BAE and bribery: The heat is on

Yesterday’s Serious Fraud Office (SFO) announcement of their wish to prosecute BAE Systems should make anyone who thinks they can cut legal corners overseas take notice of the bubbles rising quickly around them.

The SFO says that it will seek the consent of the Attorney-General – Baroness Scotland – to prosecute BAE Systems in relation to several cases of alleged corruption abroad. It is understood the cases relate to the sale of fighter-planes to the Czech Republic in 2001 and the other to the sale of an air-traffic control system to Tanzania in 2002 and other deals involving Romania and South Africa. 

At present, only the Attorney General has the power to decide whether a prosecution will go ahead, although that will change after new bribery legislation is introduced next year (of which more below). There will be considerable pressure on the Attorney General, from both directions. BAE is an extremely important British company and a prosecution, and in particular a conviction, will have a negative impact on its reputation and business. A conviction may result not only in heavy fines and costs, but could also cause it to be blacklisted from public procurement projects around the world. It could be argued that, since these allegations date back to the early 2000s, a time before BAE had implemented a comprehensive new anti-corruption code (the Woolf Report), something like this is unlikely to happen again and it is in the national interest to let bygones be bygones.

The counter argument is that the reputation of the UK Government for cracking down on overseas corruption will be badly damaged if it does not take act on the recommendation of the SFO. People will remember the 2006 decision to abandon the investigation of BAE in relation to the Al Yamamah affair (where it was alleged that large payments went to Saudi ministers in exchange for contracts). Many felt that decision was the result of political pressure from the Saudis and that it showed that Britain was not serious about tackling corruption abroad.

Of course the Attorney General will need to decide what to do based on the information before her and the circumstances of this particular case. The UK has signed up to the OECD Convention on Combating Bribery which requires that prosecution decisions are taken independently of factors of national economic interest. We can only speculate as to the strength of the evidence and the other considerations which will inform Baroness Scotland’s decision. Remember too that there is no way of knowing what the outcome of a prosecution might be – it seems clear that BAE believes in its defence, since it has consistently denied any wrongdoing and has said it will defend the case to trial if necessary.

The present situation with BAE can be contrasted with the prosecution of Mabey & Johnson, the bridge manufacturer. Mabey pleaded guilty to paying bribes to officials in various overseas countries. The company was sentenced to pay fines, costs and reparations to the countries concerned, the bill coming in at £6m. It is still not clear if any individuals are going to face personal penalties. 

Both these cases are strong indicators of the SFO’s  likely strategy in relation to corporate corruption allegations over the next few years.  It will take the traditional form of carrot and stick. Because corruption trials are expensive and their outcomes are uncertain, the SFO will wish companies to plead guilty in exchange for more lenient penalties and administrative remedies such as independent monitoring of an agreed anti-corruption policy. The SFO has made it clear that this is its preferred strategy – if companies self-report and negotiate a settlement that includes reform and financial recompense then the penalties may only be civil in nature.  The Mabey case can be seen as a model  – self-reporting leading to a quick win for the authorities and the least-worst outcome for the company.

But what of the stick? The SFO wishes companies to believe that, if they do not play ball, they face the risks of a contested trial, more reputational damage and heavier penalties on conviction. Reports this week had it that the SFO had offered BAE a deal involving a guilty plea and a very large financial figure, in nine figures. If true, the deal seems to have been rejected. The SFO’s decision to recommend prosecution can be seen as a general statement of intent, whatever the Attorney General actually decides. Its decision to issue a press release about its recommendations is another way of raising the temperature since one imagines this will itself damage BAE’s reputation, especially in the vital US market.

So companies should take note – the SFO is prepared to get tough. That said, BAE is also taking a hard line – it clearly is not prepared to do a deal at any price.

To complete the picture, it is worth mentioning that a new Bribery Bill is likely to become law some time next year. The bill simplifies and codifies the law, making it easier to obtain convictions and thus increasing the risk of conviction. The SFO will have its own discretion to decide on whether to prosecute, it will not need the permission of the Government law officers.

Under the new law, companies are likely to face a new strict-liability offence of failure to prevent the payment of bribes on their behalves. The only defence will be that the company had “adequate procedures” in place for the purpose of preventing bribery. What might those adequate procedures look like? Ironically, the current gold-standard, welcomed by government ministers, the Law Commission and others (including this writer), is an ambitious, expensive and wide-ranging programme being implemented since 2008 by a leading British exporting company. That company is BAE Systems.  

Eoin O’Shea, partner and head of the anti-corruption group at Lawrence Graham