UK Parliament legislated to permit prosecutors and companies to enter into deferred prosecution agreements, but incentives for companies remain unclear
On 25 April 2013 the Crime and Courts Act 2013 (the CCA) received Royal Assent and passed into law1. When relevant provisions come into force, expected later this year or early 2014, the CCA will allow UK prosecutors to enter into deferred prosecution agreements (DPAs) with corporates2. DPAs, similar to those long-established under US law, allow the prosecutor to agree not to press charges for criminal offences, in return for which the corporate agrees to terms—likely including payment of a fine or compensation, promises to improve internal processes and co-operation in prosecutions of third parties. All of this will be subject to English Court supervision and approval.
DPAs will give UK prosecutors a powerful tool to enforce UK white collar offences. They may also give companies a more attractive opportunity to respond to alleged wrongdoing than to defend prosecutions which may be lengthy, costly and damaging—even if ultimately successfully defended. However, the terms and the operation of the DPA will be published and may be used against the company by third parties.
This memo sets out the key provisions, and compares them to their US equivalents.
What does all of this mean?
The key takeaway points are:
- DPAs will inevitably provide additional options for both prosecutors and corporates (but not individuals) to avoid prosecutions which may be risky for both. However, they will not be compulsory and will come with significant downsides to corporates, including penalties and public admissions. Their attractiveness will depend on whether the prosecutor would otherwise prosecute, and what the prospects of success would be.
- Much will depend on the prosecutors’ Code giving guidance on when DPAs might be offered, and on the supervision of the English judiciary whose appetite for intervention remains to be seen.
- The thorny problem of self-reporting wrongdoing remains. Self-reporting currently remains a factor in both the prosecutor’s decision to prosecute in the first place and in the use of alternative powers such as Civil Recovery Orders (CROs) to strip corporates of criminal gains3. Importantly, prosecutors should clarify how self-reporting will be a factor in offering a DPA, if it is also a factor in these earlier decisions.
Who can enter into a DPA?4
DPAs can be offered by the Director of Public Prosecutions (DPP), the Director of the Serious Fraud Office (SFO), and any other prosecutor designated by the UK Secretary of State, which may in due course include entities such as the Financial Conduct Authority5, e.g. in relation to insider dealing offences.
DPAs can be offered to a body corporate, a partnership or an unincorporated association. They cannot be offered to individuals.
What offences can a DPA cover?6
A DPA can be entered into in relation to specified white collar crime offences including: common law conspiracy to defraud; theft and false accounting7; forgery and counterfeiting8; misleading financial service activities9; money laundering10; financial assistance and fraudulent trading11; fraud12; bribery and failure to prevent bribery13; and encouraging, assisting, attempting or conspiring to commit any of these offences.
What are the likely contents of a DPA?14
The prosecutor will agree to institute proceedings by charging the relevant entity with the alleged offence. This would then be automatically suspended subject to application to the Crown Court.
The entity will agree to undertakings, potentially including:
- to pay a financial penalty; compensate alleged victims; donate to charity or other third party; and/or to disgorge profits from the alleged offence;
- to implement or enhance a compliance programme relating to the entity’s policies and/or training of its employees;
- to co-operate in any investigation related to the alleged offence; and
- to pay the prosecutor’s reasonable costs.
The DPA may impose time limits for compliance with undertakings, and may stipulate consequences for breach. The DPA must in any case specify an expiry date after which the prosecutor will seek discontinuance of the proceedings.
The DPA must also contain a statement of facts relating to the alleged offence, and may include admissions by the entity.
What is the procedure for entering into a DPA?15
At an early stage in negotiations with the entity, the prosecutor must make a preliminary application to the English Court for a declaration that the DPA is likely to be in the interests of justice, and that the proposed terms are fair, reasonable and proportionate. If the court makes a declaration, it will give reasons for its decision.
The hearing of the preliminary application will be held in private, and the declaration and the reasons will also be private (although, as set out below, this will become public if the DPA is later approved).
After the prosecutor and the entity agree to the terms of the DPA, the prosecutor must make a final application for a declaration that the DPA is in the interests of justice, and is fair, reasonable and proportionate. If the court makes a declaration, it will give reasons for its decision.
The hearing of the final application may be held in private. However, the declaration and reasons must be given in open court, i.e. accessible to the public.
What happens after the DPA is agreed and approved?16
Once the court makes a declaration, the DPA comes into force. The prosecutor must then publish the DPA, the preliminary declaration and reasons, and the final decision and reasons. The only exception to publication is if the court decides to postpone it to avoid prejudicing other legal proceedings.
Once the DPA is in force, the prosecutor will likely monitor the entity’s performance. The prosecutor may apply to the court if it believes there has been a breach. The court may either invite the prosecutor and the entity to agree proposals to remedy the breach, or may terminate the DPA. The prosecutor and the entity may also agree to vary the terms if unforeseeable circumstances prevent the entity’s compliance, subject to application to the court for approval.
While the DPA is in force, the entity cannot be prosecuted for the alleged offence. On the expiry date, the prosecutor must apply to discontinue the proceedings, and publish the fact of discontinuance.
Will there be guidance on when prosecutors will seek a DPA?17
Yes. The DPP and the Director of the SFO must jointly publish a Code for prosecutors giving guidance on the general principles when prosecutors will seek and operate a DPA. Assuming this reflects the view of the UK Government during the consultation process for DPAs, relevant factors will include:
- the nature and seriousness of the offence;
- the level of premeditation and whether any attempt was made to hide the wrongdoing (including whether the corporate self-reported);
- how widespread within the commercial organisation the wrongdoing was and the seniority and number of the perpetrators;
- losses to innocent third parties;
- the likely impact on the commercial organisation of prosecution and its financial health;
- any action being taken in relation to the wrongdoing in other jurisdictions;
- what action has been taken by the commercial organisation and the level of commitment to resolving the issues, recovery and restitution of benefits and improving compliance; and
- previous convictions and DPAs.
Comparison with US DPAs
US enforcement officials have increasingly utilised DPAs and Non-Prosecution Agreements (NPAs). For example, in 2012, the US Department of Justice entered into 35 such agreements with global and well-known financial institutions across a range of industries, including in relation to prominent enforcement actions involving trade sanctions violations. US government officials vigorously defend these agreements as providing a transformative effect on corporate compliance culture globally. However, many critics have asserted that they are an inappropriate substitute for felony indictments and fail to address individual accountability and punishment. The proper role and utilisation of these agreements will continue to generate passionate debate across both sides of the Atlantic.
Although sharing common ground on many procedural and substantive aspects, important differences exist between the UK legislation and US practices relating to DPAs and NPAs:
- In the US these agreements can be offered to not only corporate entities but also individuals, although this is a relatively rare occurrence.
- There are no limitations or restrictions in the US on which offences may be included as part of these agreements: any type of criminal statute may be used as the basis for a DPA or NPA.
- In the US, all court proceedings will occur in public view, unless the court grants a motion to seal the proceedings. DPAs are filed on the court’s docket sheet while NPAs are not.
- The role of the court differs. Generally, the supervisory role of federal courts in the US has been limited—simply reviewing and endorsing the terms and conditions of the agreements reached by the parties. Recently, however, in select instances, US courts have been more active in questioning the parties about the nature and circumstances of the proposed disposition. The UK legislation envisions a much more active judicial role in this process.
- The relationship between court and enforcer may also differ. If an alleged breach of the agreement occurs, the agreements generally provide DOJ with the ability to ascertain whether the alleged misconduct constitutes a breach and what remedy is appropriate to address the breach.
Comparison with self-reports and immunity under Enterprise Act 2002
DPAs, can be compared with and decisions not to prosecute following a self-report and the regime under the Enterprise Act 2002 (EA) in the UK for receiving immunity in relation to civil and criminal cartels, i.e. civil breaches of Article 101 TFEU/Chapter 1 Competition Act 1998 by a company or undertaking and/or criminal cartel offences under the Enterprise Act 2002 by an individual. In these cases, the prosecutor (generally the Office of Fair Trading (OFT)) automatically grants complete civil and criminal immunity for an undertaking and its employees where (a) that undertaking is the first to apply, (b) there is no pre-existing investigation into such activity and (c) all of its current and former employees and directors co-operate with the OFT (Type A immunity)18. Where the conditions for Type A immunity are not met (e.g. if there is already an investigation into the activity which is the subject of the immunity application), the OFT has only the discretion to offer immunity or leniency.
In any case, similar to self-reports and DPAs, the OFT requires the applicant to provide available information and to cooperate during its investigation, and requires the applicant to admit breaches of the relevant legislation.
Recent statements from David Green QC, the current director of the SFO, to the UK Parliament indicate that decisions not to prosecute could be granted where conditions similar to the conditions required by the OFT for Type A immunity are present: “the fact of a genuine self-report – by a genuine self-report I mean, in its purest form, telling us something that we did not know already, and the corporate acting proactively to investigate it – must be very significant as a factor in weighing up the public interest limb of the decision to prosecute”19.
However, unlike in the case of the grant of Type A immunity under the EA, these decisions would be on a discretionary rather than an automatic basis. In addition, other comments from David Green QC indicate that the expectation of escape from prosecution following a self-report is unreliable, and that the SFO will seek to rely more on itself and other agencies than on companies or individuals for detecting offences: “We are primarily a crime-fighting agency. The perception seems to have arisen in the past that the SFO was anxious to do deals, and more willing to do deals, because it had no real stomach for prosecutions. That cannot be right”20.
The DPA does, however, give the SFO more flexibility in cases where it does not wish to allow a company to avoid criminal prosecution altogether by self-reporting but also does not wish to exhaust its enforcement resources on individual cases. In such circumstances, a DPA can be used to ensure appropriate punishment and deterrence in respect of offences that have been committed while maximising efficiency in the use of resources. The OFT on the other hand can use a grant of Type B21 or Type C22 immunity/leniency under the EA in similar circumstances in relation to cartels.
It is too early to say how UK prosecutors will use their forthcoming powers. However, the following analysis can be offered now.
- DPAs undoubtedly offer an additional tool for prosecutors, and one which is likely to attract additional revenue for the UK Government.
- DPAs offer an additional option for corporate entities to avoid the stigma of a prosecution or a conviction, and to avoid debarment and other consequences following a conviction.
- However, there is no obligation on corporates to enter into a DPA, and there are certain downsides, not least the payment of a fine and potentially the admission of wrongdoing and consequent civil claims. The attraction for companies will still depend on the alternative of defending a prosecution. Some companies might not find DPAs attractive if they think a case cannot be proved. In particular, since the difficulties of corporate prosecutions were a key reason for the introduction of DPAs, their perceived value may be limited in marginal cases.
- The involvement of the English judiciary will be crucial. The two-step judicial process appears capable of working effectively, but it could also present difficulties. The judge would need to be willing to form an early view on potentially incomplete facts in order to give judicial approval to a prospective decision not to prosecute for wrongdoing.
- The workability and clarity of the Code for prosecutors will be important. A strong and credible prosecutorial stance will be vital if DPAs are to be an effective tool.
- DPAs can only be entered into with corporate entities. There is no scope for individuals to enter into similar deals, and indeed they may face increase risks of prosecution if companies agree to DPAs.
- DPAs will cover a wide range of white collar crime offences, including the wide-ranging extra-territorial offence of failure to prevent bribery23. DPAs for this offence could be a potent combination for prosecutors as both that offence and DPAs were expressly designed to avoid the difficulties of a prosecution, in particular attribution of criminal intent to large corporate entities. The threat of a prosecution and the ease of avoiding it might bring many a corporate to the negotiating table.
- It is increasingly unclear how the prosecutors will respond to self-reporting of wrongdoing. It appears to be a factor for a host of possible responses. First, the SFO revised its guidance on self-reporting last year24—widely seen as reducing the prospect of a CRO under which companies may be stripped of gains of criminal activity—as an alternative to prosecution. Secondly, as set out above, David Green has confirmed that a self-report is “very significant as a factor” in deciding not to prosecute at all25. If a self-report has not led to a decision not to prosecute, how then will it also factor into a prosecutor’s decision to seek a DPA? This unfortunately remains a matter of considerable uncertainty in an area of great interest to corporates.
The next step in the development of the law is with the prosecutors. Much will depend on the contents of the Code for prosecutors, and we will monitor developments generally. In the meantime, corporates should ensure that their systems for detecting and responding to wrongdoing are sufficiently strong to place them in a position to take advantage of DPAs when they become available.