Deferred Prosecution Agreements ‘Come clean or else – Or else what?’

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Background and DPA Chess

On 24th February 2014, an important weapon was added to the law enforcement armoury in the UK. The Deferred Prosecution Agreement is supposed to be a public, transparent agreement between an organisation and the prosecutor to defer (and ultimately withdraw) a prosecution as long as certain terms are met. This can include the payment of a stiff financial penalty, compensation, disgorgement of profits and the implementation of anti-bribery / corruption measures.

DPAs have finally crossed the Atlantic on a wave of promise, notwithstanding comments made by many in agreement with Lord Justice Thomas in the Innospec case. He branded attempts at implementing cross-jurisdictional settlements in criminal proceedings as repressing the discretion of judges, ultimately concluding that ‘no such arrangements should be made again’. Critics with an eye on Innospec have been satisfied to a degree by the increased emphasis on early judicial involvement in the UK DPA arrangements. Most of the US DPAs are highly polished by the time a judge becomes involved. However, cases like Innospec remind the UK Government that the US Foreign Corruption Practices Act (FCPA) is an important spanner in the law enforcement toolkit. It has been used with increasing success in recent years by the US Department of Justice (DOJ) and their Securities and Exchange Commission (SEC) to impose some dramatic financial penalties as part of their DPA arrangements.

The potential benefit to the exchequer is not lost on the UK government and although the FCPA attracts its fair share of criticism, it is no surprise that the Serious Fraud Office in particular is looking forward to flexing its new muscles in the UK version of the DPA. A number of cases with ‘DPA potential’ are under investigation and 2014 should see at least one interesting confrontation between two heavyweights, neither of whom have any intention of blinking first. Will it be the SFO with access to ‘Block-buster funding’ and bulldog rhetoric or the Corporation with stories of the SFO’s previous failures to properly manage the evidence? Will the SFO be able to convince its first customer that a DPA is the better option or will the customer call the SFO’s bluff and invite an expensive prosecution?

Until relatively recently, the SFO found it difficult to shake a proper stick at organisations who decided not to self-report fraud or corruption within the organisation. Now, the SFO is assisted by -

  • The Bribery Act 2010;
  • A change in personnel, including the notable appointment of proper expertise; 
  • A move to nice(r) offices and perhaps culture;
  • New sentencing guidelines for offences committed by organisations;
  • Clearer codes for prosecutors; 
  • A better funding regime in the form of ‘Blockbuster’ contingency assistance from the Treasury and;
  • A notable change in the substance of the speeches made by the SFO’s director David Green, especially in terms of civil remedies.

All of this (and more) has enable the SFO to say with more force – Come clean and engage with a DPA because you won’t like the alternative. The high standard of proof in establishing corporate criminal liability is still a fly in the SFO’s enforcement soup, but this may change.

Critics are already beginning to rehearse the arguments originally used to smear the reputation of the FCPA – corporations should not be able to buy their way out of a prosecution, ultimately passing the cost of the penalty onto the public, shareholders and the job centre. An occasional high profile board level prosecution should go some way to answering those critics, but not all of the pieces are on the chess board yet and organisations will still take some convincing that a DPA is the better option. All of this assumes that organisations are properly advised on what they might be letting themselves in for.

What does the DPA aim to achieve?

The UK DPA is implemented through the addition of Part 12 of the Criminal Procedure Rules, and guidance on a more practical level is to be provided through a Code of Conduct published by the Director of Public Prosecutions and the Director of the Serious Fraud Office. The DPA attempts to act as an incentive to organizations undergoing investigation by offering a negotiated, court-approved, written settlement. By complying with the terms of the agreement, criminal prosecutions will be deferred and ultimately discontinued. The on-going possibility of prosecution is meant to ensure compliance on the part of the company due to the potentially fatal consequences of criminal conviction. Furthermore, DPAs will avoid plenty of collateral damage to blameless employees and shareholders- at least, that’s the theory.

For prosecutors, the DPA is attractive as it avoids the huge expense and uncertainty that accompanies a criminal trial. For the organisation, it offers an opportunity to remedy unlawful activity without prosecution and can limit civil liability. Effectively, the DPA introduces a statutory basis for a type of ‘plea bargaining’ in England and Wales. Not all organisations will be invited to engage and negotiate a DPA. Each scenario will be considered on its own merits and phrases like ‘meaningful self-reporting’ and ‘frank disclosure’ will become an important part of the SFO repertoire. The Code of Practice will list factors which the prosecutor may take into account when deciding whether a DPA is appropriate, such as –

  • Whether the offending represents isolated actions by individuals,
  • Whether the offending is not recent and the organisation is effectively a different entity, or
  • A conviction is likely to have disproportionate consequences

The SFO will want Organisations to know that they must enter the process of negotiating a DPA with a clear understanding of the benefits and the consequences of failing to co-operate. Proper legal advice will be a fundamental part of that process because a DPA may echo through the organisation for many years after the event.

What does the DPA regime look like?

Section 45 of the Crime and Courts Act 2013 enacts Schedule 17, containing the DPA provisions which encompass fraud, bribery and money laundering. The prosecutor must either be able to show that the evidential stage of the Full Code Test in the Code for Crown Prosecutors is satisfied, or that there is "at least a reasonable suspicion based upon admissible evidence" that the crime has taken place along with "reasonable grounds for believing that a continued investigation would provide further admissible evidence within a reasonable period of time". The prosecutor must also establish that the public interest would be properly served by not prosecuting and instead entering into a DPA.

Applying the same evidential test in a multitude of scenarios across industry sectors will be a challenge in itself and defining the ‘public interest’ will invite any number of political arguments. Timely judicial intervention may discourage the over-zealous and encourage common sense but there is no avoiding the culture change. The court is going to find itself playing a slightly different game and it is only a matter of time before someone tests the court’s resolve.

A DPA must contain a statement of facts which relate to the alleged offence and the requirements expected of the organisation. Drafting these documents for US DPAs has been regarded by some as a dark art and time will tell whether the same practice creeps into the UK. Statements of facts in US DPAs may the subject of scrutiny by shareholders, competitors, other law enforcement agencies and politicians in the age old practice of circling injured prey. Innospec is a prime example. Having settled an expensive civil claim in 2011, the offending corporation faces a new allegation from a competitor claiming that the bribes prevented the competitor from securing lucrative contracts.

The agreement must contain an expiry date and when this date is reached, the prosecutor will give notice that it does not want the proceedings to continue. After expiry, the organisation cannot be subjected to new proceedings for the same offence unless:

  • The DPA has been terminated for breach; or
  • Inaccurate, misleading or incomplete information was provided to the prosecutor and the organisation ought to have known that this was the case

Examples of requirements stipulated by a DPA include:

  • Paying the prosecutor a financial penalty, 
  • Giving compensation to any victims of the alleged offence,
  • A donation to charity or another third party,
  • Disgorging profits which have been made from the alleged offence,
  • Formulating and putting into existence a compliance programme,
  • Full cooperation in any investigation relating to the offence,
  • Reimbursing the prosecutor any reasonable costs incurred due to the investigation.

The last bullet point is particularly interesting. Charging the costs of the investigation to the organisation is not a new concept in the UK. However, the scope for challenging the cost of investigations as part of the DPA arrangements will be an interesting battleground and organisations will need careful advice on how this particular cost should form part of their calculations.

The decision to act under a DPA will be reached before any proceedings have been commenced. Preliminary judicial approval will be sought before the prosecutor can draft the terms of the final agreement. The preliminary hearing will be in private and will determine whether to issue a declaration that entering into a draft DPA with the relevant organisation is likely to be in the interests of justice and that the terms contained are fair, reasonable and proportionate. The court is required to give reasons for its decision, but these will be private until the final DPA is approved. At the final hearing, the court will re-visit whether the DPA is in the interests of justice and whether the terms are just, reasonable and proportionate. If the DPA is approved, reasoning will be given in open court. The terms of the DPA will be finalised and the agreement will be brought into force at the end of the hearing.

Following the final hearing (if approval has been given) the prosecutor must publish:

  • the DPA,
  • the declaration of the court approving the final DPA,
  • the reasoning for this decision, and
  • the previous declarations, whether these are positive or negative, at prior preliminary hearings

If things go wrong?

Throughout the duration of the DPA, the prosecutor will monitor compliance and is able to make an application to court if a breach is alleged, which will be determined by the court on the balance of probabilities. If a breach is found, the court can invite the parties to agree to a remedy for the failure or it has the option to terminate the DPA. The UK DPA will therefore operate with a greater level of judicial involvement in breach proceedings, but the prospect of breach litigation underlines the need to exercise the utmost care in negotiating the statement of facts and agreement terms. Even if a breach is not found, the application must be published by the prosecutor.

In the alternative scenario, whereby the DPA is not approved by the court, the prosecutor is not able to rely on the fact it conducted DPA negotiations or any draft DPA, unless:

  • any future proceedings against the organisation are for an offence consisting of the provision of inaccurate, misleading or incomplete information; or
  • in proceedings for an alternative offence, there is a statement in evidence made by the organisation which is inconsistent with a statement made in the course of the DPA process
  • It is important to note that although these restrictions are present, admissible evidence from the proceedings includes:
  • other evidence obtained from investigations pursued as a result of anything said in any unsigned statements of facts or a draft DPA;
  • pre-existing material provided by the organisation during the DPA process: and
  • information obtained by the prosecutor from other sources

The organisation will therefore need to exercise great care in the nature, extent and accuracy of disclosure because if a DPA is not approved, it may still be used as a springboard in a number of subtle ways to the organisation’s ultimate prejudice.

The revised Code of Practice deals with these practical issues regarding DPAs and provides the guidance for the whole process from initially deciding whether a DPA is appropriate, to the drafting of the DPA, involvement of the court, purported breaches of DPAs and discontinuance.

Guidelines on prosecutions

The code for prosecutors is a public document setting out the general principles Crown prosecutors should follow when making decisions on cases. This includes whether there is enough reliable and credible evidence against the defendant so there is a realistic prospect of conviction, and whether it is in the public interest for a prosecution to take place. Factors taken into consideration include the seriousness of the offence committed and the culpability of the individual involved. Guidance on whether the corporate body will prosecute will also be sought from the Guidance on Corporate Prosecutions and, if it is relevant, the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010. Guidance on Corporate Prosecutions is comprehensive from providing definitions of companies, explaining how liability may come about i.e. through vicarious liability or non-vicarious liability. Where offences are not strict liability, the identification principle is used which acknowledges the existence of corporate officers who are the embodiment of the company when acting in its business, which may still be the case where the individual was acting in fraud.

The latter guidelines take a robust approach in tackling commercial bribery but it is not restricted to these matters. It draws on the tests in the Code for Crown Prosecutors and it is stated that there is an inherent public interest in bribery being prosecuted to give practical effect to Parliament’s intention. The guidance covers both active and passive bribery.

When deciding whether a DPA may be appropriate, the Code of Practice states that these must be kept in mind.

When selecting which cases of fraud to prosecute, the SFO looks for the following features including cases:-

  • which undermine UK commercial/financial PLC in general,
  • where the actual or potential loss involved are high,
  • where actual or potential harm is significant,
  • in which there is a significant public interest element

Will the DPA live long and prosper?

The US has long relied on the DPA and as a result has adopted a mature process, supported by the courts. It continues to attract criticism, largely because of the power vested in the DOJ / SEC but the straightforward numbers and increasing reliance upon the US DPA suggests a good degree of success. In 2013, the US authorities presented evidence that 28 non-prosecution and deferred prosecution agreements produced almost $2.9 billion in financial penalties.

Whether this will be the case in the UK is questionable. A clear difference between English and US criminal law is the standard of proof required to establish corporate liability. English law requires a high 

standard, stating that the offence must be attributed to someone who at the relevant time was the ‘directing mind and will’ of the company or to be an ‘embodiment of the company’. Difficulties in meeting this standard have meant prosecutions have been very limited. Since 2000, only four companies have been convicted following prosecution by the SFO, largely due to this requirement. The US apply a lower standard of proof, meaning that the threat of corporate prosecution is traditionally felt more by corporations with operations in the US. As a result, the DOJ / SEC can negotiate with more confidence. There are indications that changes are occurring in this area, including the strict liability offence contrary to Section 7 of The Bribery Act 2010 for corporates which fail to prevent bribery by not having adequate measures in place.

David Green (head of the SFO) has further debated the scope of available sanctions with prominent figures including the Attorney General, the Solicitor General and the Law Commission, to include a failure by corporates to prevent acts of financial crime committed by its employees. It is said that this power would be used in exceptional cases and this would particularly be the case where the company had directly profited from the criminal conduct of its staff.

There are a number of reasons why the UK DPA arrangements will not operate in quite the same way as the American cousin. Quite apart from the legislative differences, the political environment is different. The way in which many international organisations interact with their subsidiaries in the UK (and agents outside the UK) is different and, having regard to its relative size, the UK’s reliance on the financial markets is different. The law of unintended consequences will also have something to say, but perhaps the most interesting burden will rest upon the judiciary. The court’s role may take time to settle, even though the intended role is clear enough through the response to the consultation process. The SFO’s choice of case for a UK DPA could be critical in setting the tone, just as it was with the FCPA. If Innospec is any measure of the court’s current resolve, David Green is preparing to shoulder an unenviable burden. He has been careful not to launch his appointment at the SFO with some swift showcase Bribery Act prosecutions. The pressure has been building and each advance in terms of funding or appointment of expertise has been followed by a tactical announcement; all part of reminding organisations that they should put adequate measures in place, self-report wrong doing and act in the best of faith.

However, the SFO has made it clear that it will continue to prosecute if it is in the public interest to do so. DPAs (or civil recovery orders for that matter) will not be handed out automatically to those who self-report. Companies will be required to provide incriminating information at an early stage without a guarantee that a prosecution will not take place. Notwithstanding all of the guidance issued by the SFO, the MOJ and the government at large, nobody will want to cross the river first without some special assurances or a very large shove in the back.

Organisations operating across multiple jurisdictions

Many of the organisations with ‘DPA potential’ will be those with interests across several jurisdictions, in many cases involving areas of the world where bribery and corruption is commonplace. The Code of Practice will confirm that the Prosecutor needs to reference any concurrent jurisdictional issues so a court can consider why a DPA is in the interests of justice (as well as being fair, reasonable and proportionate). The DPA will only deal with UK liability, although the activity giving rise to the UK liability can occur outside the UK. Where liability falls outside the scope of the DPA or UK prosecution, it is expected that the practice will develop whereby (through co-operation with the UK prosecutors) organisations can expect investigations to continue in other jurisdictions. This may eventually create interesting scenarios whereby prosecutors and organisations in the UK and US argue about which DPA should apply and, ultimately, where part of the financial penalty or compensation should be paid. Given time and the participation of more jurisdictions, the concept of ‘DPA shopping’ might not be as ridiculous as it sounds now.

What is the SFO up to?

It is clear that the SFO aims to increase high-profile corporate prosecutions from 2014. The SFO has recently been granted additional ‘Blockbuster funding’ from the UK treasury to aid in the bribery and corruption investigation into Rolls-Royce in China and Indonesia. Arrests have been made and since Rolls-Royce is the second largest maker of aircraft worldwide, the SFO’s ability to proceed with treasury support is evidence of their commitment to focus on the ‘top slice’ of economic crime. Allegations of corruption are not new to the defence and aerospace industry, where intermediaries are often used and are sometimes difficult to control in jurisdictions where anti-corruption measures are not high on the agenda.

Whether a DPA will emerge from the Rolls Royce investigation remains to be seen, but the SFO will almost certainly have a number of prospects to choose from by the end of the year. Arrests have been made as a result of the Libor enquiries and the pharmaceutical industry remains in the running. The construction industry warranted some recent attention and the Financial Conduct Authority (FCA) recently took over from where the FSA left off by dishing out some hefty fines to make its presence felt.

The SFO will still need to choose the first candidate carefully and every step taken in that case will be closely watched by anyone concerned in advising corporate clients regarding their exposure to the relevant risk. This could include advice on choice of markets, intermediaries, finance and subsidiaries in conjunction with advice on avoiding ‘inadequate measures’ liability contrary to Section 7 of The Bribery Act.

Sentencing Council: Fraud, bribery and money laundering: corporate offenders: Definitive Guideline

These guidelines apply to organisations sentenced on or after 1 October 2014, regardless of the date of offence. Releasing the guidelines ahead of the enactment of a new corporate offence appears odd at first, but it coincides with the new DPA regime and is in keeping with the continuing rationalisation of the sentencing exercise. The timing also acts as a reminder that a DPA or civil recovery order is not necessarily going to become the preferred option.

How will the court approach the exercise? It gets a bit technical from this point, but it is worth rehearsing because any organisation weighing the options will want as much certainty as possible.

Step One: Compensation

The court must consider making a compensation order requiring the offender to pay compensation for any personal injury, loss or damage which arises out of the offence in such an amount as the court considers appropriate. Priority is given to compensation over financial penalty.

Step Two: Confiscation

This must be considered if the Crown court thinks it is appropriate. Confiscation is an article in itself but recent events should not mask the Crown’s ability to pursue significant sums by using existing provisions of The Proceeds of Crime Act 2002

Step Three: Determining the offence category

This is done in relation to culpability and harm. Culpability is demonstrated by the offending corporation’s role and motivation which may be demonstrated by one or more of the following non-exhaustive characteristics.

  • High culpability includes aspects such as wilful obstruction of detection and involving others through pressure or coercion; whereas medium culpability includes factors such as - activity which is not unlawful from the outset.
  • Harm is represented by a financial sum with reference to the table provided in the guidelines. In cases of fraud, harm will normally be the actual or intended gross gain to the offender. In bribery cases, it will be the gross profit from the contract obtained, retained or sought as a result of the offending.

Step Four: Starting point and category range

The harm figure from step three is multiplied by the relevant percentage figure representing culpability. The court can consider adjustment from this starting point and examples of aggravating and mitigating factors are given.

Step Five: Adjustment of the fine

The court should effectively step back and consider the overall effect of its orders in this step. It ought to achieve the removal of all gain, appropriate additional punishment and deterrence.

Step Six: Factors which would indicate a reduction.

Step Seven: Reduction for guilty pleas.

Step Eight: Court must consider ancillary orders.

Step Nine: Totality principle.

If sentencing an offender for more than one offence, consideration must be given to whether the total sentence is just and proportionate.

Step Ten: Reasons.

Section 174 of the CJA 3001 imposes a duty to give reasons for, and explain the effect of, the sentence

And Finally

If DPAs are offered, negotiated, drafted, sanctioned and monitored appropriately, they offer organisations the opportunity to resolve some difficult problems they have may accumulated over the years without facing prosecution. They will also save prosecutors the uncertainty and expense which criminal trials involve. The first candidate will have to be chosen carefully. However, everyone will need to engage in the process with their eyes fully open and this could involve advising organisations on a wide range of risk topics.

The organisation’s lawyers and the SFO are preparing to shoulder a hefty burden but watching the judiciary deal with the first DPA could be most interesting. The DPA arrangements will require a significant cultural shift and if the SFO pick the wrong candidate for their first DPA, the court may find itself under pressure to wade a little deeper than it wants to, in order to micro-manage the exercise. If things go dreadfully wrong with individual cases, as they will from time to time, many will ask in years to come – was it really worth it? It is of some concern that as long as the fines keep rolling in and the economy improves, the government’s unswerving answer will be – yes.



Evan Wright is a partner in the Business Crime and Regulation department at JMW. Katie Aldwinkle contributes as part of an LLM. For further advice call 0345 872 6666.

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