The Sentencing Council’s Definitive Guidance for Fraud, Bribery and Money Laundering Offences (the “UK Guidelines”) came into force on 1 October 2014. The UK Guidelines set out a ten step process for sentencing and apply to all organisations1 sentenced on or after 1 October 2014, regardless of the date of the offence2. The Council has sought to achieve a balance between the desirability of providing a level of certainty for prosecutors and defendants as to a likely sentence and the need for flexibility as offenders can vary in size and the offences covered encompass a wide range of behaviour.
This update gives an overview of the UK Guidelines and analyses whether the UK Guidelines will lead to a change in the way corporate offenders are dealt with in the UK. It also compares the UK Guidelines with the US system for penalising corporate offenders.
Overview of the UK Guidelines
The offences covered by the UK Guidelines include fraud offences, money laundering offences and offences under the UK Bribery Act 2010 (bribing, being bribed, bribing foreign public officials and the failure of a commercial organisation to prevent bribery).
The UK Guidelines must be followed unless the courts are satisfied that it would be contrary to the interests of justice to apply them.
Step 1: Compensation
The court must consider making a compensation order requiring the offender to pay compensation for any personal injury, loss or damage resulting from the offence. The court will determine what is appropriate and will take into account the evidence and the means of the offender.
Step 2: Confiscation
Confiscation must be considered if the Crown asks for it or the court thinks that it may be appropriate. Confiscation must be dealt with before, and taken into account when assessing any other fine or financial order (except compensation).
Step 3: Determining the offence category
Punishment will be determined by a two stage process taking into account culpability and the level of harm caused by the offence. The court will assess the organisation’s “role” and “motivation” in carrying out the offence and decide whether the offence was committed with high (level A), medium (level B) or lesser culpability (level C).
Level B (medium culpability) is the default level and is adjusted upwards or downwards depending on certain characteristics specific to the nature of the organisation and the offence committed. The existence of a single characteristic indicating higher or lower culpability is sufficient to establish the corresponding level of culpability.
Characteristics indicating high culpability include, amongst others:
- Whether the corporate plays a leading role in organised, planned unlawful activity (whether acting alone or with others);
- Wilful obstruction (e.g. destruction of evidence, misleading investigators, suborning employees);
- Involving others through pressure or coercion (e.g. employees or suppliers);
- The corruption of local or national government officials or ministers;
- The corruption of officials performing a law enforcement role;
- When offences are committed over a sustained period of time; and
- Culture of wilful disregard of commission of offences by employees or agents with no effort to put effective systems in place.
Harm is represented by a financial figure which represents the gross amount the corporate obtained, intended to obtain or the loss avoided or intended to be avoided from the offence. The UK Guidelines set out suggested methods for calculating the harm figure:
- For fraud offences, the harm will normally be the actual or intended gross gain to the offender;
- For Bribery Act offences, the appropriate figure will normally be the gross profit from the contract obtained, retained or sought as a result of the offending. An alternative measure for offences of failing to prevent bribery may be the likely cost avoided by failing to put in place appropriate measures to prevent bribery; and
- For money laundering offences, the appropriate figure will normally be the amount laundered or alternatively, the likely cost avoided by failing to put in place an effective anti-money laundering programme if this is higher.
When the actual or intended gain cannot be established, the appropriate measure will be the amount that the court considers was “likely to be achieved in all the circumstances.” If there is insufficient evidence of gain or loss, the suggested measure is 10-20% of the organisation’s relevant revenue (i.e. 10-20% of the worldwide revenue derived from the product or business area to which the offence relates for the period of the offending). In large cases of fraud or bribery where the true harm is to commerce or markets generally, there may be a justification to adopt a harm figure beyond the normal measures.
Step 4: Fines matrix
Having determined the culpability level and the harm figure, the court will apply a multiplier which is derived from the culpability level and the harm figure. This is called a “starting point.”
The court will then take into account aggravating and mitigating factors to decide whether a sentence should be adjusted upwards or downwards.
Aggravating factors include amongst others:
- Previous relevant convictions or previous relevant civil or regulatory enforcement action;
- A company or subsidiary being set up to commit the fraud;
- Endemic fraudulent activity within the organisation;
- Attempts made to conceal the misconduct; and
- The offence being committed across various jurisdictions.
Mitigating factors include amongst others:
- The corporate co-operating with the investigation, making early admissions and/or voluntarily reporting the offending behaviour; and
- The offending conduct having been committed by previous directors/managers.
Step 5: Adjustment of the fine
The court must consider whether the fine calculated meets the objectives of punishment, deterrence and the removal of gain in a fair manner. The court must consider whether any adjustments should be made to the fine to ensure that it is proportionate, having regard to the size and the financial position of the offending organisation and the seriousness of the offence. The UK Guidelines set out that any fine must be substantial enough to have a real economic impact so that both management and shareholders understand the need to operate within the law. The UK Guidelines recognise that a fine may have the consequence of putting an offender out of business.
Steps 6-10: Other considerations
Having arrived at a provisional sentence, the court will then consider whether:
- The offender has given any assistance to the prosecutor or to investigators;
- The offender has entered into a guilty plea;
- It should make any ancillary orders; and
- The total sentence is just and proportionate to the offending behaviour where an offender is sentences for more than one offence.
The court has a duty to give reasons for, and explain the effect of the sentence.
Comparison with US Sentencing Guidelines
The new UK Guidelines draw heavily on the US Sentencing Guidelines for Organisations (the “US Sentencing Guidelines”), which were first introduced in 1991. Like the UK Guidelines, the US Sentencing Guidelines prescribe a series of steps in order to arrive at an appropriate penalty for corporate criminal conduct3. First, the court considers penalties that are required to remedy the harm caused by criminal conduct. Second, the court determines an appropriate fine based on an “offence level,” a “culpability score,” and other considerations that are designed to punish and to deter future misconduct. Although they are now “advisory,”4 meaning that federal courts are not required to adhere to them, most white collar practitioners believe that the structure provided by the US Sentencing Guidelines has led to greater certainty and predictability in federal criminal sentencing and, accordingly, in negotiated resolutions of federal criminal charges.
Like the new UK Guidelines, the US Sentencing Guidelines also create incentives for organisations to institute “effective compliance and ethics programmes,” which can reduce an organisation’s culpability score if it is later found to have engaged in criminal conduct5. In order to qualify, such programmes should meet seven key criteria: (1) established standards and procedures to prevent and detect criminal conduct; (2) oversight by high-level personnel; (3) reasonable efforts to exclude individuals who have engaged in misconduct from exercising substantial authority; (4) effective communication to and training for all levels of employees; (5) reasonable steps to achieve compliance, including systems for monitoring, auditing, and reporting suspected wrongdoing without fear of reprisal; (6) consistent enforcement of compliance standards including disciplinary mechanisms; and (7) reasonable steps to respond to and prevent further offences upon detection of a violation. If an organisation has an effective compliance and ethics programme in place and self-reports criminal conduct, the presumptive fines under the US Sentencing Guidelines can be reduced by as much as 95%.
The incentives created by the US Sentencing Guidelines for organisations have also been recognised in the US Department of Justice’s Principles of Federal Prosecution of Business Organisations, which governs how all federal prosecutors investigate, charge, and prosecute corporate crimes. Although a robust corporate compliance programme, self-reporting, and cooperation with the authorities will not necessarily absolve a corporation from criminal liability, they are important factors that must be considered by a prosecutor before bringing criminal charges against a business organisation6. Furthermore, if criminal charges are brought, those same factors will help an organisation negotiate a favourable plea bargain.
An organisation which is involved in multi-jurisdictional investigations and which is thinking of self-reporting must bear in mind that the English courts have in the past interfered with agreements reached with the prosecuting authorities where the pleas do not adequately reflect the alleged misconduct (for example in the BAE case). In the US, on the other hand, prosecutors play a more decisive role in determining the extent of corporate criminal liability. The parties often agree on a guilty plea and penalties before charges are ever filed in court, and courts are unlikely to disturb a negotiated result.
What does this mean in practice for corporates?
In the past, the UK has been criticised in some quarters for its record in sentencing corporate offenders, in contrast to the huge penalties that have been imposed in recent years in the US. Will this gap be narrowed as a result of the new UK Guidelines? We think it unlikely that the breathtaking multi-billion dollar penalties will be emulated in the UK in the near future, but we envisage that the UK trend will be significantly upwards and that the new UK Guidelines will lead to a narrowing of the current gap between financial penalties imposed in the UK and the US.
The UK Guidelines also reinforce the importance of pro-active compliance as this will be a mitigating factor when assessing culpability and will be taken into account when a sentence is adjusted. Moreover, in the decision making process as to whether to self-report and/or cooperate with prosecutors/investigators, companies and their advisers now have some clarity on their potential exposure to fines, compensation and confiscation orders, as well as clear guidance on how cooperation can impact the quantum of such penalties.