Mr M was the Head of the UK division of an IT company. Over a two year period he oversaw the making of £1.5 million in corrupt payments to a public official with control over two state-owned institutions based in a third world country. As a result, Mr M’s business secured £25 million in contracts for the company and he consequently increased his own personal wealth with a £500,000 bonus. The government contracts were inflated in price by £5 million because of the corrupt activities, and the IT systems were not appropriate for the needs for the institutions. Mr M’s likely sentence upon conviction before any reduction for a guilty plea would be in the range of five to eight years.
This fictional scenario was set out in the Sentencing Council’s (“the Council”) draft consultation document which was opened on 27 June seeking views from interested people and organisations in order to formulate its sentencing guidelines in respect of fraud, bribery and money laundering offences. The Consultation Paper, including the draft sentencing guidelines (“the draft Guidelines”) is available here.
It is clear from the draft Guidelines that individuals face stiff sentencing for bribery and companies could face very high penalties if found guilty of a corruption offence: up to 400% of the gross profit derived from the wrongdoing. This comes as no surprise.
This consultation process has been launched in response to the Ministry of Justice’s consultation last year on the introduction of Deferred Prosecution Agreements (“DPAs”) by the Crime and Courts Act 2013 (“the Act”) on 25 April 2013. It is expected DPAs will be available to prosecutors from February 2014. A draft Code for prosecutors on the use of DPAs was issued for consultation at the same time as the draft Guidelines. Our Guidance Note on the draft Code can be read here.
It should be noted that the Sentencing Council’s remit only extends to issuing guidelines on sentencing following conviction, and therefore the only use of the draft Guidelines in the context of DPAs is to assist the prosecutor (and corporates) to determine the appropriate level of financial penalty that should form part of a DPA. Paragraph 5(4) of Schedule 17 of the Act provides that a penalty under a DPA should be broadly comparable to the likely fine that would be imposed following a conviction after a guilty plea.
The draft Guidelines suggest that the Courts should use the following eight step decision-making process when sentencing in relation to economic crimes:
Step One: determining the offence category;
Step Two: starting point and category range (ie assessing provisional sentence or fine);
Step Three: consider any factors which indicate a reduction, such as the provision of assistance by the defendant to the prosecution;
Step Four: reduction for guilty pleas;
Step Five: totality principle (where the offender is before court for more than one offence);
Step Six: confiscation, compensation and ancillary orders;
Step Seven: duty on courts to give reasons and explain the effect of the sentence passed; and
Step Eight: consideration for time spent on bail.
This Guidance Note will focus on how the sentencing process will be applied in relation to bribery offences concerning individuals and corporate offenders.
In relation to the conviction of individuals under the Bribery Act 2010 (“the Bribery Act”) the Council has indicated that sentences for bribery should be broadly equivalent to those for fraud prosecuted under the Fraud Act 2010. Fraud offences carry a ten year maximum sentence (the same maximum jail term as contained in the Bribery Act).
Interestingly, the Consultation Paper suggests that in relation to bribery no financial amounts should be used to define harm (unlike fraud and money laundering). This is because of the perceived difficulty in quantifying the financial value of harm in relation to Bribery Act offences, the circumstances of which can vary so much.
When sentencing, the courts are expected as a first step to consider the offence category:
The courts should determine the offence category by first looking at the culpability factor of the individual. For example, the higher the level of planning and sophistication, the greater the culpability. The status of the person being bribed could also indicate a high level of culpability e.g. if the culpable person is a senior public official or law enforcement officer that will denote a high level of culpability.
Next, in order to determine the offence category, it is suggested that the courts should consider the harm caused by the bribery offence by reference to its “impact”.
There are four categories of “harm”.
Category 1 harm, the most serious, would be demonstrated by one or more of the following factors:
Serious detrimental effect on individuals (for example, by the provision of sub-standard goods or services resulting from the corrupt conduct);
Serious environmental impact;
Serious undermining of the proper function of local or national government, business or public services;
Substantial actual or intended financial gain to offender or another, or loss caused to others, for example, the loss of a contract for a bona fide competitor.
The Council’s draft sentencing schedule based on culpability and harm factors is set out below. For the most serious offences, an individual is facing a five to eight year prison sentence.
Click here to view table.
Aggravating and mitigating factors
Once the courts have considered the offence category and sentencing starting point, they may then move on to consider other aggravating and mitigating factors. Aggravating factors will include previous convictions, destruction of evidence and witness intimidation. Mitigating factors will include a previously unblemished conduct record, remorse, and early active co-operation with the authorities. The factors will either increase or decrease the sentence within the relevant category range.
Although a fine is the only punishment available for corporates for obvious reasons, there are currently no guidelines for the sentencing of organisations convicted of financial crimes.
The Council indicates in the Consultation Paper that it has tried to achieve a balance between (i) the desirability of providing a level of certainty for prosecutors and defendants as to the likely level of financial penalties, and (ii) the need for flexibility.
Flexibility is undoubtedly an important factor in the equation because the offender could vary in size from a small organisation with limited resources to an international conglomerate. Furthermore there will naturally be a reluctance on the part of the Serious Fraud Office (“SFO”) and the courts to impose a fine that would certainly bankrupt a company, causing collateral harm to innocent parties including employees and customers in the process.
When determining the appropriate level of fine, it is suggested that the first step is for the courts to decide whether a compensation order should be made. Where a compensation order is appropriate, the Council’s suggestion is that the payment of compensation should be prioritised over the payment of a fine where the means of the offender are limited. Having said that, a large multinational with deep pockets may well be hit with a “double whammy” (both a fine and a compensation payment to the victim). A willingness to compensate the victim may, however, give a positive impression to the SFO that shows a sense of remorse (to the extent a company can be seen to show such an emotion) which may be helpful if a DPA is in the balance.
Determining Offence Category (culpability and harm)
The courts will then consider the factual elements of the case to determine the offence category.
These will include culpability and harm factors.
High culpability factors include:
the company playing a leading role in organised, planned and unlawful activity;
involving others, such as employees and intermediaries, to participate through pressure or coercion;
targeting of vulnerable victims;
corruption of local or national government officials or ministers;
corruption of law enforcement officials;
abuse of dominant market position or position of trust;
offending committed over sustained period of time;
any culture of wilful disregard of commission of offences by employees or agents with no effort to put effective systems in place (applies to section 7 Bribery Act offence only: failure by a commercial organisation to prevent bribery).
Factual circumstances suggestive of a lesser culpability factor include a corporation playing a minor, peripheral role in unlawful activity organised by others and, in respect of a Section 7 Bribery Act offence, showing adequate procedures were in place to prevent bribery.
The second element of the determination of the offence category is identifying the “harm” which the draft Guidelines suggest should be expressed as a “financial figure assessed as the actual gross amount obtained (or loss avoided) or intended to be obtained (or avoided) by the offender as a result of the offence”.
In relation to bribery, that “amount” is described as usually being the gross profit from the contract obtained, retained or sought as a result of the offending.
Where a contract has not been won, but a different type of benefit was achieved through bribery, alternative measures are suggested for calculating the amount of the “harm”:
For Section 7 offences under the Bribery Act (failure by a commercial organisation to prevent bribery), it is proposed that the amount of the harm should equate to the cost avoided by failing to put in place appropriate measures to prevent bribery.
More generally, the draft Guidelines suggest that the amount of the harm should equate to 10% of relevant revenue (relevant revenue being the worldwide revenue derived from the product or business area to which the offence relates for the period of the offending).
Starting points and category ranges
It is then proposed that the courts will identify a “starting point” for any penalty by applying a multiplier (derived from the culpability level) to the harm figure.
The highest multiplier is 400% (i.e. four times the harm figure) and the lowest is 20% (i.e. one-fifth the harm figure) depending on the offence category.
The Council’s suggested multiplier table is set out below.
Click here to view table.
So for a company whose culpability level is assessed as medium and the harm figure is assessed at £100m the starting point for a fine would be £200m (but with a range of £100m to £300m depending on aggravating and mitigating factors that will be considered after the “starting point” has been identified).
Mitigating and Aggravating Factors
Aggravating factors would include previous convictions, attempts to pervert the course of justice and harm caused to national governments. Mitigating factors would include offences being committed under previous directors or owners, victims voluntarily being compensated, no previous convictions and co-operation with the investigation.
Finally, it is highly likely that there will be flexibility in the process to allow for an adjustment in the level of the fine to ensure it is proportionate having regard to the size and financial position of the company, the seriousness of the offence and the risk of unacceptable harm to third parties such as staff and customers (but not shareholders).
The Council wants any fine to be large enough to have a real economic impact on the company so as to deter wrongdoing in the future, but at the same time is seeking to ensure that the offender is, for example, not put out of business, a result which would have serious repercussions for innocent employees and customers.
The draft Guidelines as presently drafted also suggest the courts should take into account any potential reduction for a guilty plea in accordance with section 144 of the Criminal Justice Act 2003 and Guilty Plea Guidelines (which for an early admission could result in a one third reduction in any penalty).
The draft Sentencing Guidelines serve to re-emphasise to both individuals and corporates that in respect of bribery and economic crimes in general, the consequences of a conviction are likely to be very serious indeed; either lengthy jail terms for individuals or in the case of companies, extremely large fines, potentially on the scale of those seen in the US. But this should come as no surprise.
A company that commits serious corruption involving public officials, even if a DPA is agreed with the SFO, is likely to face a substantial financial penalty which may (as a minimum) equal the amount of any gross profit obtained from the wrongdoing. Self-reporting, active cooperation with the authorities in the investigation, and a previous unblemished record, may help keep the penalty to a minimum.
Of course, the best advice one can give to a company is to avoid a fine in the first place, rather than merely to seek to minimise it after the event. The only defence to the section 7 corporate offence of failing to prevent bribery under the Bribery Act is to ensure that adequate procedures were already in place to prevent such offending (and they were circumvented by a rogue employee).
Hopefully, one reaction to these draft Guidelines, even before they are finalised, is that corporates will ensure they have implemented an appropriate compliance programme. Just over two years after the Bribery Act came into force the SFO will have little sympathy for a company that has still failed to implement adequate measures to prevent bribery should they come knocking on the door.