Post-Tesco, are deferred prosecution agreements on shaky ground?

July 2019  | SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

July 2019 Issue

Following the debacle that was the trial of three former Tesco directors, sections of the legal profession are querying whether the outcome of that trial may cause corporates to pause before agreeing to enter into a deferred prosecution agreement (DPA) with a prosecuting agency, something that Tesco did in 2017 when accepting responsibility for false accounting. By way of a recap, Tesco accepted responsibility for dishonestly creating a false account of its financial position by overstating profits. This led to Tesco agreeing to pay a fine of £129m and investigation costs of £3m to the Serious Fraud Office (SFO).

DPAs, introduced by the Crime and Courts Act 2013, are judge-approved agreements negotiated between a prosecutor – the Crown Prosecution Service (CPS) or the SFO, and a corporate that is suspected of criminal wrongdoing. Any prosecution of the corporate would be suspended on conditions that would typically see the corporate pay a financial penalty, compensate victims and introduce or improve its compliance programme. That said, a DPA can also involve bespoke terms that are created to suit a particular case. A DPA will be an admission of criminal liability on the part of the corporate and will only be approved by a judge if the DPA is likely to be in the interests of justice, and that its terms are fair, reasonable and proportionate in all the circumstances. DPAs can and have been used for economic crimes, including bribery and fraud.

The introduction of the DPA regime was heralded at the time, with legislators noting that a key feature of DPAs would enable a corporate to make full reparation for criminal behaviour without the collateral damage a conviction could bring. It would also, in some instances, remove the identification principle barrier that has previously blighted the successful prosecution of corporates.

From a corporate’s point of view, DPAs could prevent significant financial fallout, as a conviction for bribery, for instance, will result in a corporate being barred from tendering for public contracts, as well as reputational fallout. However, that ‘positive’ would come at a cost, such as the ability to control  what can be an invasive process that commences with an acceptance of a prosecutor’s invitation to enter into negotiations. In addition, cooperation, a key pillar of any DPA, is likely to be intrusive, and come in the form of: (i) self-reporting; (ii) disclosure of material that would ordinarily by subject to privilege; (iii) changes to leadership; and (iv) external auditors being invited in to comb through the corporate’s affairs.

Apart from the DPA entered into by Tesco, which, to date, is the only non-bribery related DPA, there have been three other DPAs that Sir Brian Leveson PC has recently overseen: Standard Bank in 2015, followed by XYZ Limited, a company whose anonymity remains pending the trial of relevant individuals a year later, and Rolls-Royce in 2017, the UK’s largest DPA to date.

However, moving the story on a few years, there are suggestions that wear has begun to show on the tread of the DPA regime’s wheels. Wear, which could lead some corporates to think long and hard about whether to cooperate with prosecutors, and accept an invitation to enter into DPA negotiations.

There were some signs of tension with the DPA regime as early as 2015, following reports of an unsuccessful attempt by the SFO to invite Barclays to enter into DPA negotiations. It would appear that this approach was a result of the SFO’s 2012 investigation into capital raising that Barclays undertook in 2008 – at the height of the UK’s financial crisis. The SFO’s three-year investigation resulted in allegations that undisclosed payments totalling £2.4bn had been made to Qatari investors in 2008 at the same time that the Gulf state was investing heavily in Barclays, an alleged agreement that ultimately saved Barclays from coming under government control. Barclays denied there had been any criminality, and went further by challenging the SFO’s demands for access to certain documents that Barclays argued were covered by legal privilege. It is unclear precisely when any approach was made to Barclays to enter into DPA negotiations, but given Barclays’ stance, it is unlikely that negotiations would have got off the ground. The failure to release certain documents go against the grain of cooperation; a cornerstone of any DPA negotiation. That, combined with the denial of any criminality, another important part of any DPA, would have prevented any agreement being forged. As an aside, the SFO’s attempt at successfully prosecuting Barclays for conspiracy to commit fraud, and the provision of unlawful financial assistance, was cut short when the charges were dismissed in May 2018. The SFO’s appeal to the High Court to have the charges reinstated by way of a voluntary bill of indictment was equally unsuccessful and formally brought an end to the SFO’s pursuit.

If the Barclays’ tension is seen as mere background noise, the recent collapse of the Tesco trial has amplified that noise, and brought the tension front and centre. The evidence in the Tesco trial was described by the presiding judge as “so weak” that it could not go before a jury. The very public rebuke of the SFO’s handling of that case, and its reported inability to bring big corporates to justice due to a lack of resources, will do little to stem this view. Investigations into GlaxoSmithKline, and individuals suspected of wrongdoing at Rolls-Royce, adding a layer of tension with the DPA Rolls-Royce entered into, were recently withdrawn on public interest grounds.

It now transpires that there could be an increased possibility that corporates may refuse to play to a prosecutor’s tune, and instead will test the prosecution’s evidence by digging in deep for what could result in protracted litigation. However, corporates are well-advised that, before arriving at this decision, a detailed assessment should be undertaken with the assistance of lawyers as to the risks of this approach. As part of that process, a corporate should be reminded that when a DPA is entered into, it is based on the evidence that a prosecutor has amassed at that stage in its criminal investigation. This may not account for any additional unused evidence that may be disclosed as a result of defence requests or court direction under the Criminal Procedure and Investigations Act 1996 during litigation; evidence, which if examined by a jury, together with evidence secured by the corporate, could lead that jury to not be satisfied beyond reasonable doubt that the corporate is guilty.

It remains to be seen what the full effect of the Tesco trial will have on the approach a corporate could take when approached by a prosecutor to enter into DPA negotiations. The DPA regime remains in its infancy, and is likely to evolve as more agreements are entered into, but what is certain is that as a result of recent events, eye-watering fines, and the possibility of endless cooperation, may now be seen as options a corporate will not have to automatically accept.

 

Iskander Fernandez is a partner at BLM. He can be contacted on +44 (0)20 7865 3431 or by email: iskander.fernandez@blmlaw.com.

© Financier Worldwide

BY

Iskander Fernandez

BLM

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