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Case No: U20170036

IN THE CROWN COURT AT SOUTHWARK

IN THE MATTER OF s. 45 OF THE CRIME AND COURTS ACT 2013

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 17 January 2017

Before :

THE PRESIDENT OF THE QUEEN'S BENCH DIVISION

(THE RT. HON. SIR BRIAN LEVESON)

Between :

SERIOUS FRAUD OFFICE Applicant

- and -

ROLLS-ROYCE PLC Respondents

ROLLS-ROYCE ENERGY SYSTEMS INC

Sir Edward Garnier Q.C., Richard Whittam Q.C., Allison Clare, Christopher Foulkes,

Saul Herman

and Jennifer Carter-Manning (instructed by the Serious Fraud Office) for the Applicant David Perry Q.C. Miranda Hill and Katherine Hardcastle (instructed by Slaughter and

May, London) for the Respondents

Hearing date: 17 January 2017

Approved Judgment

I direct that no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

SFO v Rolls-Royce plc & anor.

Approved Judgment

Sir Brian Leveson P :

Introduction

1. This is the third (and, by far, the largest) application for approval by the court of a deferred prosecution agreement ("DPA") reached between the Serious Fraud Office ("SFO") and two entities now ultimately owned by Rolls-Royce Holdings plc namely Rolls-Royce plc ("Rolls-Royce") and its Delaware incorporated subsidiary, Rolls- Royce Energy Systems Inc ("RRESI"). It covers the conduct of Rolls-Royce and RRESI in Nigeria, Indonesia and Russia along with the conduct of Rolls-Royce alone in Thailand, India, China and Malaysia. 2.

Rolls-Royce Holdings plc (listed on the London Stock Exchange and forming part of the FTSE 100 index) is properly considered to be a company of central importance to the United Kingdom, with a reputation in the field of engineering second to none. On

its website, it describes it s activities in this way: "Rolls-Royce is a global company providing highly-efficient integrated power and propulsion solutions. Our power systems are predominantly used in aerospace, marine, energy and off- highway applications. We are one of the world's leading producers of aero engines for large civil aircraft and corporate jets. We are the second largest provider of defence aero engines in the world. Rolls-Royce is well established in the marine sector where we design vessels and integrate power systems. We have a growing presence in civil nuclear power, drawing on our skills and experience of over 50 years in powering nuclear submarines. Our MTU brand is world-renowned in high-speed diesel engines powering applications as diverse as rail locomotives and luxury yachts." 3. Rolls-Royce and its subsidiaries employ some 50,000 people, in more than

50 countries. This case concerns the conduct of its civil aerospace business which manufactures engines for the commercial large aircraft and corporate jet markets and

generates approximately 50% of its revenue, defence aerospace business which manufactures engines for the military transport market and is the second largest provider of defence aero engine products and services in the world (gen erating approximately 20% of its revenue), and its former energy business concerned with the manufacture of gas turbines and compressors to power off-shore platforms, the transport of oil and gas through pipelines, and the generation of electricity which generates less than 10% of its revenue, part of which was conducted by RRESI. 4. Against that background, it can properly be described as devastating and of the very greatest gravity that the conduct of this institution should fall to be examined within the context of a criminal investigation and that the investigation (in very large part conducted and voluntarily revealed to the SFO by Rolls-Royce itself) should reveal the most serious breaches of the criminal law in the areas of bribery and corruption (some of which implicated senior management and, on the face of it, controlling minds of the company). It involves:

SFO v Rolls-Royce plc & anor.

Approved Judgment

i) agreements to make corrupt payments to agents in connection with the sale of Trent aero engines for civil aircraft in Indonesia and Thailand between 1989 and 2006; ii) concealment or obfuscation of the use of intermediaries involved in its defence business in India between 2005 and 2009 when the use of intermediaries was restricted; iii) an agreement to make a corrupt payment in 2006/7 to recover a list of intermediaries that had been taken by a tax inspector from Rolls-Royce in

India;

iv) an agreement to make corrupt payments to agents in connection with the supply of gas compression equipment in Russia between January 2008 and

December 2009;

v) failing to prevent bribery by employees or intermediaries in conducting its energy business in Nigeria and Indonesia between the commencement of the Bribery Act 2010 and May 2013 and July 2013 respectively, with similar failures in relation to its civil business in Indonesia; vi) failure to prevent the provision by Rolls-Royce employees of inducements which constitutes bribery in its civil business in China and Malaysia between the commencement of the Bribery Act 2010 and December 2013. 5. Further, in relation to the conduct of Rolls-Royce, there have been discussions between the SFO and the Department of Justice in the United States and discussions between the Department of Justice and the Brazilian Ministério Público Federal, to ensure a coordinated global resolution of the relevant conduct. Parallel to this DPA, it is intended that a similar type of agreement reached with the Department of Justice (which has been fully disclosed in these proceedings) and a settlement with the Brazilian authorities will be announced. The American agreement covers the conduct of Rolls-Royce's energy business (in Brazil, Kazakhstan and Thailand) and also addresses conduct relating to Rolls-Royce and RRESI arising from an investigation into its use of an intermediary called Unaoil.

Deferred Prosecution Agreements

6. Although the concept of a DPA has been fully explained in both judgments which follow the first two agreements (

SFO v Standard Bank plc and SFO v XYZ Ltd), it is

worth summarising the structure as prescribed by s. 45 and Schedule 17 of the Crime and Courts Act 2013 (“the 2013 Act"). In short, a DPA is potentially available for certain economic or financial offences to a body corporate, a partnership or an unincorporated association in respect of whom the only criminal sanction is financial: it does not cover (nor does it protect from prosecution) any individual. It provides a mechanism whereby, subject to the approval of the court, prosecution can be avoided by entering into an agreement on negotiated terms with a prosecutor designated by the

2013 Act.

7. The court's role is as follows. Following the commencement of negotiations and what might become an agreement, the scheme mandates that a hearing must be held in

SFO v Rolls-Royce plc & anor.

Approved Judgment

private for the purposes of ascertaining whether the court will declare that the proposed DPA is "likely" to be in the interests of justice and its proposed terms are fair, reasonable and proportionate: see paras. 7(1) and (4) of Schedule 17 of the 2013 Act. Reasons must be given and, if a declaration is declined, a further application is permitted (paras. 7(2) and (3) ibid). In that way, the court retains control of the ultimate outcome and, if the agreement is not approved, the possibility of prosecution is not jeopardised as a consequence of any publicity that would follow if these proceedings had not been held in private. 8. If a declaration has been granted pursuant to para. 7(1) of Schedule 17 and the DPA is finalised on the terms previously identified, para. 8 of Schedule 17 comes into play.

This provides:

"(1) Where a prosecutor and P have agreed the terms of a DPA, the prosecutor must apply to the Crown Court for a declaration that - (a) the DPA is in the interests of justice, and (b) the terms of the DPA are fair, reasonable and proportionate. (2) But the prosecutor may not make an application under sub-paragraph 1 unless the court has made a declaration under paragraph 7(1) (declaration on preliminary hearing). (3) A DPA only comes into force when it is approved by the Crown Court making a declaration under sub-paragraph (1). (4) The court must give reasons for its decision on whether or not to make a declaration under sub-paragraph (1). (5) A hearing at which an application under this paragraph is determined may be held in private. (6) But if the court decides to approve the DPA and make a declaration under sub-paragraph (1) it must do so, and give its reasons, in open court. (7) Upon approval of the DPA by the court, the prosecutor must publish - (a) the DPA (b) the declaration of the court under paragraph 7 and the reasons for its decision to make the declaration, (c) in a case where the court initially declined to make a declaration under paragraph 7, the court's reason for that decision, and

SFO v Rolls-Royce plc & anor.

Approved Judgment

(d) the court's declaration under this paragraph and the reasons for its decision to make the declaration, unless the prosecutor is prevented from doing so by an enactment or by an order of the court under paragraph 12 (postponement of publication to avoid prejudicing proceedings)." 9. Thus, even having agreed that a DPA is likely to be in the interests of justice and that its proposed terms are fair, reasonable and proportionate, the court continues to retain control and can decline to concl ude that it is, in fact, in the interests of justice or that its terms are fair, reasonable and proportionate. To that end, it remains open to continue the argument in private, again on the basis that, if a declaration under para.

8(1) is not forthcoming, a prosecution is not jeopardised although it has to be

recognised that, absent a material change of circumstances between the para. 7 hearing and the para. 8 hearing, it is difficult to see how the court could conclude that a DPA which it considered likely to be in the interests of justice with terms fair, reasonable and proportionate was not, in fact, in the interests of justice with terms which are fair, reasonable and proportionate. 10. That is particularly so in the context of this case where, for entirely justifiable reasons, the para. 7 hearing (which commenced with a directions hearing on 12 January and was argued on the following day), was concluded only in the late afternoon of 16 January. Linked to the change in administration in the United States, it became necessary for a para. 8 hearing to be conducted on 17 January (dependin g on para. 7 approval). 11. Once the court has expressed itself minded to approve under para. 7, the case must be opened and argued and a declaration, along with the reasons for it, provided in open court. The entire process, including the engagement of the parties with the court then becomes open to public scrutiny, consistent with the principles of open justice. Thus, the DPA (which must contain an expiry da te and include a statement of facts: see para. 5 of Schedule 17) must be published along with the declarations provided under both para. 7 and para. 8 and, in each case, the reasons provided by the court for doing so. The only exception is where publication is prevented by statute or must be postponed to avoid a substantial risk of serious prejudice to the administration of justice in any other legal proceedings.

This Application

12. On 19 December 2016, an application was made by the Director of the Serious Fraud Office ("the SFO") pursuant to para. 7(1) of Schedule 17 of the 2013 Act in relation to a proposed DPA between the Director of the SFO, on the one hand and Rolls- Royce and RRESI on the other. A preliminary hearing was initially arranged for 23 January but, as I have indicated, for reasons which I accept were entirely justifiable, the timetable had to be substantially abridged with the hearing being conducted on 13

January. A considerable body of material

was put before the court and I received submissions from Sir Edward Garnier Q.C. and Mr Richard Whittam Q.C. for the SFO and David Perry Q.C. (who appeared over a video link from Hong Kong where he is presently engaged in other work) and Ms Miranda Hill (who was in court) for

Rolls-Royce and RRESI.

SFO v Rolls-Royce plc & anor.

Approved Judgment

13. Having considered the matter following the submissions, yesterday afternoon, I declared that entering into the DPA was likely to be in the interests of justice and that its proposed terms were fair, reasonable and proportionate. Given that I considered it appropriate to provide the most detailed explanation for my decision in this judgment (which follows less than 24 hour s after my preliminary decision), I have decided that a draft of this judgment should be made available to the parties on the usual confidential terms as broadly representing my reasons while reserving the right to modify or change them should anything in the para. 8 hearing cause me to do so. Neither side suggested that this approach did not fully comply with the provisions of Schedule 17 but it should not be taken as a precedent for any future application and follows only from the extremely limited time available to deal with the matter. 14. Since my decision under para. 7, the DPA has now been agreed and the Director of the SFO applies for a declaration under para. 8 that it is in the interests of justice and that its terms are fair, reasonable and proportionate. In other words, I repeat that I am asked definitively to approve that which I previously approved provisionally. Having regard to my conclusion that I would grant the appropriate declaration, I ordered that the proceedings should be held in public and gave leave for an appropriate stock market announcement to be published by Rolls-Royce. The case has been put into the list for Southwark Crown Court and the SFO agreed to ensure that the press (as representatives of the public) were fully informed. 15.

The interests of justice and each of the terms of the DPA require detailed consideration. First, however, it is necessary to describe in some detail the nature of

the investigation (and, in particular, the critical part that Rolls-Royce has played in it) and the conduct exposed by the investigations and which is covered by the agreement.

The Investigation

16. In early 2012, internet postings which raised concerns about the operation of Rolls Royce's civil business in China and Indonesia came to the attention of the SFO which sought information from Rolls-Royce. An investigation was immediately commenced by Rolls-Royce itself which led to a report on the findings into these and other issues in its civil and defence work. 17. Furthermore, starting in 2013, Rolls-Royce also voluntarily supplied to the SFO reports in respect of its internal investigations into its energy, defence, civil, and marine businesses. This has been far more extensive than was identified in the public domain; it included written reports revealing further corruption indications and a report concerning conduct Rolls-Royce had known about since 2010 and previously (under different leadership) decided not to notify. 18. The investigation, continuing to date, has included collection of data and review of email containers from relevant employees together with a review of relevant archive material; 229 internal investigation interviews. Rolls-Royce also reviewed over 250 relationships it had with intermediaries, agents, advisers and consultants, closely analysing over 120 of these relationships. Throughout, it has issued regular reports to the SFO and DOJ on its findings with full consequential disclosure of those findings to the SFO.

SFO v Rolls-Royce plc & anor.

Approved Judgment

19. As a result, the SFO commenced an investigation into each of these businesses and it is the largest such investigation to date. In addition to examining the internal investigations (including the interviews, Rolls-Royce having waived any claim for legal professional privilege on a limited basis), the SFO, with what Sir Edward, for the SFO, recognised was "the extraordinary cooperation of Rolls-Royce", has conducted its own extensive investigation. This investigation has included: i) obtaining from Rolls-Royce the key documents identified by the internal investigations including memoranda of interviews, along with access generally to Rolls-Royce hard copy documents; ii) obtaining from Rolls-Royce complete digital repositories or email containers where available of in excess of 100 key employees or former employees, without filtering the material for potential privilege, but, instead, permitting issues of privilege to be resolved by independent counsel; iii) obtaining documentary evidence through requests for mutual legal assistance; iv)

arresting domestic and overseas intermediaries and former Rolls-Royce employees (including searches of their premises) and conducting numerous

interviews of suspects and others wh ether voluntarily or under compulsion; v) making other targeted requests and review of material (all of which have been voluntarily provided), such as compliance material, including historic internal reviews; personnel files; employee notebooks; telephones; marketing services agent files; and accountancy records. 20. The full and extensive nature of this co-operation has led to the acquisition, and application of digital review methods to over 30 million documents. All this has been in the context of an investigation concerning conduct in multiple jurisdictions, across four business lines and spanning a long peri od of time. Sir Edward has made clear (and the Statement of Facts confirms) that the proactive approach to co-operation adopted by Rolls-Royce has led to the SFO receiving pertinent information which may not otherwise have come to its attention. Rolls-Royce's approach has included: i) genuine cooperation with the SFO in the conduct of Rolls-Royce's own internal investigation, including deferring interviews until the SFO had first completed its interview, and the audio recording of interviews where requested; ii)

disclosure of all interview memoranda was made (on a limited waiver basis), despite Rolls-Royce's belief that the material was capable of resisting an order

for disclosure, on the basis that it was privileged; iii) providing all material requested by the SFO voluntarily, that is to say without requiring recourse to compulsory powers (in one case at least effectively relinquishing control to the SFO); and iv) consulting the SFO in respect of developments in media coverage, and seeking the SFO's permission before winding up companies that may have been implicated in the SFO's investigation.

SFO v Rolls-Royce plc & anor.

Approved Judgment

21.
I have recited the extent of the assistance provided by Rolls-Royce because it is highly material both to the interests of justice and the assessment of the balance between prosecution and DPA and also to the appropriate discount to allow from the financial penalty imposed. In both SFO v Standard Bank plc (U20150854) and SFO v

XYZ Ltd

[U20150856], the DPA followed what was a self-report at a time that the SFO neither had knowledge of, nor known means of likelihood of learning about, the conduct which led to the DPA (see [27]-[28] of the decision dated 30 November 2015 and [24]-[25] of the redacted decision dated 8 July 2016 respectively). In this case, the SFO had been alerted because of the public internet posting and had initiated an inquiry. 22.
The fact that an investigation was not triggered by a self-report would usually be highly relevant in the balance but the nature and extent of the co-operation provided by Rolls-Royce in this case has persuaded the SFO not only to use the wo rd "extraordinary" to describe it but also to advance the argument that, in the particular circumstances of this case, I should not distinguish between its assistance and that of those who have self-reported from the outset. Given that what has been reported has clearly been far more extensive (and of a different order) than is may have been exposed without the co-operation provided, I am prepared to accede to th at submission. 23.
Before passing from this aspect of the case, I must make two further points. First, in relation to the marine business, the SFO has concluded (as it would have to before inviting negotiations in relation to a DPA) that there is neither sufficient evidence to satisfy the evidential test in the Code for Crown Prosecutors nor reasonable grounds for believing that a continued investigation would provide further admissible evidence within a reasonable period of time: see para. 1.2 of the Code of Practice in relation to DPAs. Thus, the marine business does not feature in this case. 24.

The second point is that the investigation into the conduct of individuals continues and nothing in this agreement in any way affects the prospects of criminal

prosecutions being initiated if the full code test for prosecution is met. I have already observed that a DPA is only available to a body corporate, a partnership or an unincorporated association (each of which could only ever be met by a financial penalty). It is not available to an individual who, if convicted of corruption or bribery is likely to face a substantial custodial sentence.

The Facts

25.
The starting point must be the structures in place at Rolls-Royce. In that regard, the Statement of Facts identifies the written policies and committees relevant to its appointment and payment of intermediaries. Put shortly, the Code of Business Conduct (first issued in 1996) included a prohibition on the payment or receipt of bribes. Rolls-Royce's marketing services department ("Marketing Services"), based at corporate headquarters, had responsibility for overseeing the intermediary appointment procedure, conducting checks on standing and maintaining a master list of appointed intermediaries and, in 1999, wa s responsible for administering the first written policy governing the use of intermediaries. No process for due diligence was specified. Additional approval was required from a senior Rolls-Royce employee where the proposed payment exceeded 5% of the contract price. In 2003, a revised

SFO v Rolls-Royce plc & anor.

Approved Judgment

policy extended this additional approval process also to require approval from Rolls

Royce's CEO.

26.
In 2003, an intermediary policy and guidance notes on the policy stated that Marketing Services was to be responsible for any necessary due diligence. The policy and guidance notes were subject to further minor amendments in 2004, 2005 and

2007. In that year, Rolls-Royce issued a Global Code of Business Ethics containing a

specific section on bribery and corruption. This Code was supported by a number of policies, including a revised intermediary policy which extended the additional approval process and distinguished between advisers and consultants requiring the former to complete an external due diligence process. 27.
In October 2009, one of the four major accountancy firms completed an Anti-Bribery and Corruption ("ABC") Compliance Review which resulted in a new policy on intermediaries issued by Marketing Services on the basis that accountability and responsibility for intermediaries was unclear, and that enhanced due diligence was not seen, even in areas of high risk. It noted that Marketing Services acted as an adviser to business units on intermediary matters and recorded documents, but did not perform any relevant compliance function; that some Rolls-Royce business units had a lack of understanding about this role; and that Marketing Services suffered from a lack of resources. 28.
The 2009 policy was more detailed, extending its remit to include other intermediaries with Marketing Services maintaining its central responsibility. The policy also prohibited commissions in excess of 10% of the contract price. The following year, following the accountants' further recommendations, a yet more detailed policy was issued which transferred overall responsibility for the process to Rolls -Royce's compliance function, and imposed requirements of business case, proper identification, and risk assessment for each intermediary. It also required that due diligence and approval processes be defined by the risk rating for each intermediary. Rolls-Royce established a new Compliance team, which replaced Marketing Services, and a Committee for Approval of High Risk Intermediaries. 29.
In addition, from at least 1997 until 2008, Rolls-Royce operated a Contracts Review Sub Committee which met once a year, at the time of the year-end audit, to consider all material contracts (defined by 2006 as greater than £10 million) where intermediaries had been paid commissions. By 2006, this committee comprised the Head of the Audit Committee (chair), another non-executive director, the Chief Executive Officer and Chief Financial Officer. Rolls-Royce General Counsel and an external audit representative also attended. In 2008, however, it was discontinued when Rolls-Royce established an Ethics Committee which oversaw the compliance function. The Ethics Committee reported to the Audit Committee (until 2011, when it became a committee of the Board). 30.
With that introduction, it is important that this judgment includes a summary of the specific allegations contained in the draft indictment. Given that the indictment covers activities spanning 7 countries and, taken collectively, over 24 years, it is inevitably complex. In relation to a number of the counts, I have attempted to reduce the exposition of the facts but in the event that there is any difference between this summary and the Statement of Facts (which is agreed by the parties and which must be included in a DPA: see para. 5(1) of Schedule 17 to the 2013 Act), the latter should

SFO v Rolls-Royce plc & anor.

Approved Judgment

be preferred. Further, rather than disturb the balance of this judgment, my summary is included as Appendix A and forms part of the judgment. 31.
In both Appendix A and the Statement of Facts, the identity of the individuals concerned has not been included although there is a distinction drawn between 'employees' and 'senior employees'. The latter term is used to contextualise communications by an employee with a superior, or, more significantly, to identify decision-makers who may be argued to represent the corporate mind. 32.
I ought to add that the identities and positions of employees within Rolls-Royce referred to in the Statement of Facts have been made known to me so that I have been able to assess their comparative seniority and, thus, the responsibility of Rolls-Royce but, given the continued criminal investigation into individuals, to go further than the Statement of Facts or my summary and identify the employees or others by name, would be to prejudice potential criminal proceedings. In addition, to name the recipients of corrupt payments or bribes, in relation to certain countries, could lead to action or the imposition of a penalty which, in this country, we would regard as contravening Article 3 of the European

Convention on Human Rights. In the

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