COMPANY INVESTIGATIONS: THE IMPORTANCE OF STRATEGY Rio Tinto’s former CEO has had his multi-million dollar bonus postponed because the mining giant is at the centre of a bribery probe. Aziz Rahman outlines how companies can develop strategies to minimise the damage caused by investigations. 29 January 2019 23 days ago As a company, Rio Tinto is one of the world’s leading mining groups. But it finds itself at the centre of an investigation over allegations of bribery relating to an iron ore project in Guinea. It has cited the investigation as the reason why it is delaying the payment of bonuses worth millions of dollars to its former Chief Executive Officer, Sam Walsh. Walsh retired as CEO in July 2016, months before Rio announced that it had alerted authorities, including the US Department of Justice and the UK’s Serious Fraud Office, about its concerns over payments related to the Guinea project. . The investigation is not good news for Walsh or Rio Tinto. It could be viewed as a warning to individuals about their liability regarding bribery. But it also emphasises the importance of companies choosing the right course of action when wrongdoing is suspected. Nobody would argue that withholding a former senior executive’s bonus payments automatically turns a bad situation into a good one. The issue at stake here is not what lands – or doesn’t land - in Sam Walsh’s bank account. The real matter to be considered is what Rio Tinto or any other company in similar circumstances should be doing to minimise the damage. Investigation Without knowing the precise details, it is clear that Rio Tinto is facing allegations of bribery. And in such a situation you have to know how to respond. Putting it simply, a company that believes it may have been involved in bribery should be going back to basics. That means conducting a carefully thought-out investigation to get to the bottom of the allegations. Such an investigation can determine what exactly has happened and examine what evidence of the wrongdoing is available. Only by taking such a step can a company understand the seriousness of the situation it finds itself in and draw up a strategy to minimise the damage. There may be some reading this who will doubt that the potential fall-out from such a situation can be minimised. But it can – if the right approach is taken. Even if a company’s investigations do find clear evidence of wrongdoing, this does not mean that it has to surrender meekly to the authorities and simply hope for the best. Choosing the right course of action can make all the difference between receiving the maximum penalty available and being treated leniently. Self-reporting the wrongdoing is likely to earn a company a certain amount of goodwill with the investigating authorities. It will not mean that the matter goes unpunished but the fact that a company is open about the problem it has discovered and cooperates with investigators is likely to mean a lesser punishment than if it is unaware of the problem or turns a blind eye to it until confronted with it by the authorities. Cooperation The importance of cooperation and strategy cannot be overemphasised. As an example, when Rolls-Royce was confronted with evidence that it had systematically spent millions of pounds in bribes over many years to secure contracts it did a number of things. Firstly, it conducted a thorough investigation into what had gone wrong. It then removed certain members of staff, reviewed most if not all of its working practices and made sweeping changes to how it functioned as a company. As a result, it was granted a deferred prosecution agreement (DPA) in 2017 by the Serious Fraud Office (SFO); which meant that it paid a fine and met certain other conditions. But crucially it avoided a conviction. Rolls-Royce’s cooperation with the SFO and the major changes it made to its working practices were large factors in it avoiding prosecution. But strategy played its part. In making representations to the SFO, the engineering giant emphasised the huge numbers of people directly and indirectly dependent on it for employment and the harm they could suffer if the firm was convicted. Rolls-Royce also argued that any conviction would have a detrimental effect on the whole market in which it operates. So while it was obviously cooperating with the SFO it was also making considered efforts to argue its case for not being treated harshly. And it succeeded. The point I wish to make, therefore, is don’t be scared by the first signs that your company has done something wrong. Such problems can be managed in a way that minimises the damage, even if there is no alternative but to admit the company has acted illegally. Liability But a company should also not be too eager to admit liability. A recent case has demonstrated this. In 2014, Tesco admitted that it had manipulated its accounts to overstate its profits. Three years later, like Rolls-Royce, it was granted a DPA. Late last year, two of its directors went on trial for fraud and false accounting but the prosecution collapsed when the judge threw the case out due to the weakness of the prosecution case. That was obviously good news for the directors concerned. But it meant that there is now a contradictory set of circumstances: Tesco has admitted there was wrongdoing and paid £129M plus legal costs under the terms of its DPA and yet neither the company nor any individuals working for it have been successfully prosecuted for what was clearly a crime. Was Tesco shrewd in agreeing to a DPA to avoid being prosecuted? Possibly. Or has the failure of the prosecution of its directors proved that Tesco was too quick to admit to wrongdoing that may never have been proven if it had been prosecuted? Again, the answer is possibly. But what is certain, as the Tesco case shows, is that careful consideration is required before any company admits liability. Corporate liability and individual liability for wrongdoing can produce situations like the one that has faced Tesco. Any company that believes it may be facing a criminal investigation must weigh up all the possibilities and take advice from specialists in this area of law before deciding how to act. Prevention Rio has already dismissed two senior executives for failing to maintain standards outlined in the company’s code of conduct. Walsh was not dismissed. But he is a former CEO being left out of pocket, for now at least, for failing to prevent bribery dating back years. A sobering thought perhaps for those in business who still believe they can stay one step ahead of the investigators or stick their head in the sand when it comes to bribery. Mr Walsh is just the latest example of a senior figure paying the price for apparently allowing bribery to be committed on his watch. And Rio Tinto is one of a number of companies having to spend time and money trying to protect its finances, reputation and standing in the marketplace due to a bribery investigation. This is an expense that proper bribery prevention would have rendered unnecessary. The energy and resources sector may currently be the subject of a number of major corruption investigations around the globe. But every company, regardless of the nature of its business or where it conducts it, requires a carefully thought-out, well-devised and properly enforced compliance programme if it is serious about bribery prevention. Each company needs to have in place measures that allow it to identify the potential for, and then prevent, wrongdoing. It is possible that wrongdoing may still be carried out. But it is less likely. Such steps cannot be a cosmetic exercise, an attempt to be seen to be doing something. They need to be a genuine effort to prevent crime – an approach that shows an awareness of the corruption risks where the company trades, includes proactive measures to reduce those risks and involves whistle blowing procedures so any suspicions are flagged up and examined. The risks of bribery will vary from country to country. Some business sectors will be more prone to it than others. But all companies must seek informed expert advice on the bribery risks in the countries and sectors in which they trade. Only then can they devise the practices they need to prevent the company and any individuals within it becoming embroiled in bribery – and any past or present senior figures being hit in their wallet as a result.