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UK Bribery Digest Fraud Investigation & Dispute Services Edition 5 July 2014

UK Bribery Digest Ernst & Young LLP - EY - United States UK firm Ernst & Young LLP is a limited liability partnership ... UK Bribery Digest ... 1 As we report only on completed cases

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Page 1: UK Bribery Digest Ernst & Young LLP - EY - United States UK firm Ernst & Young LLP is a limited liability partnership ... UK Bribery Digest ... 1 As we report only on completed cases

UK Bribery DigestFraud Investigation & Dispute Services

Edition 5 July 2014

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confi dence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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2 UK Bribery Digest Fraud Investigation & Dispute Services

This edition incorporates the case write-ups for the fi rst half of 2014, together with our summary table of cases since 2008.

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2 UK Bribery Digest Fraud Investigation & Dispute Services

This edition incorporates the case write-ups for the fi rst half of 2014, together with our summary table of cases since 2008.

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3UK Bribery Digest Fraud Investigation & Dispute Services

Contents 4 Introduction

5 Cases in the first half of 2014

10 LIBOR scandals and corruption

11 Why is the UK’s ability to tackle bribery and economic crime being questioned?

14 Has the Bribery Act had an impact on the UK’s competitive position?

18 Abbreviations

18 Contacts

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Introduction

Welcome to this Fifth Edition of our UK Bribery Digest. There are fi ve new cases to comment on in the fi rst half of 2014. The FCA continues to be active in anti-corruption matters. We report on one further enforcement action by the FCA in this area in the fi rst half of 2014. We also highlight comments on corrupt transactions the FCA felt necessary to report on in its Final Notices concerning its LIBOR manipulation enforcement actions.

We noted in the last Bribery Digest that the Serious Fraud Offi ce (the SFO), the body principally responsible for the enforcement of anti-corruption laws in the UK, has stated it has several matters in development, both under the Bribery Act and the old legislation. The SFO has indeed brought charges of corruption in three cases and has announced what should be two signifi cantly sized investigations, but none of these has yet come through to completion. In June 2014, the SFO completed the prosecution of the directors of Innospec Limited, but this is a matter that dates back to 2008. The SFO has therefore not completed a “new” corruption prosecution since July 2012.

This perceived low level of prosecutions has almost certainly been a contributing factor to the recent Downing Street order for a wide-ranging review of the UK’s ability to tackle bribery and white-collar crime. Ken Clarke, one of the main backers of the review, has stated that: “We want to be satisfi ed that we are among the countries with the highest standards in the world because it enforces the reputation of the City of London …” In a similar vein, Theresa May, the Home Secretary has suggested that for too long the UK has not taken economic crime seriously and signalled her intention to boost anti-corruption efforts.

In response to this, we wrote for one of the legal journals a brief overview of the current anti-corruption landscape and recent developments. This overview is reproduced in this edition of the Bribery Digest.

The push for more enforcement, which appears to be a clear sub-text of the call for the wide-ranging review, is likely to reignite debate during the passage of the Bribery Bill that an effective anti-corruption regime would prove uncompetitive for UK plc. We have performed analysis that seeks to identify any discernible impact on the UK’s exports and direct investment (inward and outward), which is also included in the edition of the Bribery Digest.

One refl ection from our client work in the anti-corruption area in the fi rst half of this year is that we continue to be approached by businesses, including large businesses, that are still in the early stages of building out their corruption risk management systems. We suspect that there are many businesses that remain at this early stage, even three years after the coming into force of the Bribery Act.

We hope you fi nd this new edition of the Bribery Digest useful and informative.

Jonathan MiddupPartner, UK Head of Anti-Bribery and Corruption

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5UK Bribery Digest Fraud Investigation & Dispute Services

Cases in the fi rst half of 2014

36. Former directors of Innospec Limited (June 2014)

June 2014 saw the completion of the conviction of a number of former Innospec Limited Directors. The company itself had been found guilty in March 2010 of conspiracy to corrupt (see Case 7). There followed actions against individual directors which have proceeded as follows1:

• Dennis Kerrison (former CEO) and Miltiades Papachristos (former Regional Sales Director for Asia Pacifi c) : June 2014

• Paul Jennings (former CEO): June/July 2012

• David Turner (former Sales and Marketing Director): January 2012

These former directors were found guilty of involvement in agreeing corrupt payments to public offi cials and agents of the Government of Indonesia between 2002 and 2008 as rewards for securing contracts with the government for the supply of TEL, a leaded fuel additive.

Dennis Kerrison was sentenced to four years imprisonment, Paul Jennings to two years imprisonment and Miltiades Papachristos to 18 months imprisonment. David Turner received a 16 month suspended sentence in return for his cooperation with authorities, otherwise the judge stated he would have gone to prison.

This is the fi rst contested case for overseas corruption handled by the SFO.

We comment as follows:

• These prosecutions are notable for their cross-border co-operation between the law enforcement agencies, involving the SFO, CoLP and Cheshire Constabulary in the UK, the DoJ and SEC in the US, the Corruption Eradication Commission in Indonesia and the Swiss and Singaporean authorities.

• The case provides a clear example of the social impact of corruption. TEL is a dangerous compound, banned in the UK for many years for its environmentally damaging effects (it was linked to severe neurological damage). The bribery scheme of the former Innospec directors prolonged the use of this chemical in Indonesia and ran counter to offi cial government policy to ban it.

• The Innospec Limited investigation by the SFO commenced in 2008 and has therefore taken six years to reach its outcome, while the underlying transactions date back to as early as 2002 — an indication of just how long these cases may occupy the lives of those involved.

“Corruption in this company was endemic, institutionalised and ingrained… but despite being a separate legal entity it is not an automated machine; decisions are made by human minds. None of these defendants would consider themselves in the same category as common criminals who commit crimes of dishonesty or violence….. but the real harm lies in the effect on public life, the effect on community and in particular with this corruption, its effect on the environment. If a company registered or based in the UK engages in bribery of foreign offi cials it tarnishes the reputation of this country in the international arena.”

Comments of HHJ Goymer in sentencing the former directors of Innospec Limited

1 As we report only on completed cases in the Bribery Digest and as sentencing of all four ex-directors awaited the completion of the contested cases, we are only now reporting on these four prosecutions.

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6 UK Bribery Digest Fraud Investigation & Dispute Services

Cases in the fi rst half of 2014 continued…

35. Chann Sankaran, Krishna Ganeshan and Michael Boateng (June 2014)

At a time when, stimulated by the World Cup, rumours of corruption at much higher levels in international soccer were getting plenty of air time, a “lower division” prosecution was completed in the UK.

The judge found that Sankaran and Ganeshan had come to the UK in November 2013 solely to visit clubs to fi nd soccer players they could corrupt and targeted lower division clubs because it was cheaper to bribe players on modest wages. Boateng, the former Bristol Rovers and Whitehawk FC defender, was lured into their scheme by Sankaram’s pretence of being an agent for a Finnish club through a front company Matchworld Sports Limited. The judge warned clubs at all levels need to be vigilant of the risk of match fi xing (although no actual match fi xing was proven in this case), motivated by manipulating betting.

We comment as follows:

• This is not the fi rst UK prosecution for match fi xing (see Case 21) but it is the fi rst in the sport of soccer.

• As with Case 21, which was in the world of cricket, the prosecution has its origins in a newspaper investigation, with the fi ndings handed over to the NCA. Both the newspaper and the NCA used covert recordings, including those of meetings set up to discuss supposed match fi xes as an investigative tool.

• The severity of the sentences (fi ve years each for Sankaran and Ganeshan) in the light of the modest amounts involved (the NCA undercover agent handed over €60,000 to them and Boateng appears to have received only €450) again underlines the judiciary’s view that bribery is a serious offence. The judge had a view to the importance of soccer and sport in UK national life in assessing the seriousness of the offence.

• The prosecution for conspiracy to corrupt rather than under the Bribery Act presumably refl ects the nature of the evidence available to the NCA.

• The NCA has other enquiries in this area in progress and further prosecutions might be expected.

Older readers may perhaps recall a parallel with Peter Swan of Sheffi eld Wednesday who was banned for life from professional soccer (although the ban was later lifted) and received a four year jail sentence for his involvement in a betting scam, also disclosed by a newspaper investigation. He, together with two other players, bet on Sheffi eld Wednesday to lose a match against Ipswich Town in 1962. Refl ecting on this in 2006, he was of the opinion that Sheffi eld Wednesday proved quite able to lose the game fair and square, but, if it had been required, he would have given away a penalty or even scored an own goal. It is believed the ban kept him out of the victorious England World Cup team of 1966. He had missed the previous World Cup in Chile because of dysentery. His fortune changed upon his return to professional soccer in 1972 when he scored his fi rst professional goal, for Bury against Torquay United.

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7UK Bribery Digest Fraud Investigation & Dispute Services

34. Besso Limited (March 2014)

The FCA fi ned Besso Limited (“Besso”), a medium-sized general insurance broker, £315,000 (reduced from £450,000 for early settlement) for operating between 2005 and 2011 with “a weak control environment surrounding the sharing of commissions with third parties which gave rise to an unacceptable risk that they could be used for corrupt purposes”.

The case echoes three earlier FCA actions dating back as far as 2009, against JLT Specialty Limited (see case 31), Willis (see case 18) and Aon (see case 4).

The FCA’s list of Besso’s particular failings has many familiar features to it:

• Bribery and corruption policies and procedures that were not adequate in their content or implementation.

• Failure to conduct an adequate risk assessment of third parties before entering into business relationships.

• Not carrying out adequate due diligence on third parties to evaluate the risks involved in doing business with them.

• Failure to establish and record an adequate commercial rationale to support payments to third parties.

• Failure to review relationships with third parties, in suffi cient detail and on a regular basis, to confi rm that it was still appropriate to continue with the business relationship.

• Not adequately monitoring its staff to ensure that each time it engaged a third party an adequate commercial rationale had been recorded and that suffi cient due diligence had been carried out.

• Failure to maintain adequate records of the anti-bribery and corruption measures taken on its third party account fi les.

The FCA noted that Besso did not, overall, operate in a sector of the market (wholesale general insurance) or in countries with high corruption risk. Nonetheless, its anti-bribery and corruption systems and controls were inadequate even for that relatively low level of risk.

The FCA also noted that Besso had received in January 2012 the report of a review by solicitors on its anti-bribery and corruption systems and controls. While Besso promptly implemented some of the improvements set out in that report, it is to be inferred that either Besso did not action all of the recommendations in that report or that the report’s recommendations were not suffi ciently comprehensive.

We make the following comments:

• This is a further example of the FCA’s pro-active enforcement — the FCA does not seek to prove bribery offences, only that control weaknesses may be conducive to bribery offences. These actions are on the basis of breaches of Principle 3 of the FCA’s Principles of business2.

• The FCA noted that Besso had not responded to “numerous industry wide warnings” about the need for adequate corruption risk management systems.

• Businesses in low risk environments are nonetheless required to have anti-bribery and corruption systems and controls adequate for that relatively lower level of risk.

• The FCA’s purview includes pre-Bribery Act activities. The FCA cited Besso’s insuffi cient bribery and corruption policies and procedures between January 2005 and October 2009. The Bribery Act came into effect in July 2011. There were anti-corruption laws in place prior to that date, but they were not actively enforced until 2008.

• The FCA expects regulated fi rms to respond promptly and appropriately to its inspections, “Dear CEO” letters, thematic review fi ndings and to the fi ndings of actions against other member fi rms.

• As usual in the FCA’s Final Notices, the detailed fi ndings serve as a rich source of guidance for the improvement anti-bribery and corruption systems and controls.

2 Proof of breach of Principle 3 in the context of bribery risk management, does not require the FCA to be able to prove actual corrupt transactions e.g. payment of bribes. There was no evidence that Besso Limited had entered into any illicit payments or inducements; nor was it found that the breaches were intentional or reckless; nor was it found that Besso Limited gained any fi nancial benefi t from the breaches or caused any loss.

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8 UK Bribery Digest Fraud Investigation & Dispute Services

33. Constantin Medien AG v Ecclestone and others (February 2014)

This civil case received wide publicity because of those involved. While the Claimant’s claims failed, the judge did fi nd that the transaction that was core to this matter –payments totalling US$44 million by Mr Ecclestone to Mr Gribowsky in 2006 and 2007 — comprised a bribe and part of a corrupt scheme under which Mr Gribowsky was to be rewarded for facilitating the sale of shares owned by Mr Gribowsky’s then employer (BLB) in the Formula One group to a buyer acceptable to Mr Ecclestone, as the Claimant alleged. The Claimant had also unsuccessfully alleged that the shares has been sold at an undervalue, thus depriving it of overage payments had the shares been sold for more than a specifi ed sum. In June 2012, Mr Gribowsky had been sentenced by the German criminal court to seven years and nine months imprisonment for the corruption offence.

32. Otkritie International Investment Management Ltd and others v Urumov (also known as George Urumov) and others (February 2014)

The Otkritie Group is a Russian business group involved in commercial and investment banking, including brokerage and asset management, with an offi ce and a regulated entity (Otkritie Securities) in London.

The allegations (and counter-allegations) in this civil case were wide-ranging and included, in addition to bribery3, alleged dishonesty, deceit, conspiracy, fraud, misrepresentation, forgery, blackmail, money-laundering, false impersonation, intimidation, entrapment, subterfuge, kidnap and even murder. As the judge noted in his Judgment: “In many senses, this trial has been extraordinary...Anyone sitting in court listening to the evidence and the parties’ respective submissions might have been forgiven for supposing that they were in the Old Bailey rather than in the Commercial Court sitting in the Rolls Building.”

At the heart of the case were two discrete frauds, referred to as the Sign-On Fraud and the Argentinean Warrants Fraud. In brief, the judge found certain of the defendants in principle liable for variously as much as US$23 million in respect of the Sign-On Fraud and US$151 million in respect of the Argentinean Warrants Fraud.

Cases in the fi rst half of 2014 continued…

3 The Bribery Digest includes civil cases involving fi ndings of substantial bribery; we do not seek to include all civil cases with an element of bribery.

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9UK Bribery Digest Fraud Investigation & Dispute Services

The Sign-On Fraud concerns the circumstances in which Mr Urumov came to be employed by Otkritie Securities. Mr Urumov and four other securities traders from within his team joined Otkritie Securities on payment of a “golden hello” of some US$25m. The Claimants asserted that this amount was paid in reliance upon various representations by Mr Urumov, signifi cantly that each of those fi ve individuals had a guaranteed income of US$5 million per annum at the employer they were about to leave and the “golden hello” would be shared equally between them. The Claimants asserted that Mr Urumov in fact personally received about US$8m and that most of the remainder was used by him to pay substantial bribes or kickbacks (some US$12 million in total, paid in part under the guise of a sham consultancy agreement with a Panamanian shell company) to two senior employees of the Otkritie Group for their part in lobbying for his recruitment by Otkritie Securities. Mr Urumov and one of the recipients of the bribes were found liable on the basis of, variously, the tort of bribery and/or dishonest assistance, conspiracy and breach of fi duciary duty.

The Argentinean Warrants Fraud, in which Mr Urumov had a key role, concerns one particular deal whereby Otkritie Securities was deceived into purchasing some 1.65 billion Argentine GDP peso (ARS) denominated warrants for a total of about US$213 million when in fact the warrants were in fact worth only about US$63 million — an overpayment of some US$150m.

We comment as follows:

• This case serves as reminder that substantial bribery may be remediated through the civil courts.

• Bribery may be an integral element of wider fraud schemes.

• As noted, several of the FCA Notices concerning the LIBOR manipulation cases comment on the contributing factor of business culture to the misconduct. The FCA comment, in summary, that a focus purely on fi nancial performance/ bonuses/ incentives and the related reporting is not suffi cient and is not conducive to a compliant culture. It is noteworthy that in this case too, the judge refers to submissions that: “Bankers, it should be uncontroversial and to put it mildly, are predominantly motivated by their bonus arrangements.”

“When Odysseus penetrated the underworld, he encountered, among many other ghosts, that of Eriphyle whom Homer (Od. 11.326) calls ‘hateful’ because she had been bribed by Polyneices with Aphrodite’s golden necklace to reveal the whereabouts of her husband, so that he could be found and compelled to march on Thebes where he foresaw he would be killed. This may or may not be the fi rst recorded instance of a successful bribe but, centuries later, bribery is still prevalent and pervasive however much legislators and judges try to stamp it out.

From the Judgment of Lord Justice Longmore, Lord Justice Moore-Bick and Lord Justice Lewison in Novoship (UK) Ltd and others v Nikitin and others (July 2014)

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LIBOR scandals and corruption

Between June 2012 and May 2014 the FCA issued Final Notices involving six separate regulated fi rms, variously fi ning them between £3.6 million and £200 million (prior to discounts e.g. for early settlement) for the involvement in the manipulation of LIBOR and, in one case, EURIBOR, rates of certain of their traders and brokers. In respect of these activities, these entities were found to be in breach of:

• Principle 5 of the FCA’s Principles for Businesses, by failing to observe proper standards of market conduct.

• Principle 3 of the FCA’s Principles for Businesses, by failing to take reasonable care to organise and control these affairs responsibly and effectively, with adequate risk management systems.

• In two cases, Principle 2 of the FCA’s Principles for Businesses, by failing to conduct its business with due skill, care and diligence (more specifi cally either submitting an inaccurate attestation to the FCA in respect of Principle 3 or its own compliance function failing to follow up when issues were raised internally in respect of LIBOR submissions).

In four of these six cases, the FCA highlights in its Final Notice what it describes as corrupt transactions. As these corrupt transactions are not, on our reading of the Final Notices, central to the FCA’s fi ndings of breaches of Principles 3 and 5 of its Principles for Businesses, we do not include these cases in the digest of cases, but we consider them worthy of note in this overview as a reminder that corrupt payments may be a feature of broader unethical schemes.

The corrupt transactions described by the FCA are of two types:

• “Wash trades” (risk free trades that cancelled each other out and which had no legitimate commercial rationale) in order to facilitate corrupt brokerage payments as a reward for the party making the manipulated LIBOR/EURIBOR submissions to Panel Banks. Corrupt fees of this nature totalling £258,151 (9 wash trades) were identifi ed in one case, £170,000 (9 wash trades) in another case and £211,000 (25 wash trades) in another case. Other brokers were usually required to facilitate the wash trades and did so in return for offers of entertainment.

• Corrupt quarterly retainers for “fi xing services” paid to brokers making the manipulated LIBOR/EURIBOR submissions of £90,000 in one case and £50,000 in another case.

We make the following comments:

• The corrupt transactions described by the FCA illustrate that bribes may be concealed in quite sophisticated ways, especially where the underlying transactions are themselves complex.

• All six cases involved failures to put in place adequate risk management systems, which the FCA found meant that the misconduct went undetected and continued unabated throughout the period under review. While the FCA did not conclude that the fi rms it fi ned engaged in deliberate misconduct as a fi rm, the fi rms were responsible for the systems and controls failings. The fi rms were therefore in effect held responsible for the conduct of its brokers by way of its systems and controls failings — the equivalent of a Section 7 offence under the Bribery Act.

• Several of these FCA Notices comment on the business culture as a contributing factor in the misconduct. The FCA comment, in summary, that a focus purely on fi nancial performance/ bonuses/ incentives and the related reporting is not suffi cient and is not conducive to a compliant culture. Rather, it creates a culture in which compliance is seen as a hindrance to be got around: in one case the FCA noted that the compliance team had “nothing to do with that front offi ce”.

• Inadequate transaction monitoring and inadequate management information was highlighted in several of the Final Notices. The FCA comments that such monitoring almost certainly would have detected the wash trades that were part of the LIBOR misconduct (they would be readily detectable because of their size, because the trades were executed on the same day, in the same amount, between the same counterparties and effectively cancelled each other out, and because they were often executed on dates close to the calculation of desk revenue for bonus purposes). The FCA also note that this failure was not always due to an absence of systems: the fi rms in case had electronic monitoring systems capable of generating various reports to fl ag large or unusual trades but failed to ensure that these daily desk reports were regularly produced and monitored. As such, the FCA’s adverse fi ndings appear to reveal a root cause of lack of effort to create a compliant culture.

• While these fi rms may appear to operate in a rather esoteric area of business, the FCA’s fi ndings are, in our experience, equally applicable to and transferable to many other types of business.

“Firms must play their part in preserving the integrity of the UK fi nancial system, including taking all steps necessary to prevent fi nancial crime. Where we fi nd fi rms failing to do so, we will take action.”

Tracey McDermott, the FCA’s director of enforcement and fi nancial crime

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Why is the UK’s ability to tackle bribery and economic crime being questioned?

In mid-June Downing Street ordered a wide-ranging review of the UK’s ability to tackle bribery and white-collar crime in response to a number of recent scandals. Ken Clarke, one of the main backers of the review, has stated that: “We want to be satisfi ed that we are among the countries with the highest standards in the world because it enforces the reputation of the City of London …” In a similar vein, Theresa May, the Home Secretary has suggested that for too long the UK has not taken economic crime seriously and signalled her intention to boost anti-corruption, emphasising that organised criminals often depend on bribery and corruption.

It is perhaps ironic that such comments are justifi ed so shortly after the UK introduced what has been commonly described as the “gold standard” anti-corruption law in the form of the Bribery Act. The funding and structure of the enforcement regime, together with the scope and nature of the legal remedies, have been called into question. There is a lack of clarity and certainty that needs to be rectifi ed. This naturally requires time — most notably for the case law that will enlighten our understanding of the Bribery Act — but changes in the enforcement regime will set the pace of this change.

So what are the areas that need to be addressed by this review?

Funding

The annual budget of the SFO has been progressively reduced; its payroll spend is now about £20 million per annum. This might be compared with the annual wage bill of Chelsea Football Club of £176 million for the season just ended. This is of course a mischievous comparison that is inappropriate in many ways, but at the same time it provides a context and underlies the key point: if you want the best talent in enforcement to stand up to clever fraudsters in the City and a strong squad to back them up, then be prepared to pay for it. Chelsea are a great team; the SFO’s current budget looks very Division Two. Furthermore, the current arrangement under which the SFO can request special additional funding does little to promote the prestige and independence of the organisation. The funding of the SFO out of penalties that it levies might be considered.

Structure of the enforcement regime

The structure of the enforcement regime in the UK has been a recurring debate, with a focus on what some observers would describe as a confused patchwork of bodies operating in the space. Combining them is an over-simplistic solution and entirely inappropriate to achieving speedy results — the fi rst year or so of any such combination would almost inevitably create an internal focus within the new enlarged body as it sorts itself out. The model needs to be one of specialist bodies sharing information on demand. The SFO in particular has been subject to much criticism: but if it did not exist you would need to create it — it is essential to have a prosecution body that specialises in larger scale, complex fraud cases. Enforcement bodies need stability in order to develop the appropriate culture, to attract and retain talent and to build reputations that the market respects.

The simplifi cation of fraud trials would ease the prosecution burden. Our experience as forensic accountants is that fraud is complex to investigate, but once you have worked out what actually happened it is usually easy to explain — most frauds are conceptually simple. That leaves the matter of intent. But that’s no different to any other criminal trial. So why the six month trials? Speaking as non-lawyers — and therefore perhaps with a little naivety on such matters — there must be an easier way. Specialist tribunals may be one possible solution.

Regulation v prosecution

One glaring feature of the UK anti-corruption regime is that three full years since the Bribery Act came into force there have been no related prosecutions by the SFO, the lead enforcement agency for the Act. By way of context, the Bribery Act is not retrospective and there would as a matter of course be some lag between its coming into force on 1 July 2011 and breaches coming to light. In the same period the FCA has completed three bribery-related actions (namely Willis Limited in July 2011, JLT Specialty Limited in December 2013 and Besso Limited in March 2014).

The SFO and FCA of course have different remits and powers. As a prosecutor, the SFO may only respond to suspected breaches of the Bribery Act; specifi cally Section 7 of the Bribery Act (the failure of a business to prevent bribery by its associated persons) is triggered only where there could have been a prosecution for a bribery offence (although an actual prosecution for the bribery offence is not required). As a regulator, the FCA is not under any such constraint. The FCA has in effect applied the “adequate procedures” concept under Section 7 of the Bribery Act, which would come into play as a defence in the event of prosecution, into a regulatory requirement of the FCA’s regulated businesses to have adequate procedures outside of the context of any prosecution.

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Should there be a similar approach beyond the fi nancial services sector? An argument for doing so is that placing emphasis on businesses building a compliance system to manage corruption risk, with the objective of preventing bribery, is more effective that punishing them after the event. It is unclear how many businesses have already taken the initiative in building anti-corruption compliance systems in anticipation of one day needing to call on the adequate procedures defence. Our experience, as compliance advisors, is that it tends to be the largest and most regulated businesses that have done this; the fact that even substantial businesses still approach us to assist them in building an anti-corruption compliance system suggests that many businesses are yet to take meaningful steps in that direction.

Extending corporate liability

A related potential change is the broadening of corporate liability for fraud risk. The concept is attractively simple: extend Section 7 of the Bribery Act (which makes it an offence for a business to fail to prevent bribery by an associated person — which includes employees — subject to the defence that the business had in place adequate procedures to manage this risk) — to cover economic crime generally. It is inconsistent to have this legal requirement in respect of one type of fraud (namely bribery) but not in respect of other types of fraud. This change has supporters including the Solicitor General and the Director of the SFO. It is an attractive option for several reasons.

The legal requirement of proving “directing mind” within the business, typically applied to mean the involvement of the board of directors, is unrealistic in our experience as fraud investigators and compliance advisors. Board level oversight in large companies cannot practically operate at a transactional level. We have investigated a number of signifi cant frauds that were news to the boards of directors of the businesses. The “directing mind” concept provides cynical businesses with an easy defence: ensure that no information about the fraud escalate to the board of directors. (We have investigated one dubious situation where the CEO did not have an email account or a laptop.) That is a situation which is clearly contrary to a basic principle of good risk management and compliance, namely board level sponsorship and the right tone from the top.

One area where Section 7 style corporate liability would have a massive impact is on “rogue trader” frauds, which have provided some of the biggest City scandals over recent years. Indeed, it would abolish the very concept of a “rogue” trader: henceforth, the bank would have clear responsibility for all traders and their trading decisions. No more scapegoats.

Section 7 style corporate liability would also encourage businesses to address their efforts around fraud risk management, so as to be in a position to avail themselves of the adequate procedures defence if the worst happens. As compliance advisors we have seen this happen in response to the Bribery Act, especially where the incentive has been highlighted by an FCA thematic review.

Availability of legal representation for complex cases

There has been recent press coverage of a complex fraud case being stayed as a result of the lack of available counsel willing to work at legally aided rates on complex cases. One possible solution could be making employers responsible for the legal costs of employees and former employees charged with fraud in the conduct of their business. Comparable arrangements already exist. For example, in civil litigation against a company and named directors it would be usual for the company to cover the legal costs of the directors. This arrangement would be a natural fi t with any revision of the law on corporate liability for fraud, as the prosecution could be against both the business and its employees.

DPAs and harsher sentencing

One factor that has been identifi ed as accounting for the higher level of enforcement in the US compared with other countries is the use of Deferred Prosecution Agreements (DPAs), in conjunction with the guidelines on sentencing. A signifi cant change in the enforcement landscape in the UK was the introduction DPAs earlier this year, with a new Defi nitive Guidelines on Sentencing issued around the same time which take effect later this year.

It is worth fi rst looking at the Defi nitive Guidelines on Sentencing, as they create the fi nancial stakes as it were against which a business may consider the gamble of a DPA — and it would appear to be a gamble, as will be explained. In brief, against a backdrop of criticism, including that of the judiciary, that in the past businesses found to be bribing have got off too lightly, the Defi nitive Guidelines on Sentencing means harsher punishments. In overview, the sentencing approach involves compensation (of the victims of the bribery), confi scation (to ensure no benefi t is retained by the offending business) and a factor based culpability analysis for quantifying a fi ne (by way of punishment), each determined by the judge. As the judiciary regards bribery as a serious offence, bribery is likely to fall in the highest category of culpability, resulting in a fi ne of up to 400% of the gross profi t or other benefi t received from the corrupt transactions. In all, an expensive package for offending businesses.

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The introduction of DPAs in the UK represents an attempt to meet a number of, not necessarily entirely compatible, objectives. In the light of past settlements certain parties (such as the OECD) called for greater transparency of the process and predictability of the outcome. The SFO has called for greater fl exibility in its options so as to stimulate more self-disclosure by offending businesses, as a route to more anti-bribery actions. So what are DPAs likely to achieve? As described in the legislation and related prosecution Code of Practice (it is too soon yet to have one for real) DPAs are high on transparency (mainly as a result of disclosure requirements and judicial involvement) but low on incentive toward self-disclosure.

The disincentives include: the absence of any guarantee, or even measurable criteria, that a DPA will be offered after self-disclosure; a process which is very largely in the public forum of the a court of law; penalties under a DPA that are broadly comparable to those upon prosecution; a lack of any indication of the “discount” on the penalty for cooperating with the law enforcement bodies; if the DPA is not granted, the full disclosure required to negotiate the DPA may be used in a prosecution. The US DPA regime differs signifi cantly in all of these particular respects and has a clarity arising from many years of practice.

It would appear that the DPA route would make clear sense only for an offending business for which the consequences of prosecution would be dire, such as blacklisting or irreparable brand damage. For businesses that are not in this situation, it is a gamble with odds that are diffi cult to assess prior to placing the bet. The queue of self-reporting businesses at the door of the SFO has not grown signifi cantly longer since DPAs were introduced and, as things stand, that is likely unlikely to change.

Facilitating payments

One aspect of the Bribery Act that continues to place many businesses in a seemingly impossible position is facilitating payments. The situation on the ground in many countries is that conducting businesses without facilitating payments is not a realistic approach. The Bribery Act is clear: these are bribes. Businesses caught up in facilitating payments see themselves as victims of circumstances rather than perpetrators of crimes, however. Their situation is not helped by guidance on the Bribery Act which offers no clarity or certainty. Prosecutors face equally troubling practical diffi culties at the prospect of proceeding against businesses using this type of bribe.

One effect of the current lack of clarity and certainty is that facilitating payments are swept under the carpet and no progress is being made toward the elimination of this problem in the countries affected, which surely must be one of the objectives of the anti-corruption laws. The general knowledge that facilitating payments are common but no prosecutions result gnaws at the credibility of the enforcement regime.

Measures that provide clarity and more certainty to affected businesses would doubtless be welcomed. One approach may be a procedure whereby businesses disclose facilitating payments in return for offi cial consent and protection from prosecution, subject of course to certain terms and conditions. This approach makes commercial sense until a more even international playing fi eld is achieved.

Is better enforcement not anti-competitive?

The Bribery Bill and then the new Bribery Act attracted criticism by those who worried it would make UK plc less competitive at precisely the time when additional exports and inbound investment were needed after the fi nancial crisis. It is unlikely that these same commentators are now of the view that UK plc can at last afford to apply fundamental ethical values in its international trade. So any measure to increase enforcement of anti-bribery and anti-fraud laws is likely to produce the same backlash.

Our own analysis of UK exports and inbound investment analysis shows no discernible overall impact of the Bribery Act on the UK’s exports or inward investment.

The challenge facing any change in laws, regulation and enforcement around ethical conduct is to strike the right balance. The balance is not right at present.

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14 UK Bribery Digest Fraud Investigation & Dispute Services

Has the Bribery Act had an impact on the UK’s competitive position?

We have performed a high level analysis of the UK’s exports and outward/inward investment for the fi ve years 2009 to 2013 inclusive with reference to the coming into force of the Bribery Act on 1 July 2011. The assertion that the Bribery Act is uncompetitive for the UK might be demonstrated by:

• A fall in the value of exports, outward investment and/or inward investment.

• A fall in the value of these activities involving those countries perceived to be more corrupt.

We have therefore examined the overall fi gures for exports, outward investment and inward investment for these years and have analysed these by reference to the Transparency International Corruption Perception Index 2012, which refl ects information for the previous two years and therefore represents corruption perceptions around the time of the coming into force of the Bribery Act.

We have looked at four quartiles.

• “The least corrupt quartile” — those countries with CPI scores of 75 and better

• The lower to moderate corruption risk quartile (“the second quartile”) — those countries with CPI scores of between 50 and 74

• The moderate to higher risk quartile (“the third quartile”) — those countries with CPI scores of between 25 and 49

• “The most corrupt quartile” — those countries with CPI scores below 25

We have also looked specifi cally at the BRICS (Brazil, Russia, India, China and South Africa)

Export of goods4

The value of the UK’s exports of goods analysed by the four CPI quartiles is set out in the following graphs.

2013 106

2012

2011

Value of UK exports of goods by CPI score quadrant (GBP billion)

0 30060 120 180 240

12067

2010

2009

2008

Most corrupt High to moderate level of corruption

Moderate to low level of corruption

Least corrupt

295<2

11011764 293<2

11011764 293<2

9610855 261<2

819745 225<2

9110450 246<1

Total

2013 36

2012

2011

Distribution of UK exports of goods by CPI score quadrant (%)

0 10020 40 60 80

4123

2010

2009

2008

Most corrupt High to moderate level of corruption

Moderate to low level of corruption

Least corrupt

<1

374022<1

374022<1

374121<1

364320<1

374220<1

Value of UK exports of goods exports of goods analysed by the four CPI quartiles (£ billions) and the % distribution of the total

The value of the UK’s exports of goods grew by 12% to £293 billion in 2011, the year the Bribery Act came into force, compared with the prior year and has remained stable in the subsequent two years.

The least corrupt quartile, which might be assumed to be unaffected by the Bribery Act, has nonetheless shown no growth since 2011. All four quartiles have proved to be stable in 2011, 2012 and 2013. It is notable that the UK’s export of goods to countries in the most corrupt quartile has historically been insignifi cant.

4 The source of the data is the HMRC website UKTRADEINFO.

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15UK Bribery Digest Fraud Investigation & Dispute Services

While the UK exports goods to numerous countries, it is important in understanding its overall profi le to recognise that almost 50% by value of its exports of goods in the period under review were to just 6 countries: Germany, Netherlands and Belgium (in the least corrupt quartile and some 24% of total export of goods by value in 2012) and US, France and Ireland (in the second quartile and some 26% of total export of goods by value in 2012).

Amidst the overall static picture, fi ve countries in the second quartile, four in the third quartile and one in the most corrupt quartile have shown growth UK exports of goods of on average 42% since 2011, accounting for some £21 billion of UK export sales of goods in 20135. A specifi c example is Botswana (CPI score 65): UK exports of goods to this country were insignifi cant in 2010 and have grown to £668 million in 2013.

These observations tend to suggest that the Bribery Act has had little impact on the UK’s overall performance in the export of goods.

There has been understandable focus on improving the UK’s exports to the BRICS, all of which are in the third quartile. The value of UK exports of goods to the BRICS from 2009 to 2013 was as follows:

CPI score 2009 2010 2011 2012 2013

Brazil 43 1.727 2.128 2.321 2.582 2.583

Russia 28 2.286 3.450 4.781 5.516 5.181

India 36 2.893 3.952 5.410 4.553 5.051

China 39 5.128 7.224 8.772 9.892 11.584

South Africa 43 2.142 2.763 2.894 2.588 2.408

Total 14.176 19.517 24.178 25.131 26.807

Annual growth 37% 24% 4% 7%

% of total exports 6% 7% 8% 8% 9%

UK export of goods to BRICS and the % they comprise of total UK exports of goods (£ billions)

The value of the UK’s exports of goods to BRICS grew by 24% to £24 billion in 2011, the year the Bribery Act came into force and has shown slower growth since. Other than China, the BRICS markets appear to refl ect the overall stasis in UK exports of goods since 2011. The fact that exports to BRICS, which represent some of the fastest growing economies globally, have remained a stubbornly low proportion of the UK’s total export of goods highlights a key challenge facing the UK. However, the fact that there was strong growth of UK exports of goods to China (annual increases of 13% in 2012 and a further 17% in 2013) against a backdrop of stagnation in exports of goods to the other BRICS indicates that the Bribery Act is not a barrier.

Whilst there has been understandable focus on improving the UK’s exports to the BRICS, where the UK has lagged behind major competitors such as Germany, as these economies mature export growth in the medium to longer term will need to focus on the so-called “Next Eleven” (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam). Nine of these countries are in the third quartile (while South Korea and Turkey, with CPI scores of 55 and 50 respectively are at the wrong end of the second quartile)6. This highlights a future challenge in corruption risk management for UK companies in winning in these new export markets.

Export of services7

The value of the UK’s exports of services analysed by the four CPI quartiles is set out in the following graphs.

2012 61

2011

2010

Value of UK exports of services by CPI score quadrant (GBP billion)

0 20040 80 120 160

8030

2009

Most corrupt High to moderate level of corruption

Moderate to low level of corruption

Least corrupt

171<1

638029 172<1

607526 161<1

587124 153<1

Total

2012 36

2011

2010

Distribution of UK exports of services by CPI score quadrant (%)

0 10020 40 60 80

4717

2009

Most corrupt High to moderate level of corruption

Moderate to low level of corruption

Least corrupt

<1

374617<1

374616<1

384615<1

Value of UK exports of goods exports of services analysed by the four CPI quartiles (£ billions) and the % distribution of the total

5 We include in this analysis only such countries other than BRICS which each account for at least £500 million in goods exports from the UK in 2013.

6 The CPI 2013 has been used in respect of these prospective views.

7 The source of the data is the Offi ce of National Statistics 2013 Pink Book. All named countries included in this source are included in the CPI. This source amalgamates the exports of services to countries with small values into “other sub-region” categories which cannot therefore be plotted against the CPI. The coverage of our analysis in each year of total exports of services is as follows: 2009 88%; 2010 88%; 2011 89%; 2012 89%. Figures for 2013 are not yet available.

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16 UK Bribery Digest Fraud Investigation & Dispute Services

The value of the UK’s exports of services was £193 billion in 20128 comparable with the prior year, when the Bribery Act came into force.

While the UK exports services to far fewer countries than to which it exports goods (only about a quarter of them), it is important in understanding its overall profi le to recognise that just over 50% by value of its exports of services in the period under review were — as with the exports of goods — to just six countries: Germany, Netherlands and Switzerland (in the least corrupt quartile and some 18% of total export of goods by value in 2012) and US, France and Ireland (in the second quartile and some 36% of total export of goods by value in 2012). The US by itself comprises 20% by value of the UK’s export of services.

These six countries, which are key to the UK’s export of services and which one might assume to be unaffected by the Bribery Act, have nonetheless shown no growth in 2012 compared with 2011.

Outside of these six countries, there have been a number of gains and losses within the overall static picture for 2012. Between them Japan, Singapore and Canada (countries that outscore the UK in the CPI) accounted for a fall of some £2 billion in their import of services from the UK. At the same time, Saudi Arabia (in the third quartile) represented an increase of £1.7 billion.

These observations tend to suggest that the Bribery Act has had little impact on the UK’s overall performance in the export of services.

The value of UK exports of services to the BRICS from 2009 to 2012 was as follows:

CPI score 2009 2010 2011 2012

Brazil 43 0.759 0.913 1.273 1.511

Russia 28 1.916 1.668 2.198 1.990

India 36 1.708 2.114 2.613 2.227

China 39 2.218 2.701 3.155 3.128

South Africa 43 1.626 1.886 1.994 2.139

Total 8.227 9.282 11.233 10.995

Annual growth 13% 21% (2)%

% of total exports 5% 6% 7% 6%

UK export of services to BRICS and the % they comprise of total UK exports of services (£ billions)

The value of the UK’s exports of services to the BRICS is approximately half the value of its exports of goods to these same countries. The overall picture for the export of services by the UK to the BRICS echoes that for goods: the strong growth in 2011 has not been sustained. However, that fact that much stronger growth of UK exports of services to Brazil (annual increases of 39% in 2011 and a further 18% in 2012) against a backdrop of stagnation in exports of services to the other BRICS indicates that the Bribery Act is not a barrier.

Outward foreign direct investment9

The UK’s foreign direct investment overseas is characterised by the fact that the main part of it consistently involves the mature economies of the US and Western Europe, which account for almost 60% of the UK’s gross direct investment overseas in the four years 2009 to 2012 inclusive. One third of this fi gure comprises investments in the UK offshore islands and Luxembourg. The level of investment and disinvestment in any one country in any single year can vary signifi cantly.

The total gross outward investment in recent years was approximately: 2009 £70 billion; 2010 £63 billion; 2011 £78 billion; 2012 £48 billion. The large decrease in the UK’s gross outward investment in 2012 is very largely explained by reduced levels of investment in certain of these mature economies, in part offset by increased investment in others10.

Given the countries involved, it would appear unlikely that the Bribery Act has impacted the pattern of the UK overseas investment.

In addition, there was a signifi cant decline in direct investment in Kazakhstan, Saudi Arabia, Indonesia and certain Middle East countries — all countries with higher perceived corruption risk — totalling some £14 billion, but the level of investment in these countries in 2011 was unusually high.

The overall level of disinvestment of the UK’s overseas direct investments was lower in 2011 (£19 billion) and 2012 (£20 billion) than in either of the two years prior to the introduction of the Bribery Act (2009 £45 billion and 2010 £37 billion) and there is nothing to indicate any unusually higher levels of disinvestment in countries with higher perceived corruption risk.

8 The fi gures for 2013 are not yet available.

9 The source of the data is the OECD.StatsExtracts website.

10 The movements into and out of the UK offshore islands, Luxembourg, the Netherlands and Switzerland, being established locations for holding companies, may ultimately involve other parts of the world, but information on this is not readily available.

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17UK Bribery Digest Fraud Investigation & Dispute Services

Gross direct investment by the UK in the economies of the BRICS may be summarised as follows.

CPI score 2009 2010 2011 2012

Brazil 43 0.525 1.605 1.723 0.777

Russia 28 0.467

India 36 0.695 1.856 7.090 0.360

China 39 0.343 0.797 1.311 0.908

South Africa 43 0.994 2.459 1.814 5.087

Gross total 2.557 6.717 12.405 7.132

% of total gross direct investment 4% 11% 16% 15%

UK direct investment in BRICS and the % they comprise of total UK direct investment (£ billions)

As is evident from the table, direct investment by the UK in the economies of the BRICS — and indeed other developing economies — is not yet signifi cant in the overall investment picture. The fact that the BRICS represent a steadily increasing proportion of the UK’s direct investment overseas and the high levels of investment in India in 2011 and South Africa in 2012 suggest that investment levels in these countries is not hindered by the Bribery Act.

Inward foreign direct investment11

A potential issue is that overseas investors concerned about their global activities falling within the scope of the Bribery Act by conducting a business in the UK (see Section 7 of the Act) might therefore avoid investing in the UK.

Inward investment into the UK almost exclusively involves a few mature economies, namely the US and Western Europe — a sub-set of those countries that receive the UK’s outward investment. Indeed, over the years 2009 to 2012 inclusive, just six countries (the US, France, Belgium, the Netherlands, Germany and Spain) account for two thirds of the direct foreign investment in the UK. The total net inward investment in recent years was approximately: 2009 £64 billion; 2010 £48 billion; 2011 £46 billion; 2012 £39 billion. The level of investment and disinvestment by any one in any single year can vary signifi cantly.

The inward investment in 2009 was unusually high for the period under review due to almost £19 billion invested by France. Inward investment has fallen slightly in 2011, the year the Bribery Act came into force, and 2012, largely refl ecting variances in the level of investment of the Netherlands (some £10 billion lower than in 2011, when it was unusually high).

Given the countries involved, it would appear unlikely that the Bribery Act has impacted the pattern of the UK’s inward investment. One potential exception to this observation is investment via Cyprus, Guernsey, Jersey, Bermuda and the Cayman Islands which has declined: 2009 £7 billion; 2010 £6 billion; 2011 £2 billion; 2012 £4 billion.

The level of withdrawal of investment from the UK has not signifi cantly worsened over the period under review and was unusually low in 2012: 2009 £16 billion; 2010 £15 billion; 2011 £17 billion; 2012 £4 billion.

Investment into the UK by the BRICS economies is, unfortunately, insignifi cant: less than one per cent of the total in each year other than 2011 when £0.5 billion was received from India, but still less than 2% of the total inward investment for that year.

Conclusion

There are of course numerous factors impacting on the UK’s export performance, its outward investment and its attractiveness to foreign investors. Analysis to isolate a single factor, such as the impact of the Bribery Act, is therefore extremely diffi cult. Looking for changes in the profi le of these activities by cross-reference to the CPI offers some insight: as explained above there appears to be little or no impact on this profi le. The UK’s export performance measured as a share of global exports has been in the long term decline (while major competitors such as Germany have grown their share), which is indicative that other more fundamental factors are in play.

Our high level analysis refl ects a number of implicit assumptions, the most obvious one being the assumption that all UK businesses comply with the Bribery Act. Time will be the test of that particular assumption.

It is unarguable that improved export performance by the UK must include greater penetration of developing markets, which almost always are those with the higher perceived corruption risk. Compliance with the Bribery Act will therefore require ongoing focus by those UK businesses operating in those geographies.

11 The source of the data is the OECD.StatsExtracts website.

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18 UK Bribery Digest Fraud Investigation & Dispute Services

Abbreviations

CoLP City of London Police

COPFS Crown Offi ce and Procurator Fiscal Service (Scotland)

CJA Criminal Justice Act

CPS Crown Prosecution Service

CRO Civil Recovery Order

DoJ US Department of Justice

DPA Deferred Prosecution Agreement

ECU Economic Crime Unit

FCA Financial Conduct Authority

FSA Financial Services Authority

FSMA Financial Services and Markets Act

NCA National Crime Agency

OECD Organisation for Economic Co-operation and Development

PCA Prevention of Corruption Act 1906

POCA Proceeds of Crime Act 2002

SAR Suspicious Activity Report

SEC Securities and Exchange Commission

SFO Serious Fraud Offi ce

SOCA Serious Organised Crime Agency

Fraud Investigation & Dispute Services

John Smart+44 (0) 20 7951 3401 [email protected]

Jonathan Middup+44 (0) 121 535 2104 [email protected]

David Lister+44 (0) 131 777 2308 [email protected]

Steve Caine+44 (0) 20 7951 4433 [email protected]

Contacts

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2 UK Bribery Digest Fraud Investigation & Dispute Services

This edition incorporates the case write-ups for the fi rst half of 2014, together with our summary table of cases since 2008.

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UK Bribery DigestFraud Investigation & Dispute Services

Edition 5 July 2014

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