The Serious Fraud Office (SFO) has successfully secured its first conviction under section 7 of the UK Bribery Act 2010 (the Act). On 19 February 2016, Sweett Group PLC (Sweett), a UK-based construction and professional services company, was convicted for the offence of failing to prevent its subsidiary Cyril Sweet International (CSI) from paying bribes on its behalf. The unlawful conduct took place over a three-year period from 2012 to 2015 in the United Arab Emirates. The SFO press release is available here.
Section 7 of the Act is widely known as the “corporate offence”. A relevant commercial organisation commits the offence where an “associated person” performing services on its behalf bribes another in order to obtain or retain business or a business advantage for the company.
The Sweett conviction comes hot on the heels of the first Deferred Prosecution Agreement (DPA), agreed between the SFO and ICBC Standard Bank Plc (the Bank) on 30 November 2015. We wrote in December that by entering into a DPA, no prosecution would be instigated against the Bank in that case. Since the Act came into force in 2011, the SFO has faced repeated criticism because of the lack of prosecution activity under the Act. However, and as we have been saying for some time, the lack of prosecution activity to date has more to do with the fact that the Act cannot be applied retrospectively to conduct prior to July 2011 rather than a lack of appetite of the SFO to enforce it. The Sweett conviction helps to demonstrate that the SFO is serious about enforcing the Act and pursuing unlawful acts of bribery wherever they may occur.
The conviction serves as an urgent reminder to UK organisations with subsidiaries or operations overseas that they can be liable for the acts of those performing services on their behalf. The conviction also illustrates the global reach that the Act has in relation to businesses that are incorporated in the UK or which carry on business in the UK.
Background to the conviction
The SFO commenced a formal investigation into Sweett on 14 July 2014. It found that Sweett’s Middle Eastern subsidiary, CSI, made corrupt payments to Khaled Al Badie, a senior board member of Al Ain Ahlia Insurance (AAAI), in order to secure a contract relating to the building of a £63 million hotel in Dubai. In establishing guilt against Sweett it was determined on the facts that CSI was an “associated person” under the Act and as such, the bribes to Khaled Al Badie were made with the intention of obtaining an advantage in the conduct of business for Sweett.
Having pleaded guilty to the charges, Sweett was convicted and sentenced in Southwark Crown Court to a financial penalty totalling £2.25 million. This figure comprised a £1.4 million fine, a confiscation order of £850,000 and an order for costs to the SFO of £95,000. Immediately following the conviction, Sweett’s share price value fell by 23 per cent. Sweett has since announced its decision to close its entire Middle Eastern operations.
The significance of section 7 and associated persons
Sweett’s case provides helpful guidance as to the courts’ approach in determining whether a subsidiary will be an “associated person” of its parent. An “associated person” is defined in section 8(1) of the Act as a person who performs services for or on behalf of the relevant commercial organisation. This inevitably includes an employee, an agent or, as here, a subsidiary company. However, the mere fact of a parent and subsidiary relationship is not sufficient to automatically conclude that the subsidiary is performing services for and on behalf of the parent. It requires analysis of all relevant features of the relationship. The subsidiary can be a distinct entity of itself undertaking wholly different operations from the parent company.
However, in the Sweett case, although CSI was a separate and distinct legal entity, it was operated by Sweett as a department forming part of Sweett’s Middle Eastern operation. Therefore it was not possible for Sweett to distance itself from CSI’s bribery which was established, and by virtue of the guilty plea accepted, as being for the benefit of Sweett. However, there was no indication that the CSI bribery took place with the knowledge or agreement of Sweett.
Did Sweett have adequate procedures?
The only defence available to an organisation facing a section 7 prosecution is to establish, on the balance of probabilities, that they had in place at the relevant time “adequate procedures” to prevent bribery.
Sweett was unable to rely on this defence owing to the inadequacy of the control framework over CSI’s activities. Accounting firm KPMG produced two reports in 2011 and 2014 both of which identified numerous weaknesses and failings in CSI’s anti-bribery systems and financial controls. These findings were not acted upon by either Sweett or CSI. CSI lacked policies or processes relating to the engagement of third parties and had done little to improve its internal governance since the Act came into force in 2011. However, the issue of adequacy was never tested by the court owing to Sweett’s admission that their procedures were inadequate.
As we have previously highlighted, where an organisation is facing a bribery investigation under the Act, it may be possible to avoid prosecution under a DPA. A DPA will generally only be entered into by the SFO and a prospective defendant where the organisation commits to full co-operation and transparency in its dealings with the SFO. A key element in the decision-making process for the SFO as to whether a DPA is appropriate is whether the organisation has self-reported the unlawful behaviour. The self-reporting does not guarantee protection from prosecution, but that, allied with full co-operation, means that it is much more likely that a DPA will be considered.
In Sweett’s case, no DPA was offered owing (in the SFO’s view) to a lack of full co-operation with their investigation. Rather than an open and frank discussion about the extent of their wrongdoing, during the investigation Sweett attempted to mislead the SFO by contacting AAAI and asking for a letter to substantiate that the bribes paid for the contract were in fact legitimate. This conduct was no doubt a significant influence in the SFO’s decision not to offer Sweett a DPA. This demonstrates that self-reporting alone will not be enough to secure a DPA and any organisation under investigation will need to be aware that their conduct, not only prior to the investigation, but also during it will remain under close scrutiny by the SFO.
What does this mean for businesses?
The Sweett case helps to highlight the importance of exercising oversight on all third parties (whether through a subsidiary, contractual or informal relationship) who are performing services for or on an organisation’s behalf. There is no room for complacency as the SFO, in addition to demonstrating its willingness to clamp down on bribery overseas, it has publicly stated that it has the financial resources available to take aggressive action under the Act.
It is imperative for all businesses to ensure they review their dealings with third parties and implement proactive measures to prevent bribery being committed on their behalf. They need to review how they engage with suppliers, promote sales to customers and appoint agents and distributers in order to minimise the potential risks of being engaged directly or indirectly in acts of bribery and corruption.
As we indicated in our previous article, robust anti-bribery policies and training practices should be in place for employees. Failure to implement effective policies and procedures exposes businesses to the risk of unlimited fines, up to 10 years’ imprisonment for individuals involved in acts of bribery together with associated reputational and commercial damage.
How we can help
At Walker Morris we have a specialist and dedicated Anti-Bribery and Corruption Team (which includes former regulators from the SFO and Financial Conduct Authority) with experience in advising both UK-based and overseas organisations on all aspects anti-bribery & corruption and the increasing challenges faced by businesses to ensure they are fully compliant with the Act. We can provide support advising on effective risk assessment, policy drafting, compliance, day-to-day operational support, audits, strategic transactional support, crisis management, investigations, prosecutions, compensation claims and training.