ICID Lecture
Debevoise & Plimpton
Talking Corruption with the SFO
20 October 2009
Presentation by Richard Alderman
Director, Serious Fraud Office
I am very grateful for the opportunity to be here this evening to talk to you. It is a particular privilege for me personally since this session is being chaired by Lord Goldsmith. If anyone deserves credit for initiating the process that has led to the new SFO, it is Lord Goldsmith. He had high ambitions for the SFO and clearly felt (as indeed did many others) that the SFO had lost its way and was under performing very markedly. As a result of this Lord Goldsmith set up a review by a very experienced former New York Prosecutor, Jessica de Grazia, to look at what was wrong with the SFO and to compare its performance with the performance of US counterparts, such as the Department of Justice's Office for the Southern District of New York and the New York District Attorney's Office. Jessica took the view that those US offices represented a gold standard in dealing with complex fraud and corruption. Having spent some time with those offices, I have to say I very much agree. And so a personal ambition for me is this. In the next few years when people are asked which offices are the global leaders they will single out three offices - the two offices I have mentioned in New York and the SFO. My ambition is that they will all rank equal first.
Jessica's report showed though what an enormous distance the SFO had to travel in order to get to that level. Nevertheless, let me talk to you this evening about what we have been doing and indeed some of what we plan to do in the future because it sets the scene for understanding the importance of engaging with the SFO on corruption.
The key to the Transformation in the SFO has been engagement. When I arrived in the SFO something that struck me very forcibly was the lack of engagement particularly at senior levels, between members of the SFO and the City of London whether financial or other institutions or professional advisers. This seemed to me to be wrong. My view is that the SFO has a very important role here and is part of the overall governance of the City of London. A really effective SFO is part of what is needed to assure investors and other members of the public, whether here or abroad, that the City of London is a safe place in which to do business. Much has happened since I arrived in the SFO last April and I certainly perceive that the public expect the SFO to play this role.
And so what did we do? Well, a process of engagement started. This meant cold calling people in the City and offering meetings. The response to this was often one of great nervousness by the institution or firm contacted because the image of somebody at their reception desks saying I am from the SFO was not one they necessarily wanted to have. Nevertheless, a number of people agreed to talk to me.
One comment at that time struck me very forcibly. A very senior person in the City said to me - "Richard, you need to understand that for people active in the City there is absolutely no upside in any engagement with the SFO". And I thought as a result of that - yes, he is absolutely right as a statement of where the SFO is now but absolutely wrong as a statement of where I want the SFO to be. The task I identified therefore was how to fashion an SFO which responded to what I identified as the very real need for an organisation with the wide remit that we have.
We were able to build on this quite dramatically in the Autumn. I wrote to about 60 very prominent people in the City and asked if they would spare one to two hours of their time, and the time of their senior teams, talking to me and my colleagues about what they could see happening, what frauds were unfolding as a result of the financial crisis and any new areas of vulnerability. I was overwhelmed by the response. Everybody wanted to talk to us. The information they gave to us was of enormous value. They talked to us about areas of concern. There was lots of talk, for instance, as you would expect about asset backed securities, a lot as well about hedge funds and lots about private equity. That has led to much work by the SFO on some cases some of which is in the public domain and some of which is not yet public. Furthermore we are sharing what we are learning about threats and vulnerabilities with people in the City. Those we talk to recognise there is definitely an upside in talking to us.
Another aspect of engagement brings me closer to what will be the main theme of what I want to talk about this evening and that is a new approach to corruption cases. It was quite clear from Jessica's report and the discussions I had with many people that the traditional way of dealing with corruption cases did not command confidence. The SFO's approach was to wait for allegations of corruption to be reported to the SFO and then to commence a very lengthy investigation. From the corporate's point of view it was hugely distracting and the market place had already imposed its own discipline in that those responsible were usually out of the corporate fairly quickly and new measures had been implemented to tighten up procedures.
I asked the question which nobody else seemed to me to be asking which was what is the appropriate response of an authority like the SFO in those circumstances. Nobody was looking at engagement with corporates or what they needed and the full range of tools we could use. I wanted to see much more flexibility and understanding of the commercial environment. It seemed to me that there had to be a better way.
What this led to last July was the publication of our Guide to corporates on self reporting cases of corruption. What I want to see in suitable cases is corporates identifying a corruption issue and then bringing in their advisers to conduct a rigorous investigation. At some point in this process (and views vary as to when) I want the corporate to engage us about a suitable resolution. Generally, I would want that to be a resolution on civil and not criminal lines. This would entail remediation involving payment of money, monitoring, culture change etc.
Let me describe certain aspects of what we have put in place. This will give me the opportunity to describe some differences between our approach and the U.S. approach. I can also talk about some ongoing issues where I have not yet taken a position and where I find this process of discussion to be particularly helpful. I need your views on a number of issues whether this evening or later.
First let me talk about the relationship I am expecting in cases where we shall be using our Guide. The key relationship I would expect is between me and the top board members in the corporate (the Chair, CEO and CFO). I need to know that they are personally committed to the new environment and the new culture that is needed. I want to see their personal determination to put the past behind them and to model best behaviour in the future. In the US there is a close relationship between the authorities and the Audit Committee. That committee is obviously very important but I would be very worried if the Audit Committee was telling me something about the commitment to a new culture that was not borne out by the actions of senior Board members. In appropriate cases I might in fact want to talk to the Senior Independent Director about this.
The next issue concerns monitoring. I know that this is an important and sensitive issue. I have heard many corporates and advisers tell me about what they see as the defects of the US monitoring system. It is very expensive; it is intrusive; and it can lead to a combination of the monitor and the Audit Committee actually running the company.
I have listened to these criticisms. Those who have studied our Guide closely will see that there are a number of differences between what we are proposing and the US system.
For example, monitoring will not be compulsory in every case. There may be many cases when it is needed, particularly to satisfy the public and NGOs that the company is genuine in wanting to move to the new culture. But there will be some cases (for example a one-off failure by a limited number of individuals) where it may be unnecessary and disproportionate. I am happy to leave the door open to dialogue on this.
The next issue under our Guide concerns when we would bring a prosecution. A number of people have said to me that we should give more guidance in the next edition of the Guide on when we would want to bring a prosecution. I shall do this but let me give you a few thoughts now about what I will be looking for in terms of whether a prosecution is appropriate.
I shall be looking at the following -
- how serious is the wrongdoing?
- is this an isolated incident or have there been other examples of this?
- is it systemic and part of the established business practice of the group?
- have continuing Board members derived personal profit from the wrongdoing?
- had the group been given warning before that its processes were inadequate?
- did it fail to report within a reasonable time?
- was the report full and accurate?
I will always need to consider the public interest here but I anticipate that there will be more cases dealt with civilly than criminally. I would expect as well that a key role that professional advisers will have will be to understand our approach and guide their clients here.
I also want to draw your attention to our new rulings process. This was introduced following representations to me by advisers in the M&A area who said that corporates planning to take over a company needed certainty about the SFO's approach if due diligence was showing corruption in the target company. The ruling process enables that certainty to be given. I am very pleased to find that use is being made of this.
I am looking for your help though on our rulings process in two areas following representations made to me. The first is a request that rulings should be published on the DOJ model. I am not sure about this. What strikes me in fact about the DOJ process is how few corporates use it. When I was looking at precedents earlier this year I saw that in the previous year only three rulings had been published. It made me wonder why. I suspect from what people tell me that it is because much work is done informally with DOJ. Returning though to the question of publication my inclination is not to publish details with names but to consider publishing an anonymised version. The questions I have are - is there demand for this? and more importantly, what would those who might want to use the process think of this?
The next issue on rulings is this. I was very careful in drafting the Guide to confine it to criminal action that had taken place in the past. I could not at that time give guidance on criminality that has not yet taken place although my hands are freer now as a result of the House of Lords ruling in the assisted suicide case. The questions I have now are whether there is demand for the rulings process to cover other areas in addition to M & A and whether the process should be extended to future actions. I shall give an example of what I mean when I come to talk about facilitation payments shortly.
I also want to draw your attention to the guidance we have given on adequate procedures. This will be of particular importance if the new Bribery Bill is enacted because there is a defence of adequate procedures to a new offence of negligently failing to prevent bribery. We have been asked to describe adequate procedures. The Guide is our first attempt. I am sure that more will be needed as a result of feedback we are receiving. One of the comments I have received is a plea to make it clear that what it is realistic to ask one of our largest multinationals to do is wholly impractical for a small enterprise. The Guide makes no distinction here concerning size of the entities and I want to reflect the need for this distinction in the next version.
What I am also reflecting on is this. There are some who seek an exhaustive list from the SFO. But how realistic is this? I am struck by the amount of guidance there is on this topic from many organisations such as the OECD, from non-government departments, such as Transparency International, and from corporates themselves. It is not the SFO's role to put all of this together. Indeed if we did so there would be a danger that we would lose the most important point in all the detail - this is the overriding senior Board level commitment. And so my question to you is what do you want from the SFO here?
There are some other areas as well that I know we need to address, but where I do not yet have the answers. I appreciate that you may have thought that you came here to hear me give answers to questions and instead you seem to be finding yourself subjected to a series of examination questions. I make no apology because our approach has developed as a result of engagement of this nature. I want an SFO that is responding to the real needs of society and of the corporate sector and professional advisers. For me that means being able to listen to feedback and being open about the thinking of the SFO on various issues. The solutions we come up with jointly are likely to respond to real needs and to be more effective if we do it in this way.
And so, let me give you two more examination questions. First what should our policy be on facilitation payments?
One of the issues that corporates subject to the SFO's jurisdiction have raised with us relates to these payments. As many of you will know, the US Foreign Corrupt Practices Act, unlike the UK anti-bribery laws, including the proposed new Bribery Bill, contains a specific exemption for facilitation payments.
To qualify for the US exemption, the payment in question must relate to a routine government action and be modest in amount. A company seeking to take advantage of the US exemption also must be able to show that the payment affected the timing rather than the substance of the government action and that it needed to make the payment to prevent damage to an important commercial interest of the company or a risk to its employees.
The examples that representatives of the US DOJ and SEC sometimes have given for exempt facilitation payments are small payments to speed the issuance of work papers; obtain police protection; ensure mail pickup and delivery; secure telephone, power or water service; or expedite the clearance of products, including but not limited to perishable products, through customs.
UK corporates and their advisers have recently been pointing out to me that the unequal treatment of facilitation payments under US and UK law puts them at a competitive disadvantage vis-a-vis their US competitors. They also face, of course, a competitive disadvantage with respect to companies headquartered in countries that have not adopted anti-bribery enforcement policies as robust as the policies that we have developed in the UK.
UK corporates also have described to us logistical and other problems they have had to endure because of their refusal to make facilitatation payments in countries in which such payments are expected - countries in which routine government action can be greatly delayed by their refusal to comply with the local custom concerning facilitation payments.
On the other hand a number of UK corporates have told me that they have a zero tolerance policy on facilitation payments in any jurisdiction. Their very strong belief, clearly held by the Board, is that giving in to these requests in any jurisdiction makes all employees wherever based very vulnerable to demands for these payments. They want to see rigorous enforcement of the law.
We in the SFO continue to believe that UK corporates should seek to avoid making facilitation payments. They are unlawful under our law. At the same time I recognise the force of the points made on both sides. I also recognise the distortion caused by different laws on the legality of facilitation payments.
I am committed to enforcing the anti-bribery laws that exist in the UK in a reasonable and proportionate manner. Like all other agencies on the UK Government, moreover, we operate under budgetary constraints that require us to set priorities in what we do and how we do it. And, as we explained in the self-reporting guidance document that we issued a few months ago, we are committed to providing UK corporates with as much information as we can about our enforcement policies and priorities.
And so what is the answer here? There is a real issue of principle here on which views differ. On the other hand, as a practical investigator and prosecutor with more cases to deal with than I have resources to devote to them, the possibility that I might prosecute for a one-off facilitation payment is remote. That does not mean that I condone it or believe it to be anything other than unlawful - it simply means that I have more important things to do.
This then leads me to ask whether a more comprehensive statement of our policy should be included in the Guide. Perhaps also if it were practical and feasible, there would be some extension to our rulings process. I do not know the answer to these questions but I think it right to ask them. I would welcome views particularly from those corporates that have a zero tolerance policy.
My second and last examination question is what should I do about major corporates based abroad who put UK plc at a competitive disadvantage by using bribery routinely (and in large amounts) in other countries. A number of corporates have been talking to me about this and have been giving me examples. At present I have no jurisdiction but there is a clause in the Bribery Bill that will give me jurisdiction if the foreign corporate has some business presence here. We are already thinking about what our approach should be.
I do not underestimate the difficulties whether legal or factual. I want to know if there is support for us in doing this and of particular importance, where are we going to get evidence that we can put before a jury in an English court against defendants that we can realistically bring to trial here.
I would like to move on now from exam questions to a Report on our results so far. They have been very good. Last year for instance we were successful in 17 of the 18 cases we took to court. So far this year we have been successful in each case we have taken to court. We also have more cases before the criminal courts than for many years previous. And we have also shown that we can make use of new powers such as Civil Recovery Orders. My view is that the public can take the view that the SFO is developing a good track record of successful prosecution.
The process of engagement seems to me to be an unqualified success. I see a succession of corporates wanting to talk to us not because they have found a problem but because they want to talk about risks in their sectors and what they are doing about them. They want to hear from us and we want to learn from them. They want to talk about secondments between our organisations. And they want to help on policy issues.
I welcome this engagement very much. The view I have of the new SFO is of an organisation clearly linked to society in helping protect the law abiding from the lawless. I am proud of what the SFO has been able to achieve in engaging with corporates and their advisers and I commend it to you.
