Financial crime: the future of corporate defendants

February 2014  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2014 Issue

A tougher stance against corporates who commit economic crime has long been the mantra of the bodies charged with investigating them. The 2012 appointment of David Green, the new Director of the SFO, his rewriting of the guidance on self-reporting and his public declaration that more corporate prosecutions are high on his wish list have been viewed by many as a clear signal that civil settlements will become a rarity. Uncertainty as to how to resolve cases in practical terms saw a downturn in self-reporting in 2013 and pretty much a standstill on new corporate investigations by the SFO.

The introduction of Deferred Prosecution Agreements (DPAs) is expected to turn the tide by providing greater certainty of outcome for companies that discover they have economic crime problems. DPAs have been used in the US since 1993 with great success but undoubtedly bring greater risk to directors and senior management as a result.

What are DPAs?

Schedule 17 of the Crime and Courts Act 2013 (the Act) allows the SFO and CPS to enter into DPAs with corporate defendants. While there is still no implementation date, it is widely anticipated that the provisions will come into force in February 2014. The Act identifies a range of FSMA, Companies Act and tax and customs offences as being offences for which a DPA will be available and it is expected that DPAs will be extended to the FCA and HMRC in the near future.

DPAs provide an alternative to both prosecution and civil recovery for companies. Prosecuting authorities will be able to invite corporate bodies suspected of committing economic offences to enter DPA negotiations.

Unlike civil recovery orders, DPAs will require judicial involvement and approval at an early stage. Once approved, a company will be charged but proceedings will be automatically suspended for an agreed period. The DPA will contain an agreed statement of facts relating to the alleged offence which may include admissions made by the company as well as a number of conditions, such as payment of a financial penalty (with or without compensation), cooperation with any future prosecutions of individuals, the appointment of a monitor and the implementation of a robust compliance program. Any breach of the agreed terms will mean that the prosecution can be resumed but if the company complies with the DPA then the prosecutor will return to Court at the end of the agreed period where the charges against the company will be formally dropped.

When will prosecutors offer a DPA?

The two-stage test in the draft DPA Code of Practice (the Code) sets out the criteria to be applied by prosecutors in deciding whether to offer a DPA. The evidential sufficiency test must be met. Assuming it is, the prosecutor must then be satisfied that the public interest would be properly served by a DPA, as opposed to a prosecution. Public interest considerations will include: (i) whether there is a history of similar conduct; (ii) when the offending took place and the existence of an effective corporate compliance program at that time; (iii) the approach taken by management on discovering the misconduct (including full and accurate self-reporting); (iv) the scale of the offending and whether it formed part of the company’s established business practice; and (v) the severity of the economic harm on victims.

Self-reporting criminal activity will be a key factor in deciding whether to offer a defendant a DPA. In October 2013, Green confirmed that “if a company made a genuine self-report… in circumstances where they were willing to cooperate in a full investigation and to take steps to prevent recurrence, then in those circumstances it is difficult to see that the public interest would require a prosecution of the corporate.” Certainly, in the US, successful DPAs rely almost solely on self-reporting by companies.

Is it a good outcome for a company?

The advantages to prosecutors are clear. DPAs will afford the SFO the opportunity to increase corporate discipline without the criticism civil resolutions have attracted in the past. It will be able to direct its stretched resources towards the most egregious offending and avoid the time, expense and uncertainty of a criminal trial. However, there are also advantages to the corporate, including the following:

Greater certainty of outcome. This has contributed to the success of DPAs in the US, particularly given that avoiding the time, expense and uncertainty of a criminal trial is equally attractive to a corporate defendant.

Avoid mandatory debarment. A corporate criminal conviction for bribery offences will lead to mandatory debarment under the EU public procurement regime. (A conviction under s7 of the Bribery Act 2010 – the corporate offence of failing to prevent bribery – means debarment is discretionary.) The avoidance of a conviction through a DPA will automatically militate in favour of a less serious penalty.

Avoid confiscation. As a DPA is not a criminal conviction, confiscation of the proceeds of crime will not be engaged.

Minimise reputational damage. Companies can turn a DPA to their advantage by using their clean bill of health and compliance program to attract business. Siemens, which in 2008 was fined $800m by the US authorities and €395m in Germany in respect of corrupt activities, was not barred from bidding for public contracts and has used its reformed corporate character to good effect in order to secure bids.

Global settlements. A DPA is likely to make the future of any multi-jurisdictional investigation easier and quicker if it involves the US.

Board approval. The fact that a DPA should be capable of being resolved quickly and with a higher degree of certainty than we have seen in the past will commend itself to boards.

Of course, DPAs are not without their disadvantages, even for a corporate that self-reports at the earliest opportunity.

DPAs will be entirely discretionary and so there is no absolute guarantee that the SFO will offer one, no matter how timely the company self-reports and how cooperative and transparent it may be. If the DPA negotiations fail, the company may have given the SFO material that will be admissible against it in a subsequent prosecution, thereby making the SFO’s job considerably more straightforward. If the SFO does offer a DPA, it will be made public once it has been approved by the Court and the final hearing will be in public. It is also likely that the fine will be large. The Act states that any financial penalty under a DPA should be broadly comparable to the fine that would have been imposed on a guilty plea. The Sentencing Council is to publish guidelines in early 2014 but proposals include financial penalties of up to 400 percent of the amount the company gained from its wrongdoing.

The SFO has previously faced difficulties in establishing corporate criminal liability given the requirement for a controlling mind to be guilty of criminal conduct. David Green has suggested that the answer to the corporate liability obstacle would be an extension of the principle contained in s7 of the Bribery Act to cover acts of fraud by employees as well as bribery, but it remains to be seen whether the law will be developed in this area.

The decision to self-report is a balancing exercise and a detailed risk assessment will be required by corporates and their legal advisers before any steps are taken. However, self-reporting is not the only way in which prosecutors become aware of misconduct and the likelihood of it coming to their attention through a whisteblower, another prosecuting body (in the UK or outside) or a competitor is high. Failure to self-report will make a prosecution more likely if the misconduct is subsequently discovered. As Green has said “A self-report at the very least mitigates the chances of a corporate being prosecuted. It opens up the possibility of civil recovery or a DPA.”

What about the risk to directors and employees?

Without doubt these changes will have an impact on those individuals who are suspected of having engaged in criminal activity. DPAs will leave individuals more vulnerable to prosecution. The self-reported conduct will have been fully investigated by the company and disclosed to the prosecutor and it will have an obligation to continue to cooperate. Such evidence will be sourced quickly and without the need for time consuming mutual legal assistance machinery. Individuals may well have been investigated in the run up to the company making its report to the prosecutor. Whilst not evidence that could be used against a former director of employee it will be material that forms the basis of further intelligence gathering by the prosecutor and, down the line, may be introduced as a previous inconsistent statement if the individual gives evidence at trial.

The future

Inevitably there will be an initial period of uncertainty surrounding how DPAs will work in practice. However, once the dust settles it will be up to the prosecuting bodies to be clear and unambiguous such that corporate defendants are assured that genuine reports will lead to successful DPAs. Certainly since their introduction in the US their use has risen significantly. We can expect UK corporates to embrace the procedure if the alternative is uncertainty and delay. The casualties will be the directors and officers caught up in the corporate wake. For them the likelihood of prosecution will increase and the period of relative malaise at the SFO looks likely to end imminently.

 

Jo Rickards is a partner, Johanna Walsh is a senior associate and Min Weaving is a trainee solicitor at DLA Piper UK LLP. Ms Rickards can be contacted on +44 (0) 8700 111 111 or by email: jo.rickards@dlapiper.com. Ms Walsh can be contacted on +44 (0) 8700 111 111  or by email: johanna.walsh@dlapiper.com.

© Financier Worldwide

BY

Jo Rickards, Johanna Walsh and Min Weaving

DLA Piper UK LLP

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