Corporate sentencing – how much could it cost?

October 2013 | PROFESSIONAL INSIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

In recent years the fines imposed for criminal offences by corporates in England and Wales have come under criticism from many quarters, including the judiciary and the press. There has also been a focus in Parliament on making it easier to prosecute corporates for wrongdoing. This trend has seen the assent of the UK Bribery Act with its corporate offence of failure to prevent bribery, a stronger focus on enforcement by the FSA/FCA and, recently, public statements by the SFO’s current director, David Green, that the organisation is seeking to act more as prosecutor and less as regulator.

Many commentators see this as in line with a general move towards a corporate crime enforcement landscape more akin to that in the US – meaning more aggressive prosecutors, lower thresholds for corporate criminal liability and the introduction of a legislative framework for prosecutors to help them deal with corporate offenders. This was perhaps to be expected following the comments of Lord Justice Thomas in R v Innospec Limited, in which he reflected on the sentencing of Innospec for corruption offences that: “As fines in cases of corruption of foreign government officials must be effective, proportionate and be dissuasive in the sense of having a deterrent element, I approach sentencing on the basis in this case that a fine comparable to that imposed in the US would have been the starting point, such a fine being quite seprate from and in addition to depriving Innospec Ltd of the benefits it had obtained through its criminality.”

Most recently, this has seen legislation introduced to allow prosecutors to enter into Deferred Prosecution Agreements (DPAs) with corporates in England and Wales. DPAs will act as an alternative to prosecution and may provide corporates with a further incentive to self-report in certain circumstances.

In line with this trend the Sentencing Council for England and Wales recently published draft sentencing guidelines covering offences of fraud, bribery and money laundering that include specific guidelines for sentencing corporate offenders (the ‘Guidelines’). The Guidelines are the first of their kind in England and Wales for corporate offenders. In addition to guiding sentencing decisions when corporates are prosecuted, the Guidelines are also expected to be used by prosecutors to help determine the level of penalty for corporates entering into a DPA.

The Guidelines for corporate offenders cover fraud, money laundering and bribery offences committed by corporations, which includes any organisation, body, partnership or charity. As well as taking account of existing regimes for regulatory and criminal sanctions in England and Wales, the Sentencing Council notes that it has taken into account the sentencing guidelines for corporations published by the US Sentencing Commission, as well as the civil and criminal penalties imposed in the US.

The Guidelines are structured in ‘steps’, each of which can increase or decrease a corporate offender’s financial liability. The starting point for any fine is calculating a financial figure based on the ‘harm’ caused by the offence. For bribery this is suggested as the gross profit from any contract obtained, retained or sought. Where the harm is difficult to establish, the court may apply a figure of 10 percent of the worldwide revenue derived from the product or business area to which the offence relates. The harm figure is then applied against a multiplier, determined by a corporate’s ‘culpability’ for the offence. The Guidelines set out a list of non-exhaustive characteristics that the court should ascribe to a corporation’s role and motivation in the commission of an offence when determining if the corporation’s culpability is ‘high’, ‘medium’ or ‘low’. Culpability for a Bribery Act offence of failure to prevent bribery is set out specifically, with a category of ‘high’ being ascribed to offenders with a “culture of wilful disregard of commission of offences by employees or agents with no effort to put effective systems in place”, through to ‘low’ requiring: “some effort made to put bribery prevention measures in place but insufficient to amount to a defence.” A ‘high’ culpability sees a starting point of the fine being 300 percent of the harm figure, with a range of 250-400 percent suggested, whilst a ‘low’ culpability sees a starting point of 100 percent of the harm figure, with a range of 20-150 percent suggested.

The Guidelines then allow the court discretion to vary a fine based on a corporation’s size and financial position, as well as the seriousness of the offence and any unacceptable harm that the fine might cause to third parties. Notably, the Guidelines set out that the fine should fulfil the objective of punishment and deterrence by having “a real economic impact which will bring home to both management and shareholders the need to operate within the law”. This is likely to lead to more substantial fines being imposed on larger corporations as a means of deterrence. Likewise, in certain circumstances, corporations will also be able to argue against more substantial fines where they can show that the fine would have a detrimental effect on staff, service users, customers, the local economy or the corporation’s ability to implement an effective compliance program. Self-reporting and cooperation with investigations are also among the factors, in addition to entering a guilty plea, that can lead to a reduction in a fine. Having regard to the impact on shareholders is specifically excluded and the Guidelines note that in some cases putting an offender out of business would be an acceptable consequence.

Whilst the Guidelines provide a framework within which financial penalties for corporations will be determined, it is likely that fines may vary a great deal depending on the underlying facts of a particular case and the nature of the corporate offender concerned. However, they will help to provide a corporate offender with grounds for contesting the level of fines imposed. They should also help corporations make better informed decisions about financial provisions where a corporation faces prosecution, as well as the consequences of self-reporting in terms of the likely impact on financial penalties.

Conclusion

Overall, the publication of the Guidelines is a positive step and will help corporates better assess risk and make decisions with regards to self reporting and the benefits of entering into a DPA. However, they are a further step towards the UK’s implementation of a corporate crime framework similar to that in the US and financial penalties are likely to start reflecting the fines imposed in the US. The Guidelines are open for consultation until 4 October 2013.

Peter Burrell is a partner, Paul Feldberg is a senior associate and Michael Thorne is an associate at Willkie, Farr & Gallagher LLP. Mr Burrell can be contacted on +44 (0)20 7153 1206 or by email: pburrell@willkie.com. Mr Feldberg can be contacted on +44 (0)20 7153 1217 or by email: pfeldberg@willkie.com. Mr Thorne can be contacted on +44 (0)20 7153 1204 or by email: mthorne@willkie.com.

Peter Burrell

Paul Feldberg

Michael Thorne

Willkie, Farr & Gallagher LLP