Business ethics and anti-corruption monthly update - September 2009

19 October 2009

Prosecutions, plea agreements and reduced sentences

UK: Mabey & Johnson first British company to be convicted in the UK of foreign bribery

Mabey & Johnson Ltd (the Company), a Berkshire-based manufacturer of bridge equipment, became the first major British company to be convicted of foreign bribery on Friday 25 September 2009. In August 2009, the Company pleaded guilty to two charges of corruption that occurred between 1993 and 2001 and one of breaching United Nations sanctions against Iraq between 2001 and 2002.

The Company agreed with the SFO that it would plead guilty and it is the first time the SFO has concluded such a US-style plea agreement for corruption. The agreement was endorsed by the court. The Company will now have to pay a total of £6.61 million, consisting of £4.6 million financial penalties, £1,415,000 compensation to the three affected countries (£658,000 to Ghana, £139,000 to Jamaica and £618,000 to Iraq via the United Nations Iraq Development Fund), the prosecution’s costs, and the cost of the independent monitor to oversee and report on its future conduct.

This is the first case to be heard after the publication in March 2009 of the new ‘Attorney General’s Guidelines for Plea Discussions in Cases of Serious or Complex Fraud’. In the absence of official sentencing guidelines, the court, in passing its sentence, took into account the parties’ plea discussion, the profitability of the company and the following mitigating factors:

• the Company’s early guilty plea;
• the Company’s co-operation and assistance with the SFO investigation, including voluntary disclosure of self-incriminating information;
• the fact that the indicted conducts related to the past and it had not been alleged that they relate to the present;
• the Company has taken remedial steps to limit the risk of further corrupt payments being made;
• the Company replaced its management after the corrupt acts came to light; and
• the newly appointed Board of Directors has taken significant steps at all levels of the business to reduce the occurrence of further corruption.

The SFO has stated that this case concludes its prosecution of the Company. It will however continue to pursue individuals involved in the Company’s corrupt conduct.

Companies and individuals should note the above mitigating factors as guidance when appealing for more lenient penalties if faced with corruption charges.

UK: SFO seeks Attorney General’s consent to prosecute BAE Systems

The SFO has announced it intends to seek the Attorney General’s consent to prosecute BAE Systems (the company), the defence manufacturer, for offences relating to weapons sales in Romania, the Czech Republic, Tanzania and South Africa during the 1970s until 2002.

It has been reported the company is hoping the SFO will restart talks with a view to it gaining a clearer understanding of the evidence against it. If that process succeeds the company might be willing to plead guilty to certain charges and begin talks about punishment. It is expected to refer to past financial penalties levied by the SFO when negotiating a potential fine and reportedly believes a range of previous fines of £6.6 million up to £19 million is relevant. According to reports, however, the SFO have reportedly indicated a fine of £200 million to £300 million would be suitable.

The company is concerned it could be exposed to legal action brought by its shareholders for failing to negotiate a lower fine in the plea bargaining process. It has so far denied any wrongdoing in the case. All companies facing corruption charges should be aware of potential exposure to shareholder actions.

UK: Immunity granted for cooperating with a fraud investigation

The SFO is investigating allegations of fraud and price fixing at retailer, Sports Direct (the company). It was called in by the Office of Fair Trading, which has been conducting an investigation since January 2009, having received information from JJB Sports, a rival of the company. The company could face an unlimited fine and individuals involved could be imprisoned for five years if the investigation leads to prosecution and conviction. JJB Sports has been granted immunity by promising to cooperate with the authorities. Companies generally could receive similar immunity and are encouraged to cooperate with the authorities where corrupt acts are suspected.

Korea: Cooperation with investigation considered at corruption sentencing

The Seoul District Court has sentenced Park Yeon-cha, the former CEO of shoemaker Taekwang, to three years and six months in prison, for his part in a corruption scandal that allegedly led to the death of the former Korean President, Roh Moo-hyun. Park was also fined 30 billion won on charges of evading taxes totalling 28.6 billion won and paying bribes totalling 4.5 billion won for improper influence.

Park’s cooperation in the investigation, past record in charity work and declining health were considered in determining the final sentence. Sentences were harsher in similar actions brought against people accused of taking bribes from Park, including imprisonment of up to ten years. This is another reminder to companies and individuals that cooperating with the authorities can lead to more lenient penalties.

Actions against individuals

Germany: Siemens offers settlements to former executive board members

Siemens, the engineering group (the company), has offered to negotiate settlements with seven former executives from whom it is seeking damages. The executives include former Siemens CEOs, Heinrich von Pierer and Klaus Kleinfeld, who is now CEO of the aluminium producer, Alcoa Limited.

Each executive has been accused by the company of failing to stop illegal practices and wide ranging bribery that involved €1.3 billion of suspected payments to officials around the world to win contracts. The company had to pay in excess of €2 billion in legal fees and fines paid to the US and German authorities. It will bring legal action against the executives if they fail to reach settlements by mid-November 2009.

The company recently settled with three former members of the management board who will each pay a reported €500,000. It will also receive up to €100 million from its management liability insurers in a settlement related to the executives’ failures. Shareholders threatened to sue the company if it did not claim damages.

Individuals with responsibilities for the management of companies should note that they too can face prosecution where corruption has occurred at a company, not only by the authorities, but also by their companies themselves.

France: Trader trial over alleged $7 billion fraud

Jerome Kerviel, the French trader at the bank Société Générale (the bank) accused of a multi-billion-dollar fraud, will go on trial at the Tribunal de Grande Instance in Paris in 2010. The bank holds Kerviel personally responsible for losses of more than $7.2 billion, despite Kerviel claiming he was not acting alone. Kerviel faces up to five years in prison and a fine of up to €375,000. Société Générale have stated they will ask Kerviel to reimburse almost €5 billion.

This is another example of how individuals suspected of creating company losses can face legal action by their company.

US Foreign Corrupt Practices Act exposure

First FCPA case brought against film producers

In the first FCPA case to be brought by the US Department of Justice (DoJ) against film producers, a jury has convicted two Hollywood producers, Gerald and Patricia Green, for paying, between 2002 and 2007, more than $1.8 million in bribes to the then Tourism Authority of Thailand, Governor Juthamas Siriwan, so they could manage the Bangkok Film Festival and secure two other contracts related to tourism valued at more than $13.5 million.

The Greens, a married couple, were convicted of conspiracy to violate the FCPA, eight counts of violating the FCPA and seven counts of money laundering. Patricia Green was found guilty on two counts of falsifying US tax returns related to the bribes. They could both face imprisonment of more than ten years when sentenced in December 2009.

As with any first conviction in a particular industry, where the enforcement authorities learn the ins and outs of the industry and know where the FCPA risks are, financial companies with connections to the film industry should note that it is likely this case will lead to further investigations and government scrutiny of business conducted by the film industry overseas. While this case involved the conviction of two individuals, the DoJ is just as likely to investigate parent and subsidiary companies that may be involved with bribery in the film industry.

Rio Tinto Shanghai corruption exposure

Stern Hu, head of Anglo-Australian mining company Rio Tinto’s Shanghai operations, and four other colleagues, have been accused and charged by the Chinese authorities with bribing up to 16 Chinese steel mills to purchase his company’s iron ore.

To the surprise of many, the charge, which Rio Tinto refutes, might also see related people investigated for FCPA violations. While Rio Tinto is listed in the UK and Australia, it has attracted the attention of the US authorities because it has American Depositary Receipts that trade on the New York Stock Exchange, so wide is the FCPA’s reach. This case serves as a reminder to all companies that actions by companies and individuals that are deemed to be corrupt and connected to the US may also see companies based in the US and their worldwide subsidiaries investigated by the US authorities under the provisions of the FCPA.

It has been reported that since the FCPA came into force in 1977, there have been eight reported violations of the FCPA in Greater China. There have been more investigations launched and fines and penalties issued against companies that do business in Asia. This trend looks set to continue. In 2003, six investigations were reportedly commenced, while in 2007 there were 38 new investigations. In the first half of 2009 alone, 19 enforcement actions were initiated.

Governance

France: BNP Paribas to close operations in uncooperative tax havens

French bank BNP Paribas (BNP) has announced plans to close its activities in tax havens that do not comply with international transparency criteria and listed on the OECD’s ‘grey’ list of uncooperative countries. BNP is France’s largest bank by market value with a number of subsidiaries in tax havens such as Panama, included on the list.

Other French banks could be expected to do the same, following French President Nicolas Sarkozy’s recent suggestion that France could ask its domestic banks to close their units based in countries that refuse to comply with the OECD criteria for fiscal transparency.

Korea: Probe into foreign defence firms may widen

It has been reported that an investigation into bribery cases allegedly involving foreign defence firms is widening to include a US defence firm, although the identity of the firm has not been released. The Korean Defence Security Command (the Command) is conducting a probe into Saab, the Swedish defence and aerospace company, which is suspected of having paid bribes of 300-500 million won to the president of the Security Management Institute, an advisory defence think tank at the Korean National Assembly, in exchange for classified information on a national fighter development project codenamed KF-X.

The probe of Saab seems to mark the beginning of a wider investigation into illegal lobbying activities in Korea by foreign companies and their agencies. Depending on the results of the ongoing Saab investigation, finance companies involved with defence acquisition projects should note that such projects could be affected.

International: Public-private relationships raise transparency concern

A Transparency International report covering corporate behaviour in areas from bribery to cartels, has highlighted how sophisticated types of corruption have been largely ignored during international efforts to clamp down on kickbacks paid by some companies to win contracts.

The report argues that attention must be given to targeting nepotism and corruption in private business transactions, as opposed to between companies and public officials. It says a poll of executives from countries in the OECD found that almost half reported winning business in non-OECD nations through personal relationships.

The report also raises concerns about the ‘precariously close’ nexus between private business and public institutions in a series of cases from Germany to Malaysia, adding that companies with political connections account for about 40 per cent of the stock market in Britain and as much as 80 per cent in Russia. It concludes that while businesses are ‘entitled to be heard in the political decision-making process’, there is a risk that powerful private sector players ‘capture policies and governments and profoundly thwart democratic decisions’.

Companies should note that while kickbacks have traditionally been the focus of enforcement authority investigations, it is likely other more sophisticated forms of corruption will become the focus of inquiries, such as illegal payments hidden in complex offset agreements (where a requirement is placed on a contractor to provide industrial, commercial or other economic benefits to a recipient country as compensation for the main contract to supply equipment or services).

International: Southeast Asia’s first anti-corruption declaration

More than 15 large corporations have signed Southeast Asia’s first declaration of commitment towards good business practices at the recent Governance and Anti-Corruption Conference in Singapore.

Siemens, the engineering company (the company) found guilty of using kickbacks to win contracts, is one of 17 signatories. It implemented new compliance standards following the scandal, helping it to regain market share and attracted the attention of other companies interested in importing their programme. The company has achieved a maximum rating of 100 this year on the Dow Jones Sustainability World Index which measures compliance and risk management.

Companies are reminded of the significance of implementing compliance programmes to ensure they do everything that can be reasonably expected of them to prevent corruption occurring in their everyday business practices.

The high costs of implementing such programmes may be a concern to small and medium size companies which face resource constraints. It has been suggested that this is where governments can provide assistance, providing funds to help develop ethics programmes, monitoring the ease of doing business, reviewing regulations and maintaining feedback channels for companies.

Acknowledgement

This article was first published by Complinet and is reproduced with their kind permission. Complinet is the leading provider of risk and compliance solutions to the global financial services community.