The introduction of Deferred Prosecution Agreements (DPAs) in the UK is being heralded as one of the most significant steps taken by the government in recent years to tackle serious economic crime. In view of recent publications setting out the intended process for DPAs, this briefing highlights some key points arising from the proposal.
The UK Director of Public Prosecutions and the Director of the Serious Fraud Office have recently released a draft Code of Practice (the Code) on the proposed use of DPAs which are set to become part of the prosecutorial toolkit in early 2014. Separately, the Sentencing Council is currently consulting on draft guidelines governing fraud, money laundering and bribery offences (the Guidelines). Together these publications could potentially have a profound impact on the prosecution of financial crimes involving companies in the UK, particularly in the approach to conduct caught by section 7 of the Bribery Act 2010 (the Bribery Act).
Whilst DPAs will no doubt be welcomed by prosecutors, the extent to which they will be a fair and effective measure for corporates is as yet unclear.
On the one hand, the DPA process might present an attractive alternative for a company in circumstances where it finds itself acutely exposed to the risk of a corporate prosecution. This will be the case where serious harm to victims or endemic economic crime within an organisation has been identified and the company would prefer an early resolution.
On the other hand, the proposed system lacks sufficient incentive or reward for good corporate citizens who identify issues within their business, report this promptly and properly to the authorities and take steps to remedy the failing and compensate victims. In particular, there is no guarantee that corporates who make a genuine self-report will be offered a DPA and the Code explicitly endorses the SFO's policy that it remains first and foremost a prosecutor who will only offer a DPA in specific circumstances. For these reasons it is difficult to say, at this stage, whether DPAs will have a similar impact on the legal landscape in the UK as they have had in the US over the past decade.
What do DPAs mean for businesses?
The Code and Guidelines raise a number of issues which could have significant implications for businesses in the UK, including:
The challenge to existing prosecution safeguards
What is the perceived challenge?
At present, a prosecution will only proceed if the prosecutor is satisfied that there is sufficient evidence to provide a realistic prospect of a conviction (the first limb of the so-called Full Code Test). However, for the purposes of determining whether it would be appropriate for a DPA to be negotiated, the draft Code proposes a dilution of this test so that it will be sufficient if the
prosecutor reasonably suspects that the corporate has committed the offence and reasonably believes that continuing the investigation for a reasonable period would yield further evidence which would be capable of establishing a realistic prospect of conviction.
How will this affect the prosecutor’s behaviour?
It is arguable that this diluted test erodes a fundamental safeguard of the English criminal law system because there is no longer a requirement to investigate the alleged criminality to such a degree which necessitates the prosecutor to determine whether a prosecution can be justified.
In addition, the diluted test has the scope to allow prosecutors to circumvent the ‘identification principle’ – a powerful shield for companies which requires the prosecutor to establish that the offender represented the directing will and mind of the company in order to achieve a conviction against the company itself. The upshot of this is that a company could find itself in a position where it feels a need or expectation to engage in the DPA process despite the fact that, in normal circumstances, the identification principle would significantly decrease the chances of a prosecution being pursued. (In this context it is worth noting that the Law Commission opened its 12th programme of law reform on 2 July. Among the issues the Commission is consulting on is the possibility of a full review of corporate liability, including the question of whether liability should move away from the identification principle.)
But does the proposed test really undermine the corporate position?
Whilst the revised test potentially expands the number of instances where a company may be offered a DPA there is, of course, nothing to prevent the company declining the prosecutor’s invitation to negotiate where it believes that there is insufficient evidence for the prosecutor to overcome the identification principle. The Code highlights that DPAs are entirely voluntary agreements and the company is under no obligation to agree to a DPA. The company’s decision will, of course, be made on the facts of a specific case but there is a risk that the number of resolutions effected through DPAs will be limited in the short term unless either (a) the authorities can demonstrate the attractiveness of the DPA (for example, by seeking higher penalties for companies who decide to put the prosecutor to proof) or (b) there are frequent prosecutions against corporates under section 7 of the Bribery Act (of which, to date, there have been none).
The inherent uncertainties of self-reporting
What is the position vis-à-vis self-reporting?
The DPA regime encourages companies to co-operate with the prosecutor and the Code identifies a genuine self-report as a public interest factor which will weigh against a decision to prosecute. Despite this the Code makes no guarantees when it comes to offering a DPA and the benefit that a company will derive from any self-report will depend entirely upon timing and the totality of the information that the company discloses to the prosecutor (including witness accounts and details of internal investigations).
The importance of the company conducting a satisfactory internal investigation is highlighted by the fact that the prosecutor is required to critically assess how the internal investigation was handled. The Code explicitly states that any adverse consequences caused by errors in the conduct of the internal investigation will count against the prospect of a DPA being offered to the company.
What are the uncertainties of self-reporting?
It remains at the prosecutor's discretion to ignore the DPA process and to use the disclosed material and information against the company in any subsequent prosecution. It is also important to note that self-reporting is only one of the additional public interest factors the prosecutor will consider. A company will remain at risk of prosecution irrespective of a genuine self-report if, for example, the alleged offence is part of established business practices or the company has a history of similar conduct, including prior criminal, civil and regulatory enforcement actions. These additional factors reflect some of those which are set out in the existing Joint Prosecution Guidance on Corporate Prosecutions.
The threat of super-sized fines
What is the threat for companies?
The major implication of the Guidelines is the formula proposed for calculating the fine. The Sentencing Council has adopted a similar methodology to that currently used by the UK Financial Conduct Authority which determines the starting figure from a percentage of the ‘relevant revenue’ derived from the alleged conduct. In the financial services sector, this approach has led to uncertainty and confusion for regulated firms, in particular in cases where there is no obvious relevant revenue or the alleged offence spans different business lines, product areas or more than one corporate entity. The financial risk to companies is exacerbated by the multipliers which will be applied to this base figure in order to determine the final penalty. The Guidelines recommend a multiplier of as much as 400 per cent in the most egregious cases which means that UK businesses can expect to face much higher penalties in line with those imposed in the US.
A related threat is the potential reputational damage a company may suffer by agreeing a DPA. Whilst the initial hearings will be held in private and the negotiations with the prosecutor will be subject to confidentiality undertakings, the court will give its declaration and reasons for approving a DPA in an open final hearing. A company will not therefore be immune from reputational consequences arising from its conduct merely by virtue of entering into a DPA.