Issue 11, April 2016

Welcome to Pinsent Masons’ Financial Crime and Asset Recovery team bulletin.In this issue we consider:• UK bribery enforcement takes off – lessons to be learned• Civil fraud and asset recovery• Persons of Significant Control Regulations 2016• Renewed pressure to change the law of corporate criminal liability

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UK Bribery Enforcement Takes Off The last 12 months or so have seen a number of significant developments in bribery enforcement, including:• the first conviction, following a contested trial, of a corporate

for foreign bribery;• section 7 of the Bribery Act 2010 (failure to prevent bribery)

in action (Pinsent Masons acted in both cases);• approval of the first Deferred Prosecution Agreement.

These have provided some notable “wins” for prosecutors, but of perhaps of greater import are the lessons to be learned from the plight of those involved, and their practical effect, for advisers, corporates and individuals.

Smith & Ouzman LimitedThe Serious Fraud Office (“SFO”) secured the first corporate conviction, following a contested trial, in December 2014, when Smith & Ouzman Limited (and two Directors) was found guilty of making corrupt payments of just under £400,000 to foreign officials in Kenya and Mauritania in order to secure contracts to print election ballot papers, examination enrolment documents and certificates, contrary to the Prevention of Corruption Act 1906 (a precursor to the Bribery Act 2010). Conviction was secured following a four year investigation by the SFO. The company was fined £1.3m plus subject to a confiscation order of £0.9m.

In determining the fine to be levied, Mr Mitchell followed the Sentencing Council’s Definitive Guideline for Fraud, Bribery and Money Laundering Offences for Corporate Offenders, which applies to those sentenced for relevant offences on or after 1 October 2014 (regardless of when the offence was committed), with the starting point being the gross profit for the contracts obtained by bribing a public official multiplied by, depending on the facts, between 20% and 400% in the worst cases. In this case Mr Mitchell considered the conduct fell within Category A, highlighting the following factors: the company played a leading role in organised, planned and unlawful activity; the corruption involved local or national government officials; the company abused its dominant market position; the offending was committed over a sustained period of time, namely 15 months; the motive of substantial financial gain. He concluded that “The corruption of foreign officials to procure contracts must be regarded as at the serious end of corporate offending”.

Brand-Rex LimitedThen, in September 2015, the Scottish authorities announced the first concluded enforcement action (in the form of a civil settlement) for a contravention of section 7 of the Bribery Act 2010 (corporate failure to prevent bribery by a third party). The settlement with Brand-Rex Limited (“Brand-Rex”) related to hospitality under an incentive scheme being misused by a distributor and was achieved after solicitors acting on behalf of Brand-Rex contacted the Crown Office (the Scottish prosecutor) to disclose the breach. Under the Crown Office’s self-reporting initiative, the case was deemed suitable for civil recovery settlement, rather than criminal prosecution. In terms of the settlement, £212,800 was recovered from Brand-Rex. This sum was based on the gross profit of the company related to the misuse of the incentive scheme.

Standard Bank PlcOn 30 November 2015 formal approval was given to the first Deferred Prosecution Agreement (DPA”). The DPA, between the SFO and Standard Bank Plc (now known as ICBC Standard Bank plc)(“Standard Bank”), follows Standard Bank’s indictment for failing to prevent bribery, in terms of section 7 of the Bribery Act 2010 – the same section at issue in the Brand-Rex civil settlement and in the Sweett Group case (see later). Under a DPA the indictment is immediately suspended for the duration of the DPA (three years in this case).

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The suspended charge related to a US$6 million payment by a former sister company of Standard Bank, Stanbic Bank Tanzania (“Stanbic Tanzania”), in March 2013 to a local partner in Tanzania, Enterprise Growth Market Advisors (“EGMA”). The US$6 million fee was paid into an account which EGMA had opened with Stanbic Tanzania. The SFO alleged that the payment was intended to induce members of the Government of Tanzania, to show favour to Stanbic Tanzania and Standard Bank’s proposal for a US$600 million private placement to be carried out on behalf of the Government of Tanzania. The placement generated transaction fees of US$8.4 million, shared by Stanbic Tanzania and Standard Bank. As a result of the DPA, Standard Bank will pay a financial penalty of some US$25 million, together with compensation of approximately US$7 million and a contribution to costs of £330,000. Standard Bank has also agreed to continue to cooperate fully with the SFO and to be subject to an independent review of its existing anti-bribery and corruption controls, policies and procedures regarding compliance with the Bribery Act 2010 and other applicable anti-corruption laws. It is also required to implement recommendations of the independent reviewer.

A significant landmark for the SFO, the Standard Bank DPA has been said to “serve as a template for future agreements”.

Of particular significance in determining whether a DPA was appropriate was the prompt self report to the SFO (within three weeks of Standard Bank’s head office being made aware of cash withdrawals from the EGMA account), the full disclosure of the internal investigating and the co-operation of Standard Bank. The sentencing judge noted: “Neither should it be thought 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...., I have no doubt that Standard Bank has far better served its shareholders, its customers, and its employees (as well as all those with whom it deals) by demonstrating its recognition of its serious failings...”.

The US authorities agreed to close their inquiries in return for Standard Bank entering into the DPA with the SFO.

Sweett Group PlcFinally, on 18 December 2015 Sweett Group plc (“Sweett Group”) pleaded guilty to an offence under Section 7(1) of the UK Bribery Act 2010 (failing to prevent an associated person bribing another to obtain or retain business for the company). The SFO commenced an investigation into Sweett Group in July 2014 in relation to its activities in the UAE and elsewhere. In the course of the company’s own subsequent investigations, two contracts within the Middle East, unrelated to the original allegations, were identified as suspicious and “were duly reported to the SFO” in December 2014.

The charge related to a sub-consultancy contract with North Property Management signed in 2013 through which Sweett Group’s subsidiary in the UAE, Cyril Sweett International Limited (“CSIL”), paid a bribe (in the form of monthly payments under the sub-contract), to secure a contract with Al Ain Ahlia Insurance Company to provide project management and cost consultancy services on a hotel construction project. There was no evidence that senior management at Sweett Group were aware of the purpose of the sub-contract prior to it being identified during its own internal investigations.

In sentencing the company on 18 February 2016 HHJ Beddoe determined that this was a Category A offence for reasons that included the bribery having occurred over a period of time, there being no systems to avoid bribery at the relevant time and concerns which were raised by KPMG in 2011 and 2014 in respect of weaknesses in the financial controls at CSIL were not implemented.

No compensation order was made in this case but a confiscation order of £851,152.23 was made. In determining the fine HHJ Beddoe applied a multiplier of 250% (at the lowest end of Category A and lower than the multiplier applied by the court in the DPA with Standard Bank) deeming this appropriate and within the means of the company.

Finally, in reaching the sentence a reduction in fine, of one third, for a guilty plea at the earliest opportunity was applied resulting in a fine of £1.4million payable in two instalments, the first by the end of February 2017 and the second by the end of February 2018.

So what can we take from these cases?

From an enforcement perspective:• Corporate self-reporting in the UK is increasing and it looks set

to develop as a trend, particularly as the sentencing Judge in the Standard Bank case observed that self-reporting was in the best interests of the company. Directors of a company who are faced with a decision on whether or not to self-report will need to consider the Judge’s comments when discharging their fiduciary duties.

• Self-reporting often takes place following an acquisition or a change of the senior management team.

• The US authorities appear ready to respect the UK DPA regime and global resolutions (which do not involve the US authorities taking additional action) are more achievable than they were prior to the introduction of DPAs.

• The SFO and the court expect early self-reporting and fulsome co-operation for a DPA to be appropriate. The SFO are currently taking a tough line on the level of co-operation that must be given including conducting its own inquiries and responding to compulsory notices for the provision of documents and electronic data in a short timescale. Self-reporting is therefore expensive and arduous. The SFO will need to be careful that self-reporting does not become so arduous that it is not a sufficiently attractive option.

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Financial Crime and Asset Recovery update

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• From a purely financial perspective a DPA is not any better than a fine following conviction. In fact, it may be more expensive. However, from a reputation perspective it may be the more attractive outcome.

• The Scottish self-reporting regime is different from the English regime. Completely out of court settlements are achievable under the Scottish regime. Scottish companies or overseas companies with operations in Scotland that are considering self-reporting should consider whether to report to the Scottish authorities rather than to the SFO.

From a compliance perspective:• All the cases have involved payments or benefits paid via an

agent, distributor or third party. Anti-bribery due diligence on intermediaries and introducers is essential.

• Cases involving bribery of foreign public officials are considered to be extremely seriously. There is a need for enhanced due diligence where a third party may engage with a foreign public official.

• ABC due diligence should seek to identify PEPs and potential conflicts of interest.

• It is important that companies are able to evidence the services provided by agents and consultants. Paying a consultant a significant commission for an introduction, in circumstances where no services appear to have been given, is viewed as highly suspicious.

• Corporate hospitality can be a form of bribery and particular care is needed with incentive schemes directed at a customer’s employees.

• Compliance reviews or audits by non-lawyers are not protected by privilege and may be used in evidence against a company. Compliance reviews are recommended by the Ministry of Justice’s guidance, the British Standard on anti-bribery management systems and a new draft International Standard. Before commencing a review companies should consider the application of legal professional privilege and the need to follow through on the recommended actions.

• In-house and external lawyers need to be alert to bribery red flags when preparing contracts for the engagement of agents, consultants or introducers and when advising on the lawfulness of particular arrangements. It was noted in the Standard Bank case that two in-house lawyers (including a secondee from an outside firm) were involved in documenting the arrangements that proved to be corrupt.

Civil fraud and asset recoveryA recent case before the High Court in England and Wales underlines the need to have a clear strategy from the outset if the English court is going to be used to assist in foreign proceedings on an ancillary basis. Here, the plaintiff had asked the Israeli courts to order the defendant to provide him with various documents detailing how certain trust assets had been managed. There was, however, no monetary claim. Ancillary to that action, the plaintiff had sought two injunctions preventing the defendant from disposing of his interest in assets in the British Virgin Islands, Caymen Islands and London.

The court refused. In his ruling Mr Justice Snowden said it was not in his power to grant the freezing order sought. This was because there was “no claim in the main proceedings which could give rise to any monetary judgment in favour of [the plaintiff] against [the defendant]; and hence there is no basis upon which I could grant a freezing injunction to prevent [the defendant] from dealing with his assets in order to ensure that assets remain to satisfy such a judgment”.

The case has implications for fraud cases where similar claims of breach of trust are often cited and demonstrates the need not only to have a clear strategy – in this case the plaintiff had not thought about how to protect the asset in dispute and the need to seek a monetary sum in the substantive proceedings – but also that parties in foreign proceedings should take advice from English experts before embarking on proceedings if they want to seek the English court’s discretion to grant freezing orders. That being said, when properly formulated the judgement allows freezing orders over assets that are ‘pragmatically’ still controlled by unscrupulous defendants, even if not actually owned – for example, the assets are owned by a company controlled by the defendant. However, evidence will need to be put to the court about the unscrupulous behaviour.

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Financial Crime and Asset Recovery update

Persons of Significant Control Regulations 2016We have reported before on the UK Government’s desire to increase transparency in both shareholding and property ownership, in an effort to combat, amongst other things, money laundering and tax evasion. The Small Business, Enterprise and Employment Act 2015 introduced a requirement (from 6th April 2016) for companies and limited liability partnerships (LLPs) not currently subject to certain existing disclosure requirements, to keep a register of individuals or legal entities that have “significant control” over them. From 30 June 2016 this information must be passed to the central public register at Companies House when making a confirmation statement. In addition, from 30 June 2016 those seeking to incorporate a new company or LLP will have to send to Companies House a statement of initial significant control alongside the other documents required for an application to incorporate.

In December 2015, draft guidance on the requirements was issued for consultation, which sets out, amongst other things, to help relevant organisations identify those with significant control. For companies, a person has significant control if they hold:

• more than 25% of the shares in the company, or• more than 25% of the voting rights in the company, or• the right to appoint or remove the majority of the board of

directors of the company, or• the right to exercise, or actually exercises significant control

or influence over the company, or• where a trust or firm would satisfy one of the conditions

above if it were an individual, any individual holding the right to exercise, or actually exercising, significant influence or control over that trust or firm.

Affected organisations must take reasonable steps to identify those with significant influence or control and (if they have not already done) should start doing so now. Failure to provide accurate information on the register and failure to comply with notices for information are criminal offences and may result in a fine and/or a prison sentence up to 2 years, not to mention the adverse publicity likely to flow too. It is expected that the draft guidance will be finalised shortly.

The UK Government had sought to extend the requirements for transparency to the British Overseas Territories, but met with considerable resistance to this, in particular from those with a strong financial services sector concerned that a requirement for a publically accessible register, without a similar global requirement on other territories, would place them at a disadvantage and simply move business away from them, including the very activities sought to stamp out. As a result, the UK Government and British Overseas Territories have agreed that the territories need only hold beneficial ownership information within the jurisdiction, ‘via central registers or similarly effective systems’. Moreover, the information will not be made accessible to the general public.

The matter is not at an end yet, however; the Fourth Money Laundering Directive must be implemented by 26th June 2017 and although the UK will have met most of its requirements by then some changes will still be required. For example, the requirement to hold details of beneficial ownership applies to trusts and other legal entities too and the information must be maintained constantly, rather than updated yearly as currently required. We will keep you posted.

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Financial Crime and Asset Recovery update

Renewed pressure to change the law of corporate criminal liability The fallout from the UK Government’s decision to drop plans to introduce a new offence of failing to prevent economic crime continues with commentators calling on the Government to think again. It will be recalled that last May, the Conservative party manifesto pledged to make it “a crime if companies fail to put in place measures to stop economic crime, such as tax evasion, in their organisations and [make] sure that the penalties are large enough to punish and deter”. Except in relation to tax evasion (and bribery which is already contained in legislation) that pledge was shelved with the now Conservative Government citing as its reason the fact that “there have been no prosecutions under the model Bribery Act and there is little evidence of corporate economic wrongdoing going unpunished”. Since then, of course, we have seen 3 section 7 cases (see above) – Brand-Rex, Standard Bank and the Sweett Group.

We have reported many times on SFO Director David Green’s wish to see the law in this area changed and in a recent interview with the Evening Standard, Mr Green renewed these calls for reform to make it easier to convict corporates, and particularly large corporates, as a matter of “public confidence”. Reiterating the difficulties faced by prosecutors here, who in order to secure a conviction have to “prove that the ‘controlling mind’ — usually the board of directors — was complicit in the criminality” – easy enough with small companies but well nigh impossible with large complex structures where email chains tend to “dry up” around middle management level, Mr Green suggested that introduction of US style vicarious liability could be an answer. In the US, in certain circumstances, an organisation can be held liable for the actions of its employees, giving far greater power to prosecutors.

“What is very bad and unfair and illogical is that because of our rules about the controlling mind it’s much easier to get a conviction of a very small company than it is of a huge company. That’s because at a small two-man outfit you know who the controlling minds are — those two men — whereas if you come after some enormous bank or vast international corporation then you have the identification problem. That is the illogicality. They are not being brought to justice.”

Clearly, the matter is not yet at an end and with the planned anti-corruption summit due to meet in London in May, there will undoubtedly be increased pressure brought to bear on the Government to act. As Mr Green said: “It’s hugely important that the public have confidence in the state agencies’ ability to prosecute the top tier of serious and complex fraud and bribery. Not only is it important as a matter of public confidence, it also makes London and the UK a safer place to do business, inspires more confidence and makes us a wealthier country.”

Watch this space.

Barry VitouPartner, Litigation & RegulatoryE: barry.vitou@pinsentmasons.comT: +44 (0)207 490 6501

Tom StockerPartner, Litigation & RegulatoryE: tom.stocker@pinsentmasons.comT: +44 (0)131 777 7362

Alan SheeleyPartner, Litigation & RegulatoryE: alan.sheeley@pinsentmasons.comT: +44 (0)207 054 2626

This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and theappropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate businesses for regulatory or other reasons. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. © Pinsent Masons LLP 2016. For a full list of our locations around the globe please visit our websites: www.pinsentmasons.com and www.Out-Law.com.

Issue 11, April 2016| WORLDWIDE |

Financial Crime and Asset Recovery update