Compliance, Rolls-Royce, and DPAs—what went wrong?

Legal commentators have rightly hailed the announcement of a deferred prosecution agreement (DPA) between the Serious Fraud Office (SFO) and Rolls-Royce as a huge victory for the SFO. It signals the arrival of the SFO in the “big league” of prosecuting regulators for financial misconduct and represents a truly devastating judgement against Rolls-Royce, which now has to account for criminal conduct in seven jurisdictions involving three business sectors over an almost 30-year period.

The judgement of Sir Brian Leveson, who made the judicial decision on the Rolls-Royce prosecution, provides a fascinating insight into some of the issues that will face other companies under investigation for fraud and how the courts may deal with those issues. It also offers an insight into the compliance strategies in place at Rolls-Royce and why they were so ineffective.

In paragraphs 25-29 of his judgement, Leveson recites what appears to be a truly impressive collection of anti-corruption policies at the company.

A code of business conduct was first issued in 1996 and there was a clear prohibition on the payment of any bribes. Additionally, a corporate department known as “Market Services” was responsible for the appointment procedure of agents/intermediaries, the process of conducting due diligence checks, and maintaining a list of company intermediaries.

In 1999, a policy was produced about the use of intermediaries and, in 2003, the policy was revised to specify that due diligence into those intermediaries was to be conducted by the Market Services department before they were engaged. This policy was further revised in 2004, 2005, and 2009.

In 2009, one of the big four accountancy firms conducted an anti-bribery and corruption review, resulting in a substantially revised compliance framework. In 2010, an even more detailed policy was introduced, and this came in the same year as the Bribery Act, which covered criminal law relating to bribery.

Following its success in the Rolls-Royce case, it is clear that the DPA will become an increasingly utilised tool in the U.K. judicial system. Indeed, the recent Tesco settlement shows that it will extend from bribery to other financial regulatory offences such as price fixing. More importantly, the SFO is making a clear statement of intent—that it is here to stay.

These policies no doubt fed into the assorted committees that existed at various times within the business, from the contract sub-committee all the way through to the ethics committee. Indeed, it was clear that the normal institutional hallmarks of a properly functioning compliance programme were in place.

Despite all this, quite possibly the greatest corruption scandal in U.K. corporate history still happened, which resulted in Rolls-Royce having to pay in excess of £500 million (U.S.$624M) in prosecution fines. “Why and how could this happen?” are the key questions haunting executives throughout the United Kingdom. But clues can be found in further analysis of Leveson’s judgment and the facts of the case.

Firstly, the extent of the allegations is laid bare. Leveson indicates in paragraph 4 of his judgment that these were “… the most serious breaches of criminal law in the field of bribery and corruption (some of which by the senior management, and on the face of it, the controlling mind of the company).”

In other words, it appears that some of the people in charge of Rolls-Royce at the time are implicated in this investigation. In case anyone missed the point, when considering whether Rolls-Royce should be prosecuted or subject to a DPA, Leveson then states in paragraph 61: “… My first reaction when first considering these papers was that if Rolls-Royce were not to be prosecuted in the context of egregious criminality over decades, involving countries around the world, making truly vast corrupt payments and, consequentially even greater profits, then it would be difficult to see when any company would be prosecuted.”

JUDGE’S CONCLUSION IN ROLLS-ROYCE

Below is the judge’s concluding remarks in the SFO vs. Rolls-Royce.

Although these proceedings have been required to validate a proposal and, then, a concluded agreement in relation to the investigation by the SFO into the activities of Rolls-Royce and RRESI, it is important to underline that the court has not acted merely to provide formal confirmation of that agreement. On the contrary, there has been robust challenge to the approach following a detailed analysis of the circumstances of the investigated offences, and an assessment of the financial penalties that would have been imposed had the indictment proceeded to trial and conviction. Neither have I assessed the position in a way that is identical to the approach adopted by the parties although I recognise that it has been important to stand back and assess, from an overall perspective, whether the terms of the DPA are both in the interests of justice and fair reasonable and proportionate.

Thus, as I have observed in relation to previous DPAs, there isno question of the parties having reached a private compromise without appropriate independent judicial consideration of the public interest: furthermore, publication of the relevant material now serves to permit public scrutiny of the circumstances and the agreement. Suffice to say that I am satisfied that the DPA fullyreflects the interests of the public in the prevention and deterrence of this type of crime.

Having said that, some of the remarks which I have made in the earlier cases involving DPAs justify repetition and expansion in the context of this case. Thus, in SFO v Standard Bank plc (30 November 2015), I made the point (at [66]) that it should not 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, investigation and provisional agreement to a DPA with the substantial compliance requirements and financial implications that follow. For my part, 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 and its determination in the future to adhere to the highest standards of banking. Such an approach can itself go a long way to repairing and, ultimately, enhancing its reputation and, in consequence, its business.

If that point was properly made in relation to Standard Bank plc, it is even more appropriate in relation to Rolls-Royce. I repeat that Rolls-Royce is an industry of central importance, with an engineering cap ability and capacity that is rightly the envy of all those involved in the field. Although the criminal behaviour which has been outlined in this case must rightly be condemned, its conduct since 2013 must be commended; its willingness to unearth and then accept what it has done, to learn and to start to build again will, I hope, generate support and (as with Standard Bank) better serve shareholders, customers, employees and those with whom it deals. Even more so than with Standard Bank, only in that way will it start to repair and, ultimately, enhance its reputation and, in consequence, its business.

I add one further points. It may be that there are other companies aware of its own past conduct similar to that in which Rolls Royce engaged. They cannot now change that fact, but those companies do have available to them a choice as to how they confront it. A responsible company will engage openly in the way that Rolls-Royce and so contribute to an increasing recognition of the vice that bribery and corruption constitutes and provide impetus to preventing businesses from operating in this way.

A cynic (or irresponsible company) might look at the costs which Rolls-Royce have incurred in their own investigation and wonder whether it be more sensible to keep quiet and hope that its conduct does not fall
under the eye of the authorities. Quite apart from the total failure to acknowledge the difference between right and wrong, that is to fail to understand that such an approach carries with it cataclysmic risks.

Whatever the costs Rolls-Royce have incurred, they are modest compared to the cost of seeking to brazen out an investigation which commences; absent self-disclosure and full co-operation, prosecution would requirethe attention of the company to be entirely focused on litigation at the expense of whatever business it is trying to conduct and conviction would almost inevitably spell a far greater disaster than has befallen Rolls-Royce.

It only remains for me to express my appreciation to counsel and those who instruct them on both sides for the very great care that they have taken in the presentation of this case, involving, as it has, considerable complexity and the need to focus on detail. Ensuring that all sides of the argument are properly reflected (as has been the case on both sides) has allowed this case to be concluded in a very much shorter time span than it otherwise would have required.

Source: Serious Fraud Office and Rolls-Royce plc

From these passages, it is easy to infer that the company’s bribery and corruption policies were simply window dressing, a tick-box exercise that is explicitly warned against in chapter seven of the Director’s Handbook. It appears that at Rolls-Royce, there existed a culture in which bribes were acceptable and senior management may have been actively involved in such activity. In that scenario, it is clearly not too difficult to circumvent compliance programmes. That is why, as Rolls-Royce now acknowledges, businesses should ensure that compliance is monitored by an external and independent individual. Clearly businesses will already have external auditors for accounts. However, whether those auditors would be equipped or have sufficient information to notice that the purpose of payments was in fact illicit is questionable. Hence the move to ensure that compliance is monitored externally.

Senior executives involved in the Rolls-Royce scandal will need to bear in mind that DPAs protect corporate entities. They do not protect individuals. Indeed, a term in the Rolls-Royce DPA is that the company must cooperate in relation to any investigation and prosecution of its former employees.
Many former executives at Rolls-Royce may be feeling the heat right now. There is a clear possibility that the SFO will still seek to prosecute individuals as a result of its investigation, and they will need to consider how to respond to these allegations.

Even though Leveson took great care to not identify individuals lest it be said that any future criminal trial was prejudiced, it could be argued that the tone of the judgment may still prejudice any future prosecution. There can be no doubt that such action is being considered. In any event, many former executives and employees of Rolls-Royce are going to be having sleepless nights for some time to come.

The legacy of the Rolls-Royce DPA is clear—the SFO isn’t stopping there. Just weeks after Leveson’s judgment, the regulator confirmed an investigation into bribery and corruption at the U.K. subsidiaries of another engineering company, ABB.

With undoubtedly renewed vigour, the SFO confirmed a £497.2m (U.S.$621M) DPA following its five-year investigation into the company’s business activities in China and Indonesia. Almost without drawing breath, and with costs of £13m (U.S.$16M) in the bank, the SFO swiftly moved on to its next case—part of its wider investigation into the Monaco-based oil company Unaoil.

It still may be some time before these agreements raise anywhere near the $2bn they do each year in the United States—the home of the DPA—but this case shows that the courts and, most importantly, the companies concerned are taking seriously the DPAs against them. Of course, the DPA only relates to corporates but should the SFO consider it in the public interest, it could still bring criminal charges against individuals.

Following its success in the Rolls-Royce case, it is clear that the DPA will become an increasingly utilised tool in the U.K. judicial system. Indeed, the recent Tesco settlement shows that it will extend from bribery to other financial regulatory offences such as price fixing. More importantly, the SFO is making a clear statement of intent—that it is here to stay.

Raj Chada is a criminal defence partner specialist in corruption at London law firm Hodge Jones & Allen, and author of the Directors Handbook on Bribery.

John Hartley is the head of serious fraud at London law firm Hodge Jones & Allen.

This article first appeared in Compliance Week, April 2017.