Petrofac: Plea bargain versus DPAs and the importance of good compliance
David Stern and Rebecca Thomas, 5SAH Chambers.
On 4 October 2021, Petrofac Limited (“Petrofac”) was sentenced at Southwark Crown Court following guilty pleas to seven counts of failing to prevent bribery contrary to section 7 of the Bribery Act 2010. This followed a four-year corruption and money laundering investigation conducted by the Serious Fraud Office (“the SFO”) and the earlier guilty pleas of David Lufkin, former Global Head of Sales, who was sentenced on the same occasion. This followed pre-charge plea discussions between the parties with agreement being reached as to scope of the indictment and approach to sentencing.
Petrofac must pay a fine of £47 million by February 2022 and a further £29.5 million by way of costs and confiscation within the next three months. David Lufkin was sentenced to two years’ imprisonment suspended for a period of 18 months in recognition of his significant efforts to cooperate with the SFO’s investigations. Andrew Bird QC acted for the Serious Fraud Office in its confiscation proceedings against Petrofac Limited. David Stern recently acted in the Serious Fraud Office bribery and corruption investigation into Tata Steel, which resulted in the successful termination of its investigation.
Case summary
Petrofac was convicted of failing to prevent former employees from offering and making payments to third party agents in relation to gas and oil infrastructure projects based in Iraq, Saudi Arabia and the UAE. Bribes totalling $81 million were made to win contracts worth $7.5 billion.
The corruption came to light following the commencement of an investigation by the SFO and the subsequent cooperation of David Lufkin, after his own guilty pleas to fourteen counts of bribery contrary to section 1 of the Bribery Act 2010. The corruption had tainted the very highest echelons of Petrofac with two former board members implicated.
While Petrofac had attempted their own internal investigation in 2016, the allegations failed to come to light, at least in that there was no self-report to the SFO. Petrofac’s culpability sprang from the failure of its internal compliance policies. All employees involved in the charges have since left the business and the company has indicated that it has overhauled its compliance programme, currently operating with much higher ethical standards.
During her sentencing remarks, Her Honour Judge Taylor noted that Petrofac’s efforts to remedy their compliance failings were a substantial factor when it came to the court’s decision regarding the appropriate fine. However, she accepted that there was little good in bankrupting a largely reformed company.
Through joint submissions, the parties submitted that Petrofac’s offending fell within the highest category in the sentencing guidelines, agreeing a figure for harm of £67,780,700. The parties suggested that the figure should be multiplied by 300% to reflect Petrofac’s culpability, resulting in a final fine of £131,563,336 once it had been reduced by a third to reflect Petrofac’s early guilty plea. The court determined that the appropriate multiplier to reflect Petrofac’s culpability was 325%, producing an initially larger figure than the parties had agreed. However, it was accepted that, due to obligations owed to HM Treasury and other creditors, the fine would be capped.
The prosecution placed David Lufkin’s culpability in category 1A on the sentencing guidelines which has a starting point of 7 years’ custody but accepted that this should be substantially reduced in accordance with the guidance in R v P (Blackburn) [2008] Cr App R (S) 5 concerning the operation of section 73 Serious Organised Crime and Police Act (SOCPA) 2005 agreements.
Eligibility for Deferred Prosecution Agreements
On the face of it, this case is a departure from the SFO’s recent strategy of negotiating deferred prosecution agreements (“DPAs”), whereby the corporate avoids any criminal conviction. Since the scheme was introduced in 2014, DPAs have been considered a welcome development for corporations in that they have enabled both sides to mitigate the risks and expense of lengthy trials whilst ensuring that reparation is made for corporate criminal behaviour conducted by or on its behalf.
Factors specific to this case made it unlikely the SFO and Petrofac could reach a DPA. First, it would have been undoubtedly unattractive if Petrofac avoided any criminal liability once David Lufkin had pleaded guilty. Second, the nature of ‘failing to prevent’ offences meant there was far less of an incentive for the SFO to compromise. Unless a company can show it had adequate compliance procedures in place, the offence is strict liability – the SFO faced no difficulties trying to identify the culpability of Petrofac’s ‘operating mind’.
Perhaps most importantly, it was clear that Petrofac began cooperating relatively late on in the investigation. The court noted that, but for Mr Lufkin’s cooperation, it was unlikely that Petrofac would have pleaded guilty. DPAs reached with Airline Services Limited (2020), Airbus SE (2020) and Guralp Systems Ltd (2019) were all predicated on the companies’ voluntarily self-reporting to the SFO.
Advantages of DPAs
In SFO v Standard Bank (U20150854) the court stated that financial penalties featured as a term of DPAs must demonstrate broad comparability with a fine following conviction – nonetheless, DPAs remain a much better option for companies where possible.
A DPA will be likely to have less reputational damage and less publicity than a criminal trial. A criminal conviction for certain offences (in particular s1 and s6 of the Bribery Act 2010) may prevent companies from subsequently applying for government contracts in the UK. Any kind of criminal conviction could have ramifications for companies operating in other jurisdictions, in particular the United States.
Moreover, by leaving the question of sentence in the hands of the courts rather than seeking judicial approval of any DPA, the parties relinquish control over the final outcome to the discretion of the court. In this case, HHJ Taylor plainly took the view that the parties had underestimated Petrofac’s culpability and it has only avoided the consequences of attribution at a higher level of culpability by virtue of its current financial position. Companies with deeper pockets would almost certainly do better to avoid the exercise of the court’s discretion.
In recent years, the SFO has faced some criticism for its use of DPAs as a resolution to large-scale corporate wrongdoing, particularly where no individuals were ultimately convicted or even prosecuted. In February 2019, the SFO announced it was abandoning its case against former executives of Rolls-Royce two years after a DPA had been signed; the prosecution against two former directors of Tesco ended with a successful submission of no case to answer after a DPA had been signed.
In this case, the SFO has indicated that investigations are ongoing.
Lessons learned from a compliance perspective
The criticisms made of Petrofac throughout the sentencing hearing provide helpful guidance as to the standard applied by courts when considering the culpability of companies in these instances. Companies need robust policies, procedures and a strong anti-corruption corporate ethic driven from the very top. It is clearly not sufficient to pay lip-service to regulators – policies need to be tested and work in the real world.
When sentencing Mr Lufkin, the court noted that but for his cooperation it was unlikely Petrofac would have pleaded guilty. By leaving Mr Lufkin in the wilderness with respect to these offences, Petrofac evidently worsened its position. Indeed, guidance makes clear that a good internal investigation procedure would ensure and publicise that employees who make good faith reports of misconduct would not face repercussions.
A functional internal investigation procedure is key. When faced with these allegations Petrofac were on the back foot, unable to truly get to the bottom of what had gone on before the SFO. This deprived them of both the ability to confront the allegations substantively themselves, but also to self-report and potentially reap the benefits of a deferred prosecution agreement which would have enabled it to escape the consequences of criminal convictions and maintain slightly more control over any financial penalty.
Included in the confiscation calculations was an amount agreed by both sides said to represent the pecuniary advantage gained by Petrofac by not having effective compliance systems in place – in this case that amount was said to be around $1 million a year. When placed in the context of the position Petrofac now find themselves $1 million a year seems a trivial price to pay for peace of mind.
Accordingly, the Petrofac case stands as a stark reminder to corporations, especially those operating internationally to have robust procedures in place to prevent bribery and corruption and the necessary safeguards to handle any allegations of wrongdoing when or if they arise.
David Stern (Joint Head of Business Crime Team) and Rebecca Thomas.
‘David is an exceptionally good barrister well able to persuade judges and jurors alike. His detailed approach to cases is impressive. He is calm and unflappable. His cross-examination ability is first-class.’
The Legal 500 Business and Regulatory Crime (including Global Investigations).
