As we have previously reported (Click here for our e-bulletin), recently announced consultations bring Deferred Prosecution Agreements ("DPAs") one step closer to becoming a reality.
The provisions on DPAs in the Crime and Courts Act 2013 (the "Act") do not yet have an implementation date, although the Serious Fraud Office ("SFO") has stated that it expects DPAs to become available from February 2014.
The consultations each relate to measures which would need to be in place before the DPA process envisaged in Schedule 17 to the Act can operate. They are as follows:
- The Sentencing Council's consultation on a proposed Fraud, Bribery and Money Laundering Offences Guideline (Click here), which closes on 4 October 2013. Section 9 of this guideline addresses the lack of sentencing guidance on penalties for corporations.
- The Director of Public Prosecutions ("DPP") and the Director of the SFO's consultation on a draft Code of Practice for the use of DPAs (Click here), which closes on 20 September 2013.
- The Criminal Procedure Rule Committee's consultation on amendments to the Criminal Procedure Rules to incorporate the DPA process (Click here), which closes on 30 September 2013.
1. The proposed sentencing guideline on fraud, bribery and money laundering offences
- Sentencing guidelines identify ranges of appropriate sentences and the aggravating and mitigating factors which determine where in the range a particular case should fall. Fraud, bribery and money laundering offences are all "economic offences" for which DPAs are to be available. The guideline is therefore relevant to one of the potential terms of a DPA, the financial penalty. If a financial penalty is to be included in a DPA, it must be "broadly comparable” to that which would have been imposed by a court following conviction. The proposed guideline is expected to avoid DPA negotiations being undermined by lack of clarity, as courts are obliged to follow any relevant sentencing guideline unless it is considered that it would not be in the interests of justice in any particular case.
- The guideline also addresses the general lack of sentencing guidance on penalties for corporations, by setting out a separate process for dealing with corporate offenders (a term intended to cover any organisation or body, including partnerships and charities). Penalties imposed on corporations must necessarily be based on different considerations from those for individuals, as corporations cannot be sentenced to a term of imprisonment. In formulating its approach the Sentencing Council has drawn inspiration not only from its own, limited, guidelines to date on corporate offending, but also from guidance on criminal and civil penalties imposed on corporates in other contexts, and in the US.
- There is no upper limit on the amount that can be imposed by the Crown Court by way of a fine for fraud, bribery and money laundering offences. There is, as a result, great scope for corporate penalties to be substantial – particularly as the amount of a fine will be determined, in part, by the intended and not just the actual gain made or loss avoided. The guideline seeks to replicate rather than alter existing sentencing practice and is not intended to result in an increase in the fine levels for corporate offenders, but the relative absence of examples to date means that there is a "heightened" risk that the guideline could have "unanticipated effects" on sentence levels according to the Resource Assessment accompanying the consultation. The wide range of circumstances in which corporate economic offences can be committed, and the wide range of corporations, makes it likely that there will continue to be a considerable range in amount of any fines imposed.
The proposed process for sentencing corporate offenders
A nine-step decision-making process is envisaged.
- The first step for the court to consider is whether a compensation order is appropriate, as it would take priority over the payment of any fine if the offender's means are limited. The court would also be obliged to take any confiscation order into account before imposing a fine, which would presumably take place prior to this stage.
- The second step is to determine which of the specified offence categories applies. This will be a function of the offender's culpability (high/medium/lesser) and the "harm" caused – defined, in broad terms, as the gross amount obtained (or intended to be obtained) or loss avoided (or intended to be avoided) as a result of the offence. If no evidence of gain or loss avoided is provided, gain or loss is to be calculated using a method similar to that relied on by the Financial Conduct Authority (FCA) – by which the harm or potential harm that a regulatory breach may cause can be calculated as a percentage of the revenue derived during the period of the breach from the product or business area to which the breach relates. It is suggested that 10% of worldwide revenue would be appropriate for the purposes of the guideline (which is lower than the 20% maximum which the FCA can base a penalty on, but is similar to the maximum fines imposed by the European Commission and the Office of Fair Trading for competition infringements).
- The third step is to identify the appropriate starting point and sentencing range, by multiplying the harm figure derived from the calculations conducted at the previous step by a percentage figure reflecting culpability: an increase of 250-400% for high culpability, 100-300% for medium culpability and 20%-150% for low culpability. This is a technique imported from US practice, and may as such be an alien exercise for UK sentencing courts. The court should then proceed to consider whether there are any aggravating or mitigating factors, by reference to non-exhaustive lists of factors reflecting the "seriousness" of the offence, or "personal" mitigation.
- At step four, a penalty could be further adjusted upwards or downwards in order to ensure that it is proportionate to the corporation's size and financial position, the seriousness of the offence and any "unacceptable" harm the payment of a fine might cause to third parties. The overriding consideration should, however, be to "bring home" to management and shareholders alike the need to operate within the law – if necessary by a fine which would put the organisation out of business. This consideration may not translate easily for any financial penalty to be imposed as part of a DPA – given that one of the stated rationales for introducing DPAs was to avoid unintended detrimental consequences for past and present employees, customers, investors and suppliers if the effect of a prosecution would be to put the company out of business. However, the guideline does suggest that the court should be mindful of any impact a fine would have on staff employment, service users, customers and the local economy – as well as, interestingly, the corporate's ability to implement effective compliance programmes.
- Credit for any assistance provided by the corporation (over and above merely complying with any coercive measures), and for any early guilty plea, is factored in at steps five and six, respectively, to reduce the amount of the fine. The amount of credit given for assistance and for guilty pleas is the subject of a separate sentencing guideline, as well as statutory and judicial guidance.
- Step seven requires the court to consider whether to impose any further orders on the corporation, such as a deprivation order, a financial reporting order and/or a serious crime prevention order.
- If the corporation is being sentenced for multiple offences, step eight requires the court to consider whether the total sentence is just and proportionate to the offences taken as a whole (the "totality principle").
- Finally, the guideline restates the court's obligation to give reasons for and to explain the effect of its sentence.
2. The Draft DPA Code of Practice
The draft DPA Code of Practice is intended to supplement the provisions on the DPA process in Schedule 17 of the Act by setting out the decision-making process to be followed by the DPP and the Director of the SFO when agreeing to a DPA, when applying for judicial approval of a DPA and overseeing the subsequent operation of any approved DPA.
- The draft Code goes some way towards addressing the uncertainty inherent in the DPA process, but ultimately there is no guarantee that any DPA will be approved by the court – whether at all, or in the terms negotiated. Whilst self-reporting is identified as a public interest factor against prosecution, the balancing of factors is entirely a matter for the prosecutor's discretion and subject to the court's approval. The corporation's risk-benefit analysis might, therefore, not be greatly assisted by the draft Code.
- The cost implications of a DPA to a defendant would not be limited to any financial penalty agreed, and potentially significant costs could arise from complying with other terms imposed under the DPA. These costs may be likely to be difficult to quantify during DPA negotiations, and may remain unclear at the time judicial approval of the DPA is sought.
- It is clear from the draft Code that agreeing to enter into DPA negotiations would require a corporation to disclose significant amounts of material. What is less clear is whether any refusal by a corporation to waive privilege for example over internal investigation reports, would be perceived as uncooperative. From a corporation's perspective, the disclosure obligations carry three distinct risks. Firstly, the risk that material falling within the scope of the obligation discloses information of which the organisation was not aware at the time it agreed to enter into DPA negotiations. Secondly, the risk that any material disclosed is later proved to have been inaccurate, misleading or incomplete – and that the corporation knew, or ought to have known, that it was. Finally, the risk that material disclosed ends up in the hands of third parties as a result of the prosecutor's disclosure obligations.
- It is also clear that publicity would be inevitable. Whilst preliminary hearings are to be conducted in private, it is presumed that subsequent hearings will be in public unless representations and applications are successfully made to the contrary. Publication of the DPA itself and related orders may then be delayed, in order to prevent prejudice to the administration of justice.
The draft Code identifies a total of 15 topics –the broad features of which we have broken down into five categories, as follows.
- The appropriateness of a DPA
The draft Code suggests that a DPA would be appropriate if the requirements for bringing a prosecution are made out – satisfied by an evidential and a public interest test, familiar to prosecutors, defendants and courts alike. The draft Code provides for the possibility that DPA negotiations could also be entered into even if the evidential requirements for bringing a prosecution have not yet been met, provided that there is at least a reasonable suspicion that an offence has been committed and there are reasonable grounds for believing that a continued investigation would, within a reasonable period of time, provide evidence to the required standard. This requirement does not appear onerous, and would presumably be satisfied wherever a company has self-reported.
The draft Code would supplement existing guidance on factors relevant to an assessment of the public interest in favour of, and against, bringing a prosecution. Interestingly, these factors do not include the potential "unintended detrimental consequences" of a prosecution, which was one of the rationales identified by the Government for introducing DPAs. Instead it suggests that "unduly adverse consequences for the company under the law of another jurisdiction including European law" would militate against prosecution – subject to the contradictory proviso that a decision not to prosecute on the ground that it would result in the company being debarred from public procurement in the EU would tend to undermine the deterrent effect of the relevant EU Directive (which also ignores the prospect of a DPA triggering discretionary debarment).
One of the factors which would make a DPA appropriate is the extent of the effort by management to co-operate, including self-reporting. Similar to the wide-ranging disclosure envisaged in the SFO's current guidance on the self-reporting process ("all supporting evidence" to be provided), the draft Code expects a corporation to provide information about its operations, to make witnesses available and to disclose details of any internal investigation. Withholding such material would be a factor against entering into a DPA, as would late self-reporting. The draft Code also proposes that the corporation should warrant, as a term of any DPA agreed, that any information provided to the prosecutor is not inaccurate, misleading or incomplete and that the corporation should be required to notify the prosecutor of, and to provide on request, any relevant material of which it becomes aware whilst the DPA is in force. The potential scope of these disclosure obligations is compounded by the apparent suggestion in the draft Code that a requirement imposed under a DPA to cooperate in any related investigation could extend beyond the immediate offence to "sector wide" investigations.
- The conduct of DPA negotiations
The draft DPA Code sets out a procedural framework for conducting negotiations, triggered by the prosecutor issuing a formal letter of invitation. The prosecutor must keep a full written record of the negotiations, and must retain any material obtained as it may be relevant to any future prosecution. The prosecutor would also be required to undertake, in a Terms and Conditions letter, to treat the negotiations themselves as well as any information provided by the corporate as confidential. The same confidentiality obligations would be required of the corporate, along with an undertaking to retain all relevant material until the prosecutor releases him from this obligation.
- The use of DPA material
The draft Code confirms that a prosecutor may use, in subsequent criminal proceedings, any material obtained during negotiations which do not ultimately lead to a DPA; subject to the narrow statutory prohibitions on relying on specific categories of material against the defendant in para.13 of Schedule 17 of the Act. There is no guidance, however, on other potential uses of such material – for example, in subsequent civil recovery proceedings. Nor are there any restrictions on how the corporate may use any material obtained (subject to confidentiality obligations) – to whom the prosecutor may need to disclose material, in the interests of justice and fairness, in order to enable the defendant "to play an informed part in the negotiations", and to ensure that it is not misled as to the strength of the prosecution case. Similarly, there appear to be no restrictions on the use of any material obtained by third parties as a result of the prosecutor's disclosure obligations in related criminal proceedings.
- The contents of a DPA
The draft Code envisages that DPAs should contain a combination of "financial terms", and should ordinarily include a financial penalty as well as the prosecutor's reasonable costs. It also proposes, as a standard term, that any payments required under a DPA should be made within seven days of the final hearing unless this is not fair, reasonable or proportionate.
The full cost implications of any terms agreed as part of a DPA may not necessarily be possible to conclusively estimate in advance of the DPA being agreed; particularly given the need for judicial approval. The "non-financial terms" are likely to have cost implications, some of them substantial, which may be even more difficult to quantify at the time the DPA is entered into. Particular attention is given in the draft Code to potential monitor requirements, which have hitherto only featured as part of civil recovery settlements. In addition to the monitor's remuneration the corporation would be responsible for the selection and appointment costs, as well as for the prosecutor's reasonable costs in connection with the monitorship. Should the DPA subsequently be terminated for breach, the company would not be entitled to any relief for these costs.
- DPA hearings
Finally, the draft DPA Code proposes a range of procedures for prosecutors to follow when making any applications required in the course of the DPA process – when seeking approval of the decision to enter into a DPA and for the terms of a DPA, as well as when seeking the court's determination of breaches, variations, termination and discontinuance. The prosecutor would have to provide the court with the information it needs to make any required determinations, including relevant contextual issues such as concurrent jurisdiction, on-going and/or subsequent ancillary proceedings and any disclosed wrongdoing which has not been Whilst it remains relatively rare for courts to sit in private, the draft Code suggests that it may be necessary, not just for the initial hearing, in order to avoid prejudicing any legal proceedings. Concerns about the impact of DPAs on other proceedings might be expected to arise with some frequency, as part of the rationale for making DPAs available is to enable prosecutions of individuals based on information provided by the corporate. Any publication required under the Act would then need to be temporarily postponed. The draft Code also suggests that all communications with the court in respect of a DPA – regardless of the stage in the DPA process – should in any event be confidential, and conducted by way of secure email.
3. Amendments to the Criminal Procedure Rules
These proposals would introduce a new Part 12 to the "preliminary proceedings" division of the Criminal Procedure Rules, as well as amend existing rules 76.1 and 76.7 on costs. The proposed procedures, as well as the DPA procedure as set out in the Act which they are intended to supplement, are both described as "straightforward".
The proposed procedural requirements for DPA applications
- Applications required under the Act would need to be made in writing, unless the court waives this requirement in circumstances where one application follows immediately on from another. Applications to approve a proposal to enter into a DPA would additionally require the defendant's written consent.
- Applications would need to be accompanied by a declaration by each party that neither has supplied inaccurate, misleading or incomplete information. This ensures that the court has a sanction in the event that it is misled, as it has an inherent power to sanction false declarations as a contempt of court if they interfere with, or attempt to interfere with, the course of justice. An offence of perjury might also be committed, if the maker of the declaration knew it to be false or did not believe it to be true. Any individual who makes such a declaration on a corporation's behalf would be required to confirm that they had personally made reasonable enquiry and were aware of nothing adverse; and would then be personally exposed to contempt proceedings if those assertions proved untrue.
- The same judge should hear all applications relating to the same DPA, in order to encourage "judicial continuity". Listing directions to this effect are expected to be issued in due course by or on behalf of the Lord Chief Justice.
- Applications would be subject to time limits, capable of being extended by the court.
- All proceedings would be recorded; although they would not be subject to the general provisions on recordings and transcriptions of Crown Court proceedings. Where proceedings are heard in private, the identities of the parties would not be published –in order to avoid exposing the corporation, its employees and investors to a risk of premature commercial damage.
- The court would be able to award costs on applications for determinations of breach, variations and the lifting of the suspension of a prosecution. The costs of successful applications should normally be awarded in favour of the applicant, and the costs of unsuccessful hearings awarded in favour of the defendant.
The proposed sentencing guideline has been long awaited and will be a welcome addition to the limited guidance on corporate offending and existing prosecutorial guidance dealing specifically with corporate offenders.
The combined effect of the three consultations is additional clarity on the sentencing of corporates and on how the DPA process would work in practice. Significant questions still remain, however, and are likely only to be answered in the course of practice once the provisions enter into force.
The consultations represent a valuable opportunity for corporates and other interested parties to shape both the proposed DPA process and prosecutors' approach to DPAs and their contents. We will be conducting discussion meetings in due course in order to provide a forum for debate on these important topics.