The recent Crown Court judgment in R v Innospec Limited may have disrupted the Serious Fraud Office’s goals of encouraging more companies to self-report overseas corruption and, where appropriate, enter into plea discussions and agreements.
The recent Crown Court judgment in R v Innospec Limited may have disrupted the Serious Fraud Office’s (SFO) goals of encouraging more companies to self-report overseas corruption and, where appropriate, enter into plea discussions and agreements ( EW Misc 7 (EWCC)).
The SFO’s fostering of corporate self-reporting has also been dealt a blow by the sentencing on 14 April 2010 of Robert John Dougall at Southwark Crown Court.
Conspiracy to corrupt
On 18 March 2010, Innospec Ltd, a UK subsidiary of Innospec Inc (a US NASDAQ listed company), pleaded guilty to a charge of conspiracy to corrupt. (On 8 April 2010, the Bribery Act 2010 received Royal Assent. When this Act comes into force (yet to be announced) it will introduce two completely new offences into UK law: a new corporate offence of bribery, and a new offence of bribing a public official (see “Bribery Act 2010: Royal Assent”, Bulletin, Company, this issue).)
Between February 2002 and December 2006, Innospec Ltd (through various agents) had engaged in systematic and large scale corruption of senior government officials of Indonesia, through bribes totalling approximately $8 million, to secure contracts for the supply of a fuel additive, Tetraethyl Lead (TEL). The bribes were aimed at blocking legislative moves to ban TEL due to environmental and public health concerns.
A global settlement
The US authorities commenced an investigation into Innospec Inc in 2005, and the SFO started an investigation into Innospec Ltd in May 2008. In September 2008, discussions began with the US prosecuting authorities with a view to achieving a "global settlement".
The judge commented that the level of fines and other penalties for this severity of corruption might have been more than $400 million in the US and $150 million in the UK. However, given the financial health of Innospec Inc and its subsidiaries, and in light of Innospec’s full admission and co-operation, the US and UK authorities agreed to a global settlement of approximately $40 million, of which Innospec Ltd would pay some $12.7 million (the settlement). This was the first case of a global settlement in respect of criminal proceedings in both the UK and the US.
The settlement was subject to approval by the US and UK courts. While the US courts approved the settlement, it proved more problematic in the UK.
Authority for settlements. The court clarified that, while the parties can put forward a joint submission on sentencing which can include the applicable sentencing range, the sentencing submissions should not include a specific sentence or an agreed range other than those set out in the sentencing guidelines or authorities: only the court can decide on the appropriate sentence.
While the SFO may discuss plea agreements with the defendant, it is in the interests of transparency and good governance, particularly in relation to the crime of corruption, for a court to scrutinise the basis of that plea rigorously in open court, and to see whether it reflects the public interest.
Tougher penalties. The court also made it clear that corruption of foreign government officials or foreign government ministers was at the "top end of serious corporate offending both in terms of culpability and harm".
The fine in the settlement was "inadequate". The starting point for the fine in Innospec should have been comparable to that imposed in the US, and should have been separate from, and in addition to, depriving Innospec Ltd of the benefits it obtained through its criminality.
Further, those who committed serious crimes of corruption of senior foreign government officials should not be treated in any way differently from other criminals; it would rarely be appropriate for criminal conduct by a company to be dealt with by means of a civil recovery order.
Upholding the settlement
While he made clear that the fine should have been in the "tens of millions" of pounds, Thomas LJ "reluctantly" allowed the value of the fine to remain as set out in the settlement. The judge made it clear that this was due to the unique circumstances of Innospec, and that his hands would not be tied in the same way in the future (see box “Reasons for keeping the fine”).
Despite the criticisms of the settlement, in particular, the level of the fine, Thomas LJ commended the SFO for adopting a "vigorous policy" of investigating corruption and other serious crime while simultaneously encouraging co-operation by companies and individuals in the investigation of such serious criminality and the provision of evidence against others.
Ramifications for self-reporting
It is clear that the SFO has increased its efforts to deal with overseas corruption and has shown a willingness to use all the tools at its disposal: both criminal prosecution and civil resolution.
The SFO’s own guidelines on self-reporting of overseas corruption (which were introduced in July 2009) advocate a more US-style approach, designed to encourage more companies to self-report by offering the potential incentive of a civil resolution.
The Innospec decision could, however, interfere with that approach. With the spectre of large US-level fines and the possibility of civil recovery orders becoming a rarity in corporate crime cases, companies will be extremely anxious about reporting such issues to the SFO. They will, of course, have to consider their legal obligations to report to the Serious Organised Crime Agency under the Proceeds of Crime Act 2002 to avoid the commission of a money laundering offence.
The encouragement of corporate self-reporting has also been affected by the decision of Southwark Crown Court in the case of Robert John Dougall. On 14 April 2010, Dougall, a former executive of Depuy International Limited (who pleaded guilty to involvement in corrupt payments of around $4.5 million to medical professionals within the Greek state healthcare system) was sentenced to 12 months’ imprisonment, in spite of the SFO’s recommendations of a suspended sentence due to Dougall having co-operated fully with the investigation. (The court has given Dougall leave to appeal the sentence, in recognition of the public interest issues raised by the case.)
The judgment in Innospec may also be relevant to the SFO’s proposed plea agreement with BAE Systems Plc, which has not yet received court approval (www.practicallaw.com/0-501-7689). This was in a state of limbo because of an interim injunction which prevented the SFO from seeking court approval of the plea agreement, pending a court decision on an application by pressure groups for judicial review of that agreement. On 8 April 2010, the groups announced that they were withdrawing their application for judicial review. As the injunction against the SFO has now expired, the SFO can proceed to seek court approval for the plea agreement.
Kerri Scott is an associate in the Litigation Division at Herbert Smith LLP.
Reasons for keeping the fine
Thomas LJ cited the following circumstances, unique to the case of R v Innospec Limited, as reasons for keeping the fine at the level agreed in the global settlement ( EW Misc 7 (EWCC)):
The US courts had already approved the settlement.
Innospec Ltd had pleaded guilty to all charges and had co-operated fully with the Serious Fraud Office’s investigation.
Innospec Ltd was unable to pay the level of fine that would ordinarily be imposed without entering into immediate insolvency. It would not be in the public interest for Innospec Ltd to cease trading, bearing in mind that the company had in place new systems and controls to prevent such corrupt activity in the future.
The details of the global settlement had already been announced to the markets.