Executives Jailed in UK Serious Fraud Office Crackdown on Breaches of Economic Sanctions

March 10, 2011 Authors: Lista M. Cannon, David Harris, Nicola Kelly

The UK Serious Fraud Office (“SFO”) has delivered an important warning to companies and their executives doing business in jurisdictions subject to economic sanctions. On 23 February 2011, two former directors of one of the UK’s largest privately-owned companies, bridge building firm Mabey & Johnson Ltd, were each jailed and fined for sanctions offences in connection with contracts for the construction of bridges in Iraq between 2001 and 2002.

The imposition of custodial sentences indicates that the UK regulators and courts are taking breaches of sanctions very seriously. SFO Director Richard Alderman commented that “this shows that the SFO is determined to go after senior corporate executives who break the law…It sends out a very strong message from the courts on this type of offending.”[1] Significantly, international regulators such as the SFO are continuing to increase enforcement activity in this area, and businesses and their directors can no longer focus simply on the enforcement activities of the U.S. Department of Justice and the Office of Foreign Assets Control.

Prosecution of the company

Mabey & Johnson manufactures and exports pre-fabricated bridges to developing countries. Following Iraq’s invasion of Kuwait in 1990, the company was forced to cease trading with Iraq in light of UN sanctions. However, Mabey & Johnson re-entered the market following the implementation of the UN’s Oil-for-Food Programme, which permitted Iraq to resume its export of crude oil in order to acquire humanitarian goods including designated infrastructure such as bridges. In late 2009, following a lengthy investigation by the SFO instigated by a report from the company to the regulator, Mabey & Johnson pled guilty to offences of overseas corruption in a number of countries and breaching UN Sanctions on Iraq.

The Court found that Mabey & Johnson agreed to pay kickbacks to the Iraqi Government to win a €4.2 million contract for the supply of 13 bridges through the Oil-for-Food Programme. The kickbacks amounted to 10% of the contract values. On 25 September 2009, the company was ordered to pay £6.6 million, which included a £2 million fine in connection with its activities in Iraq, to pay £618,000 to the Iraq Reconstruction Fund and to submit its internal compliance programme to an SFO approved independent monitor. Significantly, this was the first successful prosecution of a UK company in the UK for overseas corruption and breaches of the UN sanctions on Iraq. Richard Alderman described the prosecution of the company as a “landmark outcome”.[2]

Action against Mabey & Johnson directors

The SFO continued to pursue its investigation into the role of the directors in connection with Mabey & Johnson’s activities in Iraq, culminating in the latest prosecution.

The court heard that Richard Gledhill, then a Sales Manager at the company, had negotiated the contract with the Iraqi government. Charles Forsyth, former Managing Director, and David Mabey, former Sales Director, had approved the kickback payments. The SFO noted that without the kickbacks, described as “commission payments” which were paid to Mabey & Johnson’s local representative in Iraq, the bridge components would not have been permitted to enter Iraq and the company would not have received payment. The company did not have the appropriate HM Treasury licence which was required at the time to make funds available to the Government of Iraq.

Charles Forsyth and David Mabey pled not guilty to charges of making illegal payments in Iraq during 2001 and 2002 in breach of the Iraq (United Nations Sanctions) Order 2000 (the “Order”), which implemented the United Nations Sanctions on Iraq in the UK.[3] On 10 February 2011, a jury at Southwark Crown Court in London found the two former directors guilty. Richard Gledhill pleaded guilty to sanction offences at an earlier hearing and gave evidence for the prosecution.[4] On 23 February 2011, Charles Forsyth was sentenced to 21 months imprisonment, disqualified from acting as a company director for five years and was ordered to pay prosecution costs of £75,000. David Mabey was sentenced to eight months imprisonment, disqualified from acting as a company director for two years and was ordered to pay prosecution costs of £125,000. Richard Gledhill was sentenced to eight months imprisonment, suspended for two years.

Comment

The SFO and the UK courts are continuing to pursue a strong enforcement agenda. On 25 February 2011, the SFO reported that two individuals had been sentenced in separate proceedings concerning the sale of Iraqi oil under the UN Oil-for-Food Programme. Aftab Noor Al-Hassan and Riad El-Taher received 16 months imprisonment, suspended for two years and a 10-month custodial sentence respectively, for breaches of the UN sanctions on Iraq under the Order. [5] Aftab Noor Al-Hassan and Riad El-Taher both pleaded guilty to breaches of the Order.

These recent decisions are a reminder that businesses should ensure that they have effective and adequate procedures in place to comply with relevant economic sanctions when conducting business in jurisdictions of considerable risk. While sanctions relating to business activities in Iraq have been significantly reduced in recent years, there are still certain restrictions in place, including an arms embargo and financial sanctions in relation to designated individuals and companies. The SFO’s enforcement action against the former employees of Mabey & Johnson, in which Mr Justice Rivlin QC noted that “when a Director of a major company plays even a small part, he can expect to receive a custodial sentence,” indicates that breach of sanctions could be a costly mistake for businesses and their executives.

This article was prepared by Lista M. Cannon (Partner, lcannon@fulbright.com or +44 0 20 7832 3601), David Harris (Senior Associate, dharris@fulbright.com or +44 0 20 7832 3637) and Nicola Kelly (Associate, nkelly@fulbright.com or +44 0 20 7832 3630) of Fulbright & Jaworski International LLP in London. Lista, David and Nicola are lawyers in Fulbright & Jaworski L.L.P.'s International Trade Practice Group which advises clients worldwide in the areas of economic sanctions, export controls and international trade regulation.

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[1] SFO Press Release dated 23 February 2011: http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2011/mabey--johnson-ltd-former-executives-jailed-for-helping-finance-saddam-hussein's-government.aspx

[2] SFO Press Release dated 25 September 2009: http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2009/mabey--johnson-ltd-sentencing-.aspx

[3] In another interesting aspect of this case, the two former Directors had sought on appeal to have one charge under the Order quashed on ultra vires grounds. The basis of the appeal was that the Order was ultra vires section 1 of the United Nations Act 1946 (the “1946 Act”). They argued that the Order (made on or about 2000) could not be made under the 1946 Act unless made “at or about the same time” as when the relevant Security Council Resolution was adopted (the Resolution was adopted in 1990). The novel argument failed on appeal before the Supreme Court, which held that the purpose of the “at or about the same time” provision under the 1946 Act was that the order-making power would ordinarily need to be exercised speedily and was not intended to confine it to urgent use.

[4] SFO Press Release dated 10 February 2011: http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2011/mabey--johnson-directors-made-illegal-payments-to-sadam-hussein's-iraq-to-gain-contract.aspx

[5] SFO Press Releases dated 25 February 2011: http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2011/united-nations-sanctions-breaker-sentenced.aspx and http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2011/united-nations-sanctions-breaker-jailed.aspx