Section 7 failure to prevent bribery offence: adequate procedures defence finally tested

In February the Section 7 adequate procedures defence was finally tested, and rejected, in Southwark Crown Court. This was a jury trial, so there is no judgment or judicial comment on what constitutes adequate procedures. However, the submissions made, and the subsequent comments of the SFO's Joint Head of Bribery and Corruption, Camilla de Silva, illustrate the "high bar" that corporates will have to overcome if they are to show that, in the face of bribery having taken place, the procedures in place were adequate in the circumstances.

Background

The UK Bribery Act has been in force since July 2011. This introduced the Section 7 corporate offence of failure on the part of a corporate to prevent bribery being committed by an associated person with the intention of benefiting that organisation. However, a corporate will have a complete defence if it can show that "adequate" procedures designed to prevent bribery were in place.

What is "adequate" is not defined in the Act, but is covered by the guidance published by the UK government. That guidance is formulated around six guiding principles that apply across all sectors and all types of business. Corporates are advised to adopt a risk-based approach to managing bribery risks, as that will help ensure that procedures are proportionate to the risks faced.

Until this case, the issue of what is "adequate" had not been tested in the courts. Although fact-specific, the case provides an insight into what the enforcement authorities will look for in determining whether procedures were adequate.

The case

The defendant, Skansen Interiors Ltd (SIL), was a small company. It employed approximately 30 individuals operating out of a single room open-plan office, and its business was primarily in London and the South-East of England.

The prosecution concerned SIL's former managing director who allegedly made two payments of £10,000, and offered to pay a further sum of £29,000, to secure contracts. According to the prosecution, the payments were made via a company specifically created for receipt of the payments.

The bribery was discovered by SIL's incoming CEO in early 2014, before the third payment was made. Following an internal investigation, SIL reported the wrongdoing to the authorities and co-operated fully with their investigation. The new CEO also put in place an ABC policy as the company did not have one. Unfortunately SIL became dormant later in 2014 following financial difficulties.

The CPS decided to prosecute SIL for the Section 7 corporate offence, together with the former managing director and the recipient of the payments. Both individuals pleaded guilty before SIL’s trial. In its defence, SIL argued that its procedures were adequate for a company of its size and nature. The jury disagreed and found SIL guilty. As it was a dormant company with no assets, the judge ordered an absolute discharge.

What does adequate look like? 

This was a jury trial, so there is no judgment or judicial comment on what constitutes adequate procedures. However, the points made by the prosecution, and the subsequent comments of the SFO's Joint Head of Bribery and Corruption, Camilla de Silva, provide some guidance on what the enforcement agencies will look for. The key takeaways are as follows:

• Responsibility for compliance and support from the top. It is not enough for the Board to pay lip service to any policies and procedures in place. As Camilla de Silva stated, there has to be "a top level commitment from the Board for proper governance and organisation of compliance". Rolls Royce has certainly taken that point on board, enhancing the role of compliance in the aftermath of its corruption investigation. Compliance teams must be seen to be working with the Board's co-operation and oversight. In SIL, the prosecution noted that it had not designated anyone with responsibility for that compliance role. So even small companies, with no compliance function, will be expected to assign that responsibility to a senior employee.
• Policies are important but implementation is key: SIL argued that the nature and size of the business meant that it did not require sophisticated policies and procedures. It did have policies in place which emphasised the need to deal with third parties in an ethical, open and honest manner (one of which was displayed prominently on a wall) and financial controls and payment approval procedures were in place to minimise risk. However, SIL was unable to prove that its staff had read the policies that were available or that they had been reminded periodically of their existence. A comparison was drawn with the approach adopted by the new CEO who emailed the ABC policy to all staff and requested confirmation that they had read it. All corporations should ensure that policies are effectively communicated to staff and regular training/reminders provided on those policies and procedures.
• Document compliance and keep records of all steps taken: The enforcement authorities will want to see what steps were taken to embed a culture of compliance within a corporate. Without that evidence, a corporate will have an uphill struggle persuading a jury or enforcement authority that its procedures were adequate. Unfortunately for SIL, no records had been made of any compliance discussions or steps taken. It was therefore very difficult for SIL to show what compliance steps it had taken, let alone satisfy the jury that they were adequate.
• Monitoring and review: Corporations should be periodically reviewing their policies and procedures to ensure they are still fit for purpose. An organisation's risk profile may change, or there may be changes in the law that it needs to take into account. The prosecution relied on the fact that SIL was unable to show what steps it had taken when the UK Bribery Act came into force in 2011, or that it had used that as an opportunity to remind staff of the company's ethical policy and expectations.

Why wasn't a DPA offered?

Given the self-reporting and the genuine co-operation provided to the enforcement authorities, many are surprised that SIL was not offered a DPA. However, the CPS decided that a DPA was inappropriate as SIL was dormant and so there could be no ongoing benefit to be derived from one.

Other commentators have expressed concern that public resource was spent on prosecuting a dormant company with no assets. Reports suggest that the CPS wanted to send a message to corporates about the importance of having adequate procedures in place.

Making an example of a company that self-reported and provided full co-operation does seem a little harsh. Many have suggested that this will deter – rather than encourage – smaller companies to self-report. Unlike global organisations such as Rolls Royce, they won't be able to rely on the wider business and stakeholder impact arguments to justify a DPA.

Comment

The decision illustrates that even small companies with minimal risk have to have some form of policy, procedures and monitoring in place if a defence of adequate procedures is to succeed.

Larger organisations may also want to check that their compliance systems and controls are fit for purpose and are being implemented effectively. As neatly summarised by Camilla de Silva: "The case is perhaps a salient reminder to corporates to ensure their compliance procedures are sufficiently robust and the high bar that will need to be reached for a section 7 defence to succeed. The starting point is about having bespoke compliance procedures in place, but it is more about the substance of the procedures and about them actually working in the first place."

For more information on the UK Bribery Act and the government's guidance on adequate procedures, see our Quickguide.

Notes

Case: R v Skansen Interiors Limited, (unreported)

This update was prepared by reference to the summaries of the hearing published by SIL's solicitors.

Camilla de Silva's speech is available on the SFO website.