Rolls-Royce plc, the British engineering giant, announced on January 16, 2017 that it had agreed to pay a total of approximately £671 million by way of settlement with the UK Serious Fraud Office (SFO), US Department of Justice (DOJ) and the Brazilian Ministry Público Federal (MPF), after years of investigations into allegations of bribery and corruption by several of the company’s subsidiaries. The Rolls-Royce agreement is the third approved deferred prosecution agreement (DPA) for the UK prosecutor since DPAs were introduced in the United Kingdom in 2014. It is also by far the highest penalty imposed under a DPA, and for once, the penalty imposed in the United Kingdom was significantly higher than that imposed by the DOJ.
The SFO began its criminal investigation of Rolls-Royce’s subsidiaries, Rolls-Royce plc and Rolls-Royce Energy Systems Inc., in December 2013, and it became the largest investigation the SFO has conducted. The conduct investigated was alleged bribery and corruption offences committed by intermediaries used by Rolls-Royce’s conduct in Nigeria, Indonesia, Russia, Thailand, India, China and Malaysia, over a period of 24 years and in relation to its defense, energy and civil engineering businesses. The misconduct includes: agreements to make corrupt payments; concealment or obfuscation of the use of intermediaries; failure to prevent bribery by employees or intermediaries; and failure to prevent the provision by its employees of inducements which constituted bribery.
Rolls-Royce’s conduct first came to light in 2012, after the SFO became aware of internet posts that raised concerns over Rolls-Royce’s civil engineering business in China and Indonesia. The SFO requested information from the company, which immediately launched an internal investigation. In 2013, the company voluntarily provided the SFO with reports from its internal investigations, which included further indications of corrupt conduct previously unknown to the SFO.
Under the DPA, Rolls-Royce agreed to disgorge profits and pay a fine totaling approximately £497 million (plus interest) over five years, as well as pay £13 million to cover the SFO’s costs. The £497 million payment comprises disgorgement of approximately £258 million of profits and a penalty of roughly £239 million. Upon entry into the DPA, the SFO’s indictment, which alleges six offenses of conspiracy to corrupt, five offenses of failure of a commercial organization to prevent bribery and one offense of false accounting, was immediately suspended.
The DPA lasts for five years (or four if the SFO confirms that all payments and obligations have been satisfied), during which Rolls-Royce is required to comply with a series of conditions relating to its continued cooperation with the SFO, as well as its adherence to a compliance program. That a DPA was available to Rolls-Royce at all, given the extremely serious nature of the allegations and the fact that it did not self-report the conduct to the SFO, is testament to the breadth and depth of the company’s cooperation throughout the SFO’s four-year investigation. Should the company breach any of the terms of the DPA, the SFO may make an application to the Court for termination of the DPA and if that application is successful, criminal proceedings may be reinstituted.
The company has also agreed to pay the DOJ and MPF approximately $170 million and $25.5 million, respectively, in relation to similar conduct by a subsidiary involved in its energy business. It is notable that this is the first instance in which a payment to the SFO is greater than the DOJ (albeit that the two settlements do not relate to exactly the same conduct).
Commentary on Judgment
In approving the DPA, Lord Justice Leveson concluded (as he is required to do) that the DPA was in the interests of justice and that its terms were fair, reasonable and proportionate. Given the limited number of DPAs that have been entered into by the SFO, the judgment provides useful guidance and insight for other companies that may wish to enter into discussions with the SFO about concluding such an agreement.
In his judgment, Leveson LJ noted that the investigation was, “in a very large part conducted and voluntarily revealed to the SFO by Rolls-Royce itself.” He frequently emphasized the very high level of cooperation demonstrated by the company - described by the SFO as “extraordinary.” The company conducted 229 internal interviews and reviewed more than 250 of its relationships during the course of the investigation. Leveson LJ went as far as to say, “that Rolls-Royce could not have done more to address the issues that have now been exposed.” It is clear that this level of cooperation, maintained over many years and at a high price to the company (estimated around £123 million), was crucial in persuading the Judge that this DPA should be approved. The SFO persuaded the Judge that the DPA was in the interests of justice, despite the usual position being that a DPA is unavailable to companies that have not self-reported the criminal conduct.
Improvements and changes
The company appointed a ‘quasi-monitor’ of its compliance program in 2013. The court noted that Rolls-Royce made significant efforts to improve its compliance procedures, in particular by addressing the possible risks associated with its use of intermediaries. Noting that no current member of the Board was involved in any of the wrongdoing, the judge stated that the decision to approve the DPA could have been different had any current senior management been implicated in the criminal conduct, or been in a position where they should have been aware of the culture and practices at Rolls-Royce, which were described as “clearly endemic.”
Never too big to be punished
Leveson LJ noted that Rolls-Royce is a very large company, the success of which is important to the British national interest. He acknowledged that a criminal conviction against Rolls-Royce would be highly detrimental to the company, which would in turn impact the UK defense industry and innocent persons who did not commit any misconduct. While this was a factor in whether the DPA was in the interests of justice, it could not be determinative in a case of such grave conduct as this. However, the Judge found that the company was a changed organization, which will still have to suffer the impact of negative publicity regarding the DPA, and that the financial penalty imposed was commensurate with that of a guilty plea (as required by law), thus, he considered that it was in the interests of justice to approve the DPA.
Size of fine
Leveson LJ has stated that the size of a fine under a DPA should be sufficient to punish wrongdoing and deter others from engaging in similar conduct, while being sufficiently small so as to encourage companies to selfreport and to confront misconduct. Under the DPA, Rolls-Royce received a 50% percent reduction in the penalty (not disgorgement of profits) that would have been imposed had it been convicted. This reduction was clearly linked to Rolls-Royce's high level of cooperation with the SFO.
This DPA signals a serious step up for the SFO, marking a successful end to its largest investigation to date. The prosecutor (and it seems, the Judge) will no doubt be hoping that the level of penalty will deter companies from engaging in misconduct, motivate them to ensure their compliance procedures are up to scratch and that companies will be incentivized to confront serious issues of bribery and corruption head-on.
The (still rather small) body of UK case law in this area now seems clear – self-reporting and committed, longterm cooperation with the SFO should enable organizations to use DPAs and avoid the potentially disastrous consequences resulting from a criminal conviction, even if that conduct is very serious and long-running. While the level of financial penalty imposed on Rolls-Royce is high, it would have been much higher but for the DPA, and this case should serve as an example to companies of how damage can be limited in even the most difficult circumstances.