Bribery and corruption: Smith & Ouzman Ltd - first corporate convicted for overseas bribery

This article looks at the first UK conviction of a corporate — printing company Smith & Ouzman Ltd (S&O) — for overseas bribery offences following a contested trial. It is significant because it provides helpful guidance on how the courts will apply the Sentencing Council's guideline on fraud, bribery and money laundering offences (the guideline).

The outcome also provides an interesting counterpoint to the agreed fine element in the recent deferred prosecution agreement (DPA) with Standard Bank Plc for Bribery Act 2010 offences.

In December 2014, S&O and two former directors were found guilty of paying bribes totalling £395,074 to public officials in Kenya and Mauritania in exchange for contracts worth around £2.5 million. As the wrongdoing predated the Bribery Act, they were convicted under the Prevention of Corruption Act 1906.

On January 8, 2016, S&O was finally sentenced and ordered to pay a fine of £1,316,799, a confiscation order of £881,158 and a proportion of the Serious Fraud Office's costs. Unusually, no compensation was ordered as no request was made by Kenya or Mauritania, and the court was not satisfied that it would reach the victims.

Under the guideline, when determining a fine the court should first determine the corporate's level of culpability in the wrongdoing (high, medium or low), which informs a percentage multiplier to be applied to the base fine (normally the gross profit from the contract obtained as a result of the offending). The guideline contains examples of factors in each culpability category. This categorisation can mean the difference between a multiplier of 400 percent in the worst case, and 20 percent for the lowest level of culpability.

The judge classified S&O's offending in the high culpability range and applied a 300 percent multiplier. This was because S&O's directors played a leading role in the bribery, which involved corruption of public officials over a sustained period and abuse of a dominant market position, and the bribes were paid to make a substantial financial gain.

The approaches taken to the fine in the S&O sentencing and the High Court's approval of a DPA settlement for Standard Bank Plc are not easy to reconcile. In S&O, the offences were committed by senior officials within the company over a number of years in multiple jurisdictions and included bribery of foreign public officials. The directors involved gained personally as well as the wrongdoing increasing S&O's turnover. The judge's assessment that this resulted in high culpability is therefore unsurprising.

In the Standard Bank DPA, the judge applied the same percentage multiplier (300 percent), but the bribery was a one-off and the bank (and its staff) had no knowledge or direct involvement in the actions of its Tanzanian sister company (Stanbic), which had bribed government representatives to secure a fundraising mandate for the Tanzanian government. On discovering the issue, the bank immediately self-reported and extensively cooperated with the authorities. In the circumstances, the financial penalty agreed with the bank may appear high, especially as the base figure was treated as the gross turnover of the bank and Stanbic on the deal, in addition to the bank disgorging the same amount as a separate element of the DPA.

The bank received a third discount on the financial penalty element of the DPA for its early cooperation. The DPA Code of Practice requires the outcome to be "broadly comparable" with that which the court would have imposed had the corporate pleaded guilty (for which the maximum discount is one-third). However, the language of the code could have allowed a more generous discount, while remaining broadly comparable, and case law suggests that the bank's self-reporting and early cooperation could also be recognised more substantially as part of mitigation (in the same way as admissions made during police interview, for example). Of course, it could be argued that avoiding a conviction by agreeing a DPA should be incentive enough.

The DPA also offers some pointers (but only pointers, as it was an agreed outcome rather than the result of a contested trial) toward what adequate procedures might look like, especially in regulated entities. Three important learning points arise, all of which are identified in one form or another in the Financial Conduct Authority (FCA)'s Financial Crime: A Guide for Firms (April 2015) in connection with bribery controls:

• Conducting effective due diligence on agents (and not relying on others to do so) is crucial. The bank failed to perform its own due diligence on the Tanzanian "local agent". Instead, the deal team structured the arrangement to rely on the checks performed by Stanbic (which were inadequate). There were also significant gaps in the documentation justifying the use of the local agent, including why it was considered necessary; justifying the level of remuneration; and explaining the services the agent would provide.
• Compliance is not a tick-box exercise, but should be engrained in attitudes; employee actions will demonstrate whether an ethical business culture is truly engrained in the business. The bank had numerous policies and structures to deal with corruption risk, but their application to joint mandates was unclear. The bank's staff chose to interpret the policies in such a way as to progress the transaction without conducting due diligence on the local agent and they failed to identify numerous red flags. The DPA statement of facts treated this as indicating a poor ethical culture. While the deal team's approach may have been a technically available interpretation of the policies, a better approach would have been to operate the policies purposively to mitigate risk and ensure the local agent met all relevant requirements.
• Independent oversight can identify corruption risks and avoid conflicts of interest that weaken the controls environment. The bank had a committee responsible for approving new mandates and checking appropriate compliance had been followed, but a "tick-box" approach was taken to compliance (for example, the approval form did not contain questions about agents and the bank's staff chose not to disclose the agent's involvement proactively). The committee should have been within the compliance or risk function of the bank, rather than in the bank's business unit. The court also highlighted that one of the three people on the committee was the UK deal lead, an inherent conflict of interest.