Dishonest Conduct Exclusion: When is it triggered?
Where an individual is prosecuted for offences involving dishonesty, the importance of cover for defence costs under a D&O policy can hardly be over-stated…
Published 7 January 2016
The English Court has approved its first Deferred Prosecution Agreement (“DPA”) in a case brought by the Serious Fraud Office (“SFO”) against ICBC Standard Bank Plc (“Standard Bank”). It is also the first case brought under section 7 of the Bribery Act 2010.
Standard Bank worked together with its subsidiary, Stanbic Bank Tanzania Ltd (“Stanbic Bank”), on a sovereign note private placement sought by the Tanzanian Government to raise $600 million.
Stanbic Bank entered into an agreement with a Tanzanian Company called Enterprise Growth Market Advisors Limited (“EGMA”). Two of EGMA’s directors and shareholders were members of the Tanzanian Revenue Authority, and thus the Tanzanian Government. It was agreed that EGMA would receive 1% of the funds raised. In order to meet this cost, the fee for the placement was increased from 1.4% to 2.4%. There is no evidence that EGMA provided services in relation to the transaction. It received $6 million, which was shortly thereafter withdrawn in cash.
The cash withdrawal concerned Stanbic Bank, who alerted Standard Bank and within three weeks it self-reported the matter to the SFO. The SFO investigated the report, and found there was a reasonable suspicion that Standard Bank had failed to put in place adequate compliance procedures to prevent bribery, and it had failed to recognise the inherent risks of a transaction.
At the conclusion of its investigation, the SFO proposed a DPA and asked the Court to approve the proposal. The Court has declared that the proposed DPA in this case is in the interests of justice and that its terms are fair, reasonable and proportionate, the Judge finding that, “of particular significance was the promptness of the self-report, the fully disclosed internal investigation and co-operation of Standard Bank. Finally, also relevant were the agreement for an independent review of anti-corruption policies and the fact that Standard Bank is now differently owned.”
The terms of the DPA require Standard Bank to adhere to certain obligations for a period of three years. If it complies with the agreement it will not be prosecuted on a charge of failure to prevent bribery. The obligations include paying a penalty of $16.8 million to the SFO, disgorging profits of $8.4 million, paying SFO's costs and paying compensation of $7.05 million to the Tanzanian Government. No tax reduction will be sought in relation to these payments. It will also be the subject of an independent review of its existing anti-bribery and corruption controls, policies and procedures.
David Green, Director of the SFO, has said that “this landmark DPA will serve as a template for future agreements.” It also stands as a template for self-reporting under the Bribery Act, and the significant benefit that can be gained by fully co-operating in circumstances where a serious breach has been identified. More generally, in circumstances where the SFO's funding has recently been cut, it will see the potentially increased use of DPA's as a significant benefit. The concern with DPAs is always that justice is seldom seen to be done. Whether the Court actively polices this aspect remains to be seen, and in the event that DPAs become more common place in the UK, greater focus will be placed on the Court's role and it will be keen to ensure that it is not seen as a rubber stamping exercise.
There will often be a tension in relation to the pursuit of individuals involved in any wrong-doing. In any DPA the SFO will secure the Company's co-operation in relation to any ongoing investigation of individuals, and there is a danger that companies may become more prone to blame current and former Directors and Officers if it helps buy the company a better deal.
Significant coverage issues will arise if a claim is presented to D&O Insurers in this regard.
Any admissions made in the context of the DPA may trigger a dishonesty exclusion. Consideration would need to be given to the precise scope of the admission and who made the admission.
While England and Wales marks the first approved settlement under a DPA for an offence under section 7 of the Bribery Act 2010, Scotland today lacks any such self-reporting mechanism.
When, in September 2015, Scotland gave the UK its first civil settlement with respect to an offence under s.7 by Brand-Rex Limited, it did so under a Crown Office and Procurator Fiscal Service self-reporting initiative that has since lapsed.
Brand-Rex, a Scottish company with 300 employees that offers industry cabling solutions, had operated an incentive scheme offering holiday and travel vouchers for its installers and distributors. Unfortunately, one of their independent installers then offered these vouchers to one of his customer's employees: a person with influence over purchasing decisions. Utilising the self-reporting scheme then in place, Brand-Rex reached an agreement with Crown Office (Scotland's prosecuting authority) which lead to a civil recovery order being granted in the sum of £212,800, this being the sum identified as their gross profit from the breach of the Act. Crown Office approved this alternative to prosecution after Brand-Rex, having ordered an investigation by external lawyers and forensic accountants, reported the incident. Standing their lack of previous misconduct and the isolated nature of the offence, a prosecution was deemed inappropriate.
This self-reporting initiative, similar to that in place in England and Wales before the introduction of DPAs in 2014, expired on 30 June 2015. Whilst it encouraged self-reporting by Brand-Rex Limited and others, this has not led Crown Office to further extend the policy - originally introduced in 2011. In the meantime, there is a straightforward presumption in favour of prosecution for all bribery offences.
It is presumed that Crown Office will move soon to introduce something akin to the DPA process and will be following the reports of the Standard Bank DPA with interest, but it has unaccountably left a hiatus in which there is no self-reporting mechanism for corporates faced with conduct occurring, or predominantly occurring, in Scotland. (Any such conduct will be referred automatically to Crown Office. Corporates headquartered in Scotland may find conduct elsewhere in the UK referred to Crown Office by the SFO).
For corporates, there are clear advantages to being able to self-refer under this type of mechanism. For Crown Office - under significant financial pressures - self referral following an investigation undertaken at the expense of the corporate concerned is desirable, as is the ability to boast that they are promoting good corporate governance and transparency. Crown Office's civil recovery unit, which regularly faces criticism for the low amount it collects from the proceeds of crime, might see a regular income from civil settlements. We can therefore expect this hiatus to be addressed.
In the meantime, corporates headquartered or operating in Scotland should bear in mind that self-reporting to Crown Office will only result in a criminal conviction. Any advice given to senior management teams dealing with a potential offence under the Act must acknowledge this.
A claim by the company against a director for losses it has suffered resulting from the DPA are likely to fall foul of public policy principles preventing an indemnity for fines and penalties (as per the Court of Appeal in Safeway v Twigger).