Rod Fletcher and Nicholas Purnell QC, Herbert Smith Freehills LLP, Cloth Fair Chambers
This is an extract from the third edition of GIR's The Practitioner’s Guide to Global Investigations. The whole publication is available here.
23.2 Initial considerations
This chapter assumes that the corporate has already decided that a settlement is desirable in principle. This is not a straightforward exercise and will involve many of the considerations discussed in the other chapters in this book. This is likely to include a comparison of the cost involved of agreeing a settlement (and any agreed financial penalty) as against the cost involved of defending criminal proceedings and the probability of a conviction (and any penalty imposed). It will also include the reputational damage that contested criminal proceedings may have on a corporate. Corporates should also consider that a criminal conviction for certain economic and financial crimes may exclude them from competing for certain public contracts.
Of course a corporate may also successfully argue that the authority should not institute any proceedings against it: prosecutors must be satisfied of the evidential basis of the prosecution as well as the public interest in prosecuting. Many investigations in the United Kingdom result in no further action being taken against the subject of the investigation.
The attractiveness of a settlement is likely to vary considerably depending on the conduct under investigation and the investigating authorities involved. It is also likely to depend on the form of settlement available – for example, the advantages to a corporate of agreeing to a DPA in the United Kingdom are likely to be very far removed from the advantages of agreeing to a DPA in the United States. In some circumstances a settlement in the United Kingdom might not be an attractive prospect when considered in isolation, but the ability to secure a linked settlement with investigating authorities in another jurisdiction could tip the balance in favour of seeking a UK settlement as part of a global resolution.
Given that a settlement may not always be an obvious choice, the reasons for seeking to settle and the reasons for choosing a particular form of settlement should be clear before negotiations commence. The initial assessment of the corporate’s eligibility for the kind of settlement sought must be realistic, based on the best available information about the conduct and a thorough understanding of the attitude and approach adopted by the relevant authorities. The corporate will also need to be clear about the risks that settlement negotiations entail. In the event that the negotiations break down, the corporate might find itself in a worse position than it would have been in had it not entered into the negotiations in the first place. Finally, to demonstrate compliance with fiduciary obligations it will also be important to ensure that any decision-makers have no personal interest in the outcome of settlement negotiations, as they would have if they were exposed to individual liability in connection with the conduct under investigation. This may be particularly complex in relation to small corporates where any decision-makers face individual liability for criminal conduct while simultaneously attracting liability to the corporate by acting as the directing mind and will.
23.2.1 Options for seeking a settlement
220.127.116.11 Civil recovery orders
A corporate could seek to persuade an investigating authority to dispose of an investigation by initiating civil recovery proceedings rather than a prosecution. This decision is not subject to judicial approval, as the decision on whether to prosecute rests solely with the prosecutor.
Civil recovery proceedings can be brought in the High Court by a number of UK enforcement agencies against property of a value in excess of £10,000 believed to have been obtained through unlawful conduct. As a form of settling criminal proceedings a CRO has many features that could be helpful when a UK settlement is sought as one aspect of a global settlement. No prior UK conviction is required. The standard of proof is the civil one of the balance of probabilities. Judicial approval does not need to be sought before a claim can be brought, and the High Court’s jurisdiction to make the order extends over assets located overseas; although it may in practice be tempered by the local law position on enforcement of non-conviction based orders.
A CRO was for many years regarded as the best possible settlement outcome for corporates facing potential criminal proceedings in the United Kingdom, and an outcome that could plausibly be expected in a corporate self-reporting case. Two developments have impacted on this view.
First, under its current policy, the SFO will be less ready than it historically has been to dispose of an investigation by way of a CRO. In part, this is a response to the OECD’s criticisms of the UK’s lack of commitment to combating bribery of foreign public officials. In the event that the SFO were to agree to a CRO, its terms will now be published in full, which removes some of the historically perceived benefit of this form of settlement.
Secondly, the SFO has demonstrated that civil recovery proceedings and criminal proceedings are not necessarily mutually exclusive provided that the conduct can be divided. In conjunction with the conviction of Bruce Hall in 2012 and the making of a confiscation order and compensation order against him, the SFO brought civil recovery proceedings in respect of conduct falling outside the scope of the indictment because UK jurisdiction did not arise. This has to be considered, however, against the background of the criticism by Thomas LJ in Innospec of the use of a CRO in addition to trial on indictment; Thomas LJ concluded that where the facts and public interest determined that a prosecution was appropriate, the use of the civil jurisdiction was consequently inappropriate. In particular, the judge deprecated the possibility of matters arising in the same case coming within the jurisdiction of two separate judges from two separate courts. In contrast, the use of a CRO for DePuy was less problematic as the corporate was not the subject of an indictment.
18.104.22.168 Deferred prosecution agreements
A DPA may be regarded as the half-way house between a negotiated plea agreement and a CRO. It remains to be seen whether it will be a popular form of settlement or whether it will be confined to isolated instances. First, a DPA is only available in limited circumstances. Secondly, the power to apply to the courts for a DPA rests solely with the prosecutor, and the DPA provisions reserve to the prosecutor (currently only the SFO or the Crown Prosecution Service (CPS)) the right to extend any invitation to enter into DPA negotiations. Thirdly, as was identified by the former Director of the SFO, the high threshold for corporate criminal liability under English law reduces the incentive for corporates to enter into a DPA at all. To date, three of the four DPAs secured in the United Kingdom have not faced any difficult application of corporate criminal liability: Standard Bank plc related to the strict liability offence of failing to prevent bribery under section 7 of the Bribery Act 2010; XYZ Ltd applied to a small company in which the directing mind and will was easily identified; Rolls-Royce related to the strict liability offence of failing to prevent bribery as well as substantive offences of bribery and corruption involving, on the facts as admitted by Rolls-Royce for the purposes of the DPA, controlling minds of the company. At the time of writing ,the details of the UK’s fourth concluded DPA, agreed between the SFO and Tesco Stores Limited, remain unknown as the case is subject to reporting restrictions pending the prosecution of two former Tesco executives. Experience will demonstrate to what extent a corporate entity can introduce the possibility of a DPA into any discussions it may hold with the SFO.
In theory, a DPA should be an attractive form of settlement as the corporate is never actually prosecuted, avoiding some of the stigma and adverse publicity necessarily associated with a criminal trial and a conviction. A corporate will have the opportunity to make representations on and to influence the terms of the settlement that is made public, and there will be no mandatory debarment from public contracts. Importantly, a DPA may be part of a global resolution that may be in the overall commercial interests of the corporate.
The corporate is nevertheless the subject of criminal proceedings that are suspended. The offences alleged to have been committed are particularised in an indictment, and further detailed in the statement of facts accompanying the DPA. The terms of the DPA will include not only a penalty intended to reflect the penalty that would have been imposed on a guilty plea but also disgorgement of profits and potentially compensation payments.
The terms of the DPA may require the corporate to disgorge the gross profit made as a result of the criminal conduct. The DPA may also impose a financial penalty, which must be broadly comparable to the fine that a court would have imposed on conviction and is accordingly assessed by reference to the relevant Sentencing Guideline for fraud, bribery and money laundering offences (Sentencing Guideline). Where the corporate has limited means and ability to meet these financial obligations, the court may nevertheless approve a penalty that would render the corporate insolvent where it would be in the interests of justice to do so. Among other things, the court will consider the impact of any financial penalty on the corporate’s staff, service users, customers and the local economy. In XYZ Ltd, the corporate’s parent agreed to provide financial support to XYZ Ltd by returning almost £2 million from dividends received for XYZ Ltd to pay towards disgorgement. The court made clear that the innocent parent was under no contractual or legal obligation to contribute towards the financial penalty imposed on its subsidiary for the criminal conduct. However, the court did point out that the parent had received £6 million in dividend payments since acquiring XYZ Ltd. Unlike a criminal sentence, a DPA may extend to requiring the corporate to submit to a compliance monitor for a specified period.
In Rolls-Royce, the total financial orders (including those imposed in the United States and Brazil) amounted to over £650 million even after a 50 per cent reduction to the UK element of the financial penalty in recognition of Rolls-Royce’s ‘extraordinary’ co-operation. The Court was satisfied that this figure was sufficient to bring home to both management and shareholders the need to operate within the law without being so high as to put Rolls-Royce out of business, which would have been inappropriate in the circumstances.
The process of negotiating a DPA could itself deter a corporate from seeking this sort of settlement. It is lengthy and uncertain, as any agreement reached with the relevant prosecuting authority is ultimately conditional on judicial approval. It is accompanied by potentially as great a degree of public scrutiny as may be attracted by contested criminal proceedings. The provision of false, misleading or incomplete information to the relevant prosecuting authority could amount to an offence, and it can be extremely challenging for a corporate, and the relevant individual within the management structure, to certify that the material provided to the investigating agency is complete.
The DPA may become a more attractive option for corporates if there is more flexibility on the terms imposed and if higher discounts to financial penalties or sentences continue to be applied. With respect to increased discounts, the DOJ’s recent enhancements to its Pilot Program could be of interest to the SFO. In November 2017, the DOJ, announced that the Pilot Program it launched in 2016 to encourage companies to self-report potential violations of the Foreign Corrupt Practices Act (FCPA) would be made permanent and incorporated into the United States Attorneys’ Manual (now known as the Justice Manual), subject to some amendments. Under the revised FCPA Corporate Enforcement Policy, where a company ‘satisfies’ the DOJ’s standards of self-reporting, co-operating, and remediating, there will be a ‘presumption’ that the government will resolve the matter with a declination – unless there are aggravating circumstances (for example, recidivism). However, even where circumstances ‘compel’ an enforcement action, the DOJ will recommend a 50 per cent reduction off the low end of the Sentencing Guideline fine range for self-reporting companies.
In the DPA reached with XYZ Ltd, the court stated that a discount of 50 per cent to the financial penalty that would have been imposed was appropriate, given that the corporate had self-reported and admitted the criminal conduct far in advance of the earliest possible opportunity that would have applied after a criminal charge. This sizeable reduction was not based on an application of the Sentencing Guideline or the DPA statutory provisions themselves.
Even more surprising (at first glance) was the application of a 50 per cent discount to the financial penalty in Rolls-Royce, where the corporate did not make the initial self-report. The initial report of suspicions of criminality in the corporate’s civil business in Asia came from public internet postings and precipitated the SFO’s investigation; however, this led to an immediate and extensive investigation by the corporate during which it made a number of voluntary reports to the SFO in respect of other business lines in multiple jurisdictions. Rolls-Royce’s co-operation with the SFO and other authorities was said to be ‘extraordinary’. Rolls-Royce took a number of steps in addition to the extensive investigation and voluntary reports to authorities: it reviewed relationships with intermediaries, agents, advisers and consultants; provided over 30 million documents in electronic and hard copy form (Rolls-Royce agreed to the use of digital methods to identify privilege issues in the material and the use of independent counsel in relation to the privilege review); allowed the SFO to interview witnesses first and waived privilege over its own internal interview memoranda; provided material to the SFO voluntarily (without need for recourse to compulsory powers); consulted with the SFO in respect of media coverage; provided all financial data sought by the SFO and co-operated with financial assessments undertaken; and sought the SFO’s permission before winding up companies that may have been implicated in the SFO’s investigation.
The SFO submitted that in the particular circumstances of the case, the Court should not distinguish between the corporate’s assistance and that of those who have self-reported from the outset. This was accepted on the basis that what Rolls-Royce reported was far more extensive and of a different order than might have been exposed without its co-operation. The Court was satisfied that, from the moment of the initial question from the SFO prompted by the public postings on the internet, Rolls-Royce could not have done more to expose its own misconduct. Self-reporting was said in the judgment to be a core purpose of DPAs, and the weight this attracts depends on the totality of the information provided; it seems that the measures that Rolls-Royce took to unearth and report the extent of the criminality made up for the absence of an initial self-report.
There is a clear view among practitioners that the incentives to enter into a DPA, in particular the apparent maximum discount on penalty, embedded within the statutory scheme, of one-third (the same as for an early guilty plea) is insufficient and fails to recognise the positive factors in the conduct of the corporate that will have led to the offer of a DPA in the first place. It may be that both the SFO and the judiciary have recognised this in the light of reference to a 50 per cent discount to the financial penalty that could have been imposed in XYZ Ltd and the reduction that was applied inRolls-Royce.
22.214.171.124 Negotiated plea agreements
A plea agreement can be negotiated with the prosecutor at any stage after indictment, up to the conclusion of the trial. It may be preceded by advance representations on charge, which a prosecutor is under no obligation to consider but may do so at his or her discretion. Both advance representations and plea agreements could potentially reduce the scope of the conduct charged, or even determine the nature of the offence charged; as seen in BAE Systems, where the corporate had been investigated for overseas corruption but pleaded guilty to knowingly procuring the failure of its subsidiary, British Aerospace Defence Systems Ltd (BADS), to comply with the provisions of section 221 of the Companies Act 1985, and thereby aiding and abetting, counselling and procuring the commission of the offence contrary to section 225 of the Companies Act, by the officers of BADS. In BAE Systems, Mr Justice Bean was critical of the restriction on the scope of the conduct in the settlement reached between the corporate and the SFO, and in light of these criticisms prosecuting authorities may in future be less willing to minimise the conduct in negotiated plea agreements. Mr Justice Bean made clear that in cases involving negotiated plea agreements the judge will not be bound by the agreement between the prosecution and the defence, and the prosecution’s view on the proposed basis of the plea is deemed to be conditional on the judge’s acceptance of the basis of the plea. The judge made clear that the involvement of the criminal courts precludes the passing of a sentence on an artificial basis. While Mr Justice Bean accepted the basis of the sentence in BAE Systems, this may not always be the case.
The judge also expressed surprise that the SFO had committed to a blanket indemnity against investigations or prosecutions of any member of the BAE Systems group for past conduct whether disclosed or otherwise.
However, even if the charges remain unchanged, a guilty plea at the earliest possible stage makes the corporate eligible for a reduction of up to one-third off the sentence that would otherwise have been imposed on conviction.
UK prosecutors will always be open to negotiations on plea. The prosecution and the defence are in all cases required to resolve issues and agree evidence wherever possible prior to trial. The prosecutor must, however, have regard to any applicable restraints on the exercise of discretion, including the Witness Charter and the Code of Practice for Victims of Crime. In accordance with the Code for Crown Prosecutors, prosecutors will also need to ensure that the plea reflects the seriousness and extent of the offending. The Attorney General’s Guidelines to the legal profession state that prosecutors must not agree to a basis of plea that is misleading, untrue or illogical or insupportable. Where a case involves multiple defendants, the bases of plea must be factually consistent. Trial judges may ultimately, of their own motion, disregard the agreement and direct a ‘Newton’ hearing to establish the relevant facts.
Just as the decision on whether to accept a proposed basis of plea is ultimately one for the trial court, it is similarly for the sentencing court to impose the sentence on conviction. In cases of serious and complex fraud the Attorney General’s Guidelines permit the prosecution and defence to present a joint written submission to the court on sentence but this is not binding on the court. In Dougall, the court declined to impose the SFO’s suggested suspended sentence on an assisting offender, although the custodial sentence that the court did impose was overturned on appeal. The Court of Appeal criticised the SFO for adopting a role that was more akin to that of the defence. The courts in BAE Systems and in Innospec felt compelled to accept the suggested sentences because they formed part of a global settlement that the corporate entity had been invited to accept (and because of the corporate’s limited financial resources in Innospec), but Thomas LJ in Innospec warned that this approach would not be repeated in the future.
The attractiveness of a plea agreement to a corporate will depend largely on the weight of the prosecution evidence, including the existence of any co-operating co-offenders under the ‘offender assistance’ provisions set out in sections 71 to 75 of the Serious Organised Crime and Police Act 2005. In particular, the corporate’s willingness to plead is likely to reflect an assessment that the prosecutor would be able to establish corporate criminal liability. As mentioned in the introduction to this chapter, guilty pleas by corporates are more likely to be forthcoming for offences where the identification principle does not apply or liability is strict, or both, or where the corporate is small and lines of responsibility are clear; by contrast, the prosecution might in other cases struggle to identify culpable senior management.
The size of the likely penalty will also be a factor when the corporate is considering whether to plead. There is an established procedure in place by which a defendant in Crown Court proceedings can seek a binding indication from the trial judge of what sentence would be imposed on a guilty plea (Goodyear indication). That new Guideline may have similarly increased the attractiveness of plea agreements for corporates, not only by making the likely sentence more predictable at an even earlier (pretrial) stage but also by increasing the risk of higher penalties being imposed than has historically been the case and thereby incentivising an early, negotiated settlement.
The downsides of a plea agreement include the inability to contest the charges in a public forum, and loss of the opportunity of an acquittal. The advantages of a plea agreement also decline rapidly with time once a trial is under way.
There are also risks arising from plea negotiations. The Attorney General’s Guidelines state that the prosecutor may not rely on the defendant’s participation in plea negotiations or on any information disclosed during those negotiations as evidence against the defendant in the event that the negotiations fail but a signed plea agreement can be relied on as confession evidence against the defendant. A prosecutor would normally be free to rely on any evidence gathered as a result of enquiries made on the back of information disclosed in the course of the negotiations, and information provided by the defendant in connection with the negotiations could normally be relied on both in related prosecutions of other defendants and in a prosecution of the defendant for another offence. In addition, the prosecutor might be obliged to disclose material relevant to the negotiations to a co-defendant.
23.2.2 Strategic considerations when seeking a settlement in the United Kingdom
Once a corporate has decided in principle to seek to settle criminal proceedings in the United Kingdom, the objective will be to achieve the desired form of settlement as effectively as possible, avoiding or minimising, to the extent possible, adverse consequences. This section will discuss common strategic considerations that are likely to arise at the outset and during the early stages of settlement negotiations.
126.96.36.199 Timing of settlement
A preliminary strategic consideration will be the point at which to approach the relevant authority. On the one hand, a successful outcome is more likely the earlier an approach is made. The financial and reputational costs to a corporate of being a subject of a criminal investigation and prosecution will increase incrementally and early self-reporting is an important factor in determining whether a DPA will be offered. Clearly, however, the corporate needs to have sufficient knowledge about the conduct it proposes to report.
A corporate may self-report the conduct in question or otherwise bring it to the attention of relevant authorities, for example, pursuant to money laundering reporting obligations or, for listed corporations, obligations to disclose information to the market. The SFO’s most recent guidance on self-reporting was published in 2012.
In all other cases the determining factor is likely to be the type of settlement sought. Where the favoured outcome is a CRO, the driver will be to reach agreement on this form of alternative disposal before any steps are taken to initiate criminal proceedings. If the preferred form of settlement is a DPA, the timing of the settlement will be dictated by the DPA Code of Practice, but again will involve negotiations with the authority before the commencement of criminal proceedings. A settlement could be reached at any of the following points in time.
Before major production of documents
A corporate must balance the need to understand any potential criminal liability it faces with the benefit of making an early report to an authority. As stated above, corporates should establish sufficient knowledge of the circumstances before deciding to seek a settlement. Once that decision has been made, it is unlikely that an agency in the United Kingdom will be prepared to reach a settlement agreement without receiving all relevant documentation and undertaking some form of investigation. Once in the hands of the authorities, any material provided could be used against the corporate and individuals. In addition, such material can be provided to other domestic and international agencies and may ultimately be disclosed in any related civil proceedings. It has to be assumed that documents provided to investigating agencies may ultimately end up in the public domain.
Before witness testimony
To the extent that corporates record any interviews they conduct, UK authorities are likely to want access to these first accounts, which may raise issues of legal professional privilege. The Court of Appeal has recently handed down its judgment in Director of the SFO v. ENRC, which has brought some much-needed clarity to this area of the law, following two conflicting first-instance decisions of the English High Court.
The Court of Appeal in ENRC disagreed with the High Court’s strict approach to whether notes of interviews attract litigation privilege. The High Court had concluded that only a prosecution, and not an investigation, amounts to ‘litigation’ and that ‘contemplation’ of a criminal investigation does not necessarily equate to the contemplation of prosecution, such that the first limb of the test for litigation privilege would be satisfied (namely that litigation is in progress or in reasonable contemplation). However, the Court of Appeal disagreed with this analysis, finding that uncertainty over whether criminal proceedings were likely would not in itself prevent litigation from being in reasonable contemplation, and that the whole subtext of the relationship between the relevant company and the authorities was important. In this case, the court found that the relationship between ENRC and the SFO meant that there was a possibility, if not a likelihood, of prosecution if the self-reporting process did not result in a settlement. The court also said that where the SFO made explicitly clear in its communications to the company that there was the prospect of a criminal prosecution, and external legal advisers were engaged to deal with that possibility, there was a clear ground for contending that criminal prosecution, and therefore litigation, was in reasonable contemplation at the time the interview notes were prepared.
The Court of Appeal also disagreed with the High Court’s restrictive position on whether notes of interviews were prepared for the dominant purpose of litigation, which is the second limb of the test for litigation privilege. It found that the need to investigate the existence of alleged corruption was a subset of defending the litigation, and hence that notes made in interviews during the investigation stage were made for the dominant purpose of litigation.
This decision underlines the importance of obtaining advice when corporates need to conduct and create records of interviews during the fact-finding stage of an investigation, and before a prosecution decision is made by the authorities, to understand the alleged facts and any potential liability. Ordinarily, the SFO will still conduct interviews as part of its investigations following a self-report, even where there have already been interviews by the corporate. Nevertheless, the authorities may in some cases expect a corporate that wishes to obtain credit for co-operating, to waive privilege over certain documents that have been prepared during the investigation stage for the dominant purpose of engaging in settlement negotiations with the authorities. Legal advice on the limitations that should be explicitly placed on any privilege waiver they propose to provide is an essential safeguard.
In most cases, corporates will be seeking to settle before indictment. As discussed above, settlement negotiations may provide an opportunity to influence the content and timing of the indictment.
A settlement at the early stages of criminal proceedings may help to mitigate reputational damage by reducing the amount of material made available to the authorities and, through them, potentially becoming available in the public domain or to other overseas agencies.
There may yet be benefits of settling after the commencement of trial. Although disclosure obligations will have been complied with and material may have been referred to in open court (thereby becoming accessible to the public), by avoiding witness testimony the corporate may minimise the risk of further reputational and other costs as a result of adverse prosecution testimony or unpredictable defence witnesses. Settling before conviction could potentially also serve a public relations objective in presenting the corporate publicly as being somewhat co-operative (despite initially contesting the proceedings).
188.8.131.52 Ability to secure a global settlement
An early settlement of UK criminal proceedings may also increase the prospects of concluding a global settlement. In the global settlement scenario, timing is likely to be primarily driven by the authority ‘leading’ the settlement negotiations. As press reports suggested in relation to the LIBOR investigation, there can be a ‘race’ among investigating authorities to charge defendants as a means of securing jurisdiction.
Where a number of authorities may be investigating or have an interest in investigating the conduct, the potential for conflicts of jurisdiction to arise should be addressed by communications between prosecutors pursuant to multilateral and bilateral agreements such as the Eurojust guidelines for deciding which jurisdiction should prosecute and the Agreement for Handling Criminal Cases with Concurrent Jurisdiction between the United Kingdom and the United States. Prosecutors engaged in plea negotiations in serious and complex fraud cases are directed by the Attorney General’s Guidelines to liaise with any counterparts known to have an interest in the defendant, in accordance with the Prosecutors’ Convention and any other relevant agreement or guidance. However, these arrangements would not be enforceable by corporates who find themselves adversely affected by any departures from their terms; in any event, such agreements do not tend to address settlements.
In practice, constructive global settlement discussions require a high level of communication between the investigating agencies involved and also between the lawyers acting for the corporate and those investigating agencies. By way of example, in Standard Bank plc there was clearly a high level of communication between the SFO and the US DOJ (as well as between the bank’s lawyers and both the SFO and the DOJ), which ultimately resulted in the DOJ confirming in writing in advance of the UK settlement that in view of the terms of the proposed settlement it did not propose to continue its own investigation.
The SEC, on the other hand, decided to continue with its own investigation into the civil (as opposed to criminal) consequences of the alleged conduct, which resulted in a separate settlement with the bank. Although the SEC’s investigation related to separate issues, the bank completed its settlement with the SEC very shortly before the final DPA hearing in the United Kingdom and the settlement was announced on the same day. Coordinating the timing of the settlement so that it was announced at the same time was clearly in the bank’s interests, as it ensured that the UK and US investigations into the conduct were resolved simultaneously with the bank able then to draw a line under the events and focus on the future.
Similarly, in Rolls-Royce it was clear that substantial discussions had taken place between the SFO, the US DOJ and the Brazilian public prosecutor to ensure a coordinated global resolution of the relevant conduct; indeed, its DPA with the US DOJ was fully disclosed in the UK DPA proceedings, and the DPA hearing in the United Kingdom was brought forward for reasons linked to the change in administration in the United States in January 2017. Rolls-Royce announced settlements with those authorities in parallel with its DPA with the SFO. The corporate was apparently able to coordinate between prosecuting authorities such that it was prosecuted for different conduct in different jurisdictions; it was also given US$25 million credit by the DOJ for fines paid in Brazil in relation to conduct that was overlapping between its DPA in the United States and its leniency agreement in Brazil.
It is important to keep in mind when negotiating simultaneous settlements with multiple authorities and regulators (both at home and abroad) that the subject ensures that the published findings in each investigation concluded by a negotiated settlement are consistent, as authorities may have an incomplete understanding, or different interpretation, of the facts.
23.2.3 Written submissions to UK prosecuting authorities
One important risk that settlement negotiations pose for corporates is that the material generated will be relied on in the event that the negotiations break down; whether by the recipient authority or by third parties. Even if settlement negotiations will attract confidentiality to varying degrees, there will always be a number of avenues through which material provided to the authorities may be made available to other authorities and to third parties.
The extent to which settlement negotiations will generate material, and the extent to which such material may be protected from onwards disclosure, will depend on the form of settlement in question. Written submissions made to a prosecutor in the course of negotiating a plea agreement are confidential and will only be made available to third parties where it can be shown that the prosecutor’s obligation to preserve confidentiality is outweighed by a countervailing interest. In DPA negotiations, both the form and content of documents are governed by statute and are not negotiable. These documents will include the draft statement of facts and the terms of the proposed DPA, as well as the preliminary application to the court. The prosecutor will require these documents to be agreed before the application to the court can proceed. They will also include any submissions contained in related correspondence with the prosecutor, as well as minutes of any meetings between the corporate and the prosecuting authority.
23.2.4 Oral presentations to UK prosecuting authorities
Presenting information orally, as an alternative to written submissions, could in theory reduce the risk that settlement negotiations pose for corporates by limiting the amount of incriminating documentary material generated in settlement negotiations or otherwise provided to the authorities. As a strategy it is obviously conditional on securing the agreement of the prosecuting authority, and is not as frequently encountered in the United Kingdom as in the United States; but the SFO is known to have acceded to requests of this nature on occasion. Notably, this approach was employed in relation to the first and second DPAs entered into in the United Kingdom. However, in the recent Court of Appeal case of AL v. SFO, the court, in the context of a criminal trial of individuals following the corporate’s entry into a DPA, criticised the use of ‘oral proffers’ as ‘highly artificial’ and expressed its surprise that the SFO did not more robustly demand the written notes of interviews made during an internal investigation. The judgment is likely to cause the SFO to be cautious about relying on oral proffers in future investigations and instead to more robustly challenge broad claims to privilege; a senior SFO manager has stated that this decision emphasised the danger for the SFO in not challenging excessively wide claims of privilege. However, given the less restrictive approach taken to legal professional privilege by the Court of the Appeal in ENRC, there is likely to be a tension between the authorities’ desire to challenge wide claims to privilege and demand written notes of interviews, and the Court of Appeal’s decision that written interview notes made during an internal investigation are capable of being covered by litigation privilege. Therefore although oral proffers may no longer be acceptable, the authorities and co-operating corporates may find themselves in a predicament. The corporate should avoid inadvertent waivers of privilege, and the SFO is also unable to demand written interview notes made while litigation was reasonably in contemplation, and for the dominant purpose of litigation, as interpreted by the Court of Appeal in ENRC. In such cases, it is possible that the authorities may stress the importance of a corporate’s co-operation in settlement discussions and therefore seek voluntary waivers of privilege over such documents by the corporate.
It also raises the prospect that, in multi-agency settlements, there might be a divergence of approach between agencies that are content to receive oral proffers (e.g., the US Department of Justice, which regularly accepts them) and those that are not. Oral summaries of privileged information and material could still be considered by the prosecuting authority as a limited (or indeed full) waiver of privilege, as there is no settled case law in the United Kingdom on this point, which could create a risk of collateral waiver of privilege in other jurisdictions or over other material. If the underlying interviews were not privileged, a prosecutor’s notes from the presentation could potentially be disclosed to third parties, without the corporate having an opportunity to confirm whether the impressions recorded are correct.
An indication of the possible approach of courts in the United Kingdom can be gleaned from a ruling in proceedings against Dennis Kerrison and Miltiades Papachristos (employees of Innospec) in which His Honour Judge Goymer considered whether a PowerPoint presentation to the SFO/DOJ that referred to the notes of interviews conducted by the corporate with a prosecution witness amounted to a waiver of legal professional privilege in those interviews. The judge decided that there was not sufficient deployment of the interview notes in the PowerPoint presentation such as would amount to a collateral waiver of legal professional privilege in respect of those notes. It was conceded in argument that the PowerPoint presentation was subject to privilege, and as such there was no detailed discussion of the application of the principles of litigation privilege in this case. This is not always so in the investigations context, following Three Rivers No. 5. The Court of Appeal has considered more recently the ambit of litigation privilege in one of the many cases relating to the SFO’s investigation into the Tchenguiz brothers, stressing the importance of the ‘dominant purpose’ test.
23.3 Legal considerations
Settlement negotiations should only be undertaken with a thorough understanding of the legal framework that governs the particular form of settlement pursued, and any relevant policies that govern the approach adopted by the relevant prosecuting authority. A number of relevant legal principles will also need to be borne in mind as crucial background context, regardless of the form of settlement pursued.
23.3.1 Legal professional privilege (LPP)
Prosecuting authorities are increasingly requesting or encouraging corporates to waive privilege as a sign of their co-operation, or even as a precondition to concluding a settlement. The extent to which the prosecuting authority and a corporate may diverge in their interpretations or application of LPP is dealt with in Chapter 35 but the appropriateness of putting pressure on a corporate to waive LPP is far from clear; particularly in the context of a multi-jurisdictional investigation where a number of different legal systems may be in play, all with varying degrees of protection for lawyer–client communications. The collateral damage to the corporate’s interests in other jurisdictions if LPP were to be waived could potentially be substantial, and would need to be carefully considered before the corporate agreed to a global settlement involving a waiver on this basis. Attempts to resolve these difficulties by offering limited waiver may work but in practice are certainly not without risk (including, in particular, in relation to collateral waiver risks in jurisdictions that do not recognise limited waiver).
Unlike a plea agreement, the settlement of criminal proceedings by way of a CRO or DPA does not require the corporate to make formal admissions of guilt. However, the effect in practice of agreeing to a CRO or a DPA may be equivalent to an admission. An application for a CRO will be accompanied by a detailed statement of claim, and by agreeing to the CRO the defendant may be taken as confirming its agreement to the contents. Similarly, whereas an admission is not a prerequisite for a DPA, once the DPA is approved the statement of facts on which it is based becomes admissible in subsequent proceedings in England and Wales (not limited to related criminal proceedings) as if it were the corporate’s admission of its contents.
Indirect admissions of this kind entail risk for both the corporate and any other persons concerned in the conduct. They could potentially be relied on by third parties in support of civil or criminal proceedings brought against the corporate, both in the United Kingdom and overseas. They are also likely to prejudice the position of any other persons concerned in the conduct, not limited to the corporate’s officers. This exposure increases the more extensive the indirect admissions are. In negotiating the first UK DPA, the SFO considered it necessary for the statement of facts to be lengthy (in this instance, 55 pages) to put the judge in a position to approve the agreement on the most complete basis available. The approved statement of facts in Rolls-Royce was similarly long and detailed.
A corporate could seek to avoid or at least mitigate some of these adverse consequences by concluding a settlement under which a subsidiary accepts liability and makes any necessary admissions, as in the MW Kellogg Limited CRO in 2011. Note, however, that a corporate will not be able to hide behind a subsidiary that has been set up as a vehicle through which a corrupt payment may be made so that the subsidiary can be abandoned if the corrupt payment comes to light. Alternatively, a corporate could seek to negotiate a settlement under which an individual officer accepts liability instead of the corporate. However, if there is a prospect of a successful prosecution of the corporate entity, this may be unlikely to succeed. As a general matter, risk mitigation strategies of this kind are likely to be highly context-specific, and subject to the willingness of the relevant prosecuting authorities to recognise the interests at stake.
23.4 Practical issues arising from the negotiation of UK DPAs
DPAs have to date been made available only for a limited range of corporate economic offences prosecuted by either the CPS or the SFO. Statute governs eligibility for a DPA, its contents and the manner in which it is to be negotiated and approved, with limited discretion left to either the corporate or the prosecuting authority. This departure from the much more flexible US model complicates any predictions as to how frequently DPAs will be relied on in practice in the United Kingdom, but this section will consider practical issues arising from the negotiation of the first UK DPA as part of a global settlement.
The legislation requires the judge hearing the application to be satisfied that a DPA is in the interests of justice (as opposed to prosecution of the corporate). The four DPAs agreed at the time of writing, Standard Bank plc, XYZ Ltd, Rolls-Royce and Tesco Stores Limited, were all heard by Sir Brian Leveson, President of the Queen’s Bench Division, who (as is clear from the judgments in relation to the first three DPAs) went to considerable lengths to satisfy himself that the proposed DPAs were in the interests of justice and that the terms were fair, reasonable and proportionate. Notably in Rolls-Royce he said that the involvement of prosecutors in different countries (in this case, the United States and Brazil) should not preclude a DPA in the United Kingdom, but the extension of criminality to these countries is relevant to the balancing exercise of whether the DPA is in the interests of justice.
In the Standard Bank decision, Leveson P noted that the first consideration must be the seriousness of the conduct and in this regard emphasised that the potential criminality faced by the bank was the failure to prevent intended bribery committed by senior officers of a sister company. He also noted the SFO’s conclusion that there was insufficient evidence to suggest that any of Standard Bank’s employees had committed an offence. Nevertheless, in the Rolls-Royce DPA, Leveson P described the conduct of the company as some of the ‘most serious’ breaches of criminal law in the areas of bribery and corruption but found that a DPA was ultimately in the interests of justice because of the extent of other factors, demonstrating that, in certain circumstances, the seriousness of the conduct need not be a bar for a company looking to agree a DPA with the authorities. In particular Rolls-Royce was unique because of the extent of the negative impact that a prosecution of the company would have had on employees and others innocent of any misconduct – factors that were taken into account by Leveson P when balancing the public interest and interests of justice in ultimately approving the DPA.
Leveson P also attached considerable weight to the early report made by Standard Bank to the authorities, noted that the bank had made significant enhancements to its compliance policies and procedures since 2011 and that the bank in its form as at November 2015 was effectively a different entity from that which had been involved in the events that were the subject of the DPA. Notably, these two factors were also determinative in the DPAs agreed between the SFO and XYZ Ltd and the SFO and Rolls-Royce. However, in Rolls-Royce there was no self-report; the SFO had been prompted to ask questions of the company by public postings on the internet. However, Rolls-Royce’s co-operation with the SFO was praised by Leveson P, who found that the company could not have done more to expose its own misconduct, limited neither by time, jurisdiction nor area of business. It is this co-operation, in conjunction with extensive ethics and compliance measures and procedures that the company had put in place, and were committed to continuing, that was determinate in the agreement of a DPA, despite the lack of self-reporting.
DPA negotiations are held under strict confidentiality restrictions imposed by the SFO pursuant to the DPA Code of Practice. The Code of Practice requires the corporate entering into DPA negotiations to provide an undertaking in respect of the confidentiality of the fact the DPA negotiations are taking place.
What this means in practice is that third parties with whom the corporate needs to share the fact of the negotiations or any information relating to the DPA negotiations must sign a confidentiality undertaking. Any potential disclosure to the market has to be carefully considered and discussed with the SFO at an early stage (i.e., prior to the relevant obligation arising), and with the judge once an application to the court has been made. Rule 5.8 Criminal Procedure Rules 2015 stipulates that details of a court hearing must appear on the court list at most 48 hours before the court hearing, and the listing must include the names of the parties. This in itself may give rise to press and market speculation on the subject matter of the DPA and the size of the financial penalty. If an announcement is required, an application should be made to the nominated judge.
The legislation does not address anonymity of individuals in the statement of facts. There are protections afforded in US DPAs and in the course of FCA investigations by the third-party rights provisions, and by the ‘Maxwellisation’ process in public inquiries. In Standard Bank plc, the conclusion reached was that those named on the draft indictment would be named, as would be the bank’s senior deal team member, but that the remaining individuals whose conduct was relevant to the factual narrative would remain anonymous. The potential consequences of the naming of individuals following the DPA’s publication can be seen in the fact that Ms Shose Sinare, one of the Tanzanian individuals allegedly responsible for the underlying offence in Standard Bank plc, has brought a civil claim against Standard Bank in the Tanzanian courts alleging, among other things, that she had a right to see and respond to the allegations in the statement of facts.
XYZ Ltd was anonymised on the basis that there were ongoing criminal proceedings arising out of the same facts; to avoid the risk of prejudice in those proceedings, the court ordered that the judgment providing full details of the parties involved only be made public following the conclusion of those proceedings. The statement of facts has not yet been published in this case for the same reason. XYZ Ltd was a small company and was charged with both substantive offences, requiring the application of the identification principle through the involvement of very senior former employees, and for the offence of failing to prevent bribery under the Bribery Act, which may have related to both agents and employees. The XYZ Ltd case, once published in full, may shed further light on how individuals will be treated when a global settlement with a corporate is being negotiated.
Rolls-Royce did not include the identities of the individuals involved in the criminal conduct for the same reason of avoiding prejudice to potential criminal proceedings. In addition to this, the Court did not name the recipients of corrupt payments or bribes in certain countries on the basis that that this could lead to action or the imposition of penalties which would be regarded in the UK as contravening Article 3 of the European Convention on Human Rights. The Rolls-Royce DPA itself says in terms that it does not provide any protection against prosecution of any present or former officer, director, employee or agent of Rolls-Royce, and further, Rolls-Royce is required to co-operate with the investigation and prosecution of the individuals involved in the relevant conduct.
The DPA agreed between Tesco Stores Limited and the SFO, when published following the criminal trial of the three former Tesco executives, may identify or clarify the problems that are in inherent in the process for individuals who are prosecuted in relation to conduct which is also the subject of a DPA.
The negotiation process in Standard Bank plc did not move as quickly as originally anticipated. It became apparent that an adversarial stance would not be appropriate in seeking to negotiate an agreement, and over time communications became more focused and more effective. It is also clear from the facts available that XYZ Ltd andRolls-Royce took considerable periods to resolve; so, while the process towards a DPA is likely to be shorter than a contested trial, it will probably still take a considerable period to agree and be approved.
Before the preliminary application is filed at court by the SFO, the corporate is required to provide a declaration regarding the information supplied to the SFO, as well as the declaration of the individual through whom the corporate made its declaration. The declarations are required to be made pursuant to the Criminal Procedure Rules 2015.
To provide comfort to the corporate and the individual it may be necessary to follow a similar process to that used when individuals sign regulatory attestations – including understanding the documentation provided and questioning those involved in the data collection process. This is something to consider as early as possible in the DPA negotiations.
It is also clearly important to seek to ensure that the scope of any compliance review or monitorship is limited to the matters that are relevant to the circumstances of the case, as these can be intrusive, lengthy and costly exercises.
In global investigations and settlement discussions it is essential to keep in close contact with other investigating agencies, where necessary providing detailed explanations of the DPA process and the basis on which the statement of facts and DPA terms have been agreed.
23.5 Resolving parallel investigations
In the United Kingdom, historically civil proceedings were generally stayed pending the outcome of any parallel criminal proceedings. However courts consider this approach case by case and the emphasis has increasingly moved away from the presumption of a stay. Specifically in the context of contemplated CROs, the current policy (set out in the Attorney General’s Guidelines on asset recovery) should prevent civil recovery proceedings from being pursued in parallel with criminal proceedings; although the Bruce Hall example discussed above demonstrates there is no bar against such proceedings being pursued in tandem with criminal proceedings provided the conduct that is the subject of the respective proceedings can be appropriately distinguished.
23.5.1 Other domestic authorities
We have already identified some of the difficulties of negotiating a truly ‘global’ settlement and their inherent limitations; many of which are equally relevant where there are multiple domestic authorities investigating the same conduct and both civil and criminal proceedings are in contemplation. Corporates seeking to reach a settlement with other domestic authorities are likely to be assisted by agreements and MOUs already in place between the main authorities, including, for example, the memorandum of understanding between the Competition and Markets Authority and the SFO, and the FCA’s Enforcement Guide. The DPA agreed between the SFO and Tesco Stores Limited was coordinated with an agreement with the FCA that Tesco Stores Limited and its parent company, Tesco plc, had committed market abuse. At the time of writing, the DPA remains subject to a reporting restriction, and as such the details of the relationship between the commission of market abuse and the criminal conduct which was the subject of the DPA remain unclear, but it appears that this case will provide some insight into the approach taken by the SFO and FCA in engaging in settlements relating to corporates’ criminal and regulatory liability.
23.5.2 Foreign authorities
The interplay of agencies becomes even more complex where foreign agencies are involved. The participation of UK authorities in global settlements has to date typically been driven by the US authorities, reflecting the relative ease with which US prosecutors can establish corporate criminal liability. One potential issue arises from divergent and sometimes conflicting requests from authorities, typically in connection with communications, disclosure of materials and confidentiality. The aim of any settlement negotiations should be to encourage one authority to take the lead, in accordance with any applicable guidelines or agreements concluded by the relevant authorities for this purpose.
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