The SFO and O2 Investigation: Gary Pons writes for The Solicitors Journal

Recent reports in the media suggest that communications provider O2 is under investigation by the SFO for potential breaches of the Bribery Act. Unsurprisingly, neither the SFO nor O2 have made any comments in relation to these media reports.

While little detail is available during the early stages of an investigation of this nature, this has not prevented media speculation about what it concerns. It is believed to relate to alleged abuse of O2’s UK incentive scheme, which rewarded employees with a bonus based on customer growth. The Telegraph, who first reported the story, revealed that their sources informed them that the investigation concerned former O2 executives involved with the payment of kickbacks with customers. This appears to be connected to the management reorganisation at O2 in 2017 and the shift away from third party retail towards direct sales to consumers and businesses.

The disclosure of an SFO investigation is likely to create concern across the mobile communications industry. Any practices that are identified as being utilised by O2 may well be common with the industry. Further investigation into other operators in the sector cannot be ruled out.

The O2 Statement

The trigger for the report in the media is a statement issued by O2 which it was obliged to produce due to its recent merging with Virgin Media to form VMED O2 UK Limited. O2 issued its Condensed Consolidated Financial Statements on 30 June 2021. Within that 134-page statement, page 51 reveals that it had been the subject of a disclosure request:

“O2 has been addressing a request for disclosure made by governmental authorities which is related to possible violations of anti-bribery laws and regulations. O2 continues to co-operate with the governmental authorities investigating this matter which is still ongoing. Whilst it is not possible at this time to predict the full scope or duration of this matter or its eventual outcome, O2 was able to make a reasonable estimate of the outcome, and recorded an accrual during 2019, which is included in our statement of financial position as of 30 June 2021. Additional disclosures of the matters required by International Accounting Standard (IAS) 37 have not been provided as permitted by IAS 37 para 92 as the directors believe that further disclosure will be seriously prejudicial to future developments on this matter.”

The interesting part of this statement is that O2 believes it can make a reasonable estimate of the outcome.

IAS are published international accounting standards that aims to increase transparency and trust in financial reporting.

IAS 37 governs the accounting for and disclosure of provisions, contingent liabilities, and contingent assets. In this particular case the provision relates to potential liabilities that O2 could incur as a result of the investigation.

It is also noteworthy that O2 believes that disclosing the matters required by IAS is likely to seriously prejudice the way in which the investigation develops. A reasonable inference from these two statements is that O2 believes that the investigation has a solid basis and will not simply disappear over time.

How will the investigation develop?

The O2 statement reveals that is has been responding to a request for disclosure from a government authority. This is likely to be a reference to the disclosure request typically made by the SFO as part of its investigation. The key to any investigation is to firstly establish the facts, and s.2 Criminal Justice Act 1987 provides the SFO with the power to issue a notice to any person or entity, compelling them to answer questions, provide information or produce specified documents. The SFO must have reasonable grounds to suspect that an offence has been committed involving serious or complex fraud or corruption.

Where documents are provided, the SFO will be permitted to take copies or extracts from the documents and, if any such documents are not produced, explain where the documents are. It is a criminal offence to fail to comply with such a notice, provide false or misleading information or to destroy relevant documents.

Once the investigation has concluded, the SFO will consider prosecution or a deferred prosecution agreement (DPA). DPAs are a mechanism by which an organisation can avoid prosecution by means of an agreement between it and the SFO (s.45 and Sch. 17, Crime and Courts Act 2013). The DPA is made under the supervision of a judge and the court retains control over the outcome. It allows the prosecution to be suspended for a defined period, provided that the organisation meets certain specified conditions.

DPAs have been picking up momentum since their introduction in the UK in 2014. An increasing number of DPAs have been utilised in recent years – most notably Rolls Royce and Airbus – which has been a welcome development for both the SFO and corporations in that they have enabled both sides to mitigate the risks and expense of lengthy trials whilst ensuring that companies make reparation for criminal behaviour.

However, DPAs are not the answer to every case of corporate corruption, as the recent case Petrofac demonstrates. Petrofac was prosecuted by the SFO for failing to prevent bribery between 2011 and 2017. It pleaded guilty to seven counts relating to bribes that were paid or offered by its former senior executives to help Petrofac win oil and gas contracts. It was sentenced on 1 October 2021 at Southwark Crown Court and ordered to pay a total of over £77m in fines, confiscation, and costs. The outcome of this case suggests the SFO might be moving away from negotiating DPAs with companies in instances where a ‘failure to prevent’ offence may have occurred. The government is currently consulting on whether to increase the number of offences associated with ‘failing to prevent’ economic crime.

An invitation to negotiate a DPA occurs at the SFO’s discretion. The Deferred Prosecution Agreements Code of Practice sets out the factors for the SFO to take into consideration when deciding if a DPA is appropriate. These include a genuinely proactive and co-operative approach to the investigation; the existence of a proactive corporate compliance programme; and early self-reporting.

Co-operation is always an important mitigating factor, regardless of whether the case is dealt with by a DPA. Petrofac’s former head of sales David Lufkin, who pleaded guilty to a total of 19 counts of bribery, received a two-year suspended sentence. David Lufkin had co-operated with SFO investigators and assisted with the investigation, which was recognised by HHJ Taylor in her sentencing remarks.

While it has been reported that O2 is co-operating with the SFO, the nature and extent of this co-operation are not yet known. Although light is yet to be shed on the nature of the allegations against O2, the company would do well to consider the Petrofac case in order to make the right decisions at an early stage. This can be crucial in mitigating damage when a corporation is undergoing an investigation of this nature.

Bribery Act 2010

The statement from O2 specifically mentions anti-bribery law. The offences of bribery were created in English law by the Bribery Act 2010. In addition to specific offences relating to both the person giving the bribe and the person receiving it, it also introduced the offence of failing to prevent bribery, which specifically targeted commercial organisations. Its rationale is that corporate bodies should be actively engaged in preventing bribery. Thus, the commercial organisation is guilty of an offence if a person associated with it bribes another person intending to retain business for the company or to obtain or retain a commercial advantage. The Act is directed at ensuring the companies have adequate policies and procedure in place to prevent those who are associated with it from undertaking bribery.

This policy of requiring companies to have adequate procedure in place to prevent certain criminal offence has been replicated in the Criminal Finances Act 2017 in respect of tax evasion. Corporate bodies should prevent those who act for/on behalf of it, from the criminal facilitation of tax evasion.

O2 are most likely referring to this, namely an investigation into their corporate practices and the extent to which their policies, controls and procedure were effective at preventing anti-bribery.

Mitigation of damage of this nature going forward

O2’s statement is essential to maintaining market confidence. O2 must demonstrate that it is cooperating with the SFO, that it is an equal partner in detecting what has occurred. The underlying rationale behind these anti-corruption rules is to create a legal and regulatory framework that places the onus on the company to regulate its affairs, prevent bribery and corruption and co-operate with the authorities in order to do so. It is designed to bring an end to companies concealing wrongdoing, and that is why the SFO expect a company to self-report. This is not just indicative of the underlying culture change that these offences seek to bring about but it is also good commercial practice. From a legal standpoint, O2 will be well-advised to investigate the extent of any wrongdoing and then co-operate by informing the SFO of what it has discovered.

How should O2 respond?

In practical terms, this will require O2 to actively engage with the SFO, and disclose the internal information that the SFO requires for its organisation. This is likely to include relevant financial records as well as emails.

O2 has two main concerns: firstly, satisfying the SFO that it has provided all of the material required. Secondly, satisfying the market that real and concrete steps have been taken to identify what happened, how it happened and to ensure that it is not repeated.

O2 would also do well to note that, as highlighted in Petrofac, a company’s co-operation, and their overall response to the investigation, will be an important factor in determining their future. Provided a company is taking visibly significant steps to reform, not only might this influence whether a DPA is considered but it will be an important factor in any financial penalty should it face prosecution. As in the Petrofac case, the court may decide that it is not in the public interest to render bankrupt a company that otherwise operates in a financially functional manner.

Any company who risk finding themselves embroiled in corruption scandals would be well advised to consider the lessons to be learned from the Petrofac case.

Wider conclusions: What impact are the UK anti-corruption laws having?

While we know that issues of concern are being investigated and acknowledged, albeit tacitly, by O2, detailed conclusions as to the nature and extent of any alleged dealings cannot be made until the investigation is concluded and the facts established.

A similar observation holds true in relation to the effectiveness of the UK’s anti-bribery and corruptions law. Nevertheless, cases such as O2 and Petrofac do demonstrate that progress that has been made in tackling corporate corruption in the UK. They have brought to the public’s attention the nature and extent of corrupt business practices, and shown how the authorities are working to tackle it. There is little doubt that much work is still required. While the likely reaction from government will be to introduce new laws to further tighten corruption and anti-bribery, they would be well-advised to consider precisely how the current laws function. Are new laws really required, or can the perceived failures be addressed by funding the authorities to a greater degree?

What is clear is that the well-publicised nature of the O2 investigation serves as a reminder that high-profile companies need to get their affairs in order, or risk facing rigorous examination by an increasingly determined Serious Fraud Office.

This article was published on 2 December 2021 in The Solicitor's Journal.

Gary Pons is a talented and dedicated barrister. His approach to cases is distinguished by its careful preparation and measured execution. Gary is ranked in both Chambers and Partners and the Legal 500 for his work in the field of POCA and Asset Forfeiture work (all circuits).

His experience in complex financial crime and asset forfeiture has allowed Gary to develop his practice over the years. Gary has experience of foreign criminal proceedings having been involved with two high profile cases in Costa Rica. He frequently advises on multi-jurisdictional asset recovery cases.