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 instigation of an investigation by the Serious Fraud Office and the subsequent cooperation of Petrofac’s former global head of sales, David Lufkin, after his own guilty pleas to substantive offences of bribery. The corruption had tainted the very highest echelons of Petrofac.
While Petrofac had attempted its own internal investigation in 2016, the full extent of the allegations failed to come to light. Petrofac’s culpability ultimately sprang from the total failure of their internal compliance policies.
Commentary
During the sentencing hearing, submissions were made on Petrofac’s behalf informing the court that several of the projects concerned made losses. This case provides a potent reminder that contracts obtained through bribery can transpire to be not commercially viable – those receiving bribes care more about their own opportunities for financial gain than the best commercial interests of the company 'benefitting' from the contract award.
In failing to prevent bribery on this scale, Petrofac has suffered severe reputational damage alongside the heavy price of rebuild costs, court fine, confiscation, prosecution costs and their legal fees before even considering the costs of the bribes themselves and wider reputational damage.
The court praised the current board for their attempts to reform Petrofac since the allegations had come to light. These efforts were a substantial factor when it came to the court’s decision regarding the appropriate fine. Submissions were made and were acceded to by the court that there was little good in bankrupting a largely reformed company.
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 is joint head of business crime and regulation, and Rebecca Thomas a pupil barrister at 5 St Andrew’s Hill