XYZ AffairI continue my exploration of anti-corruption enforcement with a slight detour across the pond to visit the recent Deferred Prosecution Agreement (DPA) awarded in the UK Crown Court at Southwark, entitled Redacted Approved Judgment (Judgment), in the matter of an un-named company, designated as ‘XYZ Limited’ (XYZ). The Judgment was issued on July 8, 2016.

Aficionados of American (and perhaps French) history will immediately recognize the reference of the XYZ Affair between the US and France in 1797, which led to the “Quasi-War” between the countries. I found it fitting as a name for the company in this Judgment as the XYZ Affair turned on the demand of a bribe payment by the French Minister Talleyrand as a quid pro quo for American diplomats to meet and negotiate with him. Three successive French diplomats, Baron Jean-Conrad Hottinguer (X), Pierre Bellamy (Y), and Lucien Hauteval (Z), made this demand to three US commissioners sent to Paris to negotiate a peace treaty between the countries. The Americans refused the bribe and a short but intense naval war ensued. Talleyrand eventually dropped his demand that a bribe be paid to him and reached a peace treaty with America.

It was a bribery demand that led to the XYZ Affair and it was the payment of bribes that led to the DPA granted to XYZ. The bribery scheme outlined in the Judgment was the “euphemisms for bribes” that were used throughout company correspondence to signify bribery and corruption. The bribery scheme involved corrupt agents and other third parties who received payments “described as “fixed commission”, “special commission” and “additional commission”” beyond their standard remuneration.

Also of interest was the Court’s notation of the income and eventual profits to XYZ, which the Judgment stated were “taken together, in the period 2004-2013, a total of £17.24 million was paid to XYZ on the 28 implicated contracts on which bribes were offered. This sum represented 15.81% of the total turnover of XYZ in the period (being £109 million). The total gross profit from the implicated contracts amounted to £6,553,085 out of a total gross profit of £31.4 million (i.e. 20.82%). XYZ estimates a net profit of approximately £2.5 million in respect of the implicated contracts.”

XYZ’s US parent, ABC Corporation, implemented a corporate compliance program in 2011 and during this initial implementation period, the bribery scheme was discovered. Subsequently, XYZ self-disclosed the illegal conduct to the UK Serious Fraud Office (SFO). The company turned over its internal investigation in 2013 and then the SFO conducted its own investigation until 2016.

The Court went through a very detailed analysis about why it should accept a DPA and reduced fine and penalty in a section entitled “The Interests of Justice”. There were several factors laid out which are rather un-typical in the Department of Justice’s (DOJ’s) DPA program, even under the Pilot Program. While noting the seriousness of XYZ’s conduct and the length the bribery scheme was employed, the Court put some amount of weight into the fact it was the agents and third parties, who in large part, suggested the bribery scheme and not the company. Here the Court wrote, “there is no question but that XYZ spiralled into criminality as a result of the conduct of a small number of senior executives bending to the will of agents.” The Court also noted the change in XYZ’s culture by stating, “It is clear that XYZ in its current form is effectively a different entity from that which committed the offence.”

XYZ was assessed a financial penalty of £352,000, together with a disgorgement of profits at the amount of £6,201,085 (£1,953,085 to be paid by the American parent). The disgorgement amount will be paid over five years. The Judgment specifically took into account the ability of XYZ to pay the financial penalty as one of the factors that led to the Court accepting this amount. The length of the DPA was set to be “until the earlier of 31 December 2020, or such time after 31 December 2018 but before 31 December 2020, as the financial terms have been fully met.”

Laura Dunseath, writing in a blog, entitled “Opinion: SFO’s second DPA – A moderate step in the right direction. Could do better”, felt “The XYZ DPA has achieved a very welcome step back in the right direction, but it still does not go far enough to truly accomplish the Government’s stated aims of incentivizing companies to self-report and co-operate with the authorities.” However, for any US practitioner who negotiates a DPA, the Court oversight in the UK is very different. The Court’s lengthy recitation of the facts, the law, the negotiations and even the Court’s own questioning of the parties and their counsel, demonstrates a level of judicial oversight not seen on this side of the pond.

Dunseath is concerned that there are not enough incentives under the SFO interpretation of the Bribery Act penalties to fully encourage companies to come forward and self-report. Her concern was based upon the prior DPA and a sentencing that she believed sent out mixed incentives to companies. Under the first UK DPA, involving Standard Bank, the fine was calculated using a multiplier of 300% from a range of 250 – 400%, and a discount of only 33% which is on a par with the discount usually applied to a guilty plea at the first opportunity. Next was the sentence involving the Sweett Group, “where its financial penalty was proportionately lower since it was calculated using a 250% multiplier along with the 33% discount; and the proceeding against them were concluded at the sentencing hearing, and they are not subject to any on-going conditions such as the monitoring of their compliance programme or cooperation with on-going proceedings.”

She believed the SFO “sought to redress the balance and offer some advantage beyond the avoidance of criminal conviction” in the XYZ DPA, noting, “The fine was calculated using the 250% multiplier and a discount of 50% was applied rather than 33% in recognition of the fact that further discount should be given when a defendant not only pleads guilty, but brought the matter to the attention of the authorities in the first place. The financial status of the company and the impact that the fine would have on its future ability to trade was fully considered, and the fine was accordingly reduced to prevent the company being forced into insolvency.”

In a SFO Press Release, Director David Green said, “The decision as to whether to force a company into insolvency must be balanced with the level and nature of co-operation and this case provides a clear example to corporates.” Further, comments from Green highlighted the differences between the DPA practice in the US from that in the UK. In the US, DPA as private agreements between the parties and a court has no legal basis to do anything other than rubber stamp a DPA presented to it. In its statement, the SFO noted, “A DPA is not a private plea “deal” or “bargain” between the prosecutor and the company. It is a way in which a company accounts for its alleged offending to a criminal court, and can have no effect until a judge confirms in open court that the DPA is in the interests of justice and that its terms are fair, reasonable and proportionate.”

I find the last statement to accent the largest difference between the UK and US practice with regard to DPAs. In the US, it is a private agreement, negotiated between the parties and no judicial input. In the UK, there is not only judicial oversight but also, more importantly, judicial input. While I recognized the Second Circuit has made clear that charging decisions are within the sole discretion of prosecutors, this level of judicial oversight and review go a long way towards assuring justice is accomplished in the UK.


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© Thomas R. Fox, 2016