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What can we learn about the future of DPAs from the Rolls-Royce case?

Written by Robert Barrington on Wednesday, 18 January 2017

Most of the coverage of the Rolls-Royce case has focussed on the size of the fine, and whether it was right for a Deferred Prosecution Agreement (DPA) to be used.  Robert Barrington reflects on other aspects of the case.

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.

 

Image: Lewis Clarke labeled for reuse under Creative Commons Licence

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Read 451 times Last modified on Wednesday, 18 January 2017 15:25
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Robert Barrington

Robert is TI-UK's Executive Director. You can view his full bio here, and tweet him @TIukED.

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