Dec 16, 2015

Standard Bank $30 Million fine - the issues by Babatunde Akinyanju

On Monday 30th November 2015, in a crowded courtroom at the High Court in London, legal history was made when a senior judge ordered ICBC Standard Bank Plc to pay US$30 million to avoid a criminal conviction following a US$600 million bribery scandal in Tanzania.

Chinese-owed bank
The Rt. Hon.Sir Brian Leveson, President of Queen’s Bench Division made a ruling under a negotiated agreement between the prosecutor, The Serious Fraud Office (SFO) and the UK arm of the South African and Chinese bank. (On 1st February 2015, the Industrial & Commercial Bank of China Ltd (ICBC) acquired a 60% controlling stake of Standard Bank in the UK). The declaration known as a ‘Deferred Prosecution Agreement’ (DPA) suspends any criminal prosecution against the bank provided the sum of $30 million is paid by Monday, 7th December 2015, and it complies with other conditions within the next three years. 

Stanbic Bank, Tanzania
Standard Bank, a UK regulated bank (SBUK), at the relevant time was a subsidiary of Standard Bank Group Ltd, a publicly-owned company registered in South Africa. Another subsidiary of the Standard Bank Group was Stanbic Bank Tanzania Ltd (Stanbic) located in Dar es Salam. 

In 2012, the Tanzanian Government needed to raise public funds to support its ongoing “five-year development plan” for infrastructure development.  Significantly, Stanbic was not licensed to deal with non-local foreign investors in the capital markets. It therefore teamed up with SBUK to perform that role. SBUK and Stanbic submitted a joint proposal for the mandate to raise funds for the Tanzanian Govt. by way of a sovereign note placement. The transaction was significant, US$600 million, and offered future business opportunities in Tanzania for SBUK and Stanbic.

Tanzanian Government Officials 
Negotiations began in February 2012 when both banks quoted a combined fee of 1.4% of gross fees raised. In September 2012, Stanbic increased the proposed fee to be paid by the Tanzanian Govt to 2.4%. It transpired that the extra one percent fee would be paid to a “local partner”, a Tanzanian-registered company known as Enterprise Growth Market Advisors Ltd (EGMA). EMGA’s chairman and one of its three shareholders was Mr Harry Kitilya. Mr Kitilya also happened to be Commissioner of the Tanzania Revenue Authority, therefore, a serving member of the Tanzanian Govt. The Managing Director of EMGA was Dr Fraten Mboya (CEO of the Tanzanian Capital Markets & Securities Authority from 1995-2011). Stanbic did not address this conflict of interest.

SBUK was unaware of the proposed involvement of EMGA as a local partner in this transaction (along with the 1% increase in the fee) until after the proposal had been submitted to the Tanzanian Govt. When subsequent investigations were carried out no documentation could be found to explain what role if any EMGA had played in securing the deal. 

Lack of Due Diligence 
By the end of September 2012, EMGA opened a bank account with Stanbic, which obliged the bank to carry out regulatory checks (“Know Your Customer”). The checklist acknowledged that the account was “high risk”, but failed to specify reasons for this conclusion. The regulatory check also failed to mention the role of Mr Kitilya in government and that both he and Mr Mboya were “politically exposed persons”. SBUK failed to carry out its own due diligence checks on the two individuals, relying instead on the information provided by Stanbic.

False Mandate for US$6m Bribe
In November 2012, the mandate and fee letters were signed. The mandate was between SBUK, Stanbic and the Tanzanian Federal Ministry of Finance. This mandate made no mention of EMGA and referred to the “total facilitation” fee of 2.4%, constituting “total advisory, arranging co-ordinator participation and book runner fees”. It also included “disbursement costs and agency costs”. The fee letter referred to SBUK and Stanbic agreeing to act as lead managers “in collaboration with its partner.” The deal made provision for a 1% fee to be paid from Tanzanian public funds to EMGA via Stanbic, without the payment coming through normal government channels.

Stanbic Senior Executives 
The mandate was formally granted to SBUK and Stanbic in November 2012. When the financing was completed by March 2013, the amount raised was US$ 600 million. Stanbic paid EMGA the 1% fee (US$ 6 million) into an additional Stanbic collection account. Within 10 days of payment the MD of EMGA Mr Mboya withdrew majority of the $6m in cash. This was with the consent and assistance of two Stanbic senior executives Bashir Awale, CEO and Shose Sinare, Head of Corporate & Investment Banking. Mr Sinare authorised the transfer of the outstanding balance to EMGA’s account.

Standard Bank raises the dust
Other staff at Stanbic queried the cash withdrawals from EMGA and reported the matter to the head office, Standard Bank Group in South Africa and to SBUK. Internal investigations were carried out. SBUK instructed lawyers in London (Jones Day) who reported the matter to the prosecuting agency in the UK, the Serious Fraud Office (SFO). 

Prosecution and Defence negotiate
SBUK co-operated fully with the SFO and after negotiations and an agreement on the circumstances that transpired in Tanzania. The SFO accepted that SBUK had not been directly involved in the offence of bribery. Nevertheless, by not carrying out necessary checks SBUK had committed an offence. The SFO, in accordance with its Codes of Practice decided that rather than proceed with prosecution it would seek a Deferred Prosecution Agreement (DPA).

Interests of Justice Test (Para 8, Sch 15, Crime & Courts Act 2013)

1.The Director of the SFO concluded that: there was sufficient evidence that the organisation SBUK had committed an offence of failing to prevent bribery, contrary to s7 of the Bribery Act 2010; secondly, that it was in the public interest for the matter to be dealt with by a DPA (in accordance with the DPA Code of Practice).

2. Thereafter the SFO and SBUK agreed a provisional agreement as to the terms of the DPA.

3. The matter was considered by Justice Leveson on 4th November 2015, in private, when he heard submissions from Queen’s Counsel instructed by both parties. The SFO was seeking a Declaration that entering into a DPA with the organisation (SBUK) was likely to be in the interests of justice, and the proposed terms of the DPA were fair, reasonable and proportionate. 

4. In applying the ’Interests of justice test’ under Rule 11.3(3)(i) Criminal Procedure Rules 2015 Sir Brian considered the following:
Seriousness of the conduct: the alleged bribery committed by two senior executives of Stanbic with the intention to bribe a public official, using public funds for the bribe payment, such as could compromise the integrity of the financial market. He noted that SBUK was not involved in the bribery.

SBUK’s potential criminality arising out of its own compliance procedures and failure to recognise the risks inherent in the proposal. 

SBUK immediately reported itself to the authorities and adopted a genuinely proactive approach to the matter- a factor recognised in the DPA Code of Practice.

SBUK conducted a detailed internal investigation that had been sanctioned by the SFO and reported its findings. The statement of facts presented to the judge by the SFO was substantially reliant on the evidence voluntarily disclosed by SBUK.

SBUK employees responded promptly to requests by the SFO for information and material.

SBUK had no previous criminal investigations or convictions save for a civil sanction imposed in 2011, by the Financial Conduct Authority for lax anti-money laundering procedures.

SBUK had enhanced its compliance policies, procedures and processes since 2011
There was now a new board of directors at SBUK following its acquisition by ICBC in Feb 2015.

On 30th November 2015 the court declared the DPA in the following terms:
Compensation to the Tanzanian Govt. of US$6m, plus interest of US$ 1,153,125;
Disgorgement of fee income of US$ 8.4m (the sum paid to SBUK and Stanbic as Lead Managers) 
Financial penalty in the sum of US$ 16.8m;
Costs of the SFO £330,000
In addition, (not part of the DPA, but taken into account by the judge) SBUK agreed a civil settlement of US$4.2m, to the US Securities and Exchange Commission, for violation of US Securities Law as a result of this transaction.

The bank must also continue to co-operate with the SFO and show evidence of improvement in its compliance procedures over the three-year period of the DPA. The Bribery Act charge of Failing to Prevent Bribery is suspended for the duration of the order.

High Standards of Banking required for Business 
In his concluding remarks the judge noted that the UK registered bank acquiesced, albeit unwittingly in large scale bribery, which was preventable had the proper procedures being followed. He went on to say that: ”Standard Bank has far better served its shareholders, its customers and its employees (as well as those with whom it deals) by demonstrating its recognition of its serious failings and its determination in the future to adhere to the highest standards of banking. Such an approach can itself go a long way to repairing and, ultimately enhance its reputation and in consequence its business.” 

Babatunde Akinyanju is a lawyer and training consultant based in the UK and Nigeria           @bakinyanju
4th December 2015   © Copyright Babatunde Akinyanju. All rights reserved.


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