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28 February 2017 / by / in

Rolls Royce DPA: SFO, serious bite from the watchdog or a dilution of principles?

In January 2017 the engineering behemoth, Rolls-Royce entered into a Deferred Prosecution Agreement (DPA) with the Serious Fraud Office (SFO) in order to settle multinational bribery and corruption cases, with the agreement of the courts.

Additional parties to the agreement were the US Department of Justice (DOJ) and the Brazilian Federal Prosecution Office (MPF). The total amount Rolls Royce agreed to pay as part of the DPA was £671 million.

This included a disgorgement of the profits, a financial penalty and costs. The money is to be divided amongst the authorities with the UK receiving £497 million, the US receiving $170 million (£141 million) and Brazil receiving $26 million (£20 million). Additionally, £13 million will be paid directly towards the SFO’s costs. In view of their blockbuster budgetary arrangements the proportion of the £497 million that will find its way directly to the SFO’s budget remains a mystery.

Rolls Royce, which operates in over 150 countries, faced charges of conspiracy to corrupt, false accounting and failure to prevent bribery charges in respect of its overseas procurement practices. These activities are said to have taken place in Indonesia, India, China, Russia Thailand and Brazil through a network of intermediaries, over a period of more than a decade.

The DPA itself, aside from requiring that Rolls-Royce pays the above unprecedented sums over the course of the next 4 years, allows it to avoid prosecution by anti-corruption enforcement agencies in the US, UK and Brazil, for any behaviour mentioned within the agreement, provided it adheres  to the conditions imposed. The conditions include assistance with prosecuting the individuals involved in the behaviour, monitoring over the next 5 years and a rigorously timetabled reform in the company’s anti-bribery and corruption working practices and policies, involving periodic reports from Lord Gold and his team.

This was the third and some would say the most significant DPA that the SFO has entered into since their introduction under the Crime and Courts Act 2013. That significance extends not only to the financial terms of the agreement, but also to the way in which the parties came to conclude it.

The commercial benefits for any company entering into a DPA when facing such criminal allegations are clear.

The two previous DPAs made with ‘Standard Bank’ and ‘XYZ’ avoided giving the impression of paying off the prosecutor. This was because the companies involved self-reported before the prosecutor was alerted to the wrongdoing.  Until now this has been a seemingly essential step on the road towards eligibility for a DPA.  That was not strictly the case here.

It is acknowledged that Rolls-Royce became aware of the wrongdoing in 2010 and the incumbent board/senior management chose not to act. No report was made to the SFO and no internal investigation was begun.

Following this failure to self-report, the matter came to light after a whistle blower started an online blog in 2012 within which they raised their concerns about the company’s behaviour. This triggered an investigation by the SFO who contacted Rolls-Royce.

From that point onwards Rolls-Royce fully cooperated, conducting an internal investigation before formally self-reporting in 2013. It provided the content of that investigation to the SFO, making available over 30 million documents and allowing 229 interviews to be conducted on the issue.

Crucially, by the time of the SFO’s involvement, Rolls-Royce had made sweeping changes to its senior management structure, with those at the helm during the relevant period having been removed. By the time of the DPA, 38 employees had been through disciplinary procedures and many of those had left the company.

Understandably, the level of cooperation demonstrated has been described as ‘extraordinary’ within the judgment, which also notes that it brought to light additional conduct which otherwise may not have been exposed.

However, the fact remains that Rolls-Royce did not act until the SFO enquired.

This extraordinary cooperation not only made the DPA possible, it also earnt the company a 50% discount of the financial penalty imposed, rather than the third recommended. For once double counting that benefited the accused. This, in conjunction with the unique facts of the DPA in ‘XYZ’, may be seen as part of a continued effort to make the discount available under a DPA significantly more attractive than that of a standard guilty plea. Hopefully, making a DPA an even more inviting alternative to prosecution.

The agreement has been lauded as a ‘sea change on the SFO’s war on bribery and corruption’ by  Former FBI Deputy General Counsel, Lisa Osofsky and SFO director David Green believes “it shows very clearly that the SFO has teeth “. Whilst in many quarters there are whispers that the SFO are ‘playing with the big boys now’.

Some of that may well be true, but is there not also a potential policy flaw in the creation of this DPA?  Does the SFO’s willingness to proceed in this way, with the courts whole-hearted ratification, despite Rolls Royce only coming clean when discovered, require companies to be advised differently?

1.    Self-report, fully co-operate with the SFO in the hope that you will be offered a DPA.
2.    Don’t ask, don’t tell. (However, if you are found out, fire your board, hand over everything and agree to pay the SFO lots of money and you can still get a DPA).

A cynical view perhaps, but one worthy of consideration in the current climate, where Rolls-Royce’s investigation costs alone were £123 million, prior to the imposition of the £671 million DPA.

It could be said that Rolls-Royce chose to take option number 2 when their issues were internally discovered in 2010. A gamble that failed to pay off on this occasion, but they were nonetheless still able to obtain all the advantages of a DPA.

The significant share price bump on the day that the DPA was announced appears to symbolise the company’s successful navigation of the significant turbulence that they had been flying through.

Despite the clear warning of Sir Brian Leveson at the end of his judgment that the company who seeks to “..brazen out an investigation which commences; absent self-disclosure and full cooperation…..”  would face a “…. far greater disaster than has befallen Rolls Royce”, there is the suggestion that the aforementioned self-disclosure and full cooperation can now be made after the SFO has been alerted to the wrong doing.

Consequently, the SFO seem to have undermined their previous efforts and caused a dilution of the incentive for companies to self-report wrongdoing before the SFO becomes aware of it. Given the vast financial considerations involved this may just tip the scale enough to encourage some companies to gamble and choose not to self-report.

It remains to be seen whether this will set a trend or prove to be a pragmatic decision by the SFO in the particular circumstances of this case.

Finally, spare a thought for the senior executives and intermediaries accused of wrongdoing in this matter, the service of whose heads on a platter is effectively one of the conditions of the DPA.  Individual prosecutions will undoubtedly follow.

Carl Newman

Carl is a senior associate in our Business and White Collar Crime team. Carl regularly represents both companies and individuals in high value and high profile cases brought by the Serious Fraud Office (SFO), Financial Conduct Authority (FCA), National Crime Agency (NCA), HM Revenue & Customs (HMRC), the Crown Prosecution Service (CPS), NHS Counter Fraud and military investigation units.

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