Posted by: Susan Hawley | April 19, 2010

Innospec ruling raises major questions for SFO approach to overseas corruption

Innospec ruling forces major change to SFO approach to dealing with overseas corruption

On the 26th March, in a highly significant judgement on the plea agreement made between the Serious Fraud Office and Innospec (see here for more details on the case itself), Lord Justice Thomas ruled that the Director of the SFO “had no power to enter into the arrangements made and no such arrangements should be made again.” He stated that the SFO cannot agree penalties with an offender before bringing the facts of the case before a court because “the imposition of a sentence is a matter for the judiciary“. Although he accepted a limitation to the fine for Innospec in the UK of $12.7 million as laid out in the settlement put before him, he made clear that he had been forced to do so in order to avoid injustice but that “there will be no reason for any such limitation in any other case and the court will not consider itself in any way restricted in its powers by any such agreement.”

The judgement has major implications for SFO policy on dealing with overseas corruption, and for the BAE settlement (see here). Lord Justice Thomas called for full judicial oversight over plea bargains including over the basis of the plea and whether it reflects the extent of criminal conduct, as well as sole judicial control over sentencing. “A court must rigorously scrutinise in open court in the interests of transparency and good governance the basis of [any] plea and to see whether it reflects the public interest“, he said. He said that such agreements must accord with UK law as laid out in the Consolidated Criminal Practice Direction (at paras IV, 45.16 following).

The seriousness of corruption

This is a landmark judgement on corruption in terms of the weight it gives to the seriousness of corruption of foreign governments.  “There can be no doubt that corruption of foreign government officials or foreign government ministers is at the top end of serious corporate offending both in terms of culpability and harm. It is deliberate and intentional wrongdoing. It causes serious harm“, he said. Lord Justice Thomas went on: “it is no mitigation to say others do it or it is a way of doing business.” “The courts,” he declared, “have a duty to impose penalties appropriate to the serious level of criminality that are characteristic of this offence“. He described corruption as more serious than cartel offences and said that there was no reason why the financial penalties in the UK should be any less than those in the US for corruption of foreign government officials. In fact, he said, “if the penalities in one state are lower than in another, businesses in that state … will not be deterred so effectively from engaging in corruption in foreign states“.  

Critically Lord Justice Thomas also accepted that fines can be made contingent upon future earnings of a company. This is a major step towards being able to increase the level of fine available to be paid by a company.

A blow for the SFO’s civil settlements and civil recovery approach

Lord Justice Thomas was scathing about a civil recovery approach to corruption which has been at the centre of the SFO’s approach to encouraging companies to come forward and self-disclose corruption. “Those who commit such serious crimes as corruption of senior foreign government officials must not be viewed or treated in any different way to other criminals. It will therefore rarely be appropriate for criminal conduct by a company to be dealt with by means of a civil recovery order… It is of the greatest public interest that the serious criminality of any, including companies, who engage in the corruption of foreign governments, is made patent for all to see by the imposition of criminal not civil sanctions“.

Lord Justice Thomas said that confiscation orders by the Director of the SFO were problematic because they would “give rise to a very considerable conflict of interest incompatible with his independent duties as a prosecutor“, since the money confiscated goes directly to the SFO. His judgement throws into question the whole approach of the SFO to dealing with overseas corruption, which specifically offers companies the carrot of a civil settlement if they report wrongdoing to the SFO. “It would be inconsistent with the basic principles of justice for the criminality of corporations to be glossed over by a civil as opposed to a criminal sanction“, Thomas said.

Thomas also said that the UK should not adopt the US practice of allowing for agreed press notices between companies pleading guilty and the prosecutor – another central plank of the SFO’s approach to dealing with companies self-reporting overseas corruption. Thomas said that “companies who are guilty of corruption should be treated no differently to others who commit serious crimes.”

Important principles for future pleas

Lord Justice Thomas said he had had regard to several important factors:

1. that Innospec had admitted to a very serious offence reflecting the full criminality of their conduct

2. that Innospec had made a full confession and provided evidence

3. that it was legitimate to look at a company’s ability to pay and to take into account the impact that a fine could have on the solvency of a company, and thence upon innocent employees, pension liabilities and the company’s ‘clean-up’ programme for pollution it has caused in the UK

4. that a global settlement had been announced to the markets and that the US Courts had agreed the plea agreement in the US.

Implications for global settlements

The Innospec case raises critical questions about global settlements and the potential for the US’s vastly more experienced prosecutors to hold the upper hand in the making of such settlements. In a prescient paper put before the court by Innospec’s defence counsel, Nicholas Purnell QC, he argued that “the risk is that … in cases of cross border investigations, the Department of Justice wields the conductor’s baton by reason of the length of its experience and the certainty – however draconian – of its plea bargaining structures. It would be a matter of great regret should the brave new world heralded for UK investigations by the Attorney General .. become at risk to unintended institutional abuses by dominant authorities“. Clearly in the Innospec case, the Department of Justice did use its muscle to extract a greater share of the total pot available from Innospec than the SFO.

Lord Justice Thomas noted that he did not believe that the division of funds available for criminal sanctions from Innospec, which were made on a 30:70 basis to the UK:US respectively, “accorded with principle” and that given the fact that “the gravamen of the criminality was centred in the UK … [his] provision view is that the amount should have been divided 50:50.” He also called for “some resolution of principle” for how courts should allocate fines when different jurisdictions are involved and the basis on which they should do so.

The judgement may strengthen the SFO’s hand in future negotiations with the US, especially if UK fines can be shifted upwards to match those available to the US authorities. Clearly any such settlements will now need to take account of the judiciary’s role in the UK. Direction hearings and requests from the courts for indications of sentence are likely to become prerequisites for reaching any such agreements.  

Susan Hawley of Corruption Watch commented:

“This is a remarkable judgement. The SFO’s negotiated settlement approach to overseas corruption has been shown to be far too lenient, utterly untransparent and potentially unconstitutional. In light of today’s ruling, the SFO will have to go back to the drawing board with how it deals with corruption. The court has recognised how serious overseas corruption is and the need for very high penalties to sanction and deter it. The BAE settlement could now potentially receive a very rough ride in the UK courts.”


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