The Definitive Guideline on Fraud, Bribery and Money Laundering, which includes specific guidelines for Corporate Offenders, takes effect for all defendants (including corporate offenders) sentenced on or after 1 October 2014. It has been incorporated into the Magistrates Court Sentencing Guidelines. This Guideline, as it applies to corporate offenders convicted of fraud, bribery and money laundering offences, is part of a package to support the introduction of Deferred Prosecution Agreements ("DPAs") on 24 February 2014.
Under a DPA, a company will agree to certain conditions, which may include a financial penalty, reparation to victims, repayment of profits and measures to prevent future offending, as well as an agreed statement of facts setting out its wrongdoing. The Guideline is intended to assist as a point of reference when financial penalty levels within DPAs are being considered and negotiated as well as guidance for judges when sentencing corporates or individuals convicted of an offence of fraud, bribery or money laundering.
In this briefing, we summarise the key elements of the Guideline relating to corporate offenders, outline some of the key issues raised in the Consultation responses to the draft guideline, and look forward to possible future changes in corporate criminal liability.
- The basic structure of the Guideline remained unchanged from the Consultation draft;
- The most important steps in determining a fine remained that the Court will assess the actual or intended 'gain' (or loss avoided) by the company in the commission of the offence then adjust it according to the 'culpability level' taking into account a range of aggravating and mitigating factors corresponding to the behaviour of the offender- from its corporate culture and the circumstances of the commission of the crime, to its response to the offence both internally and in its dealings with investigators/prosecutors;
- There were some relatively minor, but helpful, adjustments to the aggravating and mitigating factors as compared to the Consultation draft. However, the culpability level % multipliers remained the same;
- The 'backstop' measurement of gain (used where the court cannot establish the actual or intended gain the corporate has made from the offence) had increased from 10% to between 10-20% of the worldwide revenue derived from the product or business area to which the offence relates, for the period of the offending. However, the Consultation response confirmed that this is intended to incentivise companies to provide information to assist in sentencing, rather than to be used in the normal course;
- The Director of the Serious Fraud Office and Director of Public Prosecutions published their joint Code of Practice for the use of DPAs on 14 February 2014.
The Guideline is the first of its kind to set out a process for dealing with corporate offenders (a term intended to cover any organisation or body, including partnerships and charities) convicted of fraud, bribery or money laundering. The Guideline identifies ranges of appropriate financial penalties and the aggravating and mitigating factors which determine where in the range a particular case should fall. The Council noted that there have been very few criminal prosecutions of organisations for economic offences, and consequently no well-established sentencing practice exists. Therefore, the Council has drawn inspiration from guidance on criminal and civil penalties imposed on corporates in other contexts, including in the US, as well as test cases provided by the SFO in its response to the consultation on the draft guideline.
There is no upper limit on the amount that can be imposed by the Crown Court by way of a fine for fraud, bribery and money laundering offences. Corporate penalties can be substantial – particularly as the amount of a fine will be determined, in part, by the intended and not just the actual gain made or loss avoided. The Guideline seeks to replicate rather than alter existing sentencing practice and is not intended to result in an increase in the fine levels for corporate offenders, but the relative absence of examples to date means that there is a "heightened" risk that the Guideline could have "unanticipated effects" on sentence levels, according to the Resource Assessment accompanying the consultation on the draft Guideline. The wide range of circumstances in which corporate economic offences can be committed, and the wide range of corporations, makes it likely that there will continue to be a considerable range in the amount of any fines imposed.
The process for sentencing corporate offenders
A ten-step decision-making process for any court sentencing a corporate for fraud, bribery or money laundering is set out in the Guideline. These steps are based on the steps applicable to individuals:
- The first step for the court to consider is whether a compensation order is appropriate, as this would take priority over the payment of any fine if the offender's means are limited.
- The court will then consider a confiscation order either if the prosecution asks for it or the court thinks it may be appropriate.
- The court will then determine the offender's culpability (high/medium/lesser) and the "harm" caused – defined, in broad terms as the amount obtained or intended to be obtained (or loss avoided or intended to be avoided) as a result of the offence. If insufficient evidence of gain or loss avoided is provided, the harm figure is to be calculated using a method similar to that relied on by the FCA – by which the harm or potential harm that a regulatory breach may cause can be calculated as a percentage of the revenue derived during the period of the breach from the product or business area to which the breach relates. A figure of 10-20% of worldwide 'relevant' revenue is a measure which may be used for these purposes. There is no guidance as to how 'product or business area to which the offence relates' will be determined, and it may prove difficult for courts consistently to apply the measure across a range of offenders whose operations are organised in complex and distinct ways.
- The fourth step is to identify the appropriate starting point and sentencing range, by multiplying the harm figure derived from the calculations conducted at step three by a percentage figure reflecting culpability:
Please click here to view table.
- This is a technique imported from US practice. In determining where within the category range the offence falls, and indeed whether it falls outside the normal range, the court will consider whether there are any aggravating or mitigating factors, by reference to non-exhaustive lists of factors reflecting the "seriousness" of the offence and "personal" mitigation.
- At the fifth step, the court can then adjust the penalty upwards or downwards in order to ensure that it is proportionate to the corporation's size and financial position, the seriousness of the offence and any "unacceptable" harm the payment of a fine might cause to third parties. The overriding consideration should, however, be to "bring home" to management and shareholders alike the need to operate within the law – if necessary, in "some bad cases", by a fine which would put the organisation out of business.
- This consideration may not translate easily for any financial penalty to be imposed as part of a DPA – given that one of the stated rationales for introducing DPAs was to avoid unintended detrimental consequences for past and present employees, customers, investors and suppliers if the effect of a prosecution would be to put the company out of business. However, the Guideline does suggest that the court should be mindful of any impact a fine would have on staff employment, service users, customers and the local economy – as well as the corporate's ability to implement effective compliance programmes (but not, as noted above, the interests of shareholders).
- Credit for any assistance provided by the corporation (over and above merely complying with any coercive measures) is factored in at step six, to reduce the amount of the fine. The court may also consider any other rule of law by which an offender may receive a discounted sentence in consequence of assistance given (or offered) to the prosecutor or investigator.
- If the corporation is being sentenced for multiple offences, step nine requires the court to consider whether the total sentence is just and proportionate to the offences taken as whole (the "totality principle").
- Finally, the Guideline restates the court's obligation to give reasons for and to explain the effect of its sentence.
Key Points from the Sentencing Council's Response to the Consultation
The Council stated that its underlying principles when drafting the Guideline were that any profit from the crime must be removed from the corporate, and that the penalty must have a real economic impact on the offender including on its shareholders. The Council also revealed the following key considerations in its response to the consultation:
- Insufficient information on gain: As explained above, the Guideline includes a 'backstop' measurement of gain of 10-20% of the worldwide revenue derived from the product or business area to which the offence relates, for the period of the offending. This was the most controversial aspect of the proposal, with a number of respondents arguing it could give rise to disproportionate outcomes. The Response made clear that the intention of this backstop is to encourage offenders to cooperate with the Court in providing sufficient information in relation to the gain made from the offence. It will therefore be of particular importance for corporate offenders to engage with these issues so that the Court can quantify 'gain' in a more meaningful fashion;
- Shareholders: while several responses to the consultation on the draft guideline argued in favour of allowing the court to consider the impact of a financial penalty on shareholders in certain circumstances (for example large public companies where shareholders have little involvement), the Council has rejected that argument. This reflects a view that shareholders should be vigilant about where they invest and how the corporate in which they invest behaves;
- Corporate culture: The Council has added the category of 'Wilful obstruction of detection (for example destruction of evidence, misleading investigators, suborning employees)' to the non-exhaustive list of characteristics indicating high culpability. In addition to this, offenders who are being prosecuted for offences under the Bribery Act demonstrate high culpability where there is a culture of wilful disregard of the commission of offences by employees or agents and no effort has been made to put effective systems in place, as opposed to lesser culpability where some effort has been made, but was inadequate to a degree. In this way the guideline encourages the courts identify and punish bad corporate culture.
- Aggravating/mitigating factors: A few other amendments have been made to the culpability and aggravating/mitigating factors. Generally, these are helpful. For example, a suggestion by the GC100 that "involvement through coercion, intimidation or exploitation" be added as a lesser culpability factor has been taken up. The reference to "early active cooperation" has been removed, given the overlap with the "Corporation cooperated with the investigation" factor.
- Rejection of SFO's proposal: The Sentencing Council rejected an alternative proposal by the SFO, which sought to set the sentence by reference to turnover in all cases. The Sentencing Council, rightly in our view, rejected this proposal as it would result in the level of fine being determined more by corporate structure that the merits of the case.
Director of the SFO on DPAs and the Future of Corporate Criminal Liability
The Director of the Serious Fraud Office and Director of Public Prosecutions published their joint Code of Practice for the use of DPAs on 14 February 2014. Director of the SFO, David Green QC, continues to reiterate his position that the principle contained within s. 7 of the Bribery Act, which creates the corporate offence of a company failing to prevent bribery by its employees and other associated persons (subject to the statutory defence of adequate procedures) should be extended to cover other criminal acts of corporate personnel (including the other economic crimes which are the subject of the Sentencing Council Guideline). The Director argues that the prosecution of a corporate would be appropriate in circumstances where:
- the company profited from the offence of its employees;
- a particular illegal practice was common and tolerated in a particular sector;
- deterrence was needed in a sector; or
- the senior management of a company have failed to enforce its own compliance regime.
In relation to DPAs Green stated that "[s]uch a change would also cure a problem inherent in the DPA regime. If prosecution of a corporate is currently difficult, why should a corporate agree to enter a DPA at all? DPA's represent a very useful addition to the prosecutors' toolbox for use in appropriate circumstances. They avoid the collateral damage caused by a full blown prosecution of a corporate. They are not a panacea."
In a key note address at the 32nd Cambridge Symposium on Economic Crime on 2 September 2014 the Attorney General confirmed that government officials are considering proposals for a corporate offence of failing to prevent economic crime.
Any such changes would have far-reaching implications for companies from the perspective of both legal risk and compliance programmes. Reform of the rules on corporate liability has now been called for by a number of stakeholders and development of the law seems inevitable at some stage. However, the scope and timing of any change is very unclear and it will be critical to ensure that any proposals are subject to rigorous scrutiny and debate.
In the interim, DPAs and the new Sentencing Council Guideline represent a real change to the corporate crime landscape – but their true utility and significance will only become apparent with time and when complemented by further reform.