Too big to prosecute?

‘…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’.  These were the words of Sir Brian Leveson,  the presiding judge over the Rolls-Royce DPA, who prefaced them by saying this was ‘My reaction when first considering these papers’ and went on to explain why he had changed his mind. There were three broad reasons: the cooperation of the company; the fact that it had self-reported (partly disputed – though Leveson proceeded on the basis that the company had not self-reported, but that its co-operation was so great, it should be treated as if it had self-reported)  and the impact that debarment might have on the company’s wider ecosystem of innocent employees and suppliers and the adverse effect it might have on the UK defence industry.  This leaves a sour taste.  The logical inference is that if a company is large enough and powerful enough, it will never be prosecuted due to the collateral damage; and that the possible impact on potential victims holds greater sway with the court than the actual impact on real victims.  Sir Edward Garnier QC, representing the SFO in court, was at pains to make it clear that despite the systemic corruption, across all of its businesses in many countries and over twenty-five years, this did not mean that companies would not be prosecuted in future.  Really?  If not now, when?  To know that, we must analyse whether the interests of justice were truly served by a large fine, and if not, what lessons can be learned for the future.

What options were available to achieve justice?

Prosecutors and the court have three tools to use to enable there to be the punishment, deterrent and restitution required by the law.  There are fines on the company; imprisonment of individuals; and the debarment  from public contracts in certain countries that may (or may not – it is beyond the control of the courts) result from a conviction.  The DPA uses only the first of these – a fine – and since by its nature it rules out the prosecution/debarment route, the only remaining tool to serve the interests of justice is prosecution of individuals.   It is clear that a £671 million fine, eye-catchingly large though it was, is insufficient to act as punishment and deterrent.  It represents a sum of around £130 million per year over the five years it will be paid, negligible for a company the size of Rolls-Royce, and the markets responded with a 7% rise in the company’s share price.  Since the SFO chose  not to go down the prosecution route, the key question is now whether individuals will be prosecuted – and if so, how many and of what seniority? The answer is that we don’t know.  But one of the benefits of full cooperation – and both the SFO and the Judge were at pains to point out that the company had cooperated fully – should be that evidence is made available to prosecute the individuals involved.  If that happens, then it may indeed be possible to say that the interests of justice were served.  But as of today, it looks as though the company got off lightly.

Which individuals – and what penalties?

This was systemic bribe-paying, and there will have been multiple tiers of involvement – the bribe-payers, those who helped them cover it up (for example through the accounts), those auditors who failed to spot it, the senior managers who either actively encouraged it or deliberately turned a blind eye, and the executive directors and board members who permitted the culture to allow this to happen.  They should all be held accountable in different ways.  There are a range of possibilities to do so.  A key point is that for an assessment to be made about the interests of justice, the company and the SFO should be as transparent as possible.  So from the company we need to know how many individuals have already been disciplined and the nature of the sanctions they faced, as well as how many employees were dismissed as opposed to ‘left the company’.  From the SFO, we need to know how many individuals they are investigating and of what seniority – while acknowledging that such information could only be very general as it would be unfair to name suspects while they are simply suspects and not charged. Doubtless both Rolls-Royce and the SFO will come up with excellent reasons about why this information should be kept secret.  They are wrong.  Of course, the judge has already reassured us that in his view the interests of justice have been served.   But what is at stake is confidence in the DPA system, and therefore how it might be deployed in the future.  The onus is on the SFO in particular to demonstrate that the interests of justice have been served – that means the information to make such an assessment must be in the public domain.  At face value, with systemic corruption of this nature, we might expect dozens of individual prosecutions by the SFO, stretching to senior levels.  At the same time, we might expect Rolls Royce to explain what it is doing about the implicated employees and auditors, up to and including remuneration clawbacks from the former CEO under whose tenure much of the bribery took place.

Victims, monitors and guilty parties: what do we learn about the DPA process?

DPAs are in the early stages, and mistakes will be made.  The most important thing is to learn from them.  There will be further lessons to draw, not least about the role of the judge, but here are three things which became immediately apparent:

• Where was Rolls-Royce?  It was the company’s day in court – except it wasn’t.  The company’s CEO did not turn up.  It was not apparent to those in court that any other of the company directors were present. The company’s lawyer only appeared by video link from Hong Kong.  He will undoubtedly have a good reason, and the hearing was arranged at very short notice: but it all left the unfortunate impression that the company was happy just to pay a cheque and leave the tedious administrative business to the SFO and the court.  Their advocates appeared to be the SFO – who are meant to be prosecutors.  That is not good enough.  In future, the SFO should insist that a senior company representative such as the CEO or Chair is demonstrably in court for the hearing – that should be a condition of the DPA.  A lot of this is about deterrence, which means sending the right messages to deter other companies from behaving badly.
• The company has appointed its own reviewer (Lord Gold) and can appoint any future replacement – not the SFO.  There is no external party to monitor compliance with the Gold recommendations.  The balance of power is wrong here – the SFO should appoint, and the monitoring should be done by independent third parties.
• Victims were not only marginalised – they were entirely ignored.  There was not a single mention of victims in the SFO’s submission or the statement of facts.  With unintended irony, the only victim mentioned was the company itself – in the context that if it had been prosecuted, and if debarment followed, there would be innocent victims of the company losing sales.  It is often difficult to determine the victims of corruption, but it is possible; and it is also possible to determine the harm that has been done.  The Rolls-Royce DPA has revealed a very big flaw at the centre of the DPA process.  Victims have no voice, and those who might be knowledgeable about the harm done have no place in the DPA process.  How might this be remedied?  That needs further thought, but here is one idea: the SFO uses experts in its investigations, including those commissioned to determine the company’s gross profit.  Why not commission experts to determine the harm done to victims in corruption cases.  It’s not an outlandish suggestion: the SFO itself called on Professor Sir Paul Collier as an expert witness in the Mabey Bridge case.

Where does it leave the SFO?

We should be clear that this is a breakthrough moment for the SFO.  It has gone after a major blue-chip company and the result has been a fine of US proportions.  That is to its credit  Furthermore, the DPA has been approved by the court and set out some pointers about how they will be used in future – with a big premium placed on genuine cooperation by the company.   Cooperation is a good thing, as is self-reporting, and they should rightly be encouraged.  But in the midst of its understandable pride, the SFO should also be deeply ashamed at its neglect of the victims.  We must hope that it never again comes to court with a DPA that does not place consideration of the victims at the heart of its case.  It also has three other big lessons to learn right now, and there will certainly be more to draw from this case as the dust settles:

• A large fine does not alone serve the interests of justice, and so it needs to find a way to couple the prosecution of individuals to a DPA, even if it is solely transparency about what is happening and strong commitments that individuals will be pursued as they are an important part of the equation in achieving justice.
• The crucial determinant over the size of fine is how the company’s gross profits were calculated.  This was glossed over throughout the proceedings.  We need full transparency about the basis of the calculation.  For example: it is reported in the Financial Times that the Garuda deal to sell Trent 700 engines was critical in establishing the viability and future market share of that product: is this fully reflected in the calculation of gross profit?  It is possible the fine could have been two or three times higher had the gross profits been calculated differently – but we don’t know because no detail is available.
• Even a big company DPA with a big fine leaves many questions unanswered about achieving justice.  These will be laid to rest when there is a successful prosecution of a big company and the SFO can demonstrate that no company is too big to prosecute.

Conclusions

DPAs are still in their early phases.  They could be on the verge of working very well.  The SFO has done well to secure a large fine and the on-going cooperation of the company.  But people are not celebrating because it is not clear that the interests of justice have been truly served. There is still more to come with Rolls-Royce through prosecuting individuals, which may tip the balance, and more transparency can still be provided at this point by both the SFO and the company.  Above all, the key lessons about process, victims and transparency need to be applied to future DPAs; and the SFO has both to finish the business successfully in this case, and demonstrate as soon as it can that large companies are not too big to prosecute.

Lord Justice Leveson concluded on Tuesday, that the DPA with Rolls Royce was in the “public interest”, following recognition that the company hired a network of agents to help secure contracts. The voluntary payments mean the company will avoid being prosecuted by anti-corruption investigators and thus ends the threat of being debarred from key markets.

This not the first case of a major defence contractor getting caught red-handed paying bribes to government officials to secure lucrative contracts in developing countries. Like other such high profile scandals, these proceedings demonstrate just how difficult it is for big government contractors to be brought to justice. On the face of it, there could be few clearer instances when prosecution, rather than a DPA, might seem like the only reasonable course of action.  After all, the allegations relate to up to ten countries, over a sustained period – back to 1989, and involve significant sums changing hands.  So this isn’t a one off ‘rogue’ operator and it seems implausible that senior executives were not tacitly sanctioning this activity.  So the question is, if this isn’t an occasion to prosecute and properly deter, when would be?

The justification for the decision ostensibly rested on two main points – that senior execs had come clean in terms of historical transgressions, and that it really would be quite dreadful for everyone concerned if the company lost sales as a knock-on effect of prosecution.   Hardly a compelling rationale – albeit the resultant changes to management and improvements in compliance system should be welcomed.

The underlying question is the extent to which the relationship with Government inevitably leads to a company of Rolls-Royce’s significance, effectively enjoying immunity from prosecution – even if not as a direct result of government intervention.  Indeed, the judgement specifically referenced the potential ‘adverse effect to the UK defence industry, where Rolls-Royce has a critical role’. The UK’s national security strategy has at its heart, support for a strong national defence industry. A laudable aim. The problem is achieving this without relying heavily on exports to countries of high corruption risk. In the U.S., defence budgets are some of the hardest to cut, and the domestic market is the largest worldwide; US companies can succeed even without exports, including funding the necessary R&D to make them competitive. In contrast, domestic markets in Europe are simply too small to provide the economies of scale to enable a major defence company to survive, never mind to retain capability competitiveness. Interestingly, Lord Justice Leveson specifically raised the prospect of Rolls Royce being subject to mandatory debarment in Bahrain as a strong justification for pursuing a DPA rather than prosecution. Rolls Royce’s debarment from such government contracts, even for a short period, given its size, niche capability, and the government’s commitment to supporting home grown defence industry, is an outcome HMG would surely also be pretty keen to avoid.

So if the prosecution and therefore debarment of a large defence contractor is largely off the table, what can be done to ensure a sufficiently robust disincentive? Fines, the obvious solution, will only have limited consequences for companies of this size, making up a fraction of the profit generated from foreign business procured through bribery. Whilst the total figure of £671m is eye catching and about as large as it was ever going to get for a company admitting culpability, the £130m per year that this is amounts is more uncomfortable than painful as an operating cost. In March 2010 – BAE systems paid approximately $400 million in fines; and yet just a year later they had won federal contracts in excess of $6billion. The solution probably rests in two crucial principles; ensuring debarment is never simply off the cards and, secondly, the resolve to prosecute individuals come what may. The crucial test is whether the court would ever take the view that Rolls Royce should be prosecuted. On the prosecution of individuals – well, let’s wait and see.

In the longer run, smarter thinking is needed to ensure that Europe’s vital defence industries are able to operate sustainably, but also responsibly.  Relying on governments with weak governance, but a well-armed security sector, to fund the UK’s national defence industry is a risky strategy – it will inevitably create strong incentives to protect big companies, that feel they don’t need to play by the rules. And we should also be in no doubt, that while there may be no victims in court to see justice done, victims exist in the many countries in which Rolls Royce has operated. Corrupt arms deals, particularly those where expensive equipment simply lies moribund, divert resources away from many of the poorest communities in the world and are at the root of public frustration in some of the most unstable regions of the world. Ensuring that British companies are never sustaining corruption in such countries must be central to the “public interest”.

Rolls-Royce is now the second company to have cited potential debarment as a justification for why it should avoid criminal conviction under the 2010 UK Bribery Act.

This DPA is a significant prize for Rolls-Royce. By avoiding a criminal conviction, Rolls-Royce hopes to avoid being caught out by public sector procurement rules in a number of countries that exclude or ‘debar’ convicted companies from participating in government tenders.

This was an unanticipated outcome given that Sir Brian Leveson opened his judgment by stating ‘…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’.

Yet Rolls-Royce’s assertion that conviction may cause it to lose 30% of its order book was accepted by the SFO and the court, and ultimately tipped the balance in favour of settlement over prosecution: ‘Debarment and exclusion would clearly have significant, and potentially business critical, effects on the financial position of Rolls-Royce.’ However there is no evidence that the financial impact and loss of sales estimates put forward by Rolls-Royce were challenged by independent assessors in the course of the settlement.

Based on the success of Rolls-Royce’s submission, more and more companies under investigation for bribery will now seek to emphasise the impact of debarment on their operations in order to plead for a settlement. GPT, a subsidiary of Airbus currently under investigation for bribery in UK MOD contracts with Saudi Arabia, is like Rolls-Royce, a large, global defence contractor. It is vital that the figures put forward by companies are realistic and robustly challenged by the SFO and the court, or we will end up with very few prosecutions of companies that trade with the public sector.

Debarment is not a sanction. It is an administrative decision taken by procurement officials to protect the integrity of public spending. This judgment therefore opens up a wider question of whether it is legitimate for the SFO and UK courts to consider what debarment consequences a company might face, as this directly undermines procurement laws in the UK and abroad.

Why was Rolls Royce so keen to avoid debarment?

Rolls-Royce is one of the UK Ministry of Defence’s main suppliers. The UK spends about 200 billion pounds on public procurement annually – a significant factor in shaping corporate practices. Debarment, otherwise know as blacklisting or exclusion from public contracting, is a way for governments or international lenders such as the World Bank, to exclude corrupt bidders from contract awards. Enabling public officials to include criteria such as convictions or professional misconduct into decisions on which companies to award public tenders ultimately protects the integrity of public funds.

Approving the settlement the judge noted: ‘A conviction would undeniably affect the ability of Rolls-Royce to trade in the world…It is well known that many countries operate public sector procurement rules which would debar participation following conviction.’ This statement oversimplifies global debarment laws and implementation procedures. There are broadly two types of debarment regimes operating worldwide: mandatory and discretionary debarment. Mandatory debarment regimes exclude convicted companies unless there is a compelling reason – such as a business need – for a state procurement authority, such as the MOD, to continue contracting with a convicted supplier.ⁱ

Discretionary debarment regimes are more flexible in two ways: decisions are taken on a case-by-case basis and usually don’t require a criminal conviction. The United States and India have discretionary debarment regimes. The UK and most EU states operate hybrid regimes, granting procurement authorities both mandatory and discretionary debarment powers.ⁱⁱ

The U.S. is the most active in using debarment globally, and like the World Bank, publishes a list of debarred entities. No country currently operates cross-debarment i.e. debarment in the UK will not automatically lead to debarment in France or the U.S. or India. Only the World Bank operates a cross-debarment regime with other Multilateral Development Banks such as the African Development Bank.

Did Rolls Royce exaggerate the economic impact it would suffer from a conviction?

The decision not to prosecute is controversial due to the scale and extent of bribery and fraud practiced by Rolls-Royce. To argue that prosecution would be against the interests of justice, the company stressed the economic impact it would suffer from a conviction, these estimates were seemingly accepted at face value accepted by the SFO and the court:

‘I have no difficulty in accepting that which I am informed…that 15% of Rolls-Royce’s 2014 order book was from entities subject to …mandatory debarment…and, approximately, a further 15% from entities subject to …discretionary debarment’.

No further breakdown of these estimates or support for this argument is given in the judgment, nor accompanying public documents. So the inevitable question is what is the foundation of evidence for this critical assertion? While Rolls-Royce does trade with countries that have legislation – on paper – to operate debarment regimes such as the U.S., UK, EU, India, Brazil and Nigeria, each of these respective countries implements these in their own way, and with considerable discretion. Most of the countries do not even currently implement their debarment regimes.  So the question of whether a prosecution would actually lead to debarment in other jurisdictions is surely a highly contentious fact.

Take the UK’s own approach toward debarment for example, we have been unable to find an example of a convicted company – such as Sweett Group or Mabey & Johnson – where the UK has actually used discretionary or mandatory debarment powers to exclude a company convicted of bribery.ⁱⁱⁱ And despite EU debarment rules, barely any countries in Europe actively implement debarment. In fact, of the research we conducted across Europe, only the Czech Republic confirmed that they had actually debarred a company for paying bribes.^iv

Even if the UK and EU were to start actively implementing their debarment regimes, these laws specifically allow for a government procurement authority to argue a ‘business need’ exception, or for companies to submit that they have effectively reformed or ‘self-cleaned’ in such a way as to avoid mandatory debarment.^v Similarly Nigeria is not known to have operated its debarment regime since the law was enacted. The likelihood of Rolls-Royce being excluded in these markets at all seems very low.

Perhaps the most credible risk might be in the U.S. or India given past form. But the U.S. has a highly discretionary debarment regime and the Suspension and Debarment Office in the U.S. Department of Defence, the lead agency in charge of this case, had already made a decision not to exclude Rolls-Royce. So a conviction would not have affected this outcome. Similarly, for Brazil, Rolls-Royce has reached a settlement agreement with Brazilian authorities. India on the other hand has only debarred a handful of companies and recently modified its debarment rules to allow it to continue purchasing technology from excluded companies where there is a business need to do so.^vi So it is the technology the company provides, and not a conviction, which ultimately dictates debarment decisions in India.

In short, Rolls-Royce’s case that it may lose 30% of its order book if it were to be convicted is an assertion worthy of further justification.

If this was an error of fact, might the judgment be appealed?

The terms of this DPA specifically state that the SFO may institute fresh proceedings ‘if the SFO believes that during the course of negotiations of the Agreement Rolls-Royce provided inaccurate, misleading or incomplete information to the SFO and Rolls-Royce knew, or ought to have known, that the information was inaccurate, misleading or incomplete.’

There is no clear evidence that we have been able to point to so far that either the judge or the SFO tested the assumptions put forward by Rolls-Royce, or that of any of the other companies prosecuted for bribery. If this turns out to be the case, it would be a worrying trend and could open up the possibility that Rolls-Royce, and future companies – such as GPT – can simply present a ‘best-guess’ estimate of future trade losses in order to avoid prosecution.

Should the SFO and the UK Courts be helping a company to avoid debarment anyway?

There are good reasons for countries to implement debarment rules; and at the UK Anti-Corruption Summit in May 2016, the UK committed, along with other countries at the Summit, to do just that.  The ability of procurement chiefs to exclude companies engaged in illegal practices helps shift the burden onto companies to take real responsibility for their own risk management and remediation efforts. As a consequence, this deters companies from engaging in corruption, encourages companies to deal promptly and openly with any instances of corruption, and limits the government resources required to monitor and investigate malpractice.

Rolls-Royce might argue that it has already met this bar by appointing Lord Gold in 2013 to lead a review of the company’s approach to anti-bribery and corruption compliance. In the course of his retainer, Lord Gold has produced two interim reports in respect of risk areas identified in Rolls-Royce and recommendations for change. Neither is publicly available. There also appears to be no standard against which the court or the SFO judges how well Rolls-Royce has implemented these changes.

The DPA agreement states that Rolls-Royce will provide an implementation plan to the SFO in 5 days. But what does that mean in practice? Neither the SFO nor Sir Brian Leveson QC are corporate governance experts. Indeed, Rolls-Royce had a global compliance program and prohibition on the payment of bribes throughout the period the company was engaged in systemic bribery with the knowledge of senior managers. So the key question the SFO will need to grapple with is, what the criteria will be for making this judgment and whether those making it have the right expertise to assess what has really changed?

The bar needs to be sufficiently high – by avoiding a conviction, the SFO has enabled Rolls-Royce to avoid on-going scrutiny by procurement chiefs applying the self-cleaning provisions detailed in EU and UK procurement rules that require a company to demonstrate ‘the steps taken by the company to prevent the offence occurring’ and other factors.^vii The SFO’s needs to make sure that the bar it sets is not lower than that established by UK procurement laws, or its actions may ultimately prove to be counter-productive.

And what about compensation for victims?

The judgment leaves no doubt that Rolls-Royce was organised and systematic in its approach to corruption – using a network of agents and employees in Angola, Azerbaijan, Kazakhstan, Iraq, Thailand, and Brazil to pay at least $56 million of bribes in seven countries, over a period of at least 27 years.

While the SFO acknowledges in the judgment that compensation should be sought for victims when addressing corporate offending, the judgment states that it is: ‘impossible in this case… due to the “factual complexity of the totality of the allegations …including the use of intermediaries…makes quantifying bribes paid impossible.’

By paying bribes to public officials to win contracts, Rolls-Royce’s business practices perpetuate corruption in countries where populations are struggling to hold their government officials accountable. The UK recently committed to spending 860 million pounds in foreign aid to Nigeria. These efforts are seriously undermined if British companies are entrenching corruption in government, by bribing officials to abuse their positions. 25% of Nigeria’s budget is spent opaquely, supposedly on defence equipment acquisitions, yet officers on the front line fighting Boko Haram report that they do not have weapons to fight, as the procurement budget has been misspent.^viii

The judgment does little to address the impact of Rolls-Royce’s crimes on its victims. The willingness of large, multinational companies to obey or break the law has an immediate and very real impact on levels of corruption in the defence sector. The Statement of Facts for this case details the extent to which Rolls-Royce tried to undermine anti-corruption reforms by India’s government. In 2006, in an attempt to crackdown on corruption in the defence sector, the Indian government appointed reformist minister A.K. Anthony as Minister of Defence. To reduce the risk of defence companies using agents to offer bribes to civil servant in return for awarding contracts, the Indian MOD banned their use and asked bidders to sign “Integrity Pacts” undertaking to not pay bribes or use agents. Breach of an Integrity Pact would lead to debarment from Indian contracts. Despite this, Rolls-Royce deliberately evaded attempts to reform the sector and continued to pay kickbacks to win defence contracts. When the Indian MOD and tax authorities started to investigate Rolls-Royce’s list of agents, the company bribed a tax inspector to retrieve the list in an attempt to try to prevent further investigations.

In short, Rolls-Royce’s case that a conviction would lead to automatic debarment and have a very substantial impact on the company’s future trading surely requires further justification than the SFO provided on Tuesday.

Notes:

i) See Derogation Provision, page 20, Evaluation of the functioning and impact of the EU Defence and Security Public Procurement Directive (2009/81EC) across 20 EU states, July 2016, Eva Anderson, Transparency International Defence and Security Program http://ti-defence.org/wp-content/uploads/2016/07/160728-EU-Commission-Defence-Directive-Evaluation-Paper.pdf
ii) See page 20, ibid.
iii) A section 7 bribery Act offence could incur discretionary, but not mandatory, debarment
iv) http://ti-defence.org/wp-content/uploads/2016/07/160728-EU-Commission-Defence-Directive-Evaluation-Paper.pdf
v) See page 23, ibid. Note self-cleaning is not available in UK defence procurement rules, but – as noted previously – a derogation is.
vi) http://globalinvestigationsreview.com/article/1016313/rolls-royce-finmeccanica-bid-india-defence-contracts
vii) See page 7, Evaluation of the functioning and impact of the EU Defence and Security Public Procurement Directive (2009/81EC) across 20 EU states, July 2016
viii) For example, during the height of the conflict with Boko Haram, corrupt Nigerian senior army officers stole ammunition and fuel budgets from front-line soldiers, leaving them with no alternative other than to flee and discard their weapons and vehicles when attacked by Boko Haram. In a December 2015 court martial, sixty-six soldiers on trial for mutiny had their death sentences commuted after the court heard that the soldiers had pleaded to be given weapons and equipment to combat the insurgency, but the funds had been stolen or misspent. Source: “Nigerian military commutes death penalty of 66 soldiers to jail terms”, Premium Times, 19 December 2015, http://www.premiumtimesng.com/news/headlines/195425-nigerian-military-commutes-death-penalty-of-66-soldiers-to-jail-terms.html

It should have been a triumphant moment for anyone who believes no-one is above the law. Sadly, the ruling on Rolls-Royce’s settlement – following widespread corruption allegations – fell rather short; particularly for their victims.

As a former detective, I have sat through many criminal hearings. No matter how challenging the investigation, or how complex the trial, the judge’s explanation of why the crime is so heinous is often a stirring moment. It reminds the investigators, the jury, the public and the defendant why they are there and provides a moment of pause to consider the crime’s impact. Moreover, it is the time to recognise the victims, and for society to acknowledge the wrongs that have been suffered.

But after three hours of legal argument the victim’s voice was almost entirely absent in Rolls-Royce’s hearing. Sir Brian’s 32 page judgement contained only a brief assertion that because there had been no inflation of the prices of the corruptly purchased equipment, no-one had really lost out. Perversely, the hearing focussed almost entirely on the effects on the company and its dependants. It is a peculiarity of a DPA hearing that the prosecution counsel sets out the case against a prosecution. The unintended consequence was a prosecution counsel making the case for leniency so strongly it left the defence counsel with almost nothing to say; and everyone forgot the victims.

So who were Rolls-Royce’s victims? First, there were the millions of people living in developing countries, such as India, Nigeria and Indonesia, which saw vast sums of public expenditure directed toward Rolls-Royce’s coffers. It might be argued that the cost should be defined as narrowly as the value of the bribe; and divided amongst a population, that might seem like a small price to pay. But bribes corrupt public procurement processes. They can mean products purchased that may never have been needed, are of poorer quality, or purchased in greater volumes; and when we are talking about defence and aerospace, that’s an awful lot of money. For every extra Rolls-Royce product purchased, millions could have been spent on education, healthcare, infrastructure and other defence requirements. In the Indian case, it appears that corrupt intermediaries ensured the government issued a licence fee for £3.5m more than they had budgeted (for which Rolls-Royce agreed to pay the person responsible £1m), just one example of funds which could have been better used elsewhere. Let’s put that figure in terms that victims can relate to, £3.5m could mean between four to six thousand general practitioners for Indian citizens.

Then there’s the long term damage to institutions that fail over decades to put the interests of citizens first. In many developing countries, vital institutions end up repurposed away from providing basic services to people and towards the enrichment of a corrupt elite. This type of corruption prevents many of the countries on Rolls’ list of victims from achieving their full potential. Nigeria is one of the richest countries in Africa but corruption within the establishment is a major factor holding the country back, with nearly half the population without access to clean water and sanitation. Meanwhile despite huge investments in defence, soldiers continue to fight without suitable weapons and equipment.

But there are victims in the developed world too – and I’m not just talking about those employees losing out due to declining Rolls sales. If the UK taxpayer had up until this point been rolling their eyes and wondering what all the fuss was about, it’s time to think again. What about the billions in aid projects which end up in countries which could do a great deal more to help themselves, if they were not squandering their national budgets on gadgetry which they were persuaded to purchase? And then, of course, there’s the companies that missed out on the deal because Rolls-Royce was cheating. In the arms trade, these could easily be British companies; and I doubt whether such leniency would have been tolerated if Britons had been the ones missing out on jobs, thanks to a foreign company bribing their way to success.

In truth, citizens all over the world suffer the indirect consequences of arms trade corruption. It is fuelling arms races, weapons proliferation, organised crime, human rights abuses and fundamentally undermining international stability. Whilst we cannot lay blame for these directly at the door of Rolls-Royce, let us be in no doubt, corruption in this sector has devastating potential. The victims are numerous and the suffering they feel is real, if not always visible.

The proceedings, concerning a flagship case, were a sobering illustration of how little understood the impact of corruption is. My suspicion is that from the outset of the investigation, the victims were ignored because no-one really believed that Rolls-Royce was going to be prosecuted. The level of cooperation from Rolls-Royce may have pre-occupied investigators with achieving the DPA. And without a wounded party for the SFO to answer to, the victims ultimately missed out on the most vital part of the entire process – the court room.

A Failure of Nerve: The SFO’s Settlement with Rolls Royce

So Rolls Royce has been fined £671 million under a global settlement for a bribery scheme that ranged from the 1980 right up until 2013 and spanned 13 countries. The Deferred Prosecution Agreement (DPA) with the UK’s SFO resulted in a fine of £497.2 million for payment of bribes concealed in well over $56 million of commission payments paid mainly via intermediaries in Nigeria, Indonesia, Malaysia, Thailand, India, China and Russia. The DPA with the US Department of Justice (DOJ) resulted in a fine of $170 million for payment of $35 million in bribes through intermediaries in Angola, Azerbaijan, Kazakhstan, Iraq, Thailand, and Brazil. The Brazilian prosecutors’ office has also reached a leniency agreement with Rolls Royce under which the company will pay $25 million for bribery in the Petrobras scandal.

The DPAs were rushed through so that the US agreement could be finalised before the Trump administration takes office – Trump has described the US’s Foreign Corrupt Practices Act as a ‘horrible law’ and said he will repeal it.

In his judgement, Sir Brian Leveson remarked that his first reaction was that if Rolls Royce’s “egregious criminality over decades” was not to be prosecuted “it was difficult to see when any company would be prosecuted.” However, he ultimately decided that because of Rolls Royce’s extensive cooperation during the investigation and because Rolls-Royce now has an entirely new Board and executive team, and has made considerable changes to its policies, the DPA was in the interests of justice.

The UK’s third DPA with one of the UK’s most politically and strategically important companies raises some serious questions about the DPA regime and the willingness and ability of the prosecuting authorities to prosecute what was clearly an egregious, sustained, and global pattern of wrongdoing ingrained in the very culture of the company and involving senior former executives.

In particular, the DPA raises the following key issues:

The UK’s DPA Regime Has Been Significantly Weakened By The Rolls Royce Precedent:

Previously the SFO has emphasised that companies should self-report information about wrongdoing that the SFO could not otherwise have known about. Both the previous two DPAs were based on this type of self-report. This did not happen with Rolls Royce: two whistleblowers posted allegations online and the SFO approached Rolls to ask them about the allegations. The SFO argued in this case that because Rolls Royce’s cooperation was so extensive and resulted in Rolls providing the SFO with further information of wrongdoing which the SFO was not aware of, it should be treated as having self-reported. The Rolls Royce DPA, therefore, sets a precedent that a company can fail to disclose – in fact deliberately decide not to disclose information about wrongdoing (the judgement says that Rolls Royce knew about conduct since 2010 and decided not to notify authorities), but if it then cooperates with the SFO it will still be eligible for a DPA. Companies will heave a sigh of relief that they can now safely take the risk of not disclosing wrongdoing to the SFO, but still receive all the advantages of a DPA if they do get caught as long as they then play ball. This DPA therefore potentially undermines incentives for companies to self-report – a key plank of why DPAs were introduced.

The Terms Of The UK DPA Which Include A 50% Discount In Fine, A Five Year Payment Plan And A Lack Of Transparency About How The Full Benefit Received By Rolls From The Contracts Was Calculated, Are Overly Generous And Unmerited:

Despite the fact that Rolls Royce did not self-disclose, Sir Brian Leveson still decided that it was eligible for a 50% reduction in fines under the DPA. The Department of Justice was not so generous. It gave Rolls a 25% discount in acknowledgement that it had not self-disclosed the wrongdoing. Leveson’s decision to start allowing 50% reductions in fine under DPAs is a deliberate shift away from the 30% reduction stipulated by the Crime and Courts Act 2013, and raises questions about who Leveson is accountable to when changing DPA policy on such a fundamental basis.

It is worth noting that while the US DOJ has demanded the fine upfront, the SFO has given Rolls Royce 5 years to pay the fine in instalments. This overly generous treatment raises serious questions about how much of a deterrent the DPA provides and whether fines of this type are likely to become regarded by companies as a potential cost of doing business.

The SFO Has Given An Inappropriate Assurance To Rolls Royce About Not Investigating And Prosecuting Additional Criminality Should It Emerge Alongside The DPA:

The SFO has assured Rolls-Royce (para 134) that “it would not consider it to be in the interests of justice to investigate or prosecute it for additional conduct” that pre-dates the DPA but which might arise from the SFO’s ongoing investigations into Airbus and Unaoil. But if those investigations, which the judgement reveals are currently “insufficiently advanced” to provide evidence on potential wrongdoing by Rolls Royce, reveals criminality by the company, it would be wholly inappropriate for the SFO not to penalise the company for that criminality. Additionally, it would raise questions as to why Rolls Royce had either not uncovered such criminality itself in the course of its internal investigations, or if it had, why it had not disclosed it to the SFO. That is to say, the very basis of Rolls Royce’s DPA might be called into question by information that arises from these other SFO investigations. The assurance has worrying overtones of the immunity clause that the SFO gave to BAE Systems in its 2010 settlement, which was roundly criticised by the Judge who oversaw that settlement and by the OECD.

It is notable that the DOJ’s DPA specifically requires the company to continue to cooperate with it “in any and all matters relating to the conduct [subject to the DPA] … and other conduct” under investigation by the DOJ until the term of the DPA ends, and to inform it of any further evidence or allegations of bribery. The SFO’s DPA only commits the company to cooperate if the SFO launches a prosecution.

The ‘Adverse Consequences’ That Rolls Royce Might Suffer If It Were Prosecuted, In Particular Being Debarred From Public Contracts, Were Vastly Overplayed And Their Consideration As A Public Interest Factor Against Prosecution Undermines Government Commitments To Ensure Corrupt Bidders Are Excluded From Public Contracts:

At the UK Anti-Corruption Summit in May 2016, the UK committed, along with other countries at the Summit, to exclude corrupt bidders from public contracts. However, one of the key public interest arguments given for not prosecuting Rolls Royce was that it would face exclusion from public procurement. As the judgement itself acknowledges, only 15% of Rolls Royce’s contracts would have been affected by mandatory exclusion from public contracting – a fact that suggests that claims made by the SFO and accepted by Sir Brian that a prosecution might lead to Rolls Royce’s demise were vastly over-stated. Given that EU exclusion regimes now specifically allow for companies to argue that they have effectively reformed or ‘self-cleaned’ in such a way as to avoid mandatory debarment, the likelihood of Rolls Royce being excluded at all was in any event very low.

The Impact Of Rolls Royce’s Corruption On The Countries In Which It Paid Bribes Was Given No Weight In The Proceedings:

While the innocent employees and shareholders who could potentially be affected if Rolls Royce were prosecuted were given specific mention, no reference was made to the victims of the corruption that Rolls Royce committed. None of the prosecuting authorities from the countries where bribes were paid appear to have been given a right to make representations to the court. And no real assessment of the potential harm caused by Rolls Royce’s corruption appears to have been made by the SFO. Such corruption undermines democracy, the rule of law and socio-economic development, disadvantaging citizens in victim countries.

Finally, The DPA Raises Questions About Accountability For Judicial Scrutiny Of DPAs Itself And Lack Of Third Party Representation:

Only one senior UK judge currently hears DPAs: Sir Brian Leveson. Given that DPAs cannot be judicially reviewed or challenged, it is questionable whether the process should be left in the hands of only one judge who gets to set case law on DPAs. There is no route for third parties to make representations to the court who might have evidence or reasons for questioning why a DPA might not be in the public interest. Sir Brian therefore only ever hears arguments from two parties, the SFO and the company, who are in agreement about the DPA being a good thing. The danger is that Sir Brian Leveson is not only reformulating DPA policy on the job with no oversight, but may get so familiar with the arguments in favour of DPAs, that his critical oversight is dimmed. 

What The SFO Needs To Do Now

If the SFO’s DPA with Rolls Royce represents a failure of nerve, there are a few key things the SFO must do now to show that it is serious about ensuring that the vast wrongdoing exposed in its investigation of Rolls Royce does not go completely unpunished:

• The SFO Must Bring Prosecutions Against The Intermediaries Involved Where Possible:
  In particular, it should continue its investigation into Unaoil vigorously (the danger is that it could lose appetite for such an investigation now the Rolls Royce allegations have been resolved), the Choudhries who acted as an intermediary for Rolls Royce in India, and the UK based intermediary cited in relation to corruption allegations in Kazakhstan in the DOJ’s DPA.
  
• Individual Prosecutions Against The Executives Involved Will Be A Key Test Of The SFO’s Commitment To Dealing With The Alleged Corruption Effectively:
  The SFO has said that it is pursuing investigations against individuals. Bringing those individuals, particularly senior level executives, who were responsible for the wrongdoing alleged in both the SFO and DOJ DPAs is essential.
  
• The SFO Must Look At Whether There Are Assets Belonging To Corrupt Officials Linked To The Bribes Paid By Rolls Royce And To Intermediaries Based In The UK And Whether There Are Grounds For Confiscating Them:At least one of the intermediaries involved in the alleged wrongdoing is known to have property in the UK, and it is possible that some of the officials involved, who are known to the SFO from its investigation, may also.

Failure to continue to act with determination on these matters will undermine the UK’s stated commitment to fighting corruption by British companies and will strongly suggest that the introduction of the DPA regime still results in too-cosy settlements that effectively allow big and powerful companies off the hook.

As you can see from my collegues contributions above, we at Transparency International UK have commented extensively on the recent Rolls Royce DPA Settlement

All of my colleagues have questioned whether the use of a DPA in the case of Rolls Royce was really in the public interest given the wide ranging[1] bribery uncovered by the investigations.

Andy Watson, Head of Industry Integrity at our Defence & Security Programme, asks who the victims were and why they were not mentioned in the DPA.  We, at TI feel strongly that any form of bribery, no matter how small (and it certainly was not small in this case) has victims.  Perversely, the only “victim” mentioned by Lord Leveson in the DPA hearing seems to have been Rolls Royce itself.  As Andy outlines, there were certainly many other victims of Rolls Royce’s corrupt acts.

Katherine Dixon, the head of our Defence & Security Programme, wondered whether big aerospace and defence contractors simply play by different rules and get off lightly because of the large number of British jobs at stake or the sensitive geopolitical nature of the deals involved.

Eva Anderson, a Senior Legal Officer and Barrister at TI, asks whether the impact of debarment was exaggerated to avoid a prosecution.  The DPA certainly considers the economic impact that a prosecution would have had on Rolls Royce, which would not have been insignificant.

Robert Barrington, our Executive Director, quite rightly asks whether the DPA was really in the public interest at all and whether any individuals will actually be prosecuted.

In summary, we have been critical of the use of a DPA in this case.  But a DPA is what we have ended up with, so what lessons can be drawn by other companies from all of this?

Well, one of the key things that can be learned from the DPA is that active cooperation is rewarded by the SFO.

You may ask how Rolls Royce can possibly have been rewarded given the size of the fine, a record[2] amount of £671mn?  Well, firstly, it was the level of cooperation that Rolls Royce offered[3] that was a key driver behind the decision not to prosecute but rather offer a DPA.  Secondly, the fine was reduced by 50% in light of Rolls Royce’s cooperation; a not insignificant sum given the size of the fine.

We also learned that the SFO was able to coordinate a DPA with the US and Brazilian authorities.   This has dealt a blow to the advice lawyers give to clients not to cooperate with the SFO because of the likelihood of “double jeopardy” (ie where the company gets prosecuted in another country for admitting its guilt in a DPA in the UK.)

We also learned that Rolls Royce discovered several additional cases that the SFO was not aware of. In their own intenal investigations. So by ensuring no stone was left unturned, Rolls Royce was able to wrap all historic incidences of bribery into one single DPA. Not only did this result in a DPA and a reduction of the fine, but also allowed the company to draw a line in the sand on historic business (mis)conduct.

Assuming no stone has indeed been left unturned, it is unlikely that further historic allegations will surface.. This will allow the company to genuinely draw a line in the sand and say to its customers, staff and other stakeholders, that it has turned a page and that it no longer does business the “old way”.  Time, of course, will tell whether this is indeed the case.

The overall lessons for companies here is if there are substantiated allegations, cooperate with the authorities.  Be proactive and fully cooperate with the SFO and other authorities until you have found every possible breach.  Rolls Royce spent ten times on internal investigations than the SFO spent on their investigation, giving an indication of the level of cooperation and efforts required.

Although we have been sceptical whether the DPA meets the public interest test, Robert Barrington, in his blog, rightly points out that the DPA is nevertheless a break-through moment for the SFO.  It is the first large company to be tackled by the SFO since the advent of the UK Bribery Act and the fine is larger than anything the UK has seen.

There is a long list of companies under investigation on the SFO’s website. We shall see how many of these are eligible for a DPA.  But Rolls Royce’s DPA gives a clear steer from the SFO as to what it expects in terms of cooperation.

[1] . in terms of countries, years and the amounts involved

[2] The size of the fine was a a record for a fine imposed by the SFO

[3] once the initial allegations were brought to the attention of Rolls Royce by the SFO