Financial crime and sentencing guidance are two areas where legislators in the UK have been particularly active over the last decade or so. The Proceeds of Crime Act 2002, the Fraud Act 2006 and the Bribery Act 2010 have updated the substantive law on money laundering, fraud and bribery respectively, while the system for issuing guidance on appropriate sentences changed with the creation of the Sentencing Guidelines Council (‘the SGC’) by the Criminal Justice Act 2003 and its rapid replacement by the Sentencing Council (‘the Council’), thanks to the Coroners and Justice Act 2009.
The SGC issued a set of guidelines for sentencing fraud offences only a few years ago, in October 2009. But a new, broader set of guidance was requested by the Ministry of Justice as a result of yet another new measure from the legislature: the introduction, by the Crime and Courts Act 2013, of Deferred Prosecution Agreements (‘DPAs’), which would enable organisations suspected of financial crime to avoid prosecution indefinitely on fulfilment of certain conditions (including a financial penalty).
On 27 June 2013 the Serious Fraud Office and the Director of Public Prosecutions issued a draft Code of Practice on DPAs for consultation. The Council published its Consultation on the same day. The rationale for the simultaneous publication of these two documents is that it would assist both the prosecutor and the corporation involved to know what would be the appropriate financial penalty if a particular case were sentenced at court, from which could be calculated the appropriate level of penalty to be agreed as part of a DPA.
The DPAs consultation closes on 20 September 2013, and the Council’s Consultation closes on 4 October 2013. The DPAs system is expected to go live in February 2014.
2. Some General Comments
The Introduction to the Consultation (pages 5-6) refers, by way of background, to what we might infer was a somewhat tetchy exchange between it and the Ministry on the subject of DPAs. It says first that the Ministry asked the Council to issue guidance on DPAs generally, which the Council said (rightly) was not part of its remit. It then says it ‘agreed to expedite its planned work on bribery, fraud and money laundering and to include within these guidelines guidance for sentencing both individual and corporate offenders’.
The fact that such important guidelines have been ‘expedited’ by this process might be seen as unfortunate, insofar as the result is less thought-through than it might have been. The Council makes clear in Section One of the Consultation (pages 7-9) that ‘there is some evidence that current sentencing practice does not reflect the existing SGC guideline’ on fraud, that ‘the available data on current sentencing practice held by the Ministry of Justice was not a reliable basis for developing the majority of the guidelines’, and that ‘with regard to bribery offences, the extremely limited number of sentences passed and lack of existing guideline does not allow for any analysis of current practice’, so that the sentences it proposes are based on those for confidence and banking fraud. The natural conclusion to draw from this is arguably that it is too soon to impose rigid guidelines for these offences, and the drive to do so now for the purpose of DPAs may be counterproductive.
The Council also makes clear in this Section its intention to reflect current sentencing practices rather than change them; in other words, it does not intend to make sentences for these offences any harsher than they are. This of course will disappoint those who see current sentences for financial crime as too lenient. Whether existing sentences are harsher than some perceive, and whether they should be harsher, are hard questions that the Council does not make explicit in the Consultation, although they do appear to fall within the scope of the questions asked.
With respect to fines for corporate offenders, these questions about harshness should be seen in the context of the comments of Lord Justice Thomas inR v Innospec in March 2010. He noted the severity of fines in the US and said that ‘although there may be reason to differentiate the custodial penalties imposed for corruption between the US and England and Wales, no-one [in this case] was able to suggest any reason for differentiating in financial penalties. Indeed there is every reason for states to adopt a uniform approach to financial penalties for corruption of foreign government officials so that the penalties in each country do not discriminate either favourably or unfavourably against a company in a particular state.’ On this view, the level of fines here can and should be equally harsh as in the US, and this should be reflected in the guidelines.
More generally. the Lord Chief Justice in R v Dougall in May 2010 said that ‘those who commit fraud or corruption’ should not be seen as separate from ‘those they would regard as common criminals‘, adding that ‘once convicted, those are the ranks that they join’. In the context of that case, these comments were seen as rebuke to the parties’ expectations about the relative leniency of sentencing here. In the political arena, the then-new Coalition government appeared to express a similar sentiment later that month in its Programme for Government, which prominently promised ‘to take white collar crime as seriously as other crime’. Insofar as this reflects the prevailing sentiment both of the judiciary and the public at large, the Council’s decision to embed existing guidelines and practice, rather than change them, appears to suggest a view that, whatever the perception, such sentences are already as tough as they should properly be..Though of course it does not have the power to increase maximum sentences, the Council should perhaps have been clearer on this position, which is not without controversy. It will be interesting to see to what extent these important questions are tackled by those who respond.
3. The Proposed New Guidelines for Individual Offenders
The substantive guidelines on sentencing individuals in Sections Two to Eight of the Consultation (pages 10-64; the draft guidelines are at pages 83-122) do not, it must be said, make for easy reading; indeed, it may reasonably be asked whether the authors have put much effort into making them so. They are, it seems purposively, formulaic and repetitive, and they are not helped by the decision to lavish the document as a whole (some 130 pages) with a soporific shade of lilac. Many of the ‘culpability’ and ‘harm’ factors listed for each offence seem to reflect no more than common sense, but their translation into apparently rigid matrices of sentence bands seems unlikely to assist the judiciary in individual cases.
Bizarrely, the Council also seems to have proposed unilaterally reducing the maximum sentence for some offences (subject only to the totality principle) by setting the top of the highest band at a lower figure than the statutory maximum, so for instance, the top of their proposed scale for fraud (statutory maximum 10 years’ custody) would be 8 years, money laundering (statutory maximum 14 years) would be 13 years, and bribery (statutory maximum 10 years) would be 8 years. Again, though defendants may welcome such steps, this would not seem to be a reflection of the prevailing mood of the times.
4. The Proposed New Guidelines for Corporate Offenders
Section Nine of the Consultation (pages 65-73; the draft guidelines are at pages 123-129) is where business crime lawyers and responsible directors may wish to focus their attention. The Section begins by acknowledging that ‘there is currently no guideline for sentencing organisations convicted of financial crimes’, and that ‘there have been very few criminal prosecutions of organisations for the offences covered by this guideline, and consequently no established sentencing practice for organisations’.
Sensibly then, the Council has taken into account (among other things) the regulatory and civil penalty regimes used by bodies such as the Financial Conduct Authority (‘the FCA’, formerly the Financial Services Authority), civil and criminal penalties in other jurisdictions (notably the United States), and the sentencing guideline for corporations produced by the US Sentencing Commission (‘the USSC’).
The FCA uses a five-step process for calculating financial penalties, considering: (1) disgorgement of profits; (2) the seriousness of the breach; (3) mitigating and aggravating factors; (4) adjustment for deterrence; and (5) any settlement discount. The USSC’s guidelines consider compensation first, then state that if the organisation operated ‘primarily for a criminal purpose or primarily by criminal means, the fine should be set sufficiently high to divest [it] of all its assets’. For others, the fine is set by means of a sophisticated system of base fines and multipliers with reference to seriousness (including harm done and benefit gained) and culpability respectively, and increased where necessary to ensure the disgorgement of any profits. The guidelines also prescribe exceptional circumstances (such as substantial assistance to the authorities) where departure from this system is permitted.
The Council, dauntingly, proposes a nine-step process (the first being compensation), although only steps two to four are truly significant. Step Two is to determine the offence category by reference to ‘culpability factors’ and ‘harm’, the latter being ‘a financial figure assessed as the actual gross amount obtained (or loss avoided) or intended to be obtained (or avoided) by the offender as a result of the offence’.
5. The Calculation of ‘Harm’
With reference to the ‘harm’ figure in Step Two, the Council makes a number of suggestions that may raise eyebrows among those familiar with such cases. The first is that ‘for offences of fraud… it will usually be possible to quantify’ the harm. The second is that ‘for offences under the Bribery Act, the appropriate figure will normally be the gross profit from the contract’, although for the corporate offence of failing to prevent bribery ‘an alternative measure… may be the likely cost avoided by failing to put in place appropriate measures to prevent bribery’. The third is that ‘for offences of money laundering, 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’. It goes on to suggest that in the absence of clear evidence the court may use a figure of ‘10% of the relevant revenue derived from the product or business area to which the offence relates [during] the period of the offending’.
It seems scarcely worth saying that in all but the simplest cases, the calculation of the ‘harm’ figure is likely to be a subject of fierce argument. Leaving aside the evidential issues about how much has been gained or lost, the proposed guidelines leave open all the philosophical issues about how to calculate ‘gain obtained’ (which, very broadly speaking, could mean either ‘profit’ or ‘turnover’) that are so familiar from the troubled confiscation regime under the Proceeds of Crime Act 2002 (‘POCA’). The reference to ‘gross profit’ rather than contract value in bribery cases seems unusually kind, but not nearly as kind as the mooted alternative of assessing the cost (which would be speculative, and may be minimal) of instituting ‘adequate measures’ to prevent bribery. ‘The amount laundered’ can also be a problematic concept (for instance where there is a mix of ‘clean’ and ‘dirty’ assets). Though the suggestion of 10% of ‘relevant’ revenue would in many cases be a useful incentive to come forward with evidence to help assess a more accurate figure, the questions of what ‘product or business area’ is relevant and what is ‘the period of offending’ may also present some difficulties.
6. Determining the Fine
Step Three of the proposed process determines the multiplier within the category range (between 20% and 400%) by reference to various aggravating and mitigating factors. Step Four allows the court to adjust the fine to fulfil ‘the objectives of punishment, deterrence and removal of gain’, and to take into account ‘the value, worth or available means of the offender’ and the impact of the fine on the ‘employment of staff, service users, customers and [the] local economy (but not shareholders)’ and (if relevant) the ‘performance of a public or charitable function’. The remaining steps consider other factors which would indicate a reduction (such as assistance to the prosecution); reduction for guilty pleas; ancillary orders; the ‘totality principle’ (whether the total sentence is just and proportionate); and the duty to give reasons.
Having taken account of the FCA and USSC systems, the Council’s proposal to deploy a system of base fines and multipliers is hard to fault. The choice of 20% to 400% as a potential range of multipliers clearly draws on those systems, although it should be noted that the FCA system effectively achieves a higher range by applying disgorgement first (making it, in effect, a range of between 100% and 500%). The worth of separating ‘culpability factors’ in Step Two from ‘aggravating and mitigating‘ factors in Step Three is harder to understand, as is the worth of separating the various factors in Step Four from the more general ‘totality principle’. The absence of a USSC-style concept of organisations operated ‘primarily for a criminal purpose or primarily by criminal means’, such that ‘the fine should be set sufficiently high to divest [it] of all its assets’, is unexplained but probably welcome, in that it arguably adds little to the exercise given the discretion provided in other areas.
As a general comment, the proposed guidelines are probably less helpful than might have been hoped for the purpose of DPAs. Although the general principle of ‘up to 400% of benefit obtained’ provides a useful lodestone, the proposed process unfortunately comprises an overly rigid first phase (Steps Two and Three) with an overly discretionary second phase (Step Four), and so is likely to be both very cumbersome for sentencing judges and insufficient for businesses who require at least some level of certainty in order to consider the DPA option in appropriate cases.
The Sentencing Council exists to assist the judiciary in sentencing cases in a clear and consistent manner. The guidelines of its predecessor, the SGC, with respect to sentencing fraud were notably characterised by broad principles and examples of factors to be taken into account, rather than prescriptive formulae. The fact that the Council would appear to have been prompted by the DPA proposals to bring forward guidelines on bribery, fraud and money laundering without the necessary background of learning from case law, seems unfortunate with respect to its work on sentencing individuals, which seems unlikely to achieve either clarity or consistency. Meanwhile, those seeking certainty on the applicable fines in cases of corporate offending (for the purposes of DPAs or otherwise) would be better advised to look elsewhere, principally in the evolving case law on ‘benefit obtained’ under the confiscation regime of POCA, and in the penalties imposed in FCA cases here and comparable cases in the US.