Challenging the Adequate Procedures Defence

Ilana Baines, Byrne and Partners; considers the recent case of Skansen Interiors Ltd,the first contested case following a prosecution under section 7 of the Bribery Act 2010 and comments on the lessons that can be learned for businesses, particularly Small and Medium Enterprises (SMEs) within the jurisdiction of the UK Boarder Agency.

Under section 7 of the Bribery Act 2010 (‘the Act’) it is an offence if a person associated with a Relevant Commercial Organisation (‘RCO’) bribes another person with the intention of obtaining or keeping business or obtaining a business advantage.A section 7 offence can only be committed by a Relevant Commercial Organisation (‘RCO’) as opposed to individuals. RCO’s include any corporate or partnership that carry on business within the UK or elsewhere. This includes businesses that are based overseas but have operations in the UK. Businesses in this sense include a trade or profession.Associated Persons include any person who performs a service for or on behalf of the RCO. This catches a wide range of people including employees, agents, subsidiaries or contractors.

For a section 7 offence to come into play, an offence under section 1, 2 or 6 of the Act must have taken place; namely a bribe must have been offered, made or received to/ from another person or foreign public official. It is important to note that section 7 is a strict liability offence, therefore there is no requirement for senior management of the RCO to be at fault or even know or suspect that bribes were being given or received, the prosecution merely need to show that adequate procedures to prevent bribery were not in place. A section 7 offence is punishable with a fine.

The only defence to a section 7 charge is if the RCO can show that they had adequate procedures in place to prevent any associated persons committing bribery. The Act does not specifically address what ‘adequate procedures’ actually are. The Ministry of Justice published Guidance on the Act, a copy of this can be found here. A short Quick Start Guide was also made available. The guidance focuses on section 7 of the Act and is drafted with a view to helping companies and individuals navigate the somewhat sparse legislation.

The adequate procedures defence was tested for the first time in court with prosecution of Skansen Interiors Ltd (‘Skansen’). The company tried to defend the allegation by replying on the ‘adequate procedures’ defence.

In 2013 Skansen Interiors Ltd, a British refurbishment company, tendered for the refurbishment of two office contracts in London together worth £6 million. During this process Graham Deakin, the project manager at DTZ Debenham Tie Leung (‘DTZ’) provided information to the managing director of Skansen, Stephen Banks. The information gave Skansen an advantage over other companies bidding for the contracts. Deakin also sought to influence the decision making process by informing colleagues that Skansen was his preferred choice. Skansen was successful and was awarded the two contracts. In return two payments amounting to £10,000 were paid by Skansen to Mr Deakin. These payments were approved by management at Skansen and were paid via a company that had not provided any services.

A further payment of £29,000 was also due to be paid to Mr Deakin however this payment was ultimately stopped by the new CEO, Mr Pidgen-Bennett, who joined Skansen in January 2014. Upon discovering the payments to Mr Deakin, the new CEO took a number of steps in order to deal with the issues he had uncovered:

• Commenced an internal investigation;
• Suspended Mr Banks and Mr Smith (the Commercial Director);
• Established anew anti-bribery and corruption policy;
• Stopped the further payment of £29,000;
• Submitted a Suspicious Activity Report (SAR) to the National Crime Agency;
• Self-reported the suspected criminal activity to the City of London Police; and
• Cooperated fully with the police investigation including handing over legally privileged material

Given the steps taken by the new CEO and the seemingly full co-operation provided to the authorities, including a self-report, it would surely have been a shock to the company when they learnt that criminal charges would be brought, not only against Mr Banks and Mr Deakin as individuals, but also against the company itself for failing to prevent the bribes being paid.

The trial against Skansen and individuals commenced in February 2018 and lasted 2 days. Mr Banks and Mr Deakin had pleaded guilty during earlier proceedings but the company maintained it had done nothing wrong. Skansenrelied on the section 7 defence that they had adequate procedures in place in order to prevent bribery. They argued that complex and sophisticated policies were not necessary for a company like theirs for a number of reasons:

• Size– Skansen was a very small company with no more than 30 employees. They were all based in one small open plan office.
• Risk– Skansen had no overseas business and only operated locally, therefore the associated risks of bribery were less.
• Ethos– They argued that staff at Skansen knew that they should not pay bribes. The company operated on the understanding that staff should be open, honest and act with integrity therefore no specific policy was in place to deal with this.
• Controls-Skansendid have procedures in place to ensure payments were properly monitored and approved.
• Written Material– There was a policy in place for employees to deal with third parties in an open, honest and ethical way. An example of this was displayed on a poster in the office. In addition to this, the contracts to which the bribes related contained clauses prohibiting bribery, based on standard construction industry terms.
• Effectiveness– The fact that the third payment of £29,000 that was due to be sent to Mr Deakin was stopped proved there were mechanisms in place to prevent bribery which to a limited extent were effective.

However, the jury clearly were not persuaded that sufficient procedures were in place and found the company guilty. Ironically, as the company had been dormant since 2014, the Judge’s only sentencing option was to impose an absolute discharge. An absolute discharge is the lowest level sentence available. Although still a conviction, no punishment is given and no fine has to be paid. In respect of the individuals, Mr Deakin and Mr Banks had pleaded guilty to offences under section 1 and 2 of the Act. Mr Banks was sentenced to 12 months imprisonment and received a Directors disqualification of 6 years. Mr Deakin was sentenced to 20 months imprisonment and was disqualified from being a Director for 7 years. In addition to this he was also required to pay £10,697 within 3 months or an additional 7 month jail term would be activated.

Whilst this is the first occasion of the adequate procedures defence being tested, important lessons can be taken particularly SMEs from this case. The MOJ Guidance stresses that the prevention of bribery procedures need only be proportionate to the bribery risks a company faces. However this argument did not work for Skansen as despite the size of the company and the nature of their work, the procedures that they had in place were deemed insufficient. It is now clear (if it wasn’t before), that businesses must assess the risks to their specific business and have clear written guidance that addresses any concerns the company have identified. The guidance or policies must be disseminated to employees, read by them and understood. It is not possible to rely on general understandings within the company as to how staff should act. Broadly worded policies that enforce work ethic and honest mentality will not be seen to be enough, nor will having financial safeguards in place.

Following this case, companies, in particular SMEs, need to consider how they can protect themselves from allegations of this kind. The following would be a good starting point for all companies but in particular SMEs when assessing whether they have adequate procedures in place.

1. Proportionality

The steps taken by a company need only be proportionate to the risks associated to that particular business, consider:

• The size of the company;
• Location in which the business operates; and
• The industry the company operates in.

2. Top Level Commitment

Senior employees need to actively ensure that staff and others they conduct business with know that there is a zero tolerance policy to bribery at the company. It is important that more junior members of staff see those at all levels being committed to this policy.

3. Risk Assessment

Written risk assessments must be undertaken at appropriate intervals, for example when new business is obtained or the company expands its business into a new region. This is particularly important when work expands into a new jurisdiction. Consideration should also be given to the value and duration of a project.

4. Due Diligence

Proper due diligence must be undertaken so that companies are confident in knowing who they are dealing with. This should be properly documented and records retained.

5. Communication

It is imperative that specific anti bribery policies are created to address any risks that are raised. This should be communicated to all employees in a clear manner. In the Skansen case, having a poster on the wall stating that bribes should not be paid was not deemed to be enough. On this point, Skensen were specifically criticised for failing to react to the Bribery Act 2010 coming into force.The communications should also be sent to others who are performing services for companies. It is important to maintain records of associated persons being made aware of the policies and equally important to show that they have been read and understood. One way of achieving this is to request a signature to be retained on file. Associated persons should be updated on the policy at appropriate intervals, particularly when there are changes in the business. Companies may wish to consider providing additional training to employees to ensure compliancy.

6. Monitor and Review

The procedures should be reviewed at appropriate intervals to ensure they continue to meet the identified risks and also cover any additional risks that have been identified. There should be a set timeframe for a review to take place and should most definitely occur after changes in the company and business it undertakes.

Perhaps the most surprising lesson to be learnt from this case is that companies cannot assume that self-reporting and full co-operation will mean that they avoid prosecution. In this case, Skansen made a SAR, self-reported themselves to the City of London Police and fully cooperated with the investigation yet were prosecuted for the very actions they had reported. The Serious Fraud Office actively encourages companies to self-report and this has in the past resulted in Deferred Prosecution Agreements (‘DPAs’) as opposed to a criminal prosecution. So why was the decision made in this case by the Crown Prosecution Service (‘CPS’) to proceed with a criminal prosecution against the company? The answer appears to lie in the fact that the company was dormant and had no assets which meant that a financial penalty could not be paid. In addition, the CPS argued that the public interest test was met in this particular case so that a message could be sent to others in the business community. This all serves as an important reminder that companies should seek legal advice when facing issues such as these.

Ilana Baines, Byrne and Partners; considers the recent case of Skansen Interiors Ltd,the first contested case following a prosecution under section 7 of the Bribery Act 2010 and comments on the lessons that can be learned for businesses, particularly Small and Medium Enterprises (SMEs) within the jurisdiction of the UK Boarder Agency.

Under section 7 of the Bribery Act 2010 (‘the Act’) it is an offence if a person associated with a Relevant Commercial Organisation (‘RCO’) bribes another person with the intention of obtaining or keeping business or obtaining a business advantage.A section 7 offence can only be committed by a Relevant Commercial Organisation (‘RCO’) as opposed to individuals. RCO’s include any corporate or partnership that carry on business within the UK or elsewhere. This includes businesses that are based overseas but have operations in the UK. Businesses in this sense include a trade or profession.Associated Persons include any person who performs a service for or on behalf of the RCO. This catches a wide range of people including employees, agents, subsidiaries or contractors.

For a section 7 offence to come into play, an offence under section 1, 2 or 6 of the Act must have taken place; namely a bribe must have been offered, made or received to/ from another person or foreign public official. It is important to note that section 7 is a strict liability offence, therefore there is no requirement for senior management of the RCO to be at fault or even know or suspect that bribes were being given or received, the prosecution merely need to show that adequate procedures to prevent bribery were not in place. A section 7 offence is punishable with a fine.

The only defence to a section 7 charge is if the RCO can show that they had adequate procedures in place to prevent any associated persons committing bribery. The Act does not specifically address what ‘adequate procedures’ actually are. The Ministry of Justice published Guidance on the Act, a copy of this can be found here. A short Quick Start Guide was also made available. The guidance focuses on section 7 of the Act and is drafted with a view to helping companies and individuals navigate the somewhat sparse legislation.

The adequate procedures defence was tested for the first time in court with prosecution of Skansen Interiors Ltd (‘Skansen’). The company tried to defend the allegation by replying on the ‘adequate procedures’ defence.

In 2013 Skansen Interiors Ltd, a British refurbishment company, tendered for the refurbishment of two office contracts in London together worth £6 million. During this process Graham Deakin, the project manager at DTZ Debenham Tie Leung (‘DTZ’) provided information to the managing director of Skansen, Stephen Banks. The information gave Skansen an advantage over other companies bidding for the contracts. Deakin also sought to influence the decision making process by informing colleagues that Skansen was his preferred choice. Skansen was successful and was awarded the two contracts. In return two payments amounting to £10,000 were paid by Skansen to Mr Deakin. These payments were approved by management at Skansen and were paid via a company that had not provided any services.

A further payment of £29,000 was also due to be paid to Mr Deakin however this payment was ultimately stopped by the new CEO, Mr Pidgen-Bennett, who joined Skansen in January 2014. Upon discovering the payments to Mr Deakin, the new CEO took a number of steps in order to deal with the issues he had uncovered:

• Commenced an internal investigation;
• Suspended Mr Banks and Mr Smith (the Commercial Director);
• Established anew anti-bribery and corruption policy;
• Stopped the further payment of £29,000;
• Submitted a Suspicious Activity Report (SAR) to the National Crime Agency;
• Self-reported the suspected criminal activity to the City of London Police; and
• Cooperated fully with the police investigation including handing over legally privileged material

Given the steps taken by the new CEO and the seemingly full co-operation provided to the authorities, including a self-report, it would surely have been a shock to the company when they learnt that criminal charges would be brought, not only against Mr Banks and Mr Deakin as individuals, but also against the company itself for failing to prevent the bribes being paid.

The trial against Skansen and individuals commenced in February 2018 and lasted 2 days. Mr Banks and Mr Deakin had pleaded guilty during earlier proceedings but the company maintained it had done nothing wrong. Skansenrelied on the section 7 defence that they had adequate procedures in place in order to prevent bribery. They argued that complex and sophisticated policies were not necessary for a company like theirs for a number of reasons:

• Size– Skansen was a very small company with no more than 30 employees. They were all based in one small open plan office.
• Risk– Skansen had no overseas business and only operated locally, therefore the associated risks of bribery were less.
• Ethos– They argued that staff at Skansen knew that they should not pay bribes. The company operated on the understanding that staff should be open, honest and act with integrity therefore no specific policy was in place to deal with this.
• Controls-Skansendid have procedures in place to ensure payments were properly monitored and approved.
• Written Material– There was a policy in place for employees to deal with third parties in an open, honest and ethical way. An example of this was displayed on a poster in the office. In addition to this, the contracts to which the bribes related contained clauses prohibiting bribery, based on standard construction industry terms.
• Effectiveness– The fact that the third payment of £29,000 that was due to be sent to Mr Deakin was stopped proved there were mechanisms in place to prevent bribery which to a limited extent were effective.

However, the jury clearly were not persuaded that sufficient procedures were in place and found the company guilty. Ironically, as the company had been dormant since 2014, the Judge’s only sentencing option was to impose an absolute discharge. An absolute discharge is the lowest level sentence available. Although still a conviction, no punishment is given and no fine has to be paid. In respect of the individuals, Mr Deakin and Mr Banks had pleaded guilty to offences under section 1 and 2 of the Act. Mr Banks was sentenced to 12 months imprisonment and received a Directors disqualification of 6 years. Mr Deakin was sentenced to 20 months imprisonment and was disqualified from being a Director for 7 years. In addition to this he was also required to pay £10,697 within 3 months or an additional 7 month jail term would be activated.

Whilst this is the first occasion of the adequate procedures defence being tested, important lessons can be taken particularly SMEs from this case. The MOJ Guidance stresses that the prevention of bribery procedures need only be proportionate to the bribery risks a company faces. However this argument did not work for Skansen as despite the size of the company and the nature of their work, the procedures that they had in place were deemed insufficient. It is now clear (if it wasn’t before), that businesses must assess the risks to their specific business and have clear written guidance that addresses any concerns the company have identified. The guidance or policies must be disseminated to employees, read by them and understood. It is not possible to rely on general understandings within the company as to how staff should act. Broadly worded policies that enforce work ethic and honest mentality will not be seen to be enough, nor will having financial safeguards in place.

Following this case, companies, in particular SMEs, need to consider how they can protect themselves from allegations of this kind. The following would be a good starting point for all companies but in particular SMEs when assessing whether they have adequate procedures in place.

1. Proportionality

The steps taken by a company need only be proportionate to the risks associated to that particular business, consider:

• The size of the company;
• Location in which the business operates; and
• The industry the company operates in.

2. Top Level Commitment

Senior employees need to actively ensure that staff and others they conduct business with know that there is a zero tolerance policy to bribery at the company. It is important that more junior members of staff see those at all levels being committed to this policy.

3. Risk Assessment

Written risk assessments must be undertaken at appropriate intervals, for example when new business is obtained or the company expands its business into a new region. This is particularly important when work expands into a new jurisdiction. Consideration should also be given to the value and duration of a project.

4. Due Diligence

Proper due diligence must be undertaken so that companies are confident in knowing who they are dealing with. This should be properly documented and records retained.

5. Communication

It is imperative that specific anti bribery policies are created to address any risks that are raised. This should be communicated to all employees in a clear manner. In the Skansen case, having a poster on the wall stating that bribes should not be paid was not deemed to be enough. On this point, Skensen were specifically criticised for failing to react to the Bribery Act 2010 coming into force.The communications should also be sent to others who are performing services for companies. It is important to maintain records of associated persons being made aware of the policies and equally important to show that they have been read and understood. One way of achieving this is to request a signature to be retained on file. Associated persons should be updated on the policy at appropriate intervals, particularly when there are changes in the business. Companies may wish to consider providing additional training to employees to ensure compliancy.

6. Monitor and Review

The procedures should be reviewed at appropriate intervals to ensure they continue to meet the identified risks and also cover any additional risks that have been identified. There should be a set timeframe for a review to take place and should most definitely occur after changes in the company and business it undertakes.

Perhaps the most surprising lesson to be learnt from this case is that companies cannot assume that self-reporting and full co-operation will mean that they avoid prosecution. In this case, Skansen made a SAR, self-reported themselves to the City of London Police and fully cooperated with the investigation yet were prosecuted for the very actions they had reported. The Serious Fraud Office actively encourages companies to self-report and this has in the past resulted in Deferred Prosecution Agreements (‘DPAs’) as opposed to a criminal prosecution. So why was the decision made in this case by the Crown Prosecution Service (‘CPS’) to proceed with a criminal prosecution against the company? The answer appears to lie in the fact that the company was dormant and had no assets which meant that a financial penalty could not be paid. In addition, the CPS argued that the public interest test was met in this particular case so that a message could be sent to others in the business community. This all serves as an important reminder that companies should seek legal advice when facing issues such as these.