Deferred prosecution agreements, corporate criminal liability in the UK and the position of directors and senior managers
July 2014 | SPECIAL REPORT: WHITE-COLLAR CRIME
Financier Worldwide Magazine
On 24 February 2014, section 45 and schedule 17 of the Crime and Courts Act 2013 brought Deferred Prosecution Agreements (DPAs) into being. DPAs have been part of the legal landscape in the United States for a number of years. The basic principle is that through a process of negotiation, a prosecutor and a potential criminal suspect can enter into an agreement whereby the prosecutor agrees not to prosecute the suspect in return for certain conditions being met, typically the payment of a large financial penalty, and the agreement to take certain steps to ensure there is no repeat of the offending behaviour.
The scheme in the UK will operate under the same principle, although the mechanics of the scheme are different and it is limited by statute to corporate suspects.
The UK scheme envisages a number of stages.
Having opened an investigation, the prosecution will consider whether to invite the suspect to enter into DPA negotiations. A DPA Code of Practice has been issued jointly by the Serious Fraud Office and Crown Prosecution Service. This makes clear that the decision whether or not to invite a suspect to seek to negotiate a DPA is a matter solely for the prosecutor’s discretion. It also goes on to set out various factors for and against the issue of such an invitation.
If the prosecutor decides to issue such an invitation then a process of negotiation follows. Assuming that is successful then the conclusion to the agreement involves a two stage court process. In the first stage, a hearing takes place in private at which the terms of the agreement are set out in order that the court can be satisfied that the agreement is fair, reasonable and proportionate. If this application for approval is successful, then a second hearing takes place in open court at which the approval of the DPA is declared by the court, along with the reasons and an agreed statement of facts giving full particulars relating to each alleged offence.
A DPA will last for a specified term. Assuming compliance with all of the conditions within the agreement, at the conclusion of that term, the company will be free from prosecution. Failure to comply with the conditions of the agreement may result in the matter returning to court, and could ultimately result in the prosecution of the company for the original offence under investigation.
The advantages of DPAs are well understood: certainty of outcome, the avoidance of a corporate conviction (which might well lead to exclusion from certain public contracts) and the savings of cost and time, among other things.
For those representing corporate suspects, however, DPAs also create a number of problems. A difficult decision needs to be made at a very early stage whether or not to self-report, since the existence of a ‘genuine’ self-report has been identified by the current director of the SFO as a significant factor in determining whether to invite an organisation to enter into a DPA. This may require some disclosure of privileged material, such as some of the material produced in the course of an internal investigation. The decisions whether and what to disclose must be made before there is any certainty that the prosecutor will consider the case suitable for a DPA.
A further difficulty for the adviser arises from the fact that, in contrast to the US, achieving the conviction of a corporate suspect in the UK remains extremely difficult in respect of many of the offences to which DPAs will apply. This means that entering into DPA negotiations is a far from obvious decision since the prospects of a successful prosecution in the alternative remains quite low. This may well be a reason in and of itself why DPAs will have less of an impact in the UK than they have had in the US.
For any offence in the UK that involves a mental element, which includes the majority of those offences to which DPAs will apply, the ‘identification principle’ applies. This establishes that only the acts and state of mind of those who represent the directing mind and will of the company can be said to represent the company itself. Although there has been some modification of the principle in recent cases, the current position remains that it is only the most senior personnel in a company who might be said to represent the directing mind and will of the company. In practical terms, the effect of this is that in order to prosecute a company for a criminal offence involving a mental element (for example theft, which requires proof of dishonesty), it is necessary to prosecute and convict a very senior individual within the company. This is simply not realistic in many cases.
The major exception to this principle is found in section 7 of the Bribery Act 2010 which is an offence of strict liability whereby a company commits an offence if a person associated with that company bribes another person intending to benefit the company. It is a defence for the company to prove that it had adequate procedures in place to prevent such conduct.
A significant limitation to DPAs is that they only apply to companies, not to individuals. This distinction may increase the risk to certain individuals, particularly those at a more senior level.
There are a large number of statutes in English law which include a provision whereby, if the company commits an offence, and it can be established that this offence was committed with the consent, connivance or through the neglect of an individual (generally a director, company officer or senior manager), then that individual is also guilty of the offence of the company.
While the concepts of consent and connivance both require actual knowledge of the unlawful behaviour of the company, the concept of personal criminal liability resulting from a person’s neglect, is more problematic. No direct knowledge of the company’s offence is required. The existence of personal criminal liability in circumstances of alleged neglect will turn on the specific facts of the case, including how remote from the offending activity of the company the particular individual was.
It is a concern that a company, seeking a pragmatic solution to a potentially lengthy and expensive criminal investigation, may be encouraged to admit ‘guilt’ in order to achieve a DPA, since this could, in turn, increase the risk of personal criminal liability attaching to an individual employee on the basis that their alleged neglect contributed to the offending of the company. This may well increase reluctance to take up senior corporate posts because of the personal risks involved.
To date there has been no concluded DPA, although there is believed to be at least one that is currently at the point of negotiation. Given problems proving corporate criminal liability, and the possible side effects in relation to increased risk to senior personnel within companies, it remains very uncertain to what extent they will become part of the mainstream within English criminal law, at least in the short term.
Jonathan Grimes is a partner at Kingsley Napley LLP. He can be contacted on +44 (0)20 7814 1234 or by email: firstname.lastname@example.org.
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