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Forensic Matters: The Rolls-Royce of Investigations

Rolls-Royce is synonymous with quality and reliability. But the outcome, in January, of a deferred prosecution agreement (‘DPA’) in the UK for bribery and corruption offences has tarnished this reputation.

Insights Forensic Matters: The Rolls-Royce of Investigations
Monday, 3 April 2017

This article summarises the case and considers it in the light of the Transparency International Corruption Perceptions Index (‘TI CPI’). We then take a look at the developments in Australia and how the bribery and corruption landscape (regulation and enforcement) is shifting.

1. Key facts

Rolls-Royce was charged with foreign bribery and corruption spanning at least twelve countries and 24 years. Rolls-Royce companies and some high-level executives conspired to make payments to intermediaries knowing that they would be used to bribe officials in countries including Thailand, Brazil, Kazakhstan, Azerbaijan, Angola, Indonesia and Iraq. The bribes were made in return for foreign officials providing confidential information and awarding contracts to Rolls-Royce companies. The allegations included Rolls-Royce paying a USD20 million bribe to persuade Garuda to buy Rolls-Royce engines for its Airbus A330s.

The illegal conduct involved the Rolls-Royce publicly-listed company in the UK, operating in aerospace, marine and energy; and a subsidiary headquartered in the US and therefore subject to the Foreign Corrupt Practices Act. 

2. Case outcomes

DPAs were reached with the UK SFO and the US Department of Justice (‘DOJ’). Rolls-Royce is to pay the equivalent of over AUD1 billion in fines:

  • AUD795 million to the SFO;
  • AUD221 million to the DOJ; and
  • AUD33 million to the Brazilian Public Prosecutor’s Office.
These sums are after a significant reduction in penalties1 as a result of extensive co-operation efforts.
Had a DPA not been agreed, the case would have taken years to complete due to the duration of the alleged misconduct (over 24 years) and the number of jurisdictions involved.

Rolls-Royce shares rose 5% when the settlement was announced. The settlement removed uncertainty, and the fine is spread over five years, making it more palatable for shareholders.


3. Overview of DPAs

DPAs are voluntary, negotiated settlements between a prosecutor and a defendant for serious corporate crime. They suspend a prosecution in return for compliance with conditions, which typically require a company to:

  • Cooperate with any investigation;
  • Admit to the agreed facts;
  • Pay a financial penalty; and
  • Implement a program to improve future compliance. 

If the conditions are fulfilled, the prosecution is discontinued. A breach of them, however, can result in the prosecution resuming, and further penalties. The UK allows DPAs for corporations only, while in the US, DPAs can be used for both corporations and individuals and across wider crime types.

4. Lessons from abroad

The case provides insights for corporates operating overseas, dealing with enforcement agencies, and responding to a culture of corruption.

Co-operation rewards

Corporate self-reporting is a major source of detection of foreign bribery. According to a new OECD report2 on the UK’s efforts to fight bribery, “a large proportion of the finalised foreign bribery cases, as well as ongoing investigations, have been triggered by corporate self-reports”. The availability of DPAs increases the incentive for corporates to self-report. In the first two DPA decisions in the UK3, the Court placed significant weight on a wrongdoer’s proactive self-reporting in granting the DPA.

Rolls-Royce’s DPA appears to be the exception, as it did not self-report and only co-operated with the SFO following internet posts of its wrongdoing by a whistleblower. Nevertheless, the Court found that given the ‘extraordinary’ level of cooperation provided by Rolls-Royce and the fact that what Rolls-Royce ultimately reported was “…far more extensive (and of a different order)” than what may have been uncovered without the cooperation, were relevant factors in the SFO’s decision to offer a DPA.4

Rolls-Royce’s extensive co-operation efforts led to the UK Court accepting a 50% reduction in penalties. Contrast this with the 25% reduction offered by the DOJ in its separate DPA with Rolls-Royce, or the one-third reduction in the previous two DPA cases in the UK. This raises a question for future enforcement actions: “whether this large reduction in the absence of a self-report may undermine the incentive for corporates to self-report in future.”5


Intermediaries

Intermediaries were used to mask illegal conduct. The Court was explicit in condemning this; and made it clear that companies should look closely at why agents are engaged and paid, or whether there is a legitimate need for them at all. As a result of the investigation, Rolls-Royce suspended 88 intermediary relationships. This highlights the importance of robust due diligence to know whom you are dealing with, and to ensure that business cultures and practices are aligned.

The bribery also involved masking payments by coding them to various accounts.


Culture and crime

Rolls-Royce interviewed 229 employees, conducted internal disciplinary proceedings against 38, and fired 11. One of the Court’s key considerations when granting the DPA was whether any current director or senior manager was involved in the misconduct. Had they been, the Court would not have approved the DPA and the prosecution would have proceeded, despite the cost and time involved.


5. Countries where bribery took place and how they scored on the TI CPI:

The Rolls-Royce case reinforces the need for extra vigilance in countries where information like Transparency International’s Corruption Perceptions Index shows that there is high level of corruption. The index measures perceptions of corruption on a scale of 0 (highly corrupt) and 100 (very clean). The countries where the bribery took place included some of the lowest-ranked countries:


6. Using artificial intelligence to fight crime

With the aid of technology and computer algorithms designed to expedite the review of thousands of documents, the SFO was able to “crack the case ‘exponentially quicker’ than if it was investigated manually”, said David Lumsden, the chief executive of Ravn Systems.6

A Financial Times article reports that Ravn’s software helped the “seven-person investigations team sift through 30 million documents, processing 600,000 every day.”7 The software is able to “sift, index and summarise documents as a human investigator would do, but much faster and without human error”.8 The software helped sort documents into privileged and non-privileged, a process that would have taken months of manual review.

Where large volumes of data need to be reviewed, Technology Assisted Review (‘TAR’) or Computer Assisted Review (‘CAR’) are more efficient and cost-effective than the traditional, laborious manual review of documents.

Courts are starting to become comfortable in the use of these tools in the review and disclosure process. But there is still a way to go before it is fully accepted in the courts across Australia (see ‘Technology Assisted Review in Australia’ section below).


7. Developments in Australia

The Rolls-Royce decision should cause companies everywhere to consider whether their compliance programs and risk assessment procedures are adequate. The decision also serves as a reminder that whilst there are developments in this area in Australia (including the recent Tabcorp matter), our regulatory regime still seems inadequate to deal with large and complex bribery and corruption.

Some of the key areas of focus for potential reform are:


Changes to the whistle-blower regime

Flagged towards the end of last year, these changes propose to extend whistle-blower protections under corporations law to cover disclosures relating to other legislation. Financial rewards for whistle-blowers exist in the US and have recently been flagged for discussion by the Australian government.


Enforcement cooperation program similar to the DPAs in the US and UK

The Australian government is considering a DPA-style regime. This could see larger fines in Australia and could focus the need for companies to have better processes to prevent foreign bribery and corruption. It would also increase the incentives for companies to self-report.


Debarment policies

Public sector procurement is vulnerable to corruption. Australia has yet to implement transparent policies dealing with public procuring agencies giving work to companies who have a history of bribery and corruption. Currently, there is no obligation on public procurement agencies to debar companies based on domestic/foreign bribery.


Technology Assisted Review in Australia

Australian courts are becoming familiar and more comfortable with the use of TAR in legal proceedings. A recent court decision9 ordered the use of TAR to review 1.4 million documents in accordance with a specific set of instructions, to be managed by a court-appointed referee. Prior to this decision, there had been little case law on the use of TAR in Australia.

Australia is a long way behind the US and UK in dealing with foreign bribery and corruption. But they are on the Government’s agenda, and change is coming, albeit slowly.

Endnotes
1. 50% in relation to the SFO penalty, and 25% in relation to the DOJ penalty.
2. OECD Working Group on Bribery, Phase 4 Report on Implementing the OECD Anti-Bribery Convention in the UK (Mar,2017), para 21.
3. Standard Bank and XYZ Limited. The Rolls-Royce case is the third decision settled by DPA in the UK.
4. Judgment of Sir Brian Leveson, 17 January 2017, Serious Fraud Office and Rolls-Royce Plc & Anor, para 22.
5. OECD Working Group on Bribery, Phase 4 Report on Implementing the OECD Anti-Bribery Convention in the UK (Mar,2017), para 22.
6. As reported in ‘SFO expected to promote Ravn’s crime-solving AI robot‘, by Madhumita Murgia, published in the Financial Times on February 13, 2017
7. As above
8. As above
9. Craig Macaulay, an Executive Director from our Melbourne Office, discussed the recent Victorian Supreme Court decision lending support to the use of Targeted Assisted Review in Australia in ‘Australia joins the TAR trend’ (click here to read the article). Craig has also published a more in-depth examination of the use of TAR in ‘Further Advances in Technology Assisted Review (click here to read the article).