Deferred Prosecution Agreements (“DPAs”), an established part of the legal landscape in the US, are inching ever closer to their long-awaited introduction in England and Wales. After receiving royal assent via the Crime and Courts Act 2013 earlier this year, a draft Code of Practice (“Draft Code”) explaining how the DPA process will operate is currently open for consultation.
DPAs will allow commercial organisations to settle allegations of criminal economic activity (for example bribery or money laundering) without being prosecuted and without any formal admission of guilt. An agreement is struck between the prosecutor and the corporate, under which the prosecutor will bring criminal charges but then immediately suspend the process, on the proviso that the alleged offender has agreed to, and complied with, a number of terms and conditions that the prosecutor deems appropriate.
If the prosecutor is satisfied that all obligations have been met, a criminal prosecution will not be pursued. However, should the corporate fail to comply with their obligations the criminal proceedings can be revived at a later date. For the moment, the Draft Code and the Crime and Courts Act 2013 have only designated the Crown Prosecution Service and the Serious Fraud Office (“SFO”) to be prosecutors with the authority to enter into DPAs, although it is anticipated that the newly-minted Financial Conduct Authority will be designated in due course.
The Draft Code seeks to outline when a DPA will be considered appropriate and, if so, the mechanics of how the agreement will take shape. What remains to be seen is whether the Draft Code will offer sufficient clarity and comfort to corporates, and their professional advisers, in order to encourage them to enter into negotiations with prosecutors.
A discretionary tool – by invitation only
The Draft Code is keen to stress that a DPA is a “discretionary tool” at the disposal of prosecutors and that it will only be available after a formal invitation to enter into negotiations has been extended to a corporate. The invitation (which will take the form of a letter) will contain a deadline, within which the organisation must confirm that they wish to accept the invitation to commence negotiations. The Draft Code pointedly states that an organisation has “no right to be invited to negotiate a DPA”, nor is that invitation a “guarantee that a DPA will be offered at the conclusion of discussions”.
The starting point for determining whether a DPA will be appropriate is the application of a two stage test:
1) Evidential stage – there must be a reasonable suspicion that the organisation has committed the offence, and there are reasonable grounds for believing that a continued investigation would provide further evidence within a reasonable period of time, providing a realistic prospect of securing a conviction of the company; and
2) Public interest stage – the public interest would be properly served by entering into a DPA.
The Draft Code does stress that the “more serious the offence, the more likely it is that prosecution will be required in the public interest”, with the seriousness of an offence depending in part on the culpability of the organisation and the harm to the victim, and that a “prosecution will usually take place unless there are public interest factors against prosecution which clearly outweigh those…in favour”. A “balancing exercise” will be undertaken by prosecutors, with decisions being made on a case by case basis.
So what factors will tip the balance in favour of a DPA being proffered? A non-exhaustive list of factors is provided in the Draft Code, which include:
- A lack of history of similar conduct, in which the offending in question is not an ingrained business practice;
- The offending was not endemic within the company but represented the actions of a rouge employee or agent;
- The offending is not recent in nature and the organisation in its current form is effectively a different body to that which committed the offence. Examples include where the corporate has since been taken over by another entity, the corporate no longer operates in the relevant market or industry or the culpable individuals have been dismissed;
- The corporate has a “genuinely proactive and effective” corporate compliance programme in place; and
- A generally proactive approach has been adopted by the corporate’s management team when the misdeeds are brought to their attention, including self-reporting and remedial actions (such as the compensation of victims).
Of particular interest to corporates which uncover suspected criminality is that self-reporting to the relevant authorities will militate against a prosecution being brought. The earlier the better is the clear message emanating from the Draft Code. It stresses that prosecutors will need sufficient information about the operation of the business, which will include the provision of relevant witnesses and the findings of any internal investigation that may have been conducted.
The Draft Code notes that the manner in which any internal investigation has been conducted will be carefully scrutinised by prosecutors. Any errors in that investigation, in particular those which lead to the loss or fabrication of evidence, will make a prosecution more likely.
Another notable mitigating factor is the existence of an adequate compliance programme. Given the need for corporates to have “adequate procedures” in place to prevent bribery by their employees and associated persons, this is one area where corporates which already have a robust compliance programme in place are likely to be at an advantage.
Terms of the DPA
The Draft Code states that the terms of the DPA must be “fair, reasonable and proportionate” and they may consist of a combination of requirements, clearly setting out the penalty and remedial measures which the corporate needs to comply with. It will be common for there to be a financial penalty, which will be broadly comparable to the fine that a Court would have imposed following a guilty plea. Discounts of up to 33% will be available, mostly where the corporate has self-reported to the authorities.
In addition, it will be particularly desirable for victims to be compensated (in addition to any donations to charities) and the Draft Code states that compensation should take priority over a fine. Co-operation with the future prosecutions of individuals is another possible condition and it will be common for the prosecutor to recover the costs of their investigation into the alleged offence. Where a monitor is to be appointed, this will be done at the corporate’s own expense.
Another notable term that will always be included in a DPA is warranty from the corporate, which will confirm that the information provided to the prosecutor during negotiations, and upon which the DPA is based, contains no inaccurate, misleading or incomplete information relevant to the matters covered by the DPA. This only serves to strengthen the importance to a corporate of ensuring that any internal investigation is conducted thoroughly, given that its findings will form a crucial part of the negotiations with the prosecutor.
Transparent public events
Once negotiations have commenced, the next step in the process will involve the agreement of a statement of facts. This document will include the full particulars of each alleged offence and the details of any financial loss or gain.
However, the Draft Code offers no reassurance that agreeing a statement of facts will mean that a DPA will inevitably follow. A key difference in how DPAs will function in England and Wales – in comparison with the US – is that the judiciary will play a pivotal role in overseeing the agreement of DPAs. A Crown Court judge must rubber stamp the resolution of the case by way of a DPA, after considering the proposed terms at both a preliminary, and then a final, Court hearing.
What is clear from the tenor of the Draft Code is that, by way of an agreed draft and then final written application at each Court hearing, the prosecutor and the corporate will have to convince the Court that the requisite evidential hurdles have been met (the agreement is in the “interests of justice” and that it is “fair, reasonable and proportionate”) and justify the proposed terms of the DPA.
If the DPA is provisionally approved by the Crown Court, the final hearing will be scheduled “as soon as practicable”. And whilst the Draft Code anticipates the preliminary hearing will “almost always” be in private, given that making an unsuccessful application in open court could lead to “uncertainties and destabilisation”, the SFO has been keen to stress that entering into a DPA will be a “transparent public event”.
This desire for transparency will be satisfied in a number of ways. Whilst the final application prior to the final hearing will be made on a confidential basis, if the Court feels that a DPA is suitable, it must make a declaration to that effect, along with stating the reasons for its approval, in an open final hearing. In addition, the prosecutor will publish a copy of the DPA and the declarations of the Court on its website.
This integral role for the judiciary, and the very public nature of entering into a DPA, is a product of the judiciary’s previously aired displeasure at their hands being tied by deals being made between prosecutors and corporates prior to cases of corporate wrongdoing making it to Court. Whilst there will undoubtedly be adverse publicity for the corporate in question, it is also important for the SFO to show they are bringing those guilty of “white collar” crime to heel, given the public statement of intent on this topic. There is also the need to ensure legitimacy in the eyes of the public and an understandable desire to ensure DPAs are not seen as shadowy “back room” deals used by corporates as a means of avoiding atoning for any misdeeds.
The initial rubber stamp of the judiciary, provided following the preliminary hearing, is presumably incorporated by the Draft Code in order to ensure corporates have sufficient confidence to continue to remain at the negotiating table with the prosecutor. Without this approval at an earlier stage in the process, corporates would rightfully be wary of undertaking extensive negotiations with the prosecutor against the uncertain backdrop of what view a Court would take when informed of the full details. Significantly, if the DPA is ultimately rejected by a Court, the fact that negotiations have taken place will remain confidential.
Walking on a tightrope? Disclosure of documents during DPA process
But whilst negotiations that ultimately do not lead to the agreement of a DPA will remain confidential, the Draft Code proposes that documents provided to prosecutors during negotiations will normally be available for use in subsequent criminal proceedings against the corporate, should the DPA negotiations run aground.
The Draft Code provides a non-exhaustive list of those types of documents which would be available for use:
- Pre-existing key contemporary documentation, such as contracts, accountancy records, emails and other communications provided to the prosecutor;
- Any internal or independent investigation that has been carried out prior to the DPA negotiation period commencing; and
- Any witness statements or interview notes obtained from employees prior to the DPA negotiation period commencing.
Consequently, any disclosure during the DPA negotiation process will have to be carefully considered and managed by the corporate and its legal advisers. A careful balance will have to be struck between genuinely engaging with the prosecutor – particularly given that one of the factors that will increase the chances of a DPA being offered is openness by management – and ensuring that information is not disclosed that merely serves to increase the chances of a successful prosecution should proceedings be brought in the future.
This high-wire act becomes even more precarious if the prospect of the prosecutor discovering the wrongdoing themselves appears to be unlikely. The Draft Code is also conspicuously silent on to what extent disclosed information could be passed to different regulatory authorities at home and abroad, an obvious worry for multi-nationals.
Sentencing Guidelines for fraud, bribery and money laundering
It is inevitable that fines will be one of the most common DPA conditions and the Draft Code notes that the relevant Sentencing Council Guidelines should be borne in mind when considering the financial penalty to be imposed. Consequently, the recently published consultation on the draft sentencing guidelines for fraud, bribery and money laundering (“Draft Guidelines”) are worth considering.
The majority of the media reaction to the publication of the Draft Guidelines concentrated on the potential for companies, found guilty of financial crimes against individuals or tax authorities, to have fines as high as 400% levied on their ill-gotten gains, introducing a multiplier system already used in the US. The Sentencing Council has stated that fines “must be substantial enough to have a real economic impact which will bring home to both management and shareholders the need to operate within the law”. Even if the fine could put the offender out of business, this could be an acceptable consequence for the worst offenders.
The Draft Guidelines proposes a system for corporate offenders whereby scores are provided for the level of culpability (low to high) and the harm caused (assessed by way of a financial figure). For example, the Draft Guidelines anticipate that a breach of section 7 of the Bribery Act 2010 would fall in the high culpability range. A multiplier is then applied to the level of culpability and harm, in order to give a sentencing range. The presence of any prescribed aggravating and mitigating factors are then factored in to determine the appropriate fine. As the headlines trumpeted, the highest multiplier proposed is 400% for high culpability offences. Aggravating factors include previous convictions or regulatory enforcement and cross-jurisdictional offending, whilst the mitigating factors include self-reporting and the voluntary compensation of victims.
Given that only one factor is needed to place offenders in the “high culpability” range, thus exposing them to a multiplier starting at 300% and potentially increasing to 400%, the prospects of the imposition of larger fines on corporates appears to be a very real possibility. This is likely to have a direct impact on the size of any financial penalty contained within a DPA.
DPAs have been championed in part by the SFO as they provide a relatively cost-efficient and quick means of addressing financial crime by corporates. It has been widely reported that the SFO has had to cope with falling budgets and the resources at their disposal are dwindling (resources which are likely to have been further stretched by having to recover tens of thousands of documents which were sent to the wrong owner) and that, like many other public bodies in the UK in the current austere economic climate, they are being required to do more with less. If corporates can be seen being brought to book for their indiscretions, DPAs will also achieve the key Government goal of punishing those responsible for economic crimes, something that is rarely unpopular with the public.
Corporates which are invited to enter into DPA negotiations will first have to consider whether the DPA is an attractive option for dealing with any suspected criminality that they have unearthed in their business. If it is, then it would wise to carefully scrutinise whether they meet the criteria for being offered a DPA at the end of the negotiation process. For example, if an organisation has a robust compliance programme in place, the criminality in question was committed by one individual a number of years ago and has long since left the market in which the offences were committed, then the chances of being offered a DPA at the end of negotiations should be greater.
However, the concerns highlighted above with regards to the use by prosecutors of information disclosed during the negotiation process, and the fear that this could amount to building the prosecutor’s case (or at least providing a significant helping hand) for a subsequent criminal prosecution, means that there will no doubt be caution and hesitancy amongst some corporates as to whether to engage with prosecutors.
Whilst the SFO is understandably keen to be robust as possible with economic crime, keep corporates on their toes and offer no guarantees of a sweetheart deal (shown by the non-prescriptive nature of the Draft Code, the “invitation only” approach to DPAs and the October 2012 amendments to its prosecution guidance which changed its public posture towards prosecuting corporates), there is little comfort for corporates who want the certainty of knowing whether self-reporting will lead to a DPA, or a prosecution. This uncertainty is exacerbated when you consider that, at this stage, the attitude the judiciary will adopt to the nascent DPA process is unknown.
In the meantime, the consultation remains open until 20 September 2013 and the SFO expect DPAs to be available to prosecutors from February 2014. The outcome of the consultation is awaited with bated breath.