SFO v Standard Bank: First UK Deferred Prosecution Agreement

7 12 2015

The director of the Serious Fraud Office (SFO), David Green QC, has overseen a turnaround in the ailing agency’s fortunes. Green is reportedly paid £175,000 annually and the press suggests he is likely to continue his role for another two years after his four-year term expires in April 2016. With successes such as the conviction of benchmark fraudster Tom Hayes (presently jailed in Lowdham Grange Prison) already under his belt, Green has his sights set on securing further convictions in other ongoing benchmark prosecutions. In Hayes’s appeal, Sir John Thomas LCJ has directed that a medical report should be filed by 9 December 2015. Hayes argued the Nuremberg defence and said that he was merely following orders. But he failed miserably in winning the jury’s sympathy and is a broken man. He suffers from Asperger’s syndrome and attention deficit hyperactivity disorder but that did not stop Sir Jeremy Cooke from sentencing him to 14 years’ imprisonment for his fraudulent ways. Of course, only recently the SFO also secured the UK’s first deferred prosecution agreement (DPA). In SFO v Standard Bank Plc, the president of the Queen’s Bench Division, Sir Brain Leveson approved the UK’s first DPA in a bribery case connected to a £397/$600 million sovereign note deal involving Tanzania.

Two things stand out about this case. It is the first example of a UK prosecutor entering into a DPA or a “plea deal”. Moreover, the situation was equally novel because it was the very first time that the offence of failing to prevent bribery – under section 7 of the Bribery Act – was used since its introduction in 2010. The government considers DPAs as a new and important enforcement tool to deal with corporate economic crime. DPAs came into existence in the UK by virtue of section 45 and schedule 17 of the Crime and Courts Act 2013. The present case turned on the Tanzanian government’s wish to raise funds by way of a sovereign note private placement. The bribe took place when, in March 2013, Standard Bank’s former sister firm Stanbic Bank Tanzania paid £4/$6 million to Enterprise Growth Market Advisers (EGMA). The SFO contended that the improper payment’s purpose was to induce a representative of the Tanzanian government to favour Standard Bank and Stanbic’s proposal for the sovereign note deal. Stanbic and Standard Bank shared the transaction fees of £5.6/$8.4 million that were generated by the placement. Because of failing to prevent the bribe, Standard Bank agreed to pay a £16.7/$25.2 million financial penalty. It will also pay £330,000/$497,600 in costs to the SFO and £4.6/$7 million in compensation to the Tanzanian government. Standard Bank is a former unit of South Africa’s Standard Bank, Africa’s largest bank by assets.

The unit is now known as the ICBC Standard Bank following its takeover by the world’s largest bank, i.e. the Industrial and Commercial Bank of China (ICBC). On 1 February 2015, ICBC acquired a 60 per cent controlling interest in Standard Bank from Standard Bank Group Limited (which retains a 40 per cent in Standard Bank). ICBC did not own shares in Standard Bank at the time of the events and it has no involvement in the facts in any way. The £16.7/$25.2 million penalty, payable to HM Treasury, is made up of a £11.1/$16.8 million financial penalty and a £5.6/$8.4 million disgorgement of profits. In a related deal, Standard Bank will also pay the US Security and Exchange Commission (SEC) £2.8/$4.2 million in order to resolve potential violations of America’s securities laws. Under the terms of the DPA, the SFO has suspended the prosecution and if conditions are met charges will be dropped after three years.

DPAs were introduced in early 2014 and enable prosecutors to suspend prosecution for an agreed period and then withdraw it. DPAs apply to organisations and not individuals. They can be used for fraud, bribery and other economic crime and are appropriate where it is not in the public interest to pursue a prosecution. Entering into a DPA is a transparent public event and the process requires supervision by a judge. The defendant company and the prosecutor cannot strike a private plea “deal” or “bargain” using a DPA. Rather, the mechanism merely allows a company to account for its misconduct to a criminal court and only has effect when a judge confirms in open court that the DPA is in the interests of justice and that its terms are fair, reasonable and proportionate.

In the present case, Sir Brain Leveson handed down two judgments, i.e. a preliminary ruling  and a full ruling, on 30 November 2015. In the latter judgment, at para 2, his Lordship explained:

In contra-distinction to the United States, a critical feature of the statutory scheme in the UK is the requirement that the court examine the proposed agreement in detail, decide whether the statutory conditions are satisfied and, if appropriate, approve the DPA.

Under the DPA, Standard Bank will also continue to cooperate with British and international authorities in any related investigation; the bank also agreed that it will engage PWC to independently review its procedures and ensure that the gaps identified are addressed. Before being taken over by ICBC, Standard Bank was fined £7.64/$11.5 million by the Financial Conduct Authority (FCA) in 2014 for failures related to enhanced due diligence measures; the bank’s due diligence was not consistent, it was inadequate to the task of establishing business relationships with corporate customers who were connected to politically exposed persons (PEPs). The FCA penalty did not debar the bank from the benefit of the DPA and the SFO was of the view that improvements made to conduct processes, policies and procedures mitigated in favour of entering into a DPA. Of course, the SFO has expressed its gratitude to the FCA, SEC, the Foreign and Commonwealth Office and US Department of Justice for their assistance in the resolution of this investigation and DPA.

However, by heralding these developments as a “template for future agreements”, the SFO is arguably using the case to erase its failures as an agency. Notably, the bank has onerously warranted that it will keep updating the SFO during the pendency of the three-year long DPA if it discovers further details of relevant misconduct linked to the alleged offences. So along with the continuing PWC inquiry, this element of the DPA will keep the bank’s future interlocked with the SFO and merely signing the DPA and paying the penalty will not be the end of the matter for the bank.

In order to benefit from a DPA, companies are expected to assist with the prosecution of other individuals, pay a fine or repay profits. Although Standard Bank maintains it takes “the risk of corruption very seriously” and has put measures in place to prevent repeating its failings, corporations genuinely self-reporting misconduct are not guaranteed that they will be offered a DPA. The defendant bank, which is mainly Africa focused but is subject to British regulation, alerted the SFO of the problem in April 2013 after finding evidence of misconduct and by doing so it seems to have saved time by avoiding a drawn out court procedure and the expenses that accompany it. Standard Bank has been praised for cooperating with the SFO “fully and honestly” and the court emphasised that the matter was quickly self-reported within three weeks. This is so despite the fact that the Serious and Organised Crime Agency (the National Crime Agency these days) was informed of the misconduct by Standard Bank’s solicitors before the bank contacted the SFO and this action may point to a mandatory reporting obligation pursuant to the Proceeds of Crime Act 2002 (POCA). If so, despite the mandatory requirement under POCA or requirements elsewhere within the regulatory perimeter, it was quite generous of the SFO to have credited Standard Bank for self-reporting the misconduct.

Apart from commissioning its own investigation and sharing the details with the SFO, Standard Bank provided the SFO with details of various email servers and CCTV footage in Africa, paper documents, recorded telephone conversations and employees’ inboxes and hard drives. Such an excessive level of disclosure indicates that companies wanting to enter into DPAs will have to commit themselves to a high degree of cooperation with the SFO.

Although no allegation of knowing participation in bribery had been levelled against Standard Bank or its employees, as seen above the case marks the SFO’s first successful use of section 7 of the 2010 Act, i.e. the offence of failure to prevent a bribe; third parties, or PEPs, sufficiently closely connected to the bank’s business committed a corruption offence. In his final ruling of 30 November, at para 21, Sir Brian Leveson – a legendary figure in the law perhaps best known for the historic Leveson Inquiry into the culture, practices and ethics of the press – observed in his concluding remarks:

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 role played by Standard Bank in respect of the raising in 2012-13 of US $600 million by the Government of Tanzania, it is important to emphasise that the court has assumed a pivotal role in the assessment of its terms. That has required a detailed analysis of the circumstances of the investigated offence, and an assessment of the financial penalties that would have been imposed had the Bank been convicted of an offence. In that way, there is no 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 fully reflects the interests of the public in the prevention and deterrence of this type of crime.

The present investigation into the misconduct remained behind closed doors until the DPA was announced on 26 November 2015. According to the SFO, another DPA is in the works and will be finalised by the end of the year. However, it is said that these two deals will not cause “any great avalanche” and the number of companies seeking to secure DPAs is unlikely to swell in the years to come. Symbolising “negotiated justice”, such deals are advantageous for corporate entities because of the diminished publicity that they offer in comparison to full-scale investigations and prosecutions.

On the other hand, while defendants do not have to admit wrongdoing, it is notable that the publicly published facts of the present case under the DPA stretched to 55 pages. The level of detail is significant because the court needs to be satisfied that the defendant company has a case to answer. To be sure, these proceedings will serve as a warning to entities wanting to enter into DPAs about the degree of information that needs to put in the public domain.

Briefly, the agreed facts in the case can be set out as follows. It was agreed that the relevant events took place in 2012 and 2013 prior to ICBC’s February 2015 acquisition of 60 per cent majority stake in Standard Bank. The deal to raise funds by way of a private placement of sovereign notes was jointly negotiated by Standard Bank and its former sister company Stanbic as the latter did not possess the relevant licenses to act alone. Both of them were then subsidiaries of Standard Bank Group Ltd, a publicly owned company registered in South Africa. Initially lethargic negotiations picked up pace when EGMA was introduced into the transaction by Stanbic’s employees. Transaction fees were increased from 1 per cent to 2.4 per cent and $6 million (or one per cent) was to be paid to EGMA for “services” the scope of which remained unclear. Standard Bank failed to carry out due diligence on the deal because it thought Stanbic was better placed to do so, Stanbic was paying EGMA and was in charge of the know your client (KYC) process. Quite egregiously, EMGA’s three directors and shareholders included the former CEO of Tanzania’s Capital Markets and Securities Authority and the Commissioner of the Tanzania Revenue Authority (an official of the Government of Tanzania). Only standard due diligence was conducted when EGMA opened a bank account with Stanbic. No information was provided on the KYC forms in relation to either the source of EGMA’s funds or the identities of those behind it. Even though the forms noted that EGMA was a “high risk” entity, an employee in London who reviewed the forms overlooked this designation. Standard Bank relied on Stanbic to pinpoint the bribery and corruption risks involved which the latter failed to do and the overall policy as regards introducers and consultants was unclear and training was poor. When EGMA’s “fee” – in reality an illicit kickback – of $6 million was paid into its account in Stanbic upon completion, most of the $6 million was withdrawn in cash over the course of ten days. Afterwards, Stanbic employees contacted Standard Bank and Standard Bank Group began an internal investigation within a week.

This case is an example that failures in due diligence in relation to third parties may result in the commission of the strict liability offence of failing to prevent bribery. Of course, banking groups will run much higher risks of introducing third parties into agreements/transactions in developing countries such as Tanzania and other high-risk jurisdictions in Africa and Asia.

Although the SFO accepted that a framework to deal with bribery and corruption existed within Standard Bank, the watchdog found that the employees of the bank were unsure about putting principles into practice to guarantee that their conduct was not compromised in a transaction where two members of a banking group had decided to introduce a third party into a deal. The case will serve as a reminder to banks that merely teaching on-line ethics and anti-bribery modules to employees is not a replacement for following proper procedure. Ultimately, there is no alternative to building a real culture where ambiguity and misconduct are not tolerated right from the outset. In relation to the anti-bribery and compliance mechanisms in place in the present case, it is apposite to invoke O’Brien, Gilligan, Roberts and McCormick’s recent conclusions on the volatile subject of professional standards in the finance sector. As the authors argue:

Ethical obligation was stated but not delivered. Deterrence was defective and ineffective. These cultures elevated technical compliance over substance.

As seen before on this blog, the SFO is also ploughing through the second LIBOR trial involving brokers (as opposed to submitters/traders) and has also issued the first criminal proceedings against 10 individuals accused of manipulating the Euro Interbank Offered Rate (EURIBOR). Interestingly, on 2 December 2015, the SFO also confirmed that Sweett Group plc has admitted an offence under section 7 of the Bribery Act 2010 in connection to misconduct in the Middle East. The opening of the investigation into Sweett Group plc in relation to its activities in the UAE and elsewhere had been announced by the SFO on 14 July 2014 and the first conviction under the 2010 Act will be formalised when the building and construction company pleads guilty in court at a future date.

Green inherited an ailing agency in 2012, one that was strewn with legacy problems. Prior to his arrival, under Richard Alderman’s directorship the SFO was considered to be a pragmatic dealmaker and Green vowed to bring an end to the culture of compromise. But in his speech in relation to the historic first DPA, Green somewhat ironically explained that:

This landmark DPA will serve as a template for future agreements. The judgment from Lord Justice Leveson provides very helpful guidance to those advising corporates. It also endorses the SFO’s contention that the DPA in this case was in the interests of justice and its terms fair, reasonable and proportionate. I applaud Standard Bank for their frankness with the SFO and their prompt and early engagement with us.

However, Ben Morgan, the SFO’s joint head of Bribery and Corruption said at the Managing Risk and Mitigating Litigation Conference 2015:

Every law firm we deal with tells us their corporate client is going to cooperate fully with our investigation. Only a percentage of them actually do, in our assessment. So, the message for you is, if your instructions to your external lawyers are to cooperate with us, make sure they are really doing that. Others are.

Under the DPA Code of Practice, entities entering into DPAs essentially accept that they will cooperate in probes into related offences and related defendants. In the present case, the defendant bank has offered itself on a plate to the SFO and wants to help in pinpointing both foreign and domestic misconduct of individuals and even development banks. It shows that the SFO and its director are keen to utilise DPAs in order to get large corporations to cooperate and smoke out any bad individuals out of their holes irrespective of the fact that such bad apples may even be outside the UK’s jurisdiction. To keep up his successes, the SFO’s director will be eager to achieve the first full conviction (of Sweett Group plc) under section 7 after having ended this case with a DPA.

In order to enter into a DPA the prosecutor must apply a two-stage test involving the evidential stage (which has two limbs) and the public interest stage. As regards the evidential threshold, the SFO said that on the admissible evidence there was at the very least a reasonable suspicion that Standard Bank committed the offence and reasonable grounds existed to believe that further admissible evidence favouring a conviction would come to light upon further investigation. Despite the extent of voluntary disclosure and the uncomplicated facts in the case, the SFO was not exactly full of confidence about securing a conviction.

Indeed, it failed to assert that it was in possession of sufficient evidence to generate a realistic prospect of conviction. In doing so, the fraud watchdog met the lower evidential threshold set out in the DPA Code of Practice (see at page 3) and did not rise to the challenge of meeting the first limb of the full code test laid down in the Code for Crown Prosecutors. However, perhaps it did not wish to encumber itself with the higher evidential threshold as the lower threshold sufficed in the instant case.

Unsurprisingly, in situations where misconduct is not as clear-cut as the present case, conflicts of interest may be thrown up in light of the approach between companies who are keen to seek the shelter offered by DPAs and employees who are individually exposed to criminal liability when employer companies wish to enter into DPAs. Since those who allegedly participated in bribery in the present case left the bank and the UK, the defendant (Standard Bank) seemed to have been unconcerned with conflicts of interest. But, of course, each case will turn on its own particular facts.

Bank employees will note that the statement of facts divulges the names and job titles of numerous Standard Bank and Stanbic employees. Indeed, jurisdictional issues and constraints aside, at para 128 the SFO is adamant that two former Stanbic employees based in Tanzania are guilty of bribery within the meaning of section 1 (offences of bribing another person) of the Bribery Act 2010. The facts disclose that the two besmirched individuals are Bashir Awale (the chief executive officer of Stanbic who held the official title of managing director) and Shose Sinare (who was at the relevant time acting head of corporate and investment banking).

In relation to Hayes’s ongoing appeal mentioned above, in a recent two-day fixture, his lawyer argued that his sentence was excessively long (see update here). Neil Hawes submitted that the overhauling of the criminal law was so significant there was no point making an example of Hayes to stop other traders from offending in the fashion that he did. Hawes equally argued that during Hayes’s trial, the SFO failed to identify any counter-parties who had lost out as a result of the rogue trader’s activities in the market. Fines of £6/$9 billion have been paid for the LIBOR scandal; market abuse that finally got dragged out into the open a few years ago because of the global financial crisis. Hawes also argued that the similar nature of Hayes’s offences meant that the prison sentences imposed on him should run concurrently and not consecutively.


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