The Director of the Serious Fraud Office (SFO) and the Director of Public Prosecution jointly released a draft Code of Practice providing guidance to prosecutors on the use of Deferred Prosecution Agreements (DPAs). In parallel, the Sentencing Council announced draft guidelines for sentencing individuals and companies convicted of fraud, money laundering and bribery. Both drafts are open for public comment.
The draft Code of Practice for use of DPAs
The Crime and Courts Act 2013 introduced DPAs as a new enforcement tool for prosecutors to combat fraud, bribery and other economic crimes committed by companies (but not by individuals and not for other crimes). From 2014, prosecutors may invite a company accused of these kinds of criminal offences to enter into negotiations for a DPA as an alternative to prosecution. The DPA will place a number of terms and conditions on the company, which may include disgorgement of financial benefits from the offence, compensation, implementation of a compliance or training programme, co-operation with future investigations, and/or paying the prosecutor’s investigative costs. Upon entering the DPA, the criminal proceedings will be suspended but can be resumed if the conditions of the DPA are not honoured. It is intended to be a transparent, public process, and both the decision to enter into the DPA and the terms subsequently agreed will be supervised by a judge.
Mr. Kevin Davis, Chief Investigating Officer of the SFO, commented recently that DPAs will not be “cosy deals or cut price justice”. The draft DPA Code reflects this rhetoric by emphasizing that the SFO and CPS are “first and foremost prosecutors,” and underscoring the necessary, deterrent effect of criminal prosecutions (including “draconian” consequences such as debarment from public procurement tenders). Companies have no right to be invited to negotiate a DPA, nor will selfreporting by a company guarantee an invite to negotiate a DPA (although it will be a factor in the company’s favour).
The draft DPA Code sets forth a twofold test to determine whether a DPA is appropriate: (1) is there a reasonable suspicion that the company committed the office and a reasonable prospect of conviction based on available evidence and likely results of further investigation; and (2) is the public interest properly served by not prosecuting but instead entering into a DPA. The draft DPA Code provides that where offences are “serious”, it is more likely to be in the public interest for a prosecution to proceed. There are a number of indicators of “seriousness” including the value of any gain/loss and the risk of harm (to the public, victims, shareholders, employees and creditors and to the stability and integrity of financial markets and international trade). Prosecutors also must look beyond the UK’s borders and consider the impact of the offending in other countries. Ultimately however, it will be a matter of prosecutorial discretion and assessed on a case by case basis.
The draft Code also instructs prosecutors to consider other tools within their powers such as asset recovery powers under the Proceeds of Crime Act. These can be used in addition to a prosecution or DPA, or as an alternative (for example, where there is insufficient evidence for a criminal prosecution or DPA).
To allay concerns expressed about the DPA process in the US – i.e. that it is not transparent – the draft DPA Code provides that whilst the negotiation process will be confidential, the prosecutor will publish on its website not only the DPA itself, but all orders of the court along with the reasons given by the court for approving an application for a DPA. Publication may be temporarily delayed to avoid substantial risk of prejudice to the administration of justice in legal proceedings.
One key advantage for a company in entering into a DPA is that, unlike a criminal sentence, it will not trigger mandatory debarment under the EU Public Procurement Regime (although the government has warned that it may still be a “potential factor” in deciding whether to exclude a company from public procurement tenders on a discretionary basis). Another advantage is that the company will not be required to formally admit the offence (although it will be required to admit the content and meaning of key documents referred to in an agreed statement of facts, which will be negotiated by the prosecutor and the Company as part of the DPA process).
Despite these advantages, companies who engage in this process must remain alive to the risks. In particular they must be aware that, aside from a very limited exception1, there is no limitation on the subsequent use by prosecutors of information obtained from the company during the DPA negotiation (e.g. its notes of interviews, reports) in criminal proceedings brought against either the company or others, subject to the usual rules of evidence. Legal professional privilege will still allow companies to resist production of privileged information. The bigger concern however, is likely to arise where privileged material is voluntarily disclosed by the company in the interests of appearing transparent and cooperative. In the US, it is not uncommon for prosecutors to pressure companies to disclose internal reports of investigations; it will remain to be seen whether that also will occur here in the UK. But there is no question that a difficult balance will need to be struck by companies involved in any DPA negotiation.
Lastly, the draft DPA Code provides that the financial sanction should be broadly comparable to the one that would have been imposed following a guilty plea, although the prosecutor has a “broad” discretion in this. The draft DPA Code must therefore be read in conjunction with the new draft Sentencing Guidelines on Fraud, Bribery and Money Laundering Offences which introduce guidelines for sentencing corporations that have committed economic offences. As discussed further below, under those draft guidelines, courts could potentially impose very serious fines – up to 400% of the value of the gain the company made from the criminal conduct.
Public comment is invited on eight points in the draft DPA Code: (1) the test for when a prosecutor should consider entering into a DPA; (2) factors a prosecutor may take into account when making its
decision whether to enter into a DPA; (3) the approach to disclosure; (4) whether additional terms should be included in DPAs; (5) the approach to the use of a monitor; (6) whether the policies and procedures proposed to be put in place are sufficient; (7) the approach to determining the level of financial penalty; and (8) any other comments on the draft Code. The consultation closes on Friday 20 September 2013. The consultation form can be found here.
The draft Sentencing Guidelines on Fraud, Bribery and Money Laundering Offences
The draft Sentencing Guidelines cover sentencing for economic crimes committed by both individuals and corporations. This Alert focuses on only part of those guidelines – the proposed corporate sentencing guidelines for fraud, bribery and money laundering offences committed by companies and other bodies.
There have, until now, been no guidelines for sentencing corporations convicted of financial crime. The purpose of the draft Sentencing Guidelines is to provide clear guidance to promote a consistent approach by the courts. It expressly states however, that it is not intended to be exhaustive; the courts need flexibility in sentencing so as to achieve a fair and proportionate sentence. This is particularly the case when dealing with offences committed by corporations, as the courts inevitably face significant variations between offending corporations and offending conduct.
The sentence for offences committed by corporations is a fine (and/or compensation payment). As mentioned above, the draft corporate guidelines allow the courts to hand down potentially very hefty fines in furtherance of punishing, deterring, and removing gains obtained by corporations undertaking criminal economic activity.
The process for calculating the fine is relatively straightforward. The court must first consider whether a compensation order ought to be made as well as a fine. If so, then that order will be prioritised over the payment of a fine where the financial means of an offender are limited. The court will then determine the fine amount by assessing the level of the company’s “culpability” and determining the “harm”. “Culpability” factors include abusing a position of trust, targeting vulnerable victims, playing a leading role in organised crime, corrupting governmental or law enforcement officials, or sustained offending. “Harm” is assessed not by actual loss to victims but by the amount the offender gained or intended to gain from the offence. Where there is no clear evidence of actual or intended gain, the court may substitute 10% of the worldwide revenue derived from the product or business area to which the offence relates.2 The starting range of the fine is based on a multiple of the harm, the multiplier being the level of culpability (20% to 400%).
The court will then consider any aggravating or mitigating factors to increase or decrease the range. Aggravating factors include (among others) previous convictions, endemic nature of the offense, attempts to conceal misconduct, extraterritoriality, seriousness of the offense (e.g. money laundering), substantial harm to victims or third parties (financial or otherwise), and substantial harm to the integrity or confidence of markets or of governments (local or national). Mitigating factors include (among others) early co-operation with investigations, early admissions or selfreporting, voluntary reimbursement/compensation, and lack of actual loss to victims.
The court will also look at further adjusting the fine to ensure it “fulfills the objective of punishment, deterrence, and removal of gain, in a fair and proportionate way”. The draft
guidelines state that “it is inevitable that the means and worth of the offender will have a considerable bearing on the impact of the sentence”; the fine must be “substantial enough to have a real economic impact which will bring home to both management and shareholders the need to operate within the law”. The court will consider the impact of the fine on the company (e.g. its ability to implement effective compliance programmes, the employment of staff, service users, customers and the local economy, and/or the company’s ability to perform public or charitable functions). But corporations should pay heed to what is a very clear warning in the draft guidelines – in some “bad cases”, it may be “an acceptable consequence” for the fine to have the effect of putting the company out of business altogether.
The court will make final further final adjustments if needed, to account for whether the offender assisted the prosecution or entered a guilty plea, and, if sentencing for more than one offence, whether in the round the total sentence is just and proportionate to the offending conduct.
The Sentencing Council has invited public comment on: (1) the principal factors that make the offences in question more or less serious; (2) additional factors that should influence the sentence; (3) the approach taken to structuring the draft guidelines; (4) the sentences that should be passed for fraud, bribery and money laundering offences for both individuals and corporations; and (5) whether other factors should also be considered. The consultation closes on 4 October 2013. The consultation form can be found here.