Introduction

On 31 January 2014, the Sentencing Council for England and Wales published its definitive guidelines on the sentencing of corporates found guilty of offences of fraud, bribery and money laundering (the “guidelines”).

The guidelines apply to all organisations sentenced on or after 1 October 2014, regardless of the date of the offence.

The guidelines set out a matrix of factors which a court will use to determine the level of fines, including analysis of culpability and harm, and the application of a multiplier, subject to aggravating or mitigating features.

While a fine must be proportionate, the guidelines allow for the application of a broad range of factors in arriving at a fine which must be substantial enough to have a ‘real economic impact which will bring home to both management and shareholders the need to operate within the law’.

The Guidelines

The Guidelines apply to the following offences:

Fraud

  • Conspiracy to defraud (common law)
  • Cheat the public revenue (common law)
  • Fraud Act 2006 (section 1, 6 and 7)
  • Theft Act 1968 (section 17)
  • Customs and Excise Management Act 1979 (section 170)

Bribery

  • Bribery Act 2010 (sections 1, 2, 6 and 7)

Money laundering

  • Proceeds of Crime Act 2002 (sections 327, 328, 329)

The ten steps

The Guidelines set out ten steps which a court will consider in imposing a fine on a corporate offender found guilty under the provisions above. In summary

  1. The court must consider making a compensation order requiring an offender to pay compensation for any personal injury, loss or damage resulting from the offence in such an amount as the court considers appropriate.
  2. The court must consider confiscation, if either the Crown asks for it or the court thinks it may be appropriate.
  3. The court should determine the offence category by reference to “culpability” and “harm”.
  4. Having determined culpability, the court should apply a multiplier to the harm figure by reference to a starting point (depending on culpability) and within a specified range. Aggravating or mitigating features will be applied.
  5. The combination of orders, compensation, confiscation and fine should seek to achieve removal of all gain, appropriate additional punishment, and deterrence. The court will consider whether the fine level should be adjusted to meet these objectives.
  6. The court should consider any factors which would indicate a reduction, such as assistance to the prosecution.
  7. The court should take into account any potential reduction for a guilty plea in accordance with the relevant legislation and guidance.
  8. The court must consider whether to make any ancillary orders.
  9. In cases of more than one offence, the court should consider whether the total sentence is just and proportionate to the offending conduct.
  10. The court is under a duty to give reasons for, and explain the effect of, the sentence.

Harm

The starting point for the calculation of a fine is an assessment of ‘harm’, represented by a financial sum.

In the case of fraud, harm will normally be the actual or intended gross gain to the offender. In cases of money laundering, the figure will normally be the amount laundered or, alternatively, the likely cost avoided by failing to establish effective AML procedures if that is higher.

In relation to offences under the Bribery Act 2010, the appropriate figure will normally be the gross profit from the contract obtained, obtained or sought through the offence. Alternatively, in the case of a section 7 offence of failure to prevent bribery, the appropriate figure may be the likely cost avoided by failing to establish effective anti-bribery procedures.

Significantly, the guidelines provide that where the actual or intended gain cannot be established, ‘the appropriate measure [of gain] will be the amount the court considers was likely to be achieved in all the circumstances’.

Where there is insufficient evidence of the amount that was likely to be obtained, ‘10-20 per cent of the relevant revenue (for instance, by reference to the worldwide revenue derived from the product or business area to which the offence relates for the period of the offending) may be an appropriate measure’.

Culpability

The assessment of culpability, demonstrated by the offending corporation’s role and motivation, will be key to the level of fine imposed. The guidelines set out the factors which the court will apply in deciding whether there is high, medium or lesser culpability.

The court will apply a multiplier to the harm figure depending on the level of culpability. In the case of high culpability, for example, the court will use a starting point of three times (300 per cent) the harm figure, moving within a range of 250 per cent to 400 per cent by way of adjustment for aggravating or mitigatinag features.

Factors demonstrating high culpability include:

  • Playing a role in organising or planning unlawful activity
  • The wilful obstruction of detection (including misleading investigators or suborning employees)
  • The corruption of local or national government officials
  • A culture of wilful disregard of offences by employees or agents with no effort to put effective systems in place

‘Some’ effort to put in place anti-corruption compliance measures, but to a level insufficient to amount to a defence under section 7 of the Bribery Act (only), will amount to lesser culpability.

Methodology overview

Click here to view flowchart.

A worked example

Over a five year period, a company engaged in the bribery of government officials in Latin America through local intermediaries in order to secure contracts worth £80 million (gross profit £20 million). The company fails to co-operate with regulators and maintains a not guilty plea. The company instructs its agents and employees to delete relevant e-mails. The company has ‘paper’ compliance policies with limited evidence of providing training or guidance to employees or third parties.

Click here to view flowchart.

Commentary

The guidelines indicate a determination on the part of the UK authorities to implement credible deterrents to illegal conduct by businesses. Economic crime, even at relatively low levels, may now result in fines on large, multi-national businesses which are game-changing.

The SFO, in particular, faces some challenges. The UK press recently reported that it had asked the government for more funding for large-scale enquiries. Its budget has fallen from £52 million to £28 million this year. While the SFO has reiterated its primary role as a prosecutor, it remains to be seen whether the SFO can bring effective prosecutions against large, multi-national businesses in which the court might apply the broad discretion afforded by the guidelines.

The SFO may look to the forthcoming introduction into its armoury of Deferred Prosecutions Agreements (‘DPA’) which are an alternative to full prosecution. DPAs are likely to include a term for a financial penalty, the sum of which must be broadly comparable to the fine that would have been imposed if the party had entered a guilty plea. These guidelines will provide an important reference in the context of negotiating DPAs.

From the corporates’ perspective, the guidelines reinforce the importance of proactive compliance, including decisions to make admissions or self-report where appropriate, and co-operation with regulators. Corporates will also be encouraged to examine the extent to which management change within the organisation might mitigate risk to the business.

It remains to be seen whether the fines imposed in the UK will reach the levels seen in the US. The guidelines are less mathematical than the US Federal Sentencing guidelines, but provide for sufficient discretion to guard against corporates seeking to take advantage of the system. The UK judiciary has indicated that the approach to imposing financial penalties should be more consistent across jurisdictions. In R v Innospec Limited [2010], Lord Justice Thomas commented that ‘there is every reason for states to adopt a uniform approach to financial penalties for corruption of foreign government officials… I approach sentencing on the basis that a fine comparable to that imposed in the US would have been the starting point.’

The guidelines, including the potential pegging of fines to a significant percentage of worldwide business revenues, provide the courts with significant opportunity and flexibility to impose much more significant fines than levied in the UK in the past.