity for financial penalties, as a matter of UK public policy.
DPAs do not, however, prevent separate proceedings being brought against individual directors and officers, which this judgment is at pains to emphasise. Indeed, a term is often incorporated into the DPA (as was the case here) requiring a company to co-operate in any subsequent prosecutions relating to the offences.
The increase in popularity of DPAs may therefore trigger more enquiries, and subsequent prosecutions, of directors and officers which will lead to more requests for costs indemnity under D&O policies.
Under a typical D&O wording, costs are required to be advanced until a final adjudication is made in the underlying proceedings.
In circumstances where a criminal investigation/prosecution is commenced following a successful DPA, it is likely that the individuals concerned will have been identified by the company and named to the authorities as part of that process. Accordingly, whilst there is also likely to be a high probability of culpability for these individuals, Insurers will not usually be in a position to refuse cover until the end of any criminal proceedings.
Even in circumstances where admissions are made in the agreed Statement of Facts (which is not a requirement), whether this will assist Insurers will depend on the language of the conduct exclusion. In any event, any admission is likely to be made by the company itself, and not the individual concerned.
A further complicating factor arises from the approach being adopted by the SFO and the Court when not naming the individuals specifically in public documents.
Insurers may want to review their policy wordings in this regard, in particular the conduct exclusions. They may wish to consider including a new exclusion, avoiding any liability for claims that arise out of an approved DPA. Although this may seem harsh on the individuals, it will avoid a situation where Insurers are obliged to advance costs only to then seek to claw them back upon a conviction.
DPAs are also designed to encourage and incentivise corporate self-reporting. It is possible that the leniency of the Rolls Royce decision will still lead to more companies commencing internal investigation, which may result in the company choosing to self-report to a regulator.
This will naturally require a consideration of the issue of funding for such internal investigations; and the extent to which cover is (or ought to be) available under standard policies in the market, not only for the directors and officers, but also the corporate entity. It is possible that the uptick in DPAs may lead to an increase in demand for entity cover for these types of costs; as we have seen in the Rolls Royce case, such costs can be catastrophic.
If Insurers wish to provide an indemnity, they will need to carefully consider sub-limiting any cover that is offered, and/or consider capping it, perhaps at the point when wrongdoing is uncovered and a self-report is made, in order to manage their exposure.
The insurance industry should also not underestimate the wider ramifications of DPAs particularly the possibility of follow on civil claims. In the Rolls Royce judgment, although victims were not compensated, Lord Justice Leveson encouraged them to come forward if they can quantify their loss.
In addition, with the media attention that these matters are attracting, there is also the prospect that indirect victims may look to bring their own claims too. For example, a possible group of claimants might be competitors who lost out on tenders for profitable contracts due to the corrupt acts. They may choose to sue the corporate on loss of chance grounds.
Insurers would be wise to ask questions at the underwriting stages regarding past conduct and the possibility of internal investigations and self-reports being made to the authorities so that they properly rate the risk.