Robert John Dougall, the former vice-president of De Puy Inc and marketing director of De Puy International – both subsidiaries of the US pharmaceutical company Johnson and Johnson - was jailed on the 14th April for 12 months. Dougall pleaded guilty to conspiring with De Puy to make corrupt payments to Greek health officials, primarily surgeons, to entice them to recommend De Puy orthopaedic products and other medical equipment to the Greek national health service (for the SFO press release, see here). The payments were made between February 2002 and December 2005. Greek taxpayers footed the bill for the corrupt payments as prices charged by De Puy for the orthopaedic products were inflated to cover the payments. The prices paid in Greece for the equipment were double what was paid elsewhere in Europe. In 2004 an attempt to end the payments was aborted after Dougall estimated that doing so would end in a 95% loss in turnover for the company in the Greek market. 

The SFO had asked the Judge that Dougall be given a suspended sentence because of the assistance he had provided during the investigation. Mr Justice Bean said that such a suspended sentence was not suitable “in a case where corruption was systemic and long-term and involved several million pounds in corrupt payments. The public would simply not accept if someone involved in long term criminality on this scale was not given an immediate sentence of imprisonment.”

Coming after the Innospec case, this case shows again that the courts are prepared to question the SFO’s ‘soft on those who cooperate’ approach. Dougall is the first ever executive to be jailed in the UK for bribery. In September 2008, Neils Tobiasen, the Danish managing director of a British security consultancy, CBRN, was given a suspended sentence after pleading guilty to paying around £70,000 in bribes in Uganda.

A key question is what approach the SFO will now take to the company itself. Mr Justice Bean said “corruption was in effect a company policy predating [Dougall's] involvement and approved by [his] superiors“.  What the SFO does now in relation to De Puy itself will be a key test of whether it has taken on board the comments of Lord Justice Thomas in the Innospec case (see below), or whether it plans to plough on with its civil settlement approach for self-disclosing companies. Lord Justice Thomas said that civil sanctions were generally inappropriate for companies guilty of corrupting foreign officials.

In its 2010 annual report, Johnson and Johnson said that it had first received a subpoena from the US Security and Exchange Commission (SEC) in February 2006 with regard to the participation of several of its subsidiaries in the UN Iraq Oil for Food Programme. The company says that in February 2007, it voluntary disclosed to the US Department of Justice and SEC that non-US subsidiaries had made improper payments in two “small market-market” countries, and that subsequently, payments in additional markets were disclosed which may give rise to liabilities under the US Foreign Corrupt Practices Act (FCPA). Johnson and Johnson says that it is currently cooperating with investigations by the DOJ, SEC and by agencies in other jurisdictions investigating allegations that have arisen as a result of its voluntary disclosure.

What the SFO does with De Puy itself will also be a key test of its approach to the EU Procurement Directives that require companies convicted of corruption to be barred from public contracts (see Analysis page on the EU Procurement laws). De Puy and its parent company Johnson and Johnson have a large amount of business in the EU. In January 2010, new corporate prosecution guidelines came into force for the prosecution agencies including the SFO, which allow prosecutors to take into account whether the EU Procurement Directives will be triggered as a public interest factor against prosecuting. If the SFO takes a civil settlement approach with De Puy on the basis that the EU Directive would be triggered, this could leave it open to charges that it is seeking to evade the EU Directive.

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.”

A British court ruled on March 25th that Jeffrey Tesler, a British lawyer who acted as the agent for KBR and has been indicted in the US (see  tesler-indictment[1]) for violating the US Foreign Corruption Practices Act (FCPA) for corruption, may be extradited from the UK to the US. Judge Caroline Tubbs ruled that she was satisfied that Tesler’s conduct would have been criminal under UK law; that there was a ‘substantial link‘ with the US because of the financial benefit accrued from Tesler’s actions, despite the fact that most of Tesler’s conduct occurred in the UK; and that the public interest in extraditing Tesler outweighed his rights under article 8 of the European Human Rights Act to respect for family and private life.

The extradition request now goes to the Secretary of State to determine whether the extradition should proceed. It will be open for Tesler to appeal that decision. If he is extradited, he faces a maximum prison sentence of 55 years. In the UK, he would receive a maximum sentence of 10 years.

Background

Tesler acted as the agent for a joint venture, TSKJ, involving KBR (formerly owned by Halliburton), Technip from France, Snamproggeti Netherlands – a subsidiary of Saipem from Italy, and JGC from Japan. Tesler was paid over $130 million in agency fees between 1995 and 2004, which it is alleged he passed on to high ranking officials in order to win $6 billion worth of engineering, procurement and construction contracts for the joint venture on an LNG plant, the Bonny Island Project, in Nigeria.

Another UK citizen, Wojciech Chodan, is facing an extradition trial on 20th April. Chodan acted as a consultant to the UK subsidiary of KBR, MW Kellogg, and is said to have helped organise the bribery scheme operated by KBR. Chodan reported to Albert Jackson Stanley, former CEO of KBR in the US, who pleaded guilty to corruption in September 2008 and is due to be sentenced this May. Judge Caroline Tubbs said she had taken into account Stanley’s conviction in the US in making her extradition decision.  

In February 2009, a US subsidiary of KBR, KBR LLC, pleaded guilty to violating the FCPA, and paid a $402 million criminal fine. The Securities and Exchange Commission fined the parent companies, KBR Inc and Halliburton, $177 million. 

In the UK, KBR’s subsidiary MW Kellogg has been under investigation by the SFO for some time for its role in the bribery scandal. MW Kellogg owned KBR’s share and represented KBR in the Madeira based company, LNG Servicos e Gestao, which made the payments to Tesler and it was MW Kellogg’s executives who signed agency agreements with Tesler. According to the plea agreement between the Department of Justice and KBR LLC, “KBR held its interest in [the Madeira company]  indirectly through MW Kellogg Ltd, rather than directly, as part of KBR’s intentional effort to insulate itself from FCPA liability.“

KBR announced at the end of February 2010 in its annual report that its UK subsidiary MW Kellogg had “informed the SFO that it intends to self report corporate liability for corruption-related offenses arising out of the Bonny Island project and expects to enter into a plea negotiation process under the “Attorney General’s Guidelines on Plea Discussions in Cases of Serious and Complex Fraud” issued by the Attorney General for England and Wales. MWKL is in the process of responding to inquiries and providing information as requested by the SFO. As a result of the unique factors associated with this matter and in light of MWKL’s cooperation, the SFO has confirmed it is prepared to treat MWKL as making an early self report in accordance with the SFO’s guidelines.”  This means that MW Kellogg will potentially be eligible for a civil rather than a criminal settlement.

Corruption Watch believes that MW Kellogg must receive an appropriate criminal penalty for its role in organising the bribes. Corruption Watch is deeply concerned at the suggestion that MW Kellogg can be classified as a making an early ‘self-report’ under the SFO’s guidelines on overseas corruption. The company has been under investigation by the SFO for three years. The SFO’s decision makes a mockery of its self-reporting system.