Deferred Prosecution Agreements - the new tool for tackling corruption
August 2013 | SPECIAL REPORT: WHITE-COLLAR CRIME
Financier Worldwide Magazine
Economic crime by commercial organisations does serious damage to both its immediate victims and the economy, costing billions of pounds to the taxpayer and to those directly affected. Yet successful prosecutions in this area have been relatively low. Prior to the introduction of the Bribery Act 2010, the UK saw a number of high profile bribery prosecutions fall away after plea bargain style fines of millions of pounds were agreed with the defendants. For example, in 2010 the Serious Fraud Office caused controversy after it negotiated a $12.7m (£8.2m) fine in the case against Innospec which involved the payment of bribes to public officials in Iraq and Indonesia in return for contracts to supply lead additives to petrol.
The UK’s economic crime laws have long been due an overhaul. The introduction of the Bribery Act was the government’s first step in ensuring the future fitness for purpose of its economic crime regime, by giving statutory effect to its commitments under the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Since then it has published a national strategic plan, ‘Fighting Fraud Together’, and passed legislation to create a National Crime Agency with a strong focus on economic crime. Yet the Ministry of Justice announced in a consultation paper published in October 2012 that there was still more to be done, a sentiment which is likely to be echoed by many organisations which have been the victims of economic crime, but which have faced resourcing or policy-based obstacles when seeking assistance from prosecutors in bringing the perpetrators to justice. With lack of resources and the availability of civil recourse often cited by prosecution agencies as justification for a decision not to pursue criminal proceedings against a party, the introduction of an additional prosecutorial tool is likely to be welcomed by many.
The Bribery Act gave prosecutors, for the first time in the UK, a sound statutory basis upon which to prosecute commercial entities which fail to put into place adequate procedures for the prevention of bribery. The government’s next instrument in the battle against economic crime (including bribery and corruption) comes in the form of Deferred Prosecution Agreements (DPAs).
DPAs find their statutory footing in section 45 and schedule 17 of the Crime and Courts Act 2013 which received Royal Assent on Thursday 25 April 2013. Set to be in use by February 2014, they give the Director of Public Prosecutions in England and Wales and the Serious Fraud Office (SFO) (and any other prosecutor designated by an order of the Secretary of State) an alternative basis upon which to conclude investigations into specified offences committed by a body corporate, a partnership or an unincorporated association (but not an individual). The introduction of DPAs widens the scope for enforcement against companies and corporate entities which find themselves involved in specified economic crimes including fraud and money laundering as well as bribery and corruption.
A DPA is atransparent, public and voluntary agreement between a prosecutor and an organisation whereby a prosecution for alleged criminal offences is deferred if certain conditions are met. Under a DPA, if an organisation admits wrongdoing, the prosecutor would still lay criminal charges against the organisation, but the proceedings would be automatically suspended pending compliance with stringent conditions, to be agreed between the parties. Although the conditions would be agreed on a case by case basis, they are likely to include acceptance of financial penalties, reparation to victims, repayment of profits, and specific measures to prevent future offending, such as cooperation with future prosecutions of individuals. If the conditions are not met, then the prosecution may resume and the deferment is abandoned. It is proposed that all DPA conditions will need the approval of a judge. The judiciary retains the right to reject a DPA as being inappropriate in the circumstances, for example, where it would not be in the interests of justice.
DPAs have already been successfully used in the US since 1999 as an alternative to full criminal prosecution, with the total number of corporate deferred or non-prosecution agreements entered into by the United States Justice Department rising sharply since 2007.The UK regime is modelled on the existing US practice and provides for a flexible and discretionary tool to respond to alleged criminal conduct. The objective is that DPAs will allow prosecutors to hold offending organisations to account for their wrongdoing in a focused way without the uncertainty, expense, complexity or time of a criminal trial. If UK prosecutors take DPAs to heart in the same way as their US counterparts, UK criminal prosecutions against corporates involved in economic crime should experience a welcome boost.
DPAs are not an automatic substitute for a trial and will be inappropriate where the circumstances warrant that a full criminal prosecution take place. The Ministry of Justice (MoJ) recognises that justice often requires that a full criminal prosecution take place. However, the legal framework surrounding prosecution for white-collar crime, particularly where the perpetrators are companies, means that it is not always possible or practical to do so. The MoJ recognises that in an increasingly global business environment, offences can take place across multiple jurisdictions and in complex technical fields, all of which pose significant challenges for prosecutors with investigation and prosecution often taking many years and costing millions of pounds.
The position is compounded where prosecutors are required to prove criminal liability against a commercial organisation. With the notable exception of the specific corporate offence under the Bribery Act 2010, the test is whether the ‘directing mind and will’ of the company acted guiltily. This can be very hard to prove, particularly in a multi-jurisdictional organisation where decision-making is widely delegated. The leading legal on this point is the House of Lords decision in Tesco Stores Limited –v- Nattrass which was heard in 1972. Lord Reid made it clear that a director or other person of authority who simply speaks or acts for a company is not sufficient for corporate liability to attach to the actions of that person. Instead the individual must be “acting as the company and his mind which directs his acts is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company” (emphasis added).The practical outcome of such a test is that very few corporates (especially medium or large companies with a complex management structure) are successfully prosecuted for the acts of their employees, directors and officers.
By providing an additional tool in the prosecutor’s armoury, it is hoped that DPAs will help to decrease the number of serious economic crimes which go unaddressed each year. And because the DPA regime encourages organisations to self-report and to report wider wrongdoing within their business sector or market, it is hoped that prosecuting authorities such as the SFO and the Crown Prosecution Service (CPS) will develop greater awareness of crimes being committed and obtain better evidence of them, thus enabling them to bring more cases to court, and secure restitution and justice for more victims.
There is currently no legal obligation to self-report in bribery or corruption cases in the UK, but self-reporting is not itself new. In what was described by Richard Alderman, former director of the SFO as an “exemplary model of corporate self-reporting and cooperative resolution”, Mabey and Johnson Limited (M&J) self-reported in 2008 in respect of bribes paid to foreign officials in Jamaica, Iraq and Ghana. In 2011 the company was made the subject of a civil recovery order (CRO) in the sum of £130,000, effectively confiscating sums it had received through share dividends on the unlawfully obtained contracts. The outcome for the company was undoubtedly more favourable than if it had faced a criminal prosecution. However, as David Mabey, Charles Forsyth and Richard Gledhill will testify, a CRO gives no comfort that criminal proceedings will not follow. As senior officers of M&J involved in the bribery, each received a custodial sentence for his part in the bribery notwithstanding that the company had already entered into a CRO. Accordingly, the concept of deferred prosecution under a DPA is likely to be very attractive as an alternative to a CRO and act as a key incentive to companies thinking of making a voluntary self disclosure.
Guidelines on the use of DPAs are set to be published in due course and in the meantime the new regime is subject to intense public consultation. In June, Director of Public Prosecutions and the SFO published a 21 page draft code of practice which sets out the rules for prosecutors and invites comments from the public on or before Friday 20 September 2013. The UK Sentencing Council has also opened consultation on the financial penalties for companies convicted of fraud, bribery and money laundering offences with responses required by 4 October 2013. The Criminal Procedure Rule Committee also invites views on the proposed arrangements before 30 September 2013. Amongst other things, the government will need to consider how it proposes to achieve global settlements for multi-jurisdictional organisations, to avoid ‘double jeopardy’, i.e., entering into a DPA in the UK and then facing prosecution overseas (or potentially even in Scotland, since the Scottish Serious and Organised Crime Division, Scottish Crown Office and Procurator Fiscal Service in Scotland are not automatically designated prosecutors set out in the DPA rules). The concept of a multi-jurisdictional settlement has been used successfully before, for example when the US and UK authorities cooperated in securing a plea bargain from BAE Systems plc in 2010, but it is laden with difficulty.
The government’s message is clear – companies based in the UK or doing business here need to toughen up to prevent economic crime. The SFO has already promised that the first prosecution of a corporate under section 7 of the Bribery Act is imminent this autumn. The introduction of DPAs is set to follow hot on its heels, meaning that businesses operating in the UK need to look seriously at their anti-fraud and anti-corruption regimes. Companies facing prosecution subject to the UK’s new criminal sanctions for corporate fraud and bribery need to ensure that they have done everything possible to reduce risk to the lowest practicable level. It is too late to wait for the SFO to knock at the door.
Mark Surguy is a partner and Hannah Nichols is a senior associate at Eversheds. Mr Surguy can be contacted on +44 (0)845 497 1377 or by email: firstname.lastname@example.org. Ms Nichols can be contacted on +44 (0)845 497 7614 or by email: email@example.com.
© Financier Worldwide
Mark Surguy and Hannah Nichols